A company’s ESG credentials are increasing in priority for small- and mid-cap investors. But are businesses keeping pace with increasing investor demand for ESG and, if not, how can they catch up?
New research commissioned by Downing and the Quoted Companies Alliance (QCA), and carried out by the Henley Business School, asked 150 small- and mid-cap companies, and those who invest in them, about their overall awareness around ESG.
Exactly 60% of investors surveyed said they considered themselves very knowledgeable about ESG, while only 23% of businesses felt the same. And so we start to see a gap forming between the expectations of investors and companies when it comes to ESG.
Highlighting the lower awareness of ESG that currently exists amongst small- and mid-cap companies isn’t intended as a criticism. These are, after all, businesses that are juggling many priorities and often have to be heavily focused on growth, which can stretch resources. And that’s in normal times.
It’s also important to remember this push for ESG has been happening at a time when Brexit has brought significant uncertainty for UK businesses of all shapes and sizes. Mix in the ongoing economic impact of Covid-19 and what you get is a period of historic turbulence for UK companies.
And one crucial thing that is clear from the research is the intention is there, with 62% of companies surveyed stating ESG integration is a central part of their firm’s strategy or vision.
A potential missing link here is the lack of consistent ESG standards or principles being followed by small- and mid-cap companies. Just under 70% of companies surveyed said they do not use a set of standards as the basis for evaluating and reporting on ESG.
The United Nations’ Sustainable Development Goals are probably one of the best known and widely used set of ESG standards, as are industry specific standards such as the Global Real Estate Sustainability Benchmark for the construction sector. Following established principles such as these will help CEOs focus on more material factors, as well as lend important credibility to a firm’s ESG strategy.
Talking to CEOs of these smaller firms has, however, highlighted the need for a ‘toolkit’ such as the one the QCA is developing to help them make efficient progress in closing the gap between investor expectations and investee company’s policies and disclosures.
This helps with structure, focus and credibility should also make it easier for companies to effectively communicate their ESG strategy and the progress they are making around this to investors. Many companies will have already recognised ESG issues and opportunities in their core business without even realising it, which in turn means they won’t get any credit simply because it’s not disclosed. This disparity is also highlighted by the research, with 52% of investors agreeing with the statement that smaller companies aren’t sure how to effectively communicate the potential impact of ESG to their stakeholders, while only 31% of smaller companies said the same.
An ESG strategy is a journey, not a destination, so even before a company has been able to adopt a set of principles or fully develop a strategy, there is value in communicating to stakeholders that the firm recognises, understands and values ESG issues that are relevant to its business. Keeping them up to speed with plans and reassuring them that this is a priority for the business will go a long way to keeping investors on board.