In growth projection analysis, which adjustment to the discount rate is associated with increased risk from ESG performance?

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In growth projection analysis, the discount rate captures the riskiness of future cash flows in addition to the time value of money. When ESG performance introduces more risk—due to potential regulatory changes, supply chain disruptions, fines, or reputational damage—investors require a higher return. To reflect this increased risk, the discount rate is raised. A higher discount rate lowers the present value of projected cash flows, yielding more conservative growth projections that acknowledge ESG-related uncertainty. The other options don’t adjust for risk in the discount rate: increasing near-term revenues changes cash-flow amounts but not the risk assessment; decreasing the discount rate would understate risk; shortening the forecast horizon changes the period analyzed rather than the risk-adjusted rate used to discount cash flows.