Companies looking to access capital via IPOs need to be particularly sensitive to the fact that environmental, social and governance (ESG) matters have become an integral part of every company’s equity story. They will increasingly be expected to provide information about the role ESG plays in their strategy, with a focus on the material value drivers and risks that can impact their financial position and performance. And with the momentum around establishing global standards on non-financial reporting, the focus on companies providing ESG information is gathering pace. Transparency about the company’s material ESG issues, such as its efforts to decarbonise its operations and supply chain, backed by reliable data, is therefore becoming more and more necessary for making that critical first impression.
After all, newly-listed companies will soon be benchmarked and competing for capital against those companies that already have robust reporting on their ESG strategy and material issues. Indeed, some investors will only consider companies that meet certain ESG criteria, thereby having a direct impact on the company's access to the investment pool. Investor pressure is becoming more intense, while at the same time companies are continually working to understand and meet the ever-growing information needs of their other stakeholders.
Companies need to show that ESG is genuinely part of their overall strategy and that they are aware of the impact these factors can have on their business. Investors are looking more closely for signs of this.
They are also looking at the quality of reporting, which can affect their ability to understand the drivers of risk and value in a company’s business model and impact the accuracy of their own valuations. Underestimating ESG’s importance in an IPO story, the prospectus and related marketing materials may raise questions about a management team’s ability to effectively identify and manage risks. We know from our previous research that investors link the quality of a company’s management to the quality of its reporting. A lack of clarity on ESG matters could lead to questions about the company’s long-term viability at a time when it’s only beginning to build a track record of performance. Making the effort to include substantive ESG information in the prospectus also helps ensure “reporting readiness”, indicating that the company is well prepared to meet the requirements for their first year’s annual report under the public company reporting regime.
Presenting the company’s position on the material ESG issues as part of the IPO story could be an effective way of future proofing the reporting strategy and processes of the business, right from the start of its listed life. Stakeholders will be looking for robust and reliable ESG information to assess whether ESG really is factored into decisions about operating the business. Being able to see non-financial targets and guidance on the impact of material issues on the financial performance can help companies show that they take ESG matters seriously. For companies wanting to make that good first impression, what was once a ‘nice to have’ is quickly becoming essential.