ESG IPO Readiness: Importance and preparation
Discover the importance of ESG in IPOs and how to get to grips with ESG IPO readiness.
The growing importance of ESG in IPOs
Regulators around the world are requiring companies to disclose more information about their environmental, social, and governance (ESG) performance. This is making it easier for investors to assess a company's ESG risks and opportunities. It’s also raising the bar for corporate ESG performance.
In line with this, investor demand for ESG-compliant investments is growing rapidly. According to a 2022 Global Sustainable Investment Review by the Global Sustainable Investment Alliance, global sustainable investment assets reached $35.3 trillion in 2021, up 35% from the previous year. This trend is expected to continue, as more and more investors seek to invest in companies that are aligned with their values and well-positioned to succeed in the long term.
In addition, ESG performance is increasingly seen as a proxy for good management. Many investors believe that companies with strong ESG performance are better managed and more resilient to risks, both financial and non-financial. This is due to the fact that ESG factors can have a significant impact on a company's bottom line.
As a result of these trends, companies that are preparing to go public are increasingly focused on ESG. They are developing ESG strategies, setting ESG targets, and reporting on their ESG performance to investors.
ESG, sustainability and IPO pricing
ESG disclosure and corporate sustainability practices can have an effect on IPO pricing. In fact, a 2021 study found that IPOs with more ESG disclosure tend to have lower underpricing. Interestingly, the authors also found that the effect of ESG disclosure on IPO performance is stronger for governance disclosure than for environmental or social disclosure.
The authors argue that ESG disclosure can reduce information asymmetry between companies and investors. This can lead to lower underpricing because investors are better informed about the company's risks and opportunities. ESG disclosure can also lead to higher Tobin's Q because investors perceive companies with strong ESG performance as being better managed and more resilient to risks.
These findings suggest that ESG disclosure can be extremely beneficial for companies heading towards IPO. Companies that disclose more ESG information may be able to attract more investors and raise more capital at a higher valuation.
Preparing for an ESG-focused IPO
1. Develop an ESG strategy
Identify your most material ESG risks and opportunities via a materiality assessment. Then develop a plan to mitigate those risks while capitalising on the opportunities.
2. Develop ESG policies and procedures
These should be designed to mitigate your ESG risks and promote sustainable business practices.
3. Set ESG targets
These should be specific, measurable, achievable, relevant, and time-bound.
4. Establish ESG governance structures
This could involve creating an ESG committee or appointing an ESG officer.
5. Implement ESG initiatives
This could involve things like investing in renewable energy, reducing waste, or improving employee diversity and inclusion.
6. Measure and report on ESG performance
As well as becoming a regulatory necessity, this will help you to track progress towards your ESG targets and demonstrate your commitment to ESG to investors.
7. Social impact investment
Companies can invest in ventures that have a positive social or environmental impact, even if they are not directly related to their core business. This may include investing in startups or social enterprises.
8. Disclose ESG information in the IPO prospectus
This should include information about your ESG strategy, targets, initiatives, and performance.
Future outlook: ESG and IPOs
According to EY Global Institutional Investor Survey 2022, 80% of global investors believe that ESG factors will be important in their investment decisions in the next five years. So the future of ESG factors impacting IPOs looks strong.
Companies and deal advisors can expect ESG to become a mandatory disclosure requirement for IPOs, and for ESG ratings to be incorporated into IPO valuations. As more investors specialise in sustainable investing, ESG will likely become a key factor in IPO roadshows and investor pitch meetings.
