Companies planning to list need to implement a robust ESG strategy or they will receive a discount on their valuation, according to one of Europe’s top IPO consultants.
The proportion of assets managed under sustainable criteria is growing quickly and pre-IPO companies that do not meet ESG standards risk being locked out of that capital, says Martin Steinbach, EY IPO leader for EMEIA (pictured).
The inclusion of ESG data in the IPO roadshow has grown since the beginning of last year and is now a ‘must have,’ he says. ‘Otherwise you don’t have access to those ESG investors, which are playing an important role in the IPO market.’
Last year saw record flows of $649 bn into ESG-focused funds globally, according to data from Refinitiv Lipper. Sustainable funds are now estimated to make up 10 percent of all global fund assets.
Whether private or public, companies are coming under pressure from a range of stakeholders to disclose ESG information around areas like climate change, human capital management and biodiversity.
Increasingly, that pressure is coming from regulators. In Europe, the European Commission has proposed a new sustainability reporting directive, which will see the number of companies required to disclose on ESG issues rise from around 11,000 to 50,000.
Meanwhile, the UK has made reporting under the TCFD recommendations mandatory for large companies and US regulators are weighing up new climate disclosure rules.
Amid these changes, companies going public are aligning themselves with reporting standards and frameworks – like SASB, GRI and TCFD – and aiming for quick entry into sustainable indices, says Steinbach.
‘Indices are an important driver of liquidity post-IPO,’ he explains. ‘Everyone is targeting ESG indices on top of the traditional ones. They don’t want to wait until their first annual report comes out to meet the criteria.’
When Monde Nissin went public last year, raising P48.6 bn ($1.1 bn) on the Philippine Stock Exchange, sustainability was an important part of the story, says David Nicol, chief strategy officer at the food and beverage company. ‘Had we not gone about executing this IPO so quickly, it might have been an even bigger part of the story,’ he says.
‘The first part of the ESG story was the meat-alternative business [Monde Nissin owns vegetarian and vegan products brand Quorn]. The second part was the reduction in palm oil content in the noodles, which was roughly 20 percent by weight to 5 percent, through this high-speed airflow technology we are using.’
Monde Nissin had more sustainability initiatives under way, but couldn’t mention them due to the strict rules around information released in advance of an IPO.
‘We could have been much bigger in talking about things like carbon intensity, packaging and recycling,’ says Nicol. ‘All of those measures are monitored internally, and people are working very, very hard on all that. But we did not have auditable information in time for the IPO prospectus.
‘We had the internal data, but not the external verifiability. When you put it in a prospectus, you have to prove every single number, and then you have to go back [over previous years]. Unfortunately, there was not enough time.’
When thinking about which ESG issues to discuss for the IPO, companies need to stay authentic and in line with the prospectus, says Steinbach. ‘If you use an ESG KPI, this KPI should be in the prospectus – that’s super clear. Investment banks that are underwriting the prospectus want to have comfort on whether this KPI is right or wrong,’ he says.
Turning to the IPO outlook for 2022, Steinbach says there is good momentum from last year that should support listing activity. In 2021 the IPO market hit record levels, with 2,388 deals raising $453 bn, according to data from EY.
‘When we are talking about EMEIA, we still have a low-interest-rate environment despite inflation, and this pushes investors to look for returns,’ Steinbach says. ‘The only way to survive is to mix your portfolio with risk. We also have a huge population of unicorns.’
But IPO candidates have to look at short-term volatility, warns Steinbach: ‘This could be negatively impacted by geopolitical tensions and further developments of Covid-19. Is Omicron really moving us from a pandemic to an endemic? If we don’t see external shocks, then we are positive for 2022 as the main trends that drove growth in 2021 are still there.’