3 ESG Essentials for Firms Looking to Go Public

For private companies looking to go public, the list of prerequisites usually includes a strong outlook for revenue growth, market-share expansion, a management team that can deliver profitability and, increasingly, a handle on sustainability issues, especially in the age of COVID-19.

Indeed, identifying, developing and communicating a corporate sustainability strategy has become an essential part of the process for companies looking to shore up their balance sheets by tapping public markets through initial public offerings (IPO) or special purpose acquisition (SPAC) vehicles, according to “Sustainable Value: How Emerging Public Companies Can Deliver on ESG Expectations,” a new report from the Morgan Stanley Institute for Sustainable Investing, which cites the growing pool of capital that invests based on environmental, social and governance (ESG) criteria.

“As adoption of sustainable investing continues to grow, emerging public companies run the risk of leaving some investors on the sidelines if they aren’t taking a thoughtful and strategic approach to sustainability,” said Matthew Slovik, Managing Director and Head of Global Sustainable Finance at Morgan Stanley.

Increasingly, investors are scrutinizing ESG issues such as public health, climate change and racial equality, treating them as key business risks or opportunities. As of January 2020, 33% of the $51.4 trillion in total U.S. assets under professional management used a sustainable investing strategy,¹ while 80% of institutional asset owners,² half of U.S. individual investors³ and three quarters of asset managers now practice sustainable investing.⁴

“Investors increasingly recognize that better practices around ESG can reduce tail risk and improve risk-adjusted returns,” says Melissa James, Managing Director and Vice Chairman of Global Capital Markets at Morgan Stanley. “High growth companies that are building for the future recognize that employee engagement, worker productivity and strong brand equity can be strengthened through strong sustainability practices. Therefore, pre-IPO companies focused on building sustainable and resilient business models are incentivized to formulate a strong ESG strategy in preparation for going public.”

To bridge the gap between investor expectations and limited sustainability disclosure from companies looking to go public, the Institute for Sustainable Investing identified three steps that can help corporates—and allocators in the process of vetting them—account for and communicate ESG information.

1. Integrate sustainability into corporate purpose.

A “corporate purpose” is distinct from a mission statement in that it focuses on what a company stands for versus what it does functionally. It can focus on the interests of many constituencies—from investors and employees to consumers and regulators—and should go beyond the typical pledge to “maximize shareholder value” by integrating sustainability issues. To send a strong signal that ESG issues matter, the purpose should address the environmental and social impact of products and services, as well as the company’s response to sustainability issues, such as climate change, systemic social challenges, executive accountability, diversity and inclusion, and employee well-being, benefits and compensation.

2. Identify risks and opportunities.

Early-stage companies may benefit from gathering stakeholder views and conducting peer analysis to determine their top sustainability priorities. One widely adopted framework from the Sustainability Accounting Standards Board (SASB) provides industry-specific guidance and disclosure standards on material ESG issues, such as climate risk management and human rights, and can offer a useful starting point.

Companies can also consider using the Global Reporting Initiative’s standards, which include broader stakeholder expectations in defining material ESG issues. Additionally, corporates with greater exposure to climate-related risks can leverage the recommendations of the Task Force on Climate-related Financial Disclosures.

Many private companies, especially start-ups, may lack the resources and expertise to develop and implement a strategy to manage ESG risks and opportunities. In such cases, companies may consider hiring employees with expertise in high-priority sustainability issues or shifting existing staff into ESG-focused roles to develop internal expertise. Corporates may also consider working with consultants to jump-start a sustainability strategy. 

3. Communicate an authentic sustainability strategy.

Companies should provide robust ESG data that can help investors make decisions about how they allocate their capital. The baseline: Disclose information that is consistent and comparable to data from peers, communicate a strategy to address sustainability issues and provide updates on progress. A useful way to begin is by launching an internal sustainability communications program through newsletters or town hall meetings. Once leaders are comfortable with internal efforts, they can initiate public communications through a corporate website or other external channels.

The next step is to publish a sustainability report customized to engage key audiences. Around 90% of S&P 500 companies publish sustainability reports,5 but increasingly, companies of all sizes and capitalization structures are communicating about sustainability topics. It’s now an important milestone for companies looking to meet stakeholder expectations and engage with increasingly sustainability-focused investors.

Learn more about how emerging public companies can use these building blocks to demonstrate the ability to withstand and help mitigate the world’s biggest sustainability challenges. See the full report.