The IPO volumes in Europe have been the highest in years, with Q1 2021 delivering the strongest first quarter since the turn of the millennium, reflecting the significant scale of investor demand as global investors are drawn to Europe’s compelling relative value. Improved market confidence driven in part by the ongoing vaccination programmes across the continent, additional government support programmes and recovering macroeconomic data represent the driving forces behind the strong performance in IPOs this year. These are positive signs that momentum in the IPO market will continue even throughout 2021.
Considering the current economic environment, namely the concerns around the pace of economic recovery and a hot IPO market in Q1, It is anticipated that investors will put more emphasis on differentiated equity stories and challenge the overall quality of issuers.
There is currently a strong drive from financial stakeholders to move towards establishing a global reporting system with standards on non-financial reporting. As of today, the corporate reporting system does not provide stakeholders, which includes investors, customers, employees and policy makers, with objective, relevant and timely information needed to differentiate between companies on value contribution beyond financial performance.
The building blocks of such a system have been laid out, beginning with the announcement by the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB) of their intent to merge into one organisation with the goal of simplifying the corporate reporting landscape. Moreover, the World Economic Forum released a set of universal ESG metrics and disclosures that companies can choose to report on irrespective of industry or region, with the aim of aligning existing standards and allowing for greater transparency surrounding non-financial disclosures. Similarly, in the European Union, rapid advancements have been made in the reporting of non-financial metrics with a focus on ESG. In April 2021, the EU formalised ESG reporting requirements for both asset managers and medium-to-large businesses.
Through the broadening of knowledge made available to stakeholders by going beyond the disclosure of only financial metrics, the knowledge made available to stakeholders will be broadened, allowing financial markets to allocate resources to where they can create the most value and allow adequate capital to flow towards addressing the biggest challenges the world is currently facing.
First impressions count!
In light of this momentum around establishing global standards on non-financial reporting, the focus on companies to provide ESG information is therefore gathering pace. Companies looking to access capital via IPOs need to be particularly sensitive to the fact that ESG matters have become an integral part of every company’s equity story. Corporations are facing increasing pressure to provide greater levels of information about how ESG fits into their overall strategy and their view on how it is expected to tie into their underlying financial performance.
Transparency about the role ESG plays in their strategy, with a focus on the material value drivers and risks, such as a company's efforts to decarbonise and reduce its carbon footprint, is becoming ever more crucial.
This importance is exacerbated in the case of newly-listed companies or companies looking to an IPO, since they will be competing for capital against a benchmark of other firms that already have established and robust reporting processes relating to their ESG strategy and other material issues.
Indeed, we are already seeing a shift in investor mentality in that a number of funds and asset managers are only considering investments in companies that meet certain ESG criteria. Norway’s sovereign wealth fund, Norges Bank, has recently announced that it intends to accelerate divestments from companies that fall short of key ESG metrics. More notably, the fund also pointed out that companies performing poorly on such metrics have also been increasingly exhibiting lower returns. In addition, BlackRock, being the world’s largest investment management company with over €9.5 trillion in assets under management, has started to take voting action against companies lagging in action and disclosure on ESG, evidence of its support for sustainability.
Particularly in the case of a hot IPO market, the importance of such reporting has now shifted from what was once a ‘nice to have’ to something that is essential. This is true not just to make a good first impression and differentiate from other issuers, but even simply to ensure the company's access to the investment pool.
Advisory Partner, PwC Malta
Tel: +356 2564 7091
Director, Advisory, PwC Malta
Tel: +356 2564 7026
Carl Zammit la Rosa
Manager, Advisory, PwC Malta
Tel: +356 2564 4113