September 20, 2021

IPOs: “ESG” is the Magic Word for Better Pricing

Speaking of word choices, it turns out that there’s a magical incantation for better IPO pricing, and this Mayer Brown blog reports that a recent study says it’s “ESG”:

Alessandro Fenili and Carlo Raimondo, in their study and paper ESG and the Pricing of IPOs: Does Sustainability Matter, find a significant relationship between a discussion of ESG related issues and IPO pricing. They performed textual analyses of 783 US IPOs completed during the period from 2012 through 2019 across various industries.

Given investor interest in sustainability and ESG in their investment decisions, the study focuses on the amount of information about sustainability disclosed by IPO issuers. In order to assess IPO disclosures, the study considered a list of words that were associated with ESG topics. Then, they performed textual and other analyses on the IPO prospectuses. A large increase in the number of ESG “words” in the IPO prospectuses was found to lead to reduced information asymmetry (investors have better information on which to base their investment decision regarding the IPO issuer’s ESG focus) and to less IPO underpricing.

The blog says that the study provides evidence of a strong association between ESG disclosure during an IPO and less IPO underpricing and more accurate evaluation by investors of the IPO issuer’s valuation.

Wow, so that’s all it takes? I bet there are a lot of unicorns feeling kind of silly now about wasting their time writing founders letters and over-the-top mission statements for their S-1s. I’m not sure how everyone will use these findings, but I’ve spent enough time working with investment banks to be pretty confident in my prediction that the next coal mining or fracking company prospectus you pick up will be chock full of ESG-related jargon. If you don’t believe me, just remember, these are the folks who turned cab dispatchers and commercial real estate businesses into tech companies through the power of bankerspeak.

Once again, the English philosopher Bishop Berkeley nailed it several centuries ago – “to be is to be perceived.”

John Jenkins