Skip to main content

On the Money

What the SEC's climate rule means for IPOs

Emerging growth companies are subject to new SEC climate disclosure rules, although they have longer to comply than bigger businesses.

IPO illustration

Image via Shutterstock/Bankrx

Smaller, pre-IPO companies looking to go public often lack the resources of large public companies, which have been bracing for the U.S. Securities and Exchange Commission's new rule on emissions and climate risk disclosure, and so are less likely to have the systems in place to comply with the rule. 

The SEC’s long-awaited climate disclosure rule requires publicly listed U.S. companies to disclose Scope 1 and 2 emissions considered material to their business starting in 2026. The largest of them will need to have those disclosures assured starting with fiscal year 2029. 

While the focus is on larger companies, the new SEC climate disclosure rule provides exemptions for "emerging growth" companies — defined as businesses with gross revenue of less than $1.23 billion. Emerging growth companies historically have accounted for 90 percent of IPOs; high-profile examples of companies that have espoused strong ESG principles in their investor roadshows include Allbirds, Duolingo and Sweetgreen. 

Given the intense scrutiny companies undergo during an initial public offering, compliance with the SEC climate disclosure rule should be a priority for startups and privately held companies making bold claims about their sustainability performance in their quest to attract capital from ESG investors.  

What IPO-bound companies need to know

The new SEC climate disclosure rule applies to all public companies, but emerging growth companies have a longer period to phase in disclosure of Scope 1 and 2 greenhouse gas emissions — up to five years after their IPO. 

The SEC granted this after determining the "compliance burden and cost for the GHG emissions disclosure to be proportionally greater for such registrants."  

That exemption is lifted if an emerging growth company exceeds $1.23 billion in revenue or $700 million in float or issues $1 billion in debt.

The grace period doesn’t apply to the rule’s qualitative disclosure requirements for climate risks that could be material. Emerging growth companies must include those in reporting starting with the fiscal year beginning in 2027 and filed in 2028; the rule provides an additional year to comply with certain financial expenditure disclosure requirements related to meeting climate-related targets and goals. 

Don’t limit disclosure to compliance

These days, most investors incorporate ESG analysis into their investment process in some way. One way a pre-IPO company can prepare is to identify ESG issues key to public companies in their sector. This is known as "ESG capital targeting," said Chris Hagler, head of ESG at boutique investment bank and strategic advisory firm Independence Point Advisors. 

"We analyze who invests in their public competitors and what ESG topics are most important to those investors,” Hagler said. "Then we look at how you are doing on these issues that we know these potential investors are interested in." 

For example, an apparel company planning an IPO might assess investors in VF, Lululemon and Allbirds. A benefit corporation, a type of for-profit entity that considers society or the environment alongside profit in its operating model, might study Allbirds, Coursera or Lemonade.  

ESG disclosures can help companies leading on sustainability attract investors that consider ESG and impact-related issues. Those investors can be allies because "an impact investor is a buy and hold investor. They're not the ones trading your stock, they're the ones that buy your stuff, because they want to help you grow," Hagler said.

Setting an IPO-ready ESG strategy

Some leading pre-IPO companies were building out investor engagement strategies centered on their ESG or sustainability stories before the SEC released its final climate disclosure rule, said Beth Sasfai, who leads the ESG practice at Cooley, a law firm that completed more than 1,000 IPOs since 2016 including Allbirds, Instacart and Zoom. 

Here are some common practices these companies are embracing:  

  • Assign ownership of ESG to a senior executive so it’s clear there is someone responsible for this strategy. Depending on the size of the company, ESG oversight may also be assigned to board committees. 
  • Bring legal into the conversation sooner. As more ESG efforts shift from marketing to setting targets, collecting data and reporting to investors and regulators, general counsels are being brought in to ensure proper management and communication of ESG goals and data. 
  • Be thoughtful when setting an ESG strategy and timeline. Consider what will be required from your organization when it becomes a public company, as well as which targets should be in place for an IPO.

More on this topic