Unlocking ESG Opportunities in the Small-Cap Market
Market context: improving ESG disclosures and performance by Small-Caps
Historically, ESG analysis in the small-cap market has been constrained by a lack of reliable and standardised data, making it challenging for investors to distinguish between firms. Despite smaller companies, particularly those listed on AIM, often falling below regulatory thresholds for ESG reporting, these firms are increasingly disclosing progress on a range of ESG initiatives.?
As many of these companies have limited resources to dedicate to ESG, performance is often underreported or difficult to assess based on disclosures. Additionally, ESG must be viewed proportionately – comparing a ￡20m AIM company to a FTSE 250 firm is neither fair nor insightful. Instead, sector and peer group-specific assessments are crucial to identify leaders.
As the only provider to cover all of AIM and the small-cap segment of the main market, we can consolidate and normalise patchy, non-standardised disclosures to provide interesting insights into how ESG reporting and performance are evolving. Addidat’s data (see chart below), shows that there is significant and accelerating differentiation in ESG performance, even amongst firms at ￡10-50m and ￡0-10m market capitalisations on topics such as Corporate Governance, Employee Engagement and Net Zero (Addidat’s maturity curves provide a view on how advanced companies’ ESG practices are, based on their disclosures):
Further interrogation of the data provides further insight into this ESG evolution in the small-cap market and the opportunity that exists for investors to capitalise by applying the right responsible investment approaches to manage ESG risk, engage portfolio companies on relevant topics, and ultimately, drive value.
Investor Tools: it’s not just the data you have, but how you use it?????
Data alone is not enough to unlock value. Insight comes through applying logical filters or responsible investment approaches to company data. Common approaches include Screening, ESG Integration and Stewardship:
Screening: Avoiding Laggards and Identifying Leaders?
Screening involves filtering companies based on ESG performance or adherence to specific criteria. For small-caps, screening is typically used to ensure that investment is focussed on companies meeting basic ‘hygiene factors’ such as minimum standards of corporate governance or compliance with international norms on topics such as Modern Slavery and Human Rights i.e. screening out companies that don’t meet these standards. However, it can also be used to focus investment on companies with best-in-class performance vs their peers.
ESG Integration: Linking ESG to Financial Performance
ESG integration is the process of embedding ESG factors into financial analysis and decision-making. In small-caps, this requires nuanced evaluation. Proportionality becomes key - the ESG performance of a ￡50m company should be judged relative to its resources and sector, not against global multinationals. With the right data available, investors can assess, evaluate and integrate ESG risks and opportunities into investment processes, providing a more complete view of company value.
Stewardship: Driving Change Through Engagement
Small-cap firms often lack the resources to execute ambitious ESG commitments. As a result, investor stewardship plays a critical role in driving meaningful change. By engaging with companies, investors can encourage better disclosure practices, realistic target-setting, and more robust governance structures.
How Addidat Can Help: data-driven ESG analysis for Small-Caps
Navigating the small-cap ESG landscape requires tools that can normalise and interpret complex, fragmented data. The Addidat Platform addresses this challenge by offering investors a comprehensive and structured view of ESG performance across the small-cap market, with access to a growing dataset over 110 key ESG data points, normalisation of non-standardised ESG disclosures to create a clear and comparable dataset, benchmarking against right-sized peer groups for meaningful comparisons, and integrated tools such as six maturity curves covering key ESG themes and ESG Risk Ratings to evaluate how effectively companies manage material ESG risks.?
These capabilities lead to several benefits for small-cap investment managers, such as:
Conclusion: The future of Small-Cap ESG investing
The Small-Cap ESG landscape is undergoing a significant transformation with new opportunities for investors. Finding these opportunities will require investor judgement, as success in small-cap ESG investing hinges on understanding the nuances of each company’s unique circumstances, sectoral challenges, and proportional ESG performance.
The Addidat Platform can support investors to capture these opportunities by providing the data and insight needed – get in touch with either Harry Wilson or Livvie Kirkbride to see a demo of the Addidat Platform, and start adding value to your small-Cap portfolio today.????????