Finding ESG In the Small-Cap World
If a small company acts in a sustainable manner and no one is there to measure it, are its actions still worthwhile?
Far from being a philosophical thought exercise, the question above highlights the challenge faced by investors looking to capitalize on opportunities in the small-cap space and who want their assets to make a positive impact in the world.
By some recent estimates, only about one-third of small companies report ESG data to rating agencies compared to 90% of the companies that make up the large-cap dominated S&P 500. Reasons for the failure to report can range from a lack of resources, to being unfamiliar with the process and importance of publishing data.
A common question is, how can a traditional, bottom-up stock picking firm add to the cause without changing or misrepresenting who they are?
This lack of reliable ESG information needs attention. Who better to work on it than asset managers speaking to under-followed or misunderstood companies?
During update calls with management teams we have taken the opportunity to inform them that there are various groups that monitor good corporate practices and that this is an area that is becoming increasingly important to investors. Several have responded to the conversations by noting that they will be more proactive in their communications.
For small companies to be analyzed on their ESG investing efforts requires timely, accurate information. We believe highlighting the need for improved reporting to management teams is a first step in improving the data and creating a better understanding of the ESG landscape when it comes to small businesses.
While small companies have a long way to go in closing the ESG reporting and information gap compared to their larger counterparts, we believe heightened awareness is taking root, and more robust ESG data will be available in the coming quarters and years.
We hope our efforts will speed up the process.