No matter the reason a company seeks to go public, some of the most important factors they must consider as they prepare for their IPO journey are the environmental, social, and governance (ESG) issues material to their business. In this blog post, we look at why a plan to manage ESG issues and disclosures can make a difference in pre-IPO fundraising, and how an ESG assessment contributes to the overall success of an IPO.
The Importance of Having an ESG Strategy
A report recently pointed out that an effective ESG strategy is no longer something nice to have; it is now a necessity and an important strategic consideration.1 The numbers speak for themselves. In 2021, US$130 trillion in total capital was aligned with net-zero emissions pledges and companies with robust ESG strategies in place raised more capital at a cost almost 10% lower than competitors. Now, more than ever, investors are making a push towards ESG.2 According to analysis by Morningstar, 57% of a firm’s ESG indexes outperformed comparable non-ESG indexes.3 The report also showed how 80% of companies outperformed their non-ESG counterparts over a five-year period.4
These are some of the reasons an ESG strategy matters before an IPO:
Focusing on ESG can attract the interest of key investors
It can help make your company’s IPO more competitive
It can help establish credibility for ESG and, in turn, help build your reputation
Demonstrating sustainability is more important than ever.
Why Having an ESG Rating Matters Before an IPO
It’s important for companies preparing for an IPO to first consider obtaining an ESG Risk Rating, understand what they mean, and how a rating can be used to evaluate their business. As an industry-recognized standard, ESG Risk Ratings evaluate a pre-IPO company's managed and unmanaged ESG risks and are based upon these building blocks:
Idiosyncratic ESG issues
One of the most important components here — comprising approximately one-fifth of a company’s ESG Risk Rating — is corporate governance, regardless of industry, product, or subindustry. Corporate governance refers to the rules, practices, and processes by which a firm is directed and controlled. It also involves balancing the interests of stakeholders that may include shareholders, senior management executives, customers, financiers, and even the community at large. Material ESG Issues refer to topics requiring a common set of management initiatives, such human capital, and can often influence a company's economic value in each subindustry. As for idiosyncratic issues, these refer to anything unpredictable or unexpected — for example, an accounting scandal — that could arise at any time, and in any industry, with the capacity to become an MEI. Taken together, these building blocks generate a comprehensive view into the degree to which ESG factors can have an impact on a company’s economic value before it goes public.
An ESG Assessment Can Show Sustainability
There are several advantages for a company to undergo an IPO ESG assessment by a credible third party, before listing on a stock exchange.5 The assessment serves as a supplement to the final prospectus and a company’s “intention to float” (ITF) announcement. The assessment also demonstrates its sustainability initiatives, which can generate more interest in its public offering.
At a high level, an IPO ESG assessment is derived from a combination of publicly available disclosures and details provided by the pre-IPO company, including, but not limited to:
The latest fiscal year’s disclosure related to environmental and social policies and programs
The company prospectus assessing corporate governance practices and policies
Board structure, board management quality, and integrity
Ownership and shareholder rights
Remuneration and financial reporting
An IPO ESG assessment takes these documents and resources into account to generate a report on a pre-IPO company’s exposure to ESG risks. This can then be used by investors and firms to better understand whether a company’s IPO is a smart, long-term investment, based upon how it manages its exposure.
Read our latest ebook to find out how your company can get started with an ESG assessment before filing an IPO. It also explains the steps involved, from evaluating your corporate government practices to understanding every phase before and after an assessment.
1 Deloitte. 2021. “A foundation for sustainable growth | Deloitte ECM update | Winter 2021/22.” July 29, 2022. https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/corporate-finance/deloitte-uk-deloitte-ecm-update-v1-winter-2021.pdf.
3 Down from 75% in 2020.
4 Ng, M. 2022. “ESG indexes outperform their non-ESG equivalents.” Fund Selector Asia. July 29, 2022. https://fundselectorasia.com/esg-indexesoutperform-their-non-esg-equivalents/.
5 The IPO ESG assessment uses ESG Risk Rating methodologies and provides insight into your company’s ESG risk by measuring unmanaged risk. This risk is measured by MEIs, which, as noted above, have a potentially substantial impact on a company’s economic value.
Risk and Opportunity in Biodiversity: How Sustainable Finance Can Help
This article outlines how biodiversity loss poses material risks to business and how it connects to many other issues that companies can’t ignore. In addition, it covers how biodiversity conservation presents substantial economic opportunities, and how businesses can address and access these opportunities by issuing linked instruments that integrate biodiversity considerations.
Today’s Sustainable Bond Market: Boosting Confidence in Sustainable Bond Issuances
In this article, we examine the kinds of sustainable bonds offered in the market, some of the key regulations being developed in different markets and the current initiatives to improve the quality and credibility of issuances.
Webinar Recap: How Integrating ESG Can Drive Opportunity for Private Companies
Recently, Morningstar Sustainalytics hosted a webinar – ESG in the Lifecycle of a Private Company: How Stakeholder Demands Drive Sustainability in Private Markets – to address some of the questions private companies might have surrounding ESG and how it could impact their business.