6 minute read 15 Oct 2020
Family poses on the Rainbow Bridge Qingdao City

How investors’ focus on long-term value is driving companies’ ESG plans

By Paul Go

EY Global IPO Leader

Leads Chinese and multinational companies in client servicing domain. Heads Hong Kong real estate, hospitality and construction sector audit group.

6 minute read 15 Oct 2020
Related topics IPO Private Business

As part of the Q3 2020 global IPO trends report, we look at investor’s growing interest in environmental, social and governance strategies.

In brief
  • There has been a major shift in investors adopting a more disciplined approach to evaluating organizations’ non-financial performance.
  • Companies raising new debt should be aware of their ability to access sustainable finance options.
  • A strong Environmental, Social and Governance (ESG) strategy is now a must-have for all companies.

No one will have missed the strong, growing trend around business sustainability, and the debate about how both domestic and international companies impact the global environment. Where many companies and investors have previously viewed Environmental, Social and Governance (ESG) as “nice to have,” we can now conclude that it’s quickly becoming a “need-to-have” strategic imperative across all organizations. 

From a transaction standpoint, there are certain clear trends within ESG that owners and companies should be aware of. The ideal is to make ESG an integrated part of an organization’s equity story — which will have the added benefit of demonstrating a considered vision for long-term growth.

Read more about the latest IPO trends in our Q3 2020 global IPO trends report below.

 

Download our latest quarterly IPO trends report

Our full IPO trends report provides deeper analysis and insights, including regional and country breakdowns, as well as all the data.

Explore the data (pdf)

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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.
Monica Dimitracopoulos
EY Global Long-Term Value Leader

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.

Investment banks and investors are increasingly pushing companies to define their ESG strategies and capabilities to ensure greater interest when going public.
Rafael A. Alves dos Santos
EY Financial Accounting Advisory Services, Brazil

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. 

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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.
Paul Go
EY Global IPO Leader

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).

  • Data definitions for all charts

    The data presented on this webpage and in the Global IPO trends: Q3 2020 report is from Dealogic and EY. YTD 2020 (i.e., 1 January–30 September) is based on completed IPOs as of 30 September 2020. Data is up to the close of business, 30 September 2020.

    • In compiling the IPO statistics included in these reports and press releases, we focus only on IPOs of operating companies and define an IPO as a "company's offering of equity to the public on a new stock exchange." 
    • This report includes only those IPOs for which Dealogic and EY teams offer data regarding the first trade date (the first day on which the security start trading on a stock exchange), and proceeds (funds raised, including any over-allotment sold). 
    • The first trade date determines which quarter a deal is attributed to. Postponed IPOs, or those that have not yet been priced, are therefore excluded. Over-the-counter (OTC) listings are also excluded.
    • In an attempt to exclude non-operating company IPOs such as trusts, funds and special purpose acquisition companies (SPACs), companies with the following Standard Industrial Classification (SIC) codes are excluded:
      • 6091: Financial companies that conduct trust, fiduciary and custody activities
      • 6371: Asset management companies such as health and welfare funds, pension funds and their third-party administration as well as other financial vehicles.
      • 6722: Companies that are open-end investment funds
      • 6726: Companies that are other financial vehicles
      • 6732: Companies that are grant-making foundations
      • 6733: Asset management companies that deal with trusts, estates and agency accounts
      • 6799: Special purpose acquisition companies (SPACs)
  • Definitions for IPO performance by geography

    • Americas
      includes the United States, Canada, Argentina, Bermuda, Brazil, Chile, Colombia, Jamaica, Mexico and Peru.
    • Asia-Pacific
      includes Australia, Bangladesh, Greater China, Fiji, Indonesia, Japan, Laos, Malaysia, New Zealand, Papua New Guinea, Philippines, Singapore, South Korea, Sri Lanka, Thailand and Vietnam.
    • EMEIA
      includes Armenia, Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, India, Ireland, Isle of Man, Italy, Kazakhstan, Luxembourg, Lithuania, Netherlands, Norway, Pakistan, Poland, Portugal, Russian Federation, Spain, Sweden, Switzerland, Turkey, Ukraine and United Kingdom, plus the Middle East and Africa countries listed below.
    • Africa
      includes Algeria, Botswana, Egypt, Ghana, Kenya, Madagascar, Malawi, Morocco, Namibia, Rwanda, South Africa, Tanzania, Tunisia, Uganda, Zambia and Zimbabwe.
    • Middle East
      includes Bahrain, Iran, Israel, Jordan, Kuwait, Oman, Qatar, Saudi Arabia, Syria, United Arab Emirates and Yemen.
  • Definitions for IPO deals — top stock exchanges

    We have used data from the main market and the junior market if applicable. The labels on the horizontal axis are the stock exchange tickers (see below for their full names):

    Asia-Pacific

    • ASX: Australian Securities Exchange
    • HKEx: Hong Kong Stock Exchange Main Board and its junior market, Growth Enterprise Markets (GEM)
    • IDX: Indonesia Stock Exchange
    • SET: Stock Exchange of Thailand and junior market, Market for Alternative Investments (MAI)
    • SSE: Shanghai Stock Exchange and Science and Technology Innovation Board (STAR)
    • SZSE: Shenzhen Stock Exchange and junior market ChiNext
    • TSE: Tokyo Stock Exchange (1st section, 2nd section, PRO Market) and junior markets, MOTHERS and JASDAQ

    Europe, Middle East, India and Africa

    • Euronext: Euronext (Amsterdam, Brussels, Lisbon and Paris) and junior market Alternext (Amsterdam, Brussels, Lisbon and Paris), 
    • Indian: India’s National Stock Exchange and junior market, Small and Medium Enterprise (SME) board and Bombay Stock Exchange and junior market SME board
    • LSE: London Main Market and junior market, Alternative Investment Market (AIM)
    • NASDAQ OMX: NASDAQ OMX Nordics Main Market and junior market, First North, based in Copenhagen, Helsinki, Stockholm and Riga

    Americas

    • NASDAQ: US’s National Association of Securities Dealers Automated Quotations exchange
    • NYSE: US’s New York Stock Exchange
    • B3: Sao Paulo Stock Exchange
  • Definitions for IPO deals by sector and IPO proceeds by sector

    Sectors are classified according to Thomson general industries using a company’s Sector Industry Classification (SIC) code. There are 11 sectors, which are defined below with their specific industries. The 11 sectors are shown on the horizontal axis.

    • Consumer:
      the combination of “Consumer staples” and “Consumer products and services” sectors. Its specific industries include: agriculture and livestock, food and beverage, household and personal products, textiles and apparel, tobacco, educational services, employment services, home furnishings, legal services, other consumer products, professional services, as well as travel services. 
    • Energy:
      includes the following specific industries: alternative energy sources, oil and gas, other energy and power, petrochemicals, pipelines, power, as well as water and waste management.
    • Financials:
      includes the following specific industries: asset management, banks, brokerage, credit institutions, diversified financials, government sponsored enterprises, insurance, as well as other financials.
    • Health care:
      includes the following specific industries: biotechnology, health care equipment and supplies, health care providers and services (HMOs), hospitals, as well as pharmaceuticals.
    • Industrials:
      includes the following specific industries: aerospace and defense, automobiles and components, building/construction and engineering, machinery, other industrials, transportation, as well as infrastructure.
    • Materials:
      includes the following specific industries: chemicals, construction materials, containers and packaging, metals and mining, other materials, as well as paper and forest products.
    • Media and Entertainment:
      includes the following specific industries: advertising and marketing, broadcasting, cable, casino and gaming, hotels and lodging, motion pictures or audio visual, other media and entertainment, publishing, as well as recreation and leisure.
    • Real estate:
      includes the following specific industries: non-residential, other real estate, real estate management and development, as well as residential.
    • Retail:
      includes the following specific industries: apparel retailing, automotive retailing, computers and electronics retailing, discount and department store retailing, food and beverage retailing, home improvement retailing, internet and catalog retailing, as well as other retailing.
    • Technology:
      includes the following specific industries: computers and peripherals, electronics, internet software and services, IT consulting and services, other high technology, semiconductors, as well as software.
    • Telecommunications:
      includes the following specific industries: other telecom, space and satellites, telecommunications equipment, telecommunications services, as well as wireless.

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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. 

About this article

By Paul Go

EY Global IPO Leader

Leads Chinese and multinational companies in client servicing domain. Heads Hong Kong real estate, hospitality and construction sector audit group.

Related topics IPO Private Business