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Making ESG a Priority for Small-Caps

Making ESG a Priority for Small-Caps

April 27, 2022

Active management plays a critical role in evaluating a company’s ESG practices. And with investor interest in ESG skyrocketing ­— Morningstar found that total investment in sustainable funds was up 53% in 2021 to $2.7 trillion — active managers will be charged with delivering on those investor goals. One asset class that is an untested landscape for ESG investing is small-cap stocks. According to a new blog post from Active Managers Council Steering Committee member Franklin Templeton, small-cap companies and the investment teams that analyze them are “behind the curve” when it comes to ESG.  The post called “The Unchartered Greenspace in Small-Cap ESG,” argues that investors have a unique chance to shape small-caps and their ESG policy.

Authors Steven Raineri and John Chow write that ESG integration has been slow for small-caps primarily due to a lack of resources for ESG accounting and reporting. The authors say there is a chance for financial services firms to work with small-caps and have a big influence on their direction going forward. “We believe actively engaging with portfolio companies to discuss how they can best upgrade their practices is an important first step,” they write in the blog post.

Raineri and Chow write that “established trust and an open line of communication” are critical in getting company management to listen. Active managers —who often have familiarity with both the company and the broader industry— can play a key role in helping small-caps get on the path to ESG integration. Having a relationship with a company, having access to ESG experts, and knowing the right questions to ask management can all lead to greater progress.

The authors argue that guiding small-caps toward better corporate practices will likely result in better returns for investors and stakeholders with “well-developed governance standards” leading to an “alignment of corporate interests with business sustainability.” They call it an area that could “not only have a positive impact on corporate practices” but one that will also “create value for shareholders.”

You can read more from Franklin Templeton here.

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