Making ESG principles a cornerstone of your IPO preparation

Embedding ESG objectives into your post-IPO strategy can pay off with increased stakeholder interest and long-term value creation.

In brief

• Environmental, social and governance issues (ESG) continues to become more critical to a variety of stakeholders, including the financial community, investors, customers and the public.
• For companies considering a public exit, integrating ESG priorities into their post-IPO strategy is key in delivering against these stakeholder expectations.

The road to an initial public offering (IPO) is a time-consuming, labor-intensive process that challenges even the most prepared private firms. And it’s not getting easier.

Along with the traditional methods that markets use to judge IPO candidates, companies planning to go public today must be prepared for increased interest in their environmental, social and governance (ESG) strategies and metrics.

ESG has quickly grown in importance to a variety of stakeholders, including the financial community, investors, customers and the public. Financial figures alone no longer tell a company’s story; markets are interested in a more holistic view — most importantly, whether the company operates responsibly and sustainably, and for the long-term benefit of all stakeholders. The movement is called “stakeholder capitalism” — the idea that meeting the needs of all stakeholders, rather than just shareholders, aids companies in creating lasting value.

ESG’s sweeping acceptance is the result of several converging trends, including demographic shifts and the desire for more diverse workforces, innovations in technology, corporate response to climate change and a growing realization that businesses have a responsibility to help drive positive social change and benefits.

The COVID-19 pandemic played a role too by highlighting the resiliency of companies that have strong corporate governance — and the weakness of companies that don’t.

Amid the rush of preparing for an IPO, private companies must expand the purview of their work to include ESG strategy development and detailed plans for implementation, measurement and communication. Doing so is a critical business imperative in today’s world; companies that appropriately align and govern the social and environmental issues that intersect with their business can be rewarded with better access to capital, higher stock valuations and new growth opportunities.

Just as importantly, a private company that clearly communicates its commitment to ESG sends a strong signal to the market that it has a capable, forward-thinking leadership team that can drive post-IPO success.

What ESG means for private companies

ESG encompasses a wide range of initiatives and strategies that correlate with long-term value for all stakeholders. The best way to consider ESG and its relationship to your company is to look beyond financial performance to the broader implications of your business — the people, places and processes that impact, or are impacted by, your organization.

For private companies preparing to go public, ESG typically means focusing on strategies around four key elements:

• Environmental performance and sustainability of operations and products
• Ethical sourcing and responsible supply chain management
• Workforce and supplier diversity and inclusion
• Governance leading practices, including proper board structure and representation

While many companies include philanthropic efforts, such as community donations or support for local charities, in their ESG reporting, those activities alone aren’t enough to convey how the company intends to create long-term value for all stakeholders. Today, community giving by itself is typically considered a regular component of doing business and not a strategic ESG element.

Common obstacles for private firms

Private firms preparing for an IPO face several challenges in creating a thorough, strategic ESG platform.

First, many entrepreneurs and private business leaders have a laser-like focus on financial growth and performance, and rightfully so. That’s how they successfully positioned their firms for an IPO. However, that focus means that they are sometimes caught off guard by the evolution of ESG and its importance to the financial community, investors and the marketplace.

While it’s true that most private firms have shareholders, investors and relationships with lenders, they have not yet been subject to the same level of scrutiny as public companies, making it easier to minimize ESG as a priority.

In addition, many private firms lack a deep bench of talent with experience in ESG strategy development at publicly held companies. And it’s not uncommon for private companies to silo ESG into a particular department or view it simply as another risk management effort. Without being embedded into the company’s strategic framework, ESG won’t deliver fully on its promise.

Finally, it’s necessary for private company leaders to fully understand and appreciate public company reporting requirements and develop the appropriate processes and controls to maintain compliance. Historically, those requirements have been focused on financial performance, but regulators are increasingly requiring ESG-type reporting — a trend that we expect to accelerate globally. It’s vital that private companies prepare for this as they look to go public — and continue to monitor developments closely.

The ESG journey for private companies

In my experience, companies that are coming to market today are spending more time and resources on pre-IPO readiness than ever before, and smart companies are including ESG strategy development in that preparation. But, given limited resources and time, what’s the best way to move forward?

Focusing on these five priorities can help private company leadership teams ensure that ESG principles are embedded into their post-IPO strategy:

Opportunity with ESG

As private companies consider their path toward the public markets, they can be assured that embedding ESG strategically and intentionally will be welcomed by the market. C-suites and boards know that it’s important to forge a better path forward via the adoption of ESG principles; employees and customers are demanding that they do so.

Just as important, investors are putting money where the strategy is: assets invested in ESG funds are expanding rapidly, and companies aligned to delivering long-term value enjoy lower costs of capital.

Investors back a company if they have faith in the leadership team, like the company’s story and purpose, and believe that it has the potential to deliver impressive returns. Every pre-IPO company has the opportunity — if not the obligation — to optimize its chances for long-term success by embracing ESG principles and strategies.