The need to incorporate ESG into business models is an urgent calling, which is set to gain traction in the coming times.
Businesses need to venture early on the path of sustainable reporting to enhance the credibility and visibility of their IPOs in a world that is increasingly becoming ESG-centric. The world of investing has witnessed a paradigm shift in the values that drive investments in recent times. In 2020, the pandemic resulted in a historic market crash, being the most severe since the global financial crisis of 2008. Nonetheless, investors with a focus on integrating ESG into their investment decisions remained relatively safeguarded due to the resilience of high-rated ESG funds. While this outperformance is partly due to the exposure of these funds to sectors that are less impacted by containment and social distancing measures (such as tech or telecoms), investment flows into ESG funds were much more resilient during the crisis.
Therefore, keeping in mind the recent performance, companies which are going for public listing need to be cognizant that there is extreme transparency in their disclosure. Currently, most investors pay attention to the value generated by an organization for all its stakeholders and consumers are also becoming aware of their choices, therefore value creation has become a business imperative.
[box type=”note” align=”” class=”” width=””]To demonstrate their resilience and build their investment thesis, these organizations in their pre-IPO phase should adopt sustainability into their strategy to attract socially focused investors.[/box]
More importantly, companies should also have a clear focus on communicating their ESG strategy in a clear, concise, interconnected, and defined manner. While reporting, it is crucial for a company to have a sustainability strategy that explains its approach towards addressing the issues that are material to the business.
ESG best practices of emerging public entities
As investors are recognizing the significance of sustainability reporting and its linkage with the ability to sustain, corporate boards have started incorporating sustainability aspects in the business strategy. Similarly, some observations noticed among emerging public companies gaining investor attention by integrating sustainability in their business functioning and disclosing the information were recently seen in India.
- A well-placed corporate governance structure
- Sustainability and ESG aspects integrated into the business strategy and operations
- Pre-defined KPIs for various environmental, social and governance aspects such as energy emissions, water, waste biodiversity, health and safety, diversity and inclusion
- Disclosures related to aspects of sustainability as per the globally recognized frameworks and standards such as GRI, UNGC, and UN SDGs, amongst others
- Focus on promoting low-carbon intensive technologies, sustainable products, and eco-friendly packaging
Learnings and considerations
With the rise in sustainability related disclosures, stakeholders are becoming more cautious and some of the recent examples depicted the relevance of ESG integration during the initial public offerings. Listed below are some ESG issues observed by investors that resulted in a public backlash and forced the companies in question to rethink their business models.
- Lack of proper working conditions and negligent work environment in terms of employee safety and security
- Human rights violations
- Corruption and lack of transparency
- Lack of appropriate governance framework and non-compliance with local, national, and international laws
- Issues such as weak data privacy and security, poor board independence, accounting, and business ethics
[box type=”info” align=”” class=”” width=””]Today, the focus is on integrating ESG at different stages of IPO.[/box]
There is a rising requirement for ESG in every stage of the process and a focus on how global compliance is shaping up. Fund raising for a company has evolved over the years to be in line with the transformations in the business landscape and is integrating ESG as one of the chief parameters to portray to investors.
Hence, the importance of sustainable IPOs, benefits of ESG-driven business practices in the valuation process and the growing regulatory environment in this space, are all crucial factors to be considered by an organization in its journey to public listing. While established companies are rapidly adopting ESG to deliver lasting value and build trust among stakeholders, it is equally important and beneficial for early stage and growing organizations to embark on their ESG journey soon to become truly resilient and responsible while strengthening themselves before going public.
[author title=”” image=”http://”]Author: Shailesh Tyagi, Partner, Climate Change & Sustainability Services (CCaSS) EY India[/author]