No IPO without ESG

In IPO processes, ESG plays an increasingly important role. This development is coupled with a growing number of legal and regulatory considerations.

Why ESG matters

ESG is becoming a value driver for IPOs, with investors keen to fully understand the ESG footprint of any business targeting the public markets. It is therefore no surprise that ESG covers all the key elements of an IPO process: including the equity story and strategy – the ESG strategy in particular – as well as the due diligence process designed to identify ESG risks. As with any material disclosure aspect, the prospectus is the means to provide a fulsome discussion about all ESG issues – ranging from the aforementioned ESG-strategy and implications on the operations of the business, to the documentation and reporting of ESG related information, specific KPI discussions (such as a capex) and the assessment of ESG-related risks.  

Growing number of legal and regulatory aspects

There is no set-body of law that addresses ESG issues when preparing for an IPO, taking entrepreneurial decisions and communicating with the capital markets, but rather a number of rules and regulations that a company’s management has to bear in mind.

Europe’s Non-financial Reporting Directive (Directive 2014/95/EU) already requires listed companies to disclose ESG-related information, while the Corporate Sustainability Reporting Directive, which is expected to be adopted by the European Parliament and the Council of the EU this year, will require listed companies to report in line with the Taxonomy Regulation (Regulation (EU) 2020/852).

Furthermore, there is the German Supply Chain Act (“Lieferkettengesetz”) which will become effective in 2023, and at the EU level the recently published proposal for a Corporate Sustainability Due Diligence Directive (you can read our blog posts on EU’s proposal here and the German Supply Chain Act here), which will oblige large companies to conduct – and report on – human rights and environmental due diligence annually. This increasing legalisation of ESG topics will certainly continue.

Considerations for IPO candidates

Companies should bear in mind that ESG issues need to be managed and addressed holistically when considering an IPO and will continue to exist after the listing. The ESG arena is becoming increasingly regulated and we do not expect this to change anytime soon. Even after a successful IPO, all a company’s stakeholders, particularly its investors, will continue to follow the issuer with respect to ESG topics. The issuer has not only to ensure that there is a companywide coordinated ESG strategy that goes hand-in-hand with a coordinated corporate communication strategy, but that ESG considerations will form part of the day-to-day running of the business, for example when taking decisions under the business judgement rule or selecting candidates for the executive or supervisory board office. Additionally, the new German Corporate Governance Code, which is currently under consultation, has a strong focus on ESG. If listed companies do not comply with its recommendations, they will have to disclose this and explain it their investors and other stakeholders.

 You can watch Stephan Pachinger and Sabrina Kulenkamp discussing ESG obligations for companies that pursue a listing and the requirements expected after the IPO on Finsbury Glover Hering’s website. The video forms part of a series by Finsbury Glover Hering offering a holistic view of the ESG issues surrounding IPOs.