ESG/Sustainability: ROI Advantages For Small & Mid-Cap Companies

In previous posts, I addressed increasing evidence that there can be real ROI advantage to companies that include ESG/Sustainability as an integral part of competitive strategy. The next few posts will revisit ROI to look at strategic ESG/Sustainability program efforts and communications ROI opportunities from various perspectives.

Small and Mid-Cap perspective

If you are executive leadership for a small- or mid-cap company, you may:

• Be feeling caught off-guard on the heels of recent significant developments in mainstream attention to ESG/Sustainability
• Find yourself in sudden ESG communications catch-up mode with understandable resource constraints
• Be looking for new ways to communicate directly with the buy-side investors if your sell-side coverage is already and/or anticipated to be impacted by MiFID II

In order to catch up without exhausting your staff and budget, look for “low-hanging-fruit” to capture ROI as quickly as possible. A couple ideas:

Top Line: B2B supply chain sales

As highlighted in a recent Gartner supply chain research commentary:

“ESG has emerged as a source of growth and innovation strategy for supply chains, spurring better performance and mitigating supply chain risks.”

Why develop the widget (or ESG disclosure) that nobody wants?  What are your customers (and competitors) focusing on in their ESG/Sustainability disclosure and supplier questionnaires?

AlphaSense search on ‘ESG Sustainability AND Profitability’ for the latest 12 months found 56 small and mid-cap companies across 10 sectors, with related disclosure including supply chain policies, expectations and supplier audit practices across the cap range, from $266mm market cap Natural Grocers by Vitamin Cottage [$NGVC] to Tetra Tech [$TTEK] and Goodyear [$GT], market cap $3.3bn and $4.2bn, respectively.

Bottom Line: Cost of Capital (C.O.C.) and Market Value (P/E)

As highlighted in a recent DFIN white paper, ESG has become an increasingly important talking point across sectors and market cap size. The CFA Institute has found over 73 percent of investors now consider ESG indicators in their decision-making processes.

S&P and Fitch just announced they are adding ESG sections to their corporate credit ratings reports. While Moody’s has been doing so for several years, S&P expects to have 40 percent of the companies it rates to be covered by the end of 2019.

A newly released Morgan Stanley survey shows 75 percent of U.S. asset managers say their firms now offer sustainable investing strategies, up from 65 percent in 2016. Another 82 percent think strong ESG practices can lead to higher profitability and better long-term investments.

The same AlphaSense search, mentioned above, found small and mid-caps referencing sustainability – commitment, cost and profitability – within quarterly earnings calls, e.g. $479mm market cap Catchmark Timber Trust [$CTT], $1.97bn Ottertail [$OTTR] and $2.2bn DiamondRock [$DRH].

Pamela Styles is principal of Next Level Investor Relations LLC, a strategic consultancy with dual Investor Relations and ESG / Sustainability specialties.