As a staggering 79% of investors now consider a company’s ESG practices a crucial factor in their investment decisions, sustainability has swiftly moved from a nice-to-have to a must-have for businesses eyeing an IPO. 

With 115 initial public offerings on the US stock market in 2024—a 17% increase from the same time in 2023, according to Stock Analysis—and a Morgan Stanley banker forecasting more tech IPOs in 2024 and a “better year” in 2025, the market is showing clear signs of recovery.

But in the high-stakes world of IPOs, how can companies navigate the increasingly complex landscape of investor expectations around sustainability? What sets a successful IPO exit apart from the rest?

Increasingly, it’s how these companies integrate environmental, social, and governance (ESG) practices into their business strategy. Christine Uri, founder of ESG for In-house Counsel, recently shared her insights on building a compelling business case for sustainability and ensuring IPO readiness in a Greenplaces webinar.

Building the business case for sustainability

One of the primary challenges in implementing ESG and sustainability practices is securing top-level buy-in. Christine outlines a four-step process to building a compelling business case for sustainability:

1. Individual meetings: Gauge executive perspectives, including those of the CEO and CRO, on sustainability.
2. Education: Present hard data on client demands (e.g., RFP requirements), revenue impacts, and investor expectations.
3. Regulatory awareness: Get acquainted with global ESG guidelines and regulations, such as California’s Climate Corporate Data Accountability Act, SEC climate disclosure rules, and science-based targets (SBTs).
4. Streamlined approach: Focus on three primary targets closely tied to company goals. As Uri puts it, “If you try to do 10 things, you’re gonna do nothing.”

Sustainability’s impact on company valuation

When asked about which sustainability aspects most influence company valuation, Uri notes that it often depends on the industry. However, she highlights three critical areas:

• Governance practices: This includes board diversity, executive compensation tied to ESG goals, and transparent reporting.
• Carbon emissions: This encompasses tracking your Scope 1, 2, and 3 emissions. 
• Supply chain management: Many major companies like Google, Microsoft, Apple, and Walmart now require their suppliers to meet specific sustainability standards.

“If you have poor governance practices, that’s gonna be a major investment problem,” Uri warns. She also cautions against making broad sustainability claims without solid backing, as these can pose significant legal and reputational risks in today’s environment.

Essential steps for IPO readiness

To ensure your company is well-positioned for a successful IPO, Uri recommends the following steps:

1. Establish good governance: Create a clear sustainability strategy and assign responsibility at the executive level.
2. Gather relevant data: Collect comprehensive ESG metrics across your operations.
3. Benchmark performance: Compare your sustainability efforts to industry peers and leaders.
4. Identify quick wins: Focus on easily implementable initiatives with high impact, like an employee sustainability initiative.
5. Start early: Begin your sustainability journey well in advance of your IPO plans.

“If you wait until you are getting to sustainability due diligence, you know, that could be three months before your IPO. And if you haven’t done any work by then, you’re not going to change your situation. So I would put it on that checklist at least 24 months in advance,” Uri recommends.

The role of in-house counsel and value creation

In-house legal teams play a vital role in ESG initiatives. Uri recommends that legal professionals stay informed about regulations and trends, develop a basic understanding of key concepts, and build cross-functional support to drive progress within the organization.

Uri emphasizes the potential for value creation through these initiatives. She encourages companies to explore new market opportunities, potential government funding, product innovations, and access to new client segments through improved ESG performance. After all, studies like this one from McKinsey show companies with strong ESG practices can achieve up to 10% higher market valuations.

Avoiding common pitfalls

When preparing for an IPO, companies should be cautious about overstating their ESG credentials, also known as “greenwashing”. Uri warns, “If you try to put out a ‘we’re net zero’ kind of statement without being able to back it up, that’s going to shoot you in the foot because it’ll cost you credibility.” 

She adds, “The standard isn’t you have to be a rock star. The standard isn’t that you have to be in the top 5% of performers or leading the pack. The standard is, are you running a responsible business?”

Looking ahead

As companies prepare for IPOs in this evolving market, integrating sustainability into business strategy is non-negotiable. By taking a proactive approach, companies can not only meet investor expectations on sustainability but also unlock new avenues for value creation and competitive advantage. 

Meanwhile, Uri reminds us of the broader implications of our business decisions: “The Earth’s atmosphere doesn’t care whether you can tick and tie your valuation numbers. And so, we have to also bring that kind of human perspective into what we do every day.”

Ready to make sustainability a cornerstone of your IPO strategy? At Greenplaces, we empower businesses to seamlessly integrate ESG practices into their operations. Our expert guidance helps you secure investor confidence, enhance your valuation, and identify opportunities for growth.