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An Initial Public Offering (IPO) is a key milestone in a company’s corporate journey. Companies preparing for an IPO must convince existing and potential investors they are ready to take such an important step. This involves intense examination of their financial, operational, commercial, and managerial performance. During this process, a company preparing for IPO must also assure investors of its potential for long-term success in the public domain.

Uncertain global financial and political conditions have affected the IPO market in recent years. Much of this volatility is related to environmental, social and governance (ESG) issues. This places greater pressure on pre-IPO companies to demonstrate their sustainability, resilience and ability to manage the threats and opportunities caused by changing circumstances. Stakeholders want to see companies take a strategic approach to ESG. Effectively communicating efficient ESG management and performance has become a pivotal factor in attracting investors. Below we look at what this means for companies preparing for an IPO.  

Why ESG is important in preparing for IPO

Evolving stakeholder expectations about the global importance of ESG issues has changed the framework for analysing costs and benefits in investment decisions. The alignment of ESG in a company’s operations is now as critical as financial factors in ensuring a successful IPO. It has become a lens to evaluate a company’s overall performance. There are several ways in which this affects companies preparing for IPO. These include:

Investor decision-making: Investors increasingly consider companies’ ESG performance when making investment decisions. A recent survey found that 80% of global investors have sustainable investment policies in place to minimise their risk and maximise opportunities. Pre-IPO companies with robust ESG practices are more likely to attract interest from investors that recognise how ESG positively affects long-term value and competitive advantage.

Risk management: Each ESG pillar contains issues with associated risks. Companies that proactively manage ESG issues reduce the risk of potential liabilities, reputational damage and lost opportunities. Integrating ESG into their pre-IPO preparations puts companies in a better position to reduce those risks.

Branding and credibility: Integrating ESG into business operations and strategies helps to establish a company’s credibility with its key audiences and markets. An ESG strategy is essential for building a sustainable brand. A sustainable brand can create a competitive advantage from increased brand awareness and stimulate long-term value. A sustainable brand builds trust with investors and customers by being transparent about the company’s ESG plans, goals, activities and challenges.

Stakeholder goodwill: Investors are more attracted to companies with solid business relationships that will continue after the IPO. Demonstrating a genuine commitment to sustainability, diversity, and ethical governance attracts customers, suppliers and talented employees to the company.

Higher valuations: Recent research shows that high ESG ratings positively affect IPO valuations. ESG ratings are an industry-recognised methodology to quantify and evaluate the extent to which a pre-IPO company is open to risk from ESG factors. Investors use this analysis to assess a company’s competitiveness and potential for long-term value. Investors prioritising ESG factors are increasingly important in the IPO market. Companies without a robust ESG strategy, or who don’t make their ESG data available during roadshows, will be denied access to these investors. This will likely result in a discount on their valuation.

The importance of effective pre-IPO communications

A successful IPO can take years of careful planning. Carefully managing a company’s communications is a key component of the plan. A company’s business model, value proposition, growth strategy and differentiators need to be effectively communicated to key stakeholders. Communicating ESG position, strategy and performance has become equally vital to ensuring a successful IPO.

Investors no longer just focus on financial documents during their due diligence. They give equal prominence to assessing how a company navigates its ESG challenges. This helps them to judge the quality of the company’s management, the resilience of its business model, and how ESG factors might affect its strategy, material value drivers and financial performance. Effective ESG communications are essential to attracting the right investors pre-and post-IPO.

There are several ways pre-IPO companies communicate their ESG activities to enhance credibility and visibility. They can publish ESG reports that detail their environmental initiatives, social impact and governance procedures. Annual sustainability reports provide an overview of sustainability objectives, initiatives and progress, and an opportunity to engage profoundly with stakeholders. Pathfinders and prospectuses are critical documents in the IPO journey. They can include sections about how ESG has been integrated into the business model and the company’s achievements. Roadshows, presentations and meetings provide further opportunities for pre-IPO companies to engage with investors and highlight their ESG efforts.

ESG communications are an opportunity for pre-IPO companies to develop a compelling, distinctive corporate narrative. Explaining the impact of the company’s work on society and the environment can reinforce its IPO story. Clear and honest communication of a company’s ESG efforts, achievements and challenges can help to build a reputation for transparency and authenticity. This is important as stakeholders increasingly scrutinise the veracity of company information. They assess whether ESG truly is a key factor in operational decisions. Carefully considered and honest ESG communications can help a company reach and connect with new audiences.

Conversely, a lack of clarity or accuracy in ESG communications can jeopardise a company’s IPO prospects. It can raise questions about a management team’s judgement, and its ability to identify and manage risk. Doubts about a company’s long-term viability, when it is beginning to build a performance track record, can be seriously damaging to its IPO prospects. There is never a second chance to make a first impression.

Clear and accurate ESG disclosures during pre-IPO preparations can create a basis for productive, long-term investor relationships and corporate access. It helps companies develop a corporate story that engages investors who base their decisions on the value inherent in ESG initiatives. Adopting ESG practices at an early stage can present a strategic advantage for pre-IPO and newly public companies.

Detailed and transparent ESG disclosures before and during IPO can also signal a company’s fitness to comply with the reporting obligations of listed companies after IPO. The UK Government and regulators are making ESG reporting requirements more extensive and demanding. SECR (Streamlined Energy and Carbon Reporting) and TCFD (Taskforce for Climate-related Financial Disclosures) are now mandatory for a greater number of companies, including some AIM companies. The forthcoming UK Sustainability Disclosure Standards will be the basis for more streamlined future statutory and regulatory sustainability reporting. Introducing a capability for ESG reporting at an early stage helps pre-IPO companies prepare for more rigorous reporting requirements as a public company.

Embracing ESG gives a pre-IPO company greater visibility and competitive edge. The key to optimising this advantage during the IPO process is to communicate this effectively and skilfully to key stakeholders, especially investors.

Perivan has extensive IPO prospectus, pre-and post-IPO corporate finance, and investor communications capabilities. Its design team works with many companies to design and produce their sustainability, ESG and annual reports.

If you would like to know more about how Perivan can help you at every stage of your corporate journey, or how Perivan’s data room, Engage, can help you to manage your corporate access and investor communications, please get in touch with the Perivan team to arrange a demo and answer your questions.