finnCap launches ESG handbook for SMEs

finnCap has launched a scoping handbook and toolkit informing small cap firms how they can improve their ESG credentials. 

Collating data from 102 small and mid-cap companies in a variety of sectors and conducting a survey of small cap focused fund managers, finnCap has constructed a 15-point scorecard for small cap companies to use in order to stand up to increased scrutiny over environmental, social and governance concerns from investors.  

finnCap’s equally weighted measurements divide out ESG into its component parts, and measure factors related to them for each company against sector and market averages. In providing clearly measurable targets – and providing advice on how they can be achieved – SMEs can use the toolkit and scorecard to systematically demonstrate how investable they are from an ESG standpoint.  

From the analysis of finnCap’s client companies as well as fund managers of UK smaller company funds, the report was able to draw out three key recommendations SMID cap firms can implement to demonstrate their ESG credentials to investors: 

• Obtaining key environmental data points (eg energy, CO2 and waste figures) 
 
• Application of the most important policies (eg environmental, discrimination, community outreach and ethical practices)  

• Promoting more board equality 

With investors applying ever more scrutiny on all aspects of ESG, addressing all elements of finnCap’s scorecard is crucial for companies to comprehensively display their ESG credentials. In practical terms, this means companies need to focus on stakeholder areas which their sector hasn’t traditionally seen as important as others.  

Highlighting ongoing efforts by indexes and platforms such as the MSCI ESG Ratings, FTSE Russell ESG Ratings, Sustainalytics and RepRisks (which leverages machine learning to measure sustainability credentials), finnCap notes that the need to quantify and mathematically measure ESG is now being met. However, these ratings skew towards measuring larger cap firms, meaning that the assessment of ESG-compliant small and mid-cap companies often goes unrealised. 

Compliance with finnCap’s measurements, which can be weighed against similar SMID caps, will be crucial as current investment trends in large funds and large cap stocks focusing on ESG begin to trickle down to small and mid-cap interests. Of the small cap specialist fund managers who contributed to the survey, nearly all envisage using the factors laid out in the toolkit to make portfolio decisions in the future – significant when reflecting that just a minority of the same respondents considered ESG factors three years ago.  

This is attributed to a confluence of factors over the last decade has seen a rush to rebalance capital into ESG compliant assets. This trend has been accelerated by the onset of the Covid crisis and has led to 80 per cent of S&P 500 companies reporting ESG metrics compared to just 20 per cent in 2011. Meanwhile in the UK in June 2020, responsible investments made up 2.6 per cent of all assets under management – up from 1.7 per cent less than a year earlier in May 2019. 

Concerns over the risk related to current affairs and climate change has led leading fund management firms to adjust their portfolios to a more comprehensive ESG offering, citing the fact they provide better risk adjusted returns for investors. This tallies with finnCap’s fund manager survey, which found that a significant majority of fund managers actively pressure their investee companies to be more “ESG compliant”.  

This can partly be explained by one of the largest wealth transfers in history is underway, with £5.5 trillion set to pass from ‘baby boomer’ parents to millennials over the next 30 years in just the UK alone. In an ESG context, this is significant due to the fact that 90 per cent of millennials want to invest on an ESG compliant basis, whilst 84 per cent already do. 

Ensuring compliance with ESG is, therefore, vital to ensuring a pipeline of future investment for any small or midcap firm. 

Raymond Greaves, Head of Research for finnCap, says: “The pace with which environmental and ethical factors are being factored into investments globally has meant that small and medium sized companies will increasingly be analyzed through an ESG lens. Using our scorecard will help small and medium sized firms remain attractive to investors and fund managers in a post COVID environment where funding will be reserved, in large part, for companies that can systematically prove they have multiple stakeholder interests at heart and operate in a forward thinking manner.” 
 
Sam Smith, CEO of finnCap, says: “Companies now recognise that ESG concerns are no longer simply a way to signal a company’s caring credentials – they are a fundamental part of sustainable business success. As we look to recover from the pandemic and restore economic growth, ESG should be a hallmark of our approach – ensuring that the growth that is delivered is more responsible, sustainable and for the benefit of all. In this report, we put the UK smaller companies market under the ESG microscope, giving insight into how institutional investors are thinking about these issues as well as providing a simple, practical approach to assessing companies with our finnCap Scorecard.”