The task of communicating with investors can be daunting for pre-IPO and newly public companies but, when actively integrated into a company’s identity and goals, has the potential to be an important component in connecting with the public markets. This is particularly true when it comes to a company’s Environmental, Social, and Governance (ESG) strategy.
ESG reporting allows for the communication of certain strategic goals, progress toward meeting those goals, and how these activities fit into a company’s broader operational strategy. ESG disclosures can further facilitate an analysis of a company’s operations, communicating the plan to harness these factors to help drive performance and potentially create value by taking advantage of related growth and strategic potential while building a brand.
Transparency on ESG initiatives presents an opportunity to capture strategic value, facilitate effective investor relations, and access a whole new set of investors through ESG-focused funds. The market has spoken: Many investors, private equity firms, and investment management companies appear have an interest in aligning their investment dollars with companies who deliver on carbon reduction goals, providing this and other elements of ESG reporting as benefits to the broader community.
Looking Ahead
Pre-IPO and newly public companies should not ignore ESG simply because it is not required…yet. There is an expectation that it is only a matter of time before regulations come into effect requiring ESG disclosure. The Securities and Exchange Commission (SEC) released a proposed rule on March 21, 2022, that would require public companies to disclose both their greenhouse gas emissions and climate related risks, as well as the climate impacts within the financial statements themselves. The new regulation would require organizations to provide certain climate disclosures in its registration statements and annual reports.
Globally, regulators are already beginning to make ESG reporting mandatory. On January 5, 2023, the Corporate Sustainability Reporting Directive (CSRD) came into force, establishing sustainability standards and reporting requirements. Mandatory reporting under these new standards would begin in fiscal year 2024 for certain companies.
Beyond the coming regulatory requirements, early adoption of ESG practices may present a strategic advantage. Already ESG issues, as well as the responses of governments, companies, and individuals to those issues, are beginning to reshape the global economy. This transformation is changing the calculus for analyzing the costs and benefits of existing strategies in real time, while creating new tactical advantages for those who are able to identify and seize them.
Looking ahead, whether operational/financing strategy or the inevitability of regulation drives a company’s interest in ESG reporting, there are plenty of reasons for companies to get started today preparing for the environment they will face tomorrow.
What does it take?
ESG reporting encompasses a wide array of non-financial information, and not every element of that framework is or ought to be a focus for every company. A company may want to report on half a dozen topics in an ESG report eventually, but there may only be one or two of those topics that it is either ready to begin reporting on or is currently prioritizing based on what is most important to stakeholders.
A great place to start is a materiality assessment, which helps management determine what to include in an ESG report. This exercise will help determine the topics most important to the company through an evaluation of priority stakeholder interests and business impacts. Through a materiality assessment, management can begin looking at their data requirements.
The importance of data cannot be overstated. The ability to achieve ESG reporting goals hinges on the ability to collect accurate data. Depending on reporting goals and available data, companies may need to invest in software that tracks emissions or a reporting tool to reliably house the information gathered. Of course, as part of implementing any new systems or reporting tools, it is also important to take a look at existing or new controls that may be required to validate the data coming in and out.
Once accurate data is available, the effective communication of that data becomes paramount. Third parties have been known to fact check the claims made in ESG reporting, and exaggerated or imprecise claims can be seen as “greenwashing,” which may diminish the report’s credibility. That’s not to say ESG reporting isn’t worth it. Just as companies are careful to clearly and accurately describe changes in revenue or earnings per share on an earnings call, it is important to clearly and accurately describe ESG metrics. This can be achieved, in large part, by being open and transparent in describing efforts and successes. While this may involve growing pains in the near term, transparency is a tool that drives value.
The investor lens
Investors are leading the way in prioritizing ESG reporting. Many investment managers and funds have focused on specific issues such as clean tech, green real estate, sustainable forestry, agriculture, education, and health. However, not every ESG-focused investor is making a values-based decision. Many potential investors are simply assessing whether the companies they are considering investing in are doing a good job of capturing value in a changing world.
Individual investors are not alone in their interest in ESG reporting. Public statements of institutional investors and the business community writ large have elevated this topic significantly in recent years. One pivotal instance of this goes back to August 19, 2019, when the Business Roundtable announced the release of a new Statement on the Purpose of a Corporation. Centrally, this statement, which was signed by 181 CEOs, asserted that corporations had a duty to a variety of stakeholders within their communities and not just their shareholders; and it was credited with bringing significant attention to ESG reporting.
As the prevalence of ESG-focused funds increases, pre-IPO and newly public companies meet not only consumer demand for their goods and services but also the demand of investors for companies that can deliver on stated values that are important to both the company and the investor.
The ESG reporting journey
There are many reasons to pursue ESG reporting as a newly public company. This pursuit may lead to many decisions about a company’s priorities, data, and tools. With an experienced team in place, this journey can propel a company’s overall strategy forward, positioning them for success in the future.
Contemplating taking your company public? Start your journey today by using our free IPO readiness tool, IPO SelfAssess.
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