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ESG performance also matters for pre-IPO companies

Newly public companies, from Uber to Beyond Meat, are facing extra scrutiny on sustainability issues. Pre-IPO companies should pay attention.

It’s no news flash that strong environmental, social and governance (ESG) performance is increasingly important for publicly traded companies. ESG investing has increased more than 17 percent annually over the past couple of years, according to McKinsey, and more than one-quarter of the total global assets under management — roughly $20 trillion — is invested according to ESG metrics.

For public companies, it’s critical to engage investors on ESG performance with effective communication and storytelling around their sustainability initiatives. And with so many high-profile companies going public this year, including Levi’s, Beyond Meat, Lyft, Uber, Airbnb and The We Company, it’s a good time to ask the question: does ESG also matter for companies looking to go public?

Levi’s whets investor appetite with ESG

Earlier this year, Levi’s had one of the most successful IPOs of 2019 after spending more than 30 years as a private company. The purpose-driven apparel company has invested heavily in ESG-related endeavors, such as developing waterless jeans and Project F.L.X., an innovation to make denim finishing processes more sustainable.

Levi’s sees a strong correlation between its commitment to addressing ESG issues and investor support. In a LinkedIn blog post published shortly after the IPO, Levi President and CEO Chip Bergh writes: "...there is a hearty investor appetite to support companies with strong brands, proven management, demonstrated business results and a solid moral compass."

Bergh claims that Levi’s business is stronger than it has been in decades because of its work to be both "the world’s best apparel company and one of the best performing and most sustainable companies in any industry. 

I believe it is false to say we or any company must choose between business performance or responsible social conduct. The most successful companies do both.
"This is because there is no question in my mind that our value and our values are inextricably linked, and I believe it is false to say we or any company must choose between business performance or responsible social conduct. The most successful companies do both. That’s how they drive growth, strengthen their brand and keep their people inspired and engaged."

But Levi’s benefits from being a longstanding brand with plenty of recognition. What about newcomers?

Unleashing market forces for good

A growing number of investors are looking to use their money to drive positive impact. This is good news both for social enterprises and any startup focused on addressing ESG challenges.

"There is a whole category of investors now looking to align their investments with their values," said Tony Stayner, managing director at Excelsior Impact Fund, who spent more than 20 years managing and advising high-growth situations in Silicon Valley and now focuses on impact investing.

"Unleashing market forces by supporting mission-driven companies that accelerate this transformation is a critical strategy, and we all need to focus more of our time, talent and treasure on these efforts, for the clock is ticking," Staynor added.

Stayner also is board and executive committee member at Silicon Valley Social Venture Fund (SV2), a community of more than 200 individuals and families who have come together to learn about effective giving and pool our resources to support innovative social ventures. SV2 supports social enterprises tackling social and environmental problems, such as PastureMap, a mobile app that empowers cattle ranchers to manage grasslands more efficiently and profitably while sequestering carbon and reducing emissions.

When purpose pays

Speaking of cows — or a lack thereof — Beyond Meat was one of the most interesting and successful IPOs of 2019.

ESG is in Beyond Meat’s, well, bones, as the company is on a mission "to create nutritious plant-based meats that taste delicious and deliver a consumer experience indistinguishable from that provided by animal-based meats," according to its S-1 filing to the SEC.

Recently, investors and employees who bet on the company before it went public were handsomely rewarded when they sold nearly 3.5 million shares in a secondary offering that Beyond Meat priced at $160 a share — more than six times the original share price of $25 during the May IPO.

The success of Beyond Meat’s IPO bodes well for other purpose-driven companies likely to go public in the future. But the benefits of being a startup focused addressing ESG issues often can be felt long before they hear the opening bells ring on the New York Stock Exchange.

The benefits of being a startup focused addressing ESG issues often can be felt long before they hear the opening bells ring on the New York Stock Exchange.
"Purpose indirectly helps a pre-IPO startup in multiple ways — first and foremost by attracting and retaining talent," said Jessica Appelgren, vice president of communication at Impossible Foods. "Investors are investing in the team’s ability to execute on the business goals and if the team is motivated and bonded by a shared purpose I can only imagine that productivity is higher, though we have no way to measure that."

While there’s no need to add to the copious ink already spilled over the fact that being a purpose-driven company helps attract millennial talent, it also can help lure top leadership which can transform a company’s future. Deloitte research (PDF) found that businesses outperform the market when they make an authentic commitment of this nature, driven by an ability to better engage and inspire all stakeholders including talent, consumers, partners, regulators and investors.

A chief reason why Impossible Foods was able to attract its new president, Dennis Woodside, was because he was compelled by the mission, Appelgren said. In an Impossible Foods press release earlier this year, Woodside said: "I love what Impossible Foods is doing: Using science and technology to deliver delicious and nutritious foods that people love, in an environmentally sustainable way."

Woodside has a "proven track record of turning startups into transformative corporations," the release says. Since his hiring earlier this year, Woodside has helped the company improve its manufacturing processes dramatically, Appelgren said. This is sure to catch the attention of investors.

A flash or a bang?

From an investor’s perspective, it can be difficult to know if any "disruptive" company is a proverbial flash in the pan or a big bang that will change the world forever. That’s why many investors focus more on broader ESG trends to guide where they put their money.

"Investors are human, and all else equal, ESG can be convincing," said Matthew Kennedy, senior IPO market strategist at Renaissance Capital, a provider of institutional research and IPO exchange-traded funds (ETFs), which has Beyond Meat, Uber and Lyft in its IPO ETF. "IPO investors are more interested in broader market opportunities, which can coincide with ESG."

Investors are human, and all else equal, ESG can be convincing. IPO investors are more interested in broader market opportunities, which can coincide with ESG.
Kennedy cited electric vehicles as an example — investors are more interested in the market opportunity of shifting away from gas-powered vehicles than the individual companies themselves. Companies that are able to communicate that their own value propositions match with broader trends and investment opportunities can find success. Tesla, for example, has been able to attract the attention of investors because it effectively communicates how its offering ties into the broader shift to electric vehicles.

Granted, this isn’t easy. ESG is a complex and often dry subject that doesn’t always lend itself to becoming trending tales. Having a clear understanding of your corporate purpose, complemented by a strong sustainability communications frameworks is important for turning this into a coherent and compelling narrative. That’s why the thinkPARALLAX team recently published a whitepaper outlining best practices for engaging investors via ESG communication.

It follows that the best thing any purpose-driven pre-IPO company can do to attract investment dollars and broader interest is to connect their product or service to a broader ESG trend through effective storytelling. This also helps attract and retain top talent that ensures the company can deliver on its ESG aims, which in turn engages investors looking to help make purpose pay.

If you’re a company with IPO aspirations, the stories you tell about ESG are just as important as how you perform on it.

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