By Sam van de Schootbrugge 03-03-2021
In: deep-dives | ESG & Climate Change

Do ESG Ratings Affect IPO Valuations?

(4 min read)
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A firm’s environmental, social, and governance (ESG) profile appears increasingly linked to financial outcomes. Investors are therefore considering ESG factors alongside more traditional financial variables when making investment decisions. This includes initial public offering (IPO) listings, where information disparities often result in significant mispricing. A new Journal of Corporate Finance paper examines whether country-level ESG ratings can affect IPO valuations. They find:

Firms undergoing IPO conform to the ESG norms of their listed country, and higher MSCI ESG Government Ratings reduce IPO underpricing.
A one standard deviation improvement in a country’s ESG Government Rating is associated with a 7.07ppt decrease in first-day returns for IPOs that occur in that country.
Underpricing tends to be lower in countries with stronger environmental risk management practices, e.g., countries with better water and/or energy resource management.
Lastly, the negative relation between ESG ratings and underpricing is stronger in countries with higher liability standards and stronger shareholder protections.

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