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Maximizing IPO value through ESG equity
April 14, 2022
When going public, your equity story explains to prospective investors why they should buy your shares. It communicates your mission and business model, your strengths and market opportunities, and how your company is positioned relative to competitors. As you prepare your IPO prospectus, keep in mind the increasing importance of including the company’s environmental, social and governance (ESG) performance and strategic plans as part of your larger equity story.
ESG has become a particular focal point over the past seven years as private equity firms have radically reassessed its importance and value, and it’s increasingly informing private equity firms’ strategic thinking, attitude and approach. At the same time, sustainability funds have continued to increase in prominence and size, indicating a shift in investor sentiment surrounding ESG.
As a result, many companies have matured on numerous fronts, including how they value ESG performance; how ESG influences investment decisions, enterprise value and multiple; and how ESG has sparked closer engagement with investors via public reporting.
What to focus on when articulating your ESG story
In this new environment, executives need to communicate their company’s ESG performance and strategy in a coherent and transparent manner without making unsubstantiated or misleading claims — or “greenwashing” their story. For an IPO, it’s important to communicate information on topics like climate change; greenhouse gas emissions; cybersecurity or data privacy; diversity, equity and inclusion (DE&I); and community engagement. Environmental and social topics are typically specific to your sectors, while governance topics are mostly applicable across industries. Start your ESG equity story by evaluating the ESG topics material for the stakeholders for your company, sector and industry peers.
We also expect ESG equity stories to be influenced by the geographical areas in which companies operate. Internationally, you’ll find existing roadmaps for standards and regulations with expectations for all frameworks governed by the International Sustainability Standards Board (ISSB), a body of International Financial Reporting Standards (IFRS).
In the US, ESG guidelines are less clear and uncertainties around ESG regulations have increased given the political environment of the past few years. Existing guidance from the SEC is limited, with the first SEC interpretive guidance around climate change disclosures published in 2010 and human capital disclosure requirements published in 2020 as a part of the modernization of certain S-K regulations.
As ESG reporting rules ramp up, it’s time to get ahead
In response to the rising interest, the SEC further issued a sample letter regarding climate change disclosure in 2021. And now, in 2022, the SEC has published proposed regulations on cybersecurity and climate change.
If these proposed rules are mandated for public companies in the US, this would represent a watershed moment for investors and financial markets. The required disclosures about climate-related risks would increase significantly and likely have a material impact on a company’s business or consolidated financial statements.
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The bottom line
Ultimately, a company articulates its equity story in many ways, including through SEC disclosure documents, earnings reports, investor presentations and press releases. Through these various channels, a company’s equity story brings to life its strategic priorities and financial and nonfinancial key performance indicators (KPIs), against which the management will be measured as the company becomes public.
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