Why ESG is gaining importance in pre-IPO process

1.  The valuation upside of ESG integration

How a company responds to these ESG-focused issues could also be considered as the leading indicator of its financial performance and stability in the future. The International Valuation Standards Council (IVSC) recognizes ESG as a ‘pre-financial’ information rather than a ‘non-financial’ information.

ESG factors reflect on the long-term prospects of a company, which takes into consideration its financial performance, resilience, and the ability to sustain during adverse situations.

2.  Gaining investor interest

As ESG consciousness is increasing amongst the investor community where integrating ESG factors into investment decisions is  prevailing along with financial performance and market benchmarks. To this end, investment funds have upgraded their requirements to conduct due diligence and incorporate ESG aspects in line with the international ESG frameworks and standards such as Task Force on Climate-related Financial Disclosures (TCFD) and Sustainability Accounting Standards Board (SASB), amongst others when considering investments.

3.  Strengthening competitive edge

Not only investors, but consumers also  place great emphasis on company values. With the growing need for sustainable development, consumers expect companies to contribute towards the betterment of environment and society. They prefer brands that resonate with their belief of focusing  on short term solutions. The idea is to  invest in cost-effective and  sustainable innovations that are poised to generate consistent returns over the long-term.

4.  Improved Market Reputation

Periodic ESG reporting and communication that is accurate and transparent acts as an effective brand management tool for companies. Companies that are committed to generating holistic value for all stakeholders are not only reliable, but also nurtures positive market reputation of their approach towards sustainability. ESG integration can be instrumental for emerging public organizations in building long-term trust with its consumers while leading to a positive press image.

5.  Recruiting and retaining employees

Employees care about the organizations they work with. Today, millennials and Gen Z are amongst the largest generations in the workforce that seek purposeful employment opportunities. As a result, individuals are increasingly choosing job opportunities with companies that are committed towards bringing lasting change in the environment and society while building reliable corporate governance. As per a LinkedIn research, professionals  are proudest  working at companies that promote work-life balance and flexibility (51%), foster a culture where they can be themselves (47%) and have a positive impact on society (46%). 

How can companies start their ESG journey before IPO?

• Aligning the company’s purpose with its sustainability objectives: It is crucial for companies to align its purpose with their sustainability goals. A company’s purpose should go beyond just meeting shareholder expectation and include all its stakeholders. This further enables the company to work towards delivering holistic value.
• Identifying Risks and Opportunities: For companies moving towards adopting sustainability, identification of ESG-related risks and opportunities is an important aspect. It is generally difficult for companies to identify risks and opportunities due to the lack of relevant expertise and resources. However, such organizations may choose to hire employees with prior experience in the field of ESG or collaborate with consultants that can help them in developing a sustainable strategy relevant to their businesses and industries.
• Adopting Standard Framework for measuring ESG Performance: Since impact investors pay attention towards the value generated by an organization for all its stakeholders, it is important for a company, aspiring to go public, to ensure accurate and quality ESG disclosures on its performance to report and communicate its efforts. While there is no standard approach to assess an organization’s ESG performance, certain globally recognized approaches can be adopted by companies to benchmark their disclosure to communicate the impact created by them.
• Communicating the Company’s Sustainability Strategy: Organizations that are preparing to go public should adopt sustainability to attract socially focused investors. Nevertheless, more importantly, companies should also focus on communicating their ESG strategy in a clear 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.