Chapter 1
Investors’ growing ESG expectations
Businesses’ sustainability agendas are moving from the sidelines to the heart of how organizations can create long-term value.
The 2020 EY Climate Change and Sustainability Services (CCaSS) Institutional Investor survey (pdf) found that 98% of investors surveyed indicated they were adopting a more disciplined and rigorous approach to evaluating organizations’ non-financial performance. Moreover, 72% stated that they conduct structured, methodical evaluations — a significant increase from the 32% who said they used a structured approach back in 2018.
Organizations that authentically anchor their strategies to a meaningful purpose — with a focus on driving long-term, sustainable value across stakeholders — are best positioned to benefit from, demonstrate and measure the value they create.
Structured evaluations of ESG increasing
72%of investors conduct structured evaluations of nonfinancial performance, compared to 32% in 2018.
Our survey found that from 2016 to 2019, the number of investors making “frequent” use of non-financial metrics in their decisions rose from 27% to 43%, making ESG reporting an increasingly vital concern. Only 9% of investors didn’t use non-financial performance as part of their decision making, while just 2% of investors don’t see the need for a formal framework to measure and communicate intangible value.
This means companies — whether seeking to go public through an IPO or deliberating on doing IPO as an exit option — must establish robust routines for measuring and presenting relevant and meaningful ESG performance indicators.
The challenge for corporate leaders is exacerbated by the fact that there are not yet agreed standards for ESG reporting. Our own explorations into the options as part of the Embankment Project for Inclusive Capitalism, identified 63 potential metrics to help measure long-term value.
The question is which ones will be most meaningful for your stakeholders and potential investors.
Related article
Investment banks and investors are increasingly pushing companies to define their ESG strategies and capabilities to ensure greater interest when going public.
Capital markets are also increasingly aware of the need to reflect on the formidable, long-term impact that environmental disruption can have. As a result, investors are looking to the recommendations of the Task Force on Climate-related Financial Disclosures as part of their evaluations.
For owners seeking an exit of an investment through a trade sale, for example, as a dual-track process connected to an IPO, this means their focus should also be on identifying weak ESG areas that a potential buyer could view as problematic.
The benefits of sustainable finance
Companies facing a refinancing of existing facilities or raising new debt should also be aware of their ability to access sustainable finance or ESG-linked loans. This is a hot topic, and a trend that regulators and the banking community are driving. The latter with its Principles for Responsible Banking.
With the rising focus on sustainability in business, including clear ESG metrics in the terms and conditions of financing arrangements may result in a discount of the interest of the facility of loan, and consequently a lowered cost of financing. We see banks are now more often integrating climate risk into their credit risk assessments.
Before approaching banks and seeking to negotiate an ESG-linked financing, companies, no matter whether they are public or private, must have a clear road map to achieve the anticipated ESG metrics, as they are increasingly likely to be questioned about them.
Everyone from customers to investors is aware of the need to use our planet’s resources in a more sustainable way. It is therefore safe to say that the strong trend around addressing the ESG aspects of capital markets’ transactions is here to stay.
Related article
Subscribe to EY Quarterly IPO Trends reports
Get the latest IPO analysis direct to your inbox
Chapter 2
Key highlights from global IPO trends
Global IPO activity rebounds sharply, hitting historic highs in Q3 2020
Although the market sentiments can be fragile, the scene is set for a busy last quarter to end a turbulent 2020 that has seen some stellar IPO performance.
Q3 2020 bucked the traditionally slow IPO period as people were forced to travel less, work from home and the markets were awash in liquidity resulting in the most active third quarter in the last 20 years by proceeds, and the second highest third quarter by deal numbers.
Globally, YTD IPO activity accelerated, resulting in a 14% increase in total IPOs bringing the total to 872, and an impressive 43% rise in proceeds of US$165.3b.
This year has been nothing if not unpredictable. As we move into the final quarter of the year, investors may look to lock in profits as soon as they see signs of market uneasiness. Globally, a divergence between economic well-being and GDP, and stock market valuations, are also causing some anxiety among investors.
Paul Go, EY Global IPO leader, joins Bloomberg Asia to discuss the Asia-Pacific IPO market for Q4 2020.
To get more insight into the steps companies need to take to maximize their chances of IPO success, download our Guide to Going Public (pdf).
Subscribe to EY Quarterly IPO Trends reports
Get the latest IPO analysis direct to your inbox
Summary
Investors are increasingly eager to measure companies’ intangible value in a more structured way, to help them evaluate organization’s potential long-term value creation strategies.