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PTWhy is the ESG journey essential for IPO companies?
The Initial Public Offering (IPO) is one of the main means for a company to raise funds and enable expansion plans, investments in new operations or projects. The operational part of this process has two central aspects: one of communication and exposure of the company, in order to become known and attract investors, and the other regulatory, since the IPO is regulated and demands that companies meet a series of requirements. Communication to the market prior to the capital opening and the IPO process itself are being impacted by the increased relevance of the ESG agenda.
ESG agenda and investors’ expectations
The scenarios for the insertion of socio-environmental and governance topics in the corporate agenda have been gradually taking shape over the past few years. There are some central points in these scenarios. One of these points, which is more in line with traditional market models, is related to investment risk assessment. In other words, investors are demanding that ESG risks be more clearly communicated, so they can incorporate them into their risk-return evaluations in relation to the capital invested. In this direction, for example, the TCFD (Task force on Climate-related Financial Disclosure) emerged in 2017 in line with concerns about the effects of climate change on business.
In 2022, the World Economic Forum published the Global Risks Report¹ , which accounts that, over a 10-year horizon, environmental risks are among the top 5 most serious threats to the world as failure of climate action, extreme weather events, biodiversity loss, erosion of social cohesion, and livelihood crises. In addition, the COVID-19 pandemic demonstrated the social pillar relevance, the S of ESG, leading companies to rethink their relationship with the community and their employees.
These evidences show that investors are increasingly clear about the importance of a consolidated ESG strategy for the businesses’ results in which they provide capital. Companies with a mature ESG strategy take a long-term view, considering ESG risks in their Risk Management Plan and in their strategy on an interdisciplinary basis and across all areas of the business. Therefore, they have greater resilience and adaptability to the socio-environmental risks that are accentuated in the organizational environment, as well as taking advantage of the opportunities and trends that arise with them.²
Thus, it is important for companies planning an IPO to structure an ESG strategy from the beginning of their IPO planning and to give visibility to this strategy during the roadshow, which consists – in simplified terms – a series of presentations by the company to potential investors. This is a pitch about the offering, which includes scenario projections, the company’s history, objectives, its products, and past and projected financial results. Incorporating information about the ESG strategy at this point can increase attractiveness by meeting investors’ demands for this type of information.
The impact of the ESG agenda on capital market regulations
On the other hand, to consolidate the capital opening, the company needs to meet the criteria required for the listing segment it wants to be part of. Stock Exchanges set different Corporate Governance criteria for the segments, defining transparency and organizational structure requirements.
On the São Paulo Stock Exchange, for example, the most stringent criteria are for the “Novo Mercado” listing segment. The Governance criteria defined reflect the four basic principles of Corporate Governance: Transparency, Fairness, Accountability, and Corporate Responsibility. Companies that guarantee these four principles in their governance provide investors with better accuracy when analyzing their securities.
In addition to the criteria for the IPO, the company, once listed, becomes more exposed, requiring a more mature reporting process demanded by the inspection agencies. In Brazil, this role is performed by the CVM (in Portuguese, Comissão de Valores Imobiliários, CVM), which aims to maintain transparency and guarantee investors the necessary information for analysis, allowing a better allocation of capital.
CVM requires publicly traded companies to publish their financial information through the Reference Form. Following the perception consolidation that ESG agenda is important for the risk analysis of an investment, regulations have been adapted and updated in order that organizations report ESG management information. Through Resolution n° 59 of 2021, CVM will adopt the “report or explain” model for including ESG information in the Reference Form as of December 1st, 2022.
ESG strategy fundamentals
To meet the new demands, it is necessary to adopt the best corporate governance practices, which refer to the processes, policies, and guidelines that inform how the company operates and is controlled. Among the main governance practices are the definitions of how stakeholders’ interests will be inserted in their decision making and what the material issues are, it means, those issues reflecting the company’s most significant impacts on the economy, the environment, and people (including human rights impacts).
Understanding these impacts is key to developing appropriate management arrangements for the key ESG topics that have been mapped. In addition, this includes processes that seek to ensure ethical business conduct, accountability structures, and thematic committees, for example, which ensure the oversight, monitoring, and business management in accordance with key corporate policies, guidelines, and goals.
Additionally, the company should seek to integrate ESG risks into its enterprise risk management, broadening the analysis’ scope and ensuring the integration of issues such as: impacts of climate change on business, health and safety of employees and communities; and risks related to emerging legislation related to environmental and social aspects.
Aiming to standardize and enable a certain comparability between companies, different frameworks have been created to support sustainability reporting, participation in stock exchange indexes, or the creation of ratings. Examples include the CDP (Carbon Disclosure Project), the B3 Corporate Sustainability Index (ISE B3), and the Dow Jones Sustainability Index (DJSI). By means of questionnaires, these mechanisms evaluate companies from various sectors on the same ESG management aspects and serve as a source of information for investors’ decision-making.
With a well-established corporate governance and an integrated view of ESG risks to the business, the company will have the necessary basis to implement and develop actions, projects, and programs that address the most relevant environmental and social issues, contributing to an ESG strategy development which is coherent with the corporate reality and aligned with the business.
To ensure the effective communication of this strategy, it is essential the company adopts practices for monitoring key indicators, preferably aligned with internationally recognized standards, along with reporting practices, in order to ensure transparency about the adopted practices, monitoring goals and commitments.
Questionnaires, indexes and ESG ratings
With capital opening, in addition to the need to comply with the requirements of regulatory bodies, companies are now more exposed to the demand for information about their ESG management processes.
To standardize and enable some comparability among companies, ESG questionnaires, indexes and ratings were created, such as the CDP (Carbon Project Disclosure), the B3 Corporate Sustainability Index (ISE B3) and the Dow Jones Sustainability Index (DJSI). Through questionnaires, these mechanisms assess companies from various sectors on the same ESG management aspects and serve as a source of information for investors’ decision-making.
The reporting stage, which includes adherence to these questionnaires and reporting, is the consequence of a consolidated strategy, which depends on good information management.
WayCarbon assists companies of different sizes and sectors in this process by developing materiality analysis, maturity diagnosis, development of action plans and indicators, ESG positioning communication materials and reporting processes. In addition, it developed Climas, ESG management software that brings agility, robustness, and transparency to the sustainability strategy of organizations. Talk to our specialists and learn more.
BIBLIOGRAPHICAL REFERENCES
¹Relatório de Riscos Globais de 2022. 17ª Edição. Acesso em https://www.zurich.com/en/knowledge/topics/global-risks/the-global-risks-report-2022
² Guia Sustentabilidade e Gestão ASG nas Empresas 2022. Acesso em: https://www.b3.com.br/data/files/C9/27/46/11/220838101E311E28AC094EA8/Guia_B3_Sustentabilidade_ASG_v2209_VF.pdf
Cecília Braga
