Latest IPOs Are All About the Mission. NewsWire

NewsWire: 9/15/21

• The companies launching IPOs this fall want customers to know they’re not just about the bottom line. The emphasis on charitable and sustainable values reflects changes in both corporate America and the market. (The Wall Street Journal)
• NH: The list of companies going public this fall include Millennial favorites like sneaker maker Allbirds, glasses retailer Warby Parker, and clothing rental service Rent the Runway. They also have something else in common: an emphasis on doing good.
• We have written about corporate America’s embrace of ESG. (See “Roundtable’s CEOs Claim Commitment to All Stakeholders,” “In Fashion, Sustainability Pays,” and “Investing with Purpose.”) But this is the first time a crop of IPOs has uniformly branded themselves as pro-social. Allbirds has said it hopes its filing’s emphasis on ESG issues will be used as a model for future “SPOs”: sustainable public offerings.
• These companies say that they value purpose just as much as profits. Let me quote from Allbirds’s filing: “While many businesses see tension between profit and purpose, we see opportunity. The more sustainable we are, the better we believe our products and business will be.” 
• Media outlets and pundits have attributed this shift to changing consumer preferences. As Millennial shoppers and employees go, so go startups. Sustainability is hot because that's what up-and-coming buyers value.
• My take? The primary focus of firms going public is neither purpose nor profits. It's valuation. That's what feeds the appetite chain, from the underwriters and brokers down to the initial investors. Normally, the IPO will of course stress profitability within a finite time horizon in order to assure a high valuation. That's because, when the economy is healthy and capital markets are competitive, many genuinely profitable alternatives are available.
• But in today's abnormal world, capital markets are not competitive and no one knows what the profitable alternatives are (or whether any exist). Even junk bond yields have sunk below the inflation rate, which makes anything you point to "profitable." In such a world, you need something else to stand out, something marking your firm as socially exclusive and desirable and likely to be swept up with approval by those overflowing with wealth and status.
• "ESG," I submit, is an excellent marker for this purpose. It targets those individuals and funds who figure, well, if the Fed is going to bail out even my worst mistakes, why not invest in a few that I feel really good about?
• To some degree, this sort of mood accompanies every market boom. When valuations soar (according to standard metrics), the importance of near-term profitability recedes.
• But there's this difference. Typically, these booms are driven by at least some underlying evidence of structural economic innovation. In the year 2000, for example, the dot-com boosters could point to a "computer revolution" whose economic impact was already showing up in surging labor productivity over several years in a full-employment economy.
• Today, there is no such evidence. To the extent there's obvious structural innovation going on, it's all happening in monetary and fiscal policy. The key question investors should be asking is this: At the end of the day, what will be the inflation-adjusted, after-tax economic consequences of this policy revolution? On this question, IMO, the ESG promoters have no better insights than any of the rest of us.