The IPO ESG Process - How to Prepare Communications and Reporting
ESG (environment, social, and governance) reporting and risk disclosure has become a standard requirement for public companies - as well companies planning to IPO (initial public offering). Nearly 80% of institutional investors use ESG risk, ratings, and scoring criteria in their investment process as of 2023, with over $40 trillion invested in ESG assets around the world.
If you company is planning or considering an IPO, or have already started the process, here are some recommended best practices and background information on ESG reporting.
Why is ESG so Important for IPOs?
Environmental, social, and governance (ESG) factors can have a significant impact on a company's financial performance, risk profile, and therefore, IPO performance and valuation. ESG factors can provide insight into a company's management practices, business model, and overall sustainability, which can affect its long-term financial prospects and shareholder returns.
ESG investor risk refers to potential financial losses or negative impacts that can result from investing in companies, assets, or industries that do not align with environmental, social, and governance (ESG) principles and market trends. This can include risks such as reputational damage, corporate governance failings, regulatory changes, climate risk, and shifts in consumer demand toward more sustainable products and services.
For example, a company that has strong ESG practices may be seen as more likely to have stable and sustainable revenue streams, as well as a lower risk of regulatory or reputational issues. In contrast, a company with poor ESG ratings and performance may face increased regulatory scrutiny, reputational damage, and financial risks, such as legal liabilities or business model disruptions.
As a result, many companies are increasingly prioritizing ESG considerations in their IPO communications and investor relations efforts, including:
- Reviewing and understanding how ESG analysts and rating firms will assess their company pre- and post-IPO
- Performing and disclosing an ESG materiality assessment
- Preparing a company's first ESG report
- Including ESG disclosures and information in IPO filings and investor communications
- Engaging with various investors, analysts, and stakeholders on IPO-relevant ESG topics and issues
By demonstrating a strong grasp of ESG throughout the IPO process, aspiring companies demonstrate their commitment to sustainability and responsible business practices, which helps build trust with investors and enhance their market reputation.
ESG and IPO Valuation and Performance
While ESG focuses on "non-financial" performance indicators compared to classic investor metrics like profit and earnings-per-share, ESG issues increasingly have material, financial impact on a company's access to capital, operating costs, and long-term competitive standing. ESG criteria give investors a holistic risk lens to evaluate a business or investment's key ESG-related risks.
ESG analyst scores and investment ratings are designed to capture and reflect an investment's ESG risk profile.
For example White & Case, a New York-based international M&A law firm finds that, across more than 2,000 academic and case studies, there's a 70% direct, positive correlation between a company's ESG scores and its financial performances.
Investors, increasingly mindful of this correlation, use ESG as a key screening process in their investment decisions and portfolio allocations.
In recent years, many investors ranging from BlackRock to public pension funds have articulated increased demand for companies with strong ESG profiles to go public. As a result, many companies and startups make efforts to highlight their ESG efforts and performance in their IPO documents in order to appeal to these investors.
There are also many examples where companies with poor ESG track records have faced challenges in their IPO process. For example, in 2019, WeWork faced challenges in its IPO due to concerns about its corporate governance and business model, which led to the company delaying its IPO and ultimately withdrawing it.
Additionally, there have been instances where companies and startups have had to address specific ESG risks or controversies in their IPO process. For example, in 2021, the ride-sharing company Lyft faced criticism over its treatment of drivers and its impact on traffic and the environment, which it addressed directly in its IPO documents.
ESG Investor Relations IPO Strategy
When it comes to ESG investor relations around an IPO, it's important to consider the overall strategic goal(s).
Are you looking to address specific investor ESG concerns about your business model? Attract new ESG-oriented investors? Increase your analyst ESG ratings score(s)? All of the above?
It's important to have a vision and sense of what your organization wants to accomplish with its ESG investor relations activities throughout the IPO process.
Many larger institutional investors and fund managers like BlackRock, State Street, Fidelity, Vanguard and others post public information on their websites about their ESG criteria, voting approaches, and investment expectations. ESG analysts like S&P, MSCI Sustainalytics, and ISS do as well. Be sure to review and familiarize yourself with that information.
Once you're clear on your overall shareholder and market strategy, then you can turn to reporting, disclosure, and other key ESG IPO responsibilities.
The ESG Reporting and Disclosure Process for IPO'ing Companies
Typically, the largest commitment of an investor relations team's time and resources during an IPO process will be devoted to preparing ESG disclosures.
ESG disclosure are publicly shared information about a company's performance, practices, and risks related to ESG issues. This can include information about a company's environmental impact, labor practices, corporate governance, and other topics that are relevant to ESG. The purpose of ESG disclosure is to provide transparency and accountability around a company's ESG performance and practices. This can help investors and other stakeholders make informed decisions about the company, as well as help the company identify areas for improvement and better manage its ESG risks.
What should you disclose around an IPO? When it comes to ESG, it depends. There's no one-size-fits-all approach to ESG IPO disclosure, as the specific information provided should be based its industry, size, and other factors. However, there are a number of ways to assess or get a general sense of your organization's ESG risk and performance profile:
- For starters, what questions and concerns are you getting from your existing investors? What about prospective investors? Or your investment bankers?
- Has your company performed an ESG materiality assessment? Materiality assessments are often highly effective at surfacing material ESG topics and risks for a company with IPO aspirations
- Do you have industry peers or competitors who are already public? How are they approaching their ESG disclosures and communications?
ESG reports and disclosure are important in investor relations because they're used by ESG ratings and analyst firms to calculate a company's ESG investment rating. Then, in turn, institutional investors factor those ESG ratings and scores into their investment decisions. As a result, improving their company's ESG analyst ratings and rankings is an important priority for many investor relations teams.
Investors - including IPO investors - principally want ESG data and disclosures because they want to consider the full picture when it comes to investment risks that will matter in the context of their overall investor returns, but may not be included in a company's traditional financial reporting or an asset's capital profile. Things like environmental impact, worker human rights and safety, and governance competency.
Exxon Mobil, Meta (Facebook), Twitter, Tesla, Theranos, Volkswagen, Wells Fargo, and FTX are all cautionary, recent examples of companies whose share price and investor returns have been significantly influenced by ESG risk factors.
And remember, ESG investment risk is very company-specific. Some IPOs have high ESG investor risk due to factors like their industry (examples: fossil fuel, mining, fast fashion), geographic location(s), corporate leadership and governance, business practices, or other areas.
How to Reduce and Manage ESG Investor Risk in an IPO
There are several steps IR teams can take to reduce their company's ESG investment risk profile during an IPO process:
- Conduct a thorough ESG materiality and risk assessment: This involves researching and evaluating the potential environmental, social, and governance (ESG) risks associated with the company's operations, products, and services. This assessment can help identify potential ESG IPO risks and help the company take action to mitigate them (or, at a minimum, prepare disclosures addressing them). For more on ESG materiality, please read our guide here. Or feel free to contact us directly for IPO materiality help or questions.
- Develop an internal ESG risk management plan: This plan should outline the steps the company will take to manage and reduce its ESG risks. This can include implementing new ESG policies, initiatives, and procedures, investing in new technologies, divesting from high-risk ESG investments, or engaging with stakeholder groups to better understand and address ESG concerns.
- Consider TCFD: The Task Force on Climate-related Financial Disclosures (TCFD) has become one of the global standard frameworks in the United States, UK, and EU for communicating climate-related investor risk. If you’re a startup or company approaching an IPO, use TCFD to establish and communicate your core climate risks, risk management strategic, goals, and KPIs.
- Engage with stakeholders and IPO investors: Actively listen to and engage with your company's key ESG stakeholders, including customers, employees, and IPO investors, to better understand their concerns and priorities. This can help a company identify and address potential ESG IPO risks and improve its overall ESG performance. Investor perspective on ESG risk is particularly important. We always recommend engaging investors during a materiality assessment, even if you're a private company.
- Invest in sustainability initiatives: Invest in projects and initiatives related to renewable energy, reducing waste and emissions, and implementing more sustainable business practices. These initiatives can help the company reduce its ESG IPO risk profile and improve its overall sustainability performance and perception.
- Be transparent and disclose what matters: Don't hide or bury material ESG-related aspects of your business. Be transparent and address them directly in your IPO and investor communications. Investors hate unexpected ESG surprises, and markets can be quick to punish unexpectly poor ESG performance or negative events.
- Monitor and report on ESG performance: Once you've IPO'd, it's likely your company will be manage investor relationships and ESG disclosures long-term. Keep tracking and reporting on the company's ESG performance, including its progress reducing material ESG risks and improving sustainability.
ESG risk management is a firm-wide, cross-disciplinary approach that starts from the top. It's critical that a company's board and C-suite are engaged in evaluating, assessing, and managing ESG risks, as well as allocating resources toward addressing them. If that's not happening, investor relations leadership needs to advocate for it and push the agenda.
Why It's Critical to Prioritize ESG in IPO Investor Relations & Communications
Compared to quarterly earnings cycles and other investor relations responsibilities, ESG often requires a longer-term lens on corporate strategy, risk, and value creation. But ESG also carries near-term, immediate consequences, particularly for companies who fail to consider and address material ESG considerations pre- or post-IPO.
In particular, effective vs. ineffective ESG investor relations has implications for:
- Access to capital - From institutional ESG investors like BlackRock and State Street to private equity and banking lenders, more capital providers are using ESG indices, scores, and ratings signals to assess the risk-return profile of their allocation decisions. Emerging evidence suggests better ESG performance translates to a lower cost of capital for companies, plus broader liquidity access
- Initial IPO performance - ESG factors influence the level of demand for a company's shares. If investors view a company as a good ESG performer, they may be more likely to buy the company's stock, thereby supporting a higher share price. Conversely, if investors view a company as a poor ESG performer, they will be less likely to buy the company's stock, putting negative pressure on the share price
- Share price risk - Research from MSCI and Morgan Stanley indicate strong ESG performers have lower earnings volatility and lower market risk compared to lower-ranking companies
- Board risk - From Engine No. 1's Exxon Mobil board activism campaign to State Street voting against the re-election of directors at 400 companies who failed to improve gender diversity on their all-male boards, directors who fail to act on material ESG risks and opportunities are increasingly seen as poor fiduciaries
- Climate risk - As climate change and biodiversity loss fuel trillions of dollars in economic loss and risk, organizations need to identify, manage, and adapt to climate impacts across their business model, products, and value chain. Fortune 500 companies alone carry an estimated $2 trillion+ in financial risk from climate impacts
- Regulatory risk - On the legal side, regulators in the European Union (EU), United Kingdom (UK), United States, Canada, Singapore, and other regions are pushing for more robust ESG implementation across financial reporting, non-financial reporting, and regular operational practices. The Corporate Sustainability Reporting Directive (CSRD) and European Sustainability Reporting System (ESRS) require thousands of companies doing business in the EU to improve their sustainability performance and ESG disclosures. Be aware of local ESG regulations related to the exchange and jurisdications where you're IPO'ing and operating
- Brand and customer risk - The majority of consumers (and a growing number of businesses) want to buy from sustainable brands, making ESG investment, integration, and innovation important ways to de-risk current and future revenue streams while strengthening public reputation
- Financial ROI - There are many, proven ways sustainability and ESG integration can drive operational cost savings and tangible ROI for category leaders
In many ways, ESG performance has become a proxy for responsible management quality, brand reputation, and macroeconomic risk management. A well-run company that cares about its people, customers, and the environment will logically be more resilient over time and outperform its peers who don't. Again and again, that carries through to better IPO performance.
The Long-Term Importance of ESG in Investor Relations
Overall, ESG considerations are an important factor for investors in evaluating a company's IPO. That makes ESG a central responsibility for IPO teams and IR leaders. There are dozens of case studies demonstrating how strong, thoughtful, and strategic ESG risk management and governance are competitive business advantages that deliver positive ROI and shareholder value, and it's important for IR teams to be the stewards of that narrative leading up to and through the IPO process.
Many companies start their ESG investor relations work due to compliance and investor reporting pressures, only to find that as their ESG investments, maturity, and capabilities evolve, they realize significant cross-company benefits and efficiencies.
Every company's ESG roadmap is different - and ESG investor relations is a long-term, strategic communications avenue for boards, management teams, and IR leadership that doesn't end with a successful IPO. The benefits of strong ESG investor relations on brand reputation, employee talent attraction and retention, culture, operational efficiency, risk management, and access to capital are not only numerous - many are quantifiable. And, as always, if we can help your organization enhance the effectiveness of its ESG investor relations and reporting efficiency, please be in touch.