Hamilton Locke – Jo Ruitenberg
ESG credentials are nice to have but not essential for us. We need to focus on running and growing the business instead. That’s the common refrain and misconception from small – medium sized private companies looking to access capital through an IPO.
However, the seismic shift in investment focus for institutional shareholders, and in particular private equity funds, increasingly sees these investors putting ESG (Environment, Social, Governance) at the heart of their investment strategy. Accordingly, a company’s ability to access that deep pool of capital will be affected by its ESG credentials.
We sat down with Emilie O’Neill, Head of ESG at Perennial Partners, to better understand from a fund manager’s perspective why she thinks ESG issues should be on your radar.
Key insights
- How can ESG be relevant to raising capital? Studies have shown that strong ESG credentials translate to about a 10% lower cost of capital [i] . Increasingly, private equity funds and super funds have mandates to invest in companies with strong ESG credentials seeing it as a means of value creation. In some cases, fund managers like Perennial Partners, have sustainable investment funds and are investing in companies that are making a positive impact on the ESG front. A company’s ability to access that capital is detrimentally affected if it does not have the ESG credentials to meet the funds’ investment criteria.
- What are the top 2 issues you look for? From a social and governance perspective, board composition is fundamental. Firstly, whether there is diversity on the board is the easiest issue to identify. Secondly, how management are incentivised to develop the company’s ESG credentials and to meet the company’s stated targets will be the subject of close scrutiny. Specifically, investors will look at whether the executive remuneration is tied to the company achieving its ESG targets. Both these matters tie into creating long term value for shareholders.
- How does it play out once you’re listed? Many institutional shareholders now expect companies to demonstrate performance against their ESG commitments and targets. Where a company fails to do so, there are tangible actions that can be, and are being, undertaken against them by institutional shareholders such as voting on ESG related resolutions to remove incumbent directors or selling out of the stock all together.
Developing ESG credentials
ESG credentials can be and should be developed years before a company is looking to IPO. From a social and governance perspective, creating a diverse board and the right mix of independent directors will take some time to achieve but will undeniably be the focus of future investors’ scrutiny.
IPO messaging
ASIC’s Regulatory Guide 228 Prospectuses includes climate change risks in the list of examples of common risks that may need to be disclosed in a prospectus. Investors will also actively look for information about a company’s ESG credentials and the role ESG plays in their strategy, and this can be achieved through integrating ESG considerations throughout IPO communications, noting that it is important that these credentials be authentic. Investors will do their due diligence and will be on the lookout for greenwashing, and the law ultimately prohibits misleading and deceptive statements in the prospectus and other communications.
Non-obvious ESG considerations
ESG considerations may not always be obvious. A company that is in an industry or sector that may be negatively perceived on the environmental front needs to be ready to address those matters upfront. For example, companies that are part of the digital assets ecosystem should be prepared to address concerns about the sustainable use of energy.
Similarly, companies with an inherent sustainability focus need to ensure to address their governance and social credentials. Recently, New Energy companies have been under more scrutiny to ensure their international supply chains and governance credentials meet global ESG expectations.
ESG disclosures as a listed company
Listed companies must have a corporate governance statement and must disclose the extent to which they have followed the recommendations set by the ASX Corporate Governance Council during the reporting period. These include a recommendation to disclose whether it has any material exposure to ESK risks and if it does, how a company manages or intends to manage those risks. ASX notes that companies that do not consider that they have any material exposure to environmental risks should carefully consider the basis for the belief and benchmark against their peers.
ASIC also recommends that listed companies with material exposure to climate risk follow the recommendations of the Task Force on Climate-Related Financial Disclosures (a task force consisting of 32 members from across the G20).
There is also a growing global trend that has seen governments impose climate-related financial reporting obligations on companies beyond listed companies, such as those registered in their jurisdiction and financial institutions.
Therefore, how ESG considerations are incorporated into a company’s IPO journey plays an important role in that company’s ability to access capital and ability to hit the ground running as a listed company.
Hamilton Locke has strategic foresight and execution skills for transactions undertaken throughout all stage of a business’ lifecycle. We have extensive experience advising on transactions of all sizes and advise on both the debt and equity sides of corporate transactions, whether for listed public companies or private companies.
For more information, please contact Jo Ruitenberg.
[i] https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/why-esg-is-here-to-stay
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