ESG for Small-Cap Companies: Why it Matters, and What You Should Do

Though ESG has become a dominant trend in the capital markets, many small-cap companies neglect to include much ESG information in their investor outreach and websites, assuming that true ESG is only really a concern for mid- and large-cap companies.

This is understandable, but wrongheaded. A September study by Kroll found that companies with superior ESG ratings outperformed companies with lower ESG ratings by an average annual return margin of 4.3%. ESG leaders outpaced laggards in nearly every industry, across every major geographic region. Earlier research by Nasdaq found that the price-to-earnings ratios of ESG leaders were 11% above the S&P 500 market average, compared to ESG laggards clocking in at negative 0.8%.

As ESG funds continue to rise in popularity, more and more retail investors are also paying attention to ESG. IR Magazine found that 45% of retail investors say that ESG is important when making investing decisions, a number that we expect to increase in the coming years.

And while it’s true that small-cap investors are generally less concerned about ESG than are huge investment funds, strong ESG performance can still help smaller companies elevate themselves in a crowded market.

For small-caps, ESG should be looked at less as an obligation you need to fulfill, and more as an opportunity to differentiate your company from the competition.

But what does that look like in practice? What steps can small-cap companies take immediately to start making ESG a priority?

Talk to your investors

  • Talk to your investors

The easiest way to determine how ESG affects your investor base is by communicating directly to your biggest investors. Have a frank meeting with them to ask how they think about ESG, which issues are important to them, and what, if anything, they’d like to see your company undertake to elevate your ESG standing.

Also, when meeting with prospective investors, ask them whether ESG is part of their decision-making process. Inquire about what they look for ESG-wise in companies like yours.

Identify key ESG risks

  • Identify key ESG risks

It’s likely you’ve already taken ESG risks into account in your company, and it’s also likely that many of your investors have too. Be transparent about these potential pitfalls in your investor-facing communications, and how your company is addressing them head-on. Since your investor base already likely has these in mind, it’s a good idea to show how you plan to account for them.

Show your work

  • Show your work

The simplest way to show investors you care about ESG is through a dedicated ESG page on your website. Now, you don’t need to make ESG a core part of your company identity, but you should have something about ESG on your IR site. It doesn’t require a ton of content: just identify a few key priorities and a few core KPIs you can track, and share your ESG goals. A set of metrics you can review several times a year will allow investors to track your progress, and help your team gauge how your efforts are faring.

Investors believe ESG affects long-term shareholder value—and the data confirms this. Small-cap companies ignore ESG at their own peril. Treat ESG as a potential vector for future opportunities, establish a foundation of transparency from the outset, and build trust with your investor base.

 

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Priscila Sotelino