Companies strengthen their ESG credentials to boost IPO valuations

  • Companies are increasingly touting ESG missions to amplify their public debuts.
  • The advisers are responsible for integrating these values ​​into the public records of so-called benevolent companies.
  • But their IPOs deviate widely from specific measures for fear of liability or backlash from investors.

U.S. stock indexes have hit record highs this year as economic growth and a banked investor base have brought new companies to U.S. stock exchanges at gargantuan valuations.

Excluding ad hoc acquisition vehicles, 283 companies have completed IPOs since the start of the year, well ahead of 209 made during the same period in 2020 and 152 a year earlier, according to Dealogic data.

Among the latest wave are ‘do-good’ companies like eyewear maker Warby Parker and yogurt company Chobani, which tout sustainability measures as part of their value propositions. This move has the potential to boost their IPOs.

“It improves your assessment if you can meet an ESG requirement,” said Jill Ford, head of the Equity Markets Union for the Americas at Credit Suisse, referring to environmental, social and corporate governance. “You’ll have more eyeballs on it and dollars chasing it, which will be sticky money that isn’t going anywhere.”

But when it comes to going public, capital markets experts told Insider the playbook isn’t much different from marketing an IPO without sustainability measures. In a traditional IPO, investors bet on a new company that they believe will make money, but it’s never guaranteed. ESG themes are also based on future promises, sometimes immeasurable, that a company pushes to appear as a better corporate citizen.

It’s hard to put sustainability goals in an S-1

Granted, many companies set measurable KPIs related to diversity or carbon emissions, among others, that investors can question during calls for results.

Chobani founder Hamdi Ulukaya, for example, has promised to share the fruits of an IPO with his employees, many of whom are refugees.

More than 30% of the yogurt maker staff are immigrants or refugees, and they are entitled to a 10% stake in the company through an employee shareholding program, Ulukaya told Inc. in 2018. An introduction in The stock market, which Reuters said in July could value Chobani at more than $ 10 billion, would earn staff a healthy salary.

“Sustainability is no longer just seen as part of corporate communications,” said Keith Tuffley, Citi Group’s global co-director of sustainability and business transitions. “It requires companies to think longer term.”

But some companies that defend mission statements announcing their commitments to sustainable development will have to refrain from making specific promises.

Lawyers will advise their clients to avoid specific forward-looking measures in public filings and direct them to ESG “themes” related to their company’s strategy, said Robert Hayward, capital markets partner at Kirkland & Ellis.

The shoe company Allbirds, for example, is committed to using sustainable wool in its shoes. Rent the Runway says its business model of renting clothes rather than selling them to consumers is better for the environment, although a recent study found that clothing rental services could have a worse effect on the economy. climate crisis than other ways of using clothes.

Warby Parker, who is expected to go public through a direct listing this year, said in his S-1 that he plans to “use resources responsibly, reduce waste and maintain a carbon footprint. neutral “but did not include specific measures related to these goals. The company said it had chosen to be designated as a Certified B company, but added that “there is no guarantee that the expected positive impact of being a public benefit company will be realized.” .

“A client can’t just pick up the phone and say, ‘Hey, when you’re preparing the S-1 project, sprinkle some ESG fairy dust on the disclosure,” ”said Hayward of Kirkland & Ellis. “You must have verifiable facts for an IPO.”

Sustainability attracts investors

Banks are also hiring people, like Citi’s Tuffley, who are as savvy about the climate crisis as they are about financial risk assessment.

Head of Keith Tuffley

Keith Tuffley, Global Co-Director of Citi’s Sustainability and Business Transition Group.

Keith Tuffley / Citi


“You cannot be a good banker now unless you understand that we are going through a massive energy and sustainable transition,” he said. “We are also seeing many investors creating new funds focused on ESG strategies. As a banker, you want to be able to connect these investors with the companies that are driving these strategies.

Although the Securities and Exchange Commission has not released full ESG disclosures for the public offerings, it is cracking down on investors weighing these IPOs.

SEC Chairman Gary Gensler said on Wednesday the regulator would review practices surrounding fund managers’ claims to be green or sustainable. The move could force managers to disclose the data they use to identify their funds as sustainable investment vehicles, Bloomberg reported this week.

It’s important to note that companies tend to disclose voluntary information, knowing that this widens their pool of potential investors, according to Sara Orr, ESG partner at Kirkland & Ellis.

But money is still king, especially as heated stock markets allow progressive companies to go public at sky-high valuations.

Bankers and lawyers are under pressure to prove that their clients keep their promises. Investors, too, will hold these companies accountable for their lofty promises once they enter the public fray, according to Ford of Credit Suisse.

“It can’t be a one-size-fits-all thing. It has to be a living, breathing engagement where companies give investors updates, metrics and KPIs over time. And it has to start early,” she declared.

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