ESG/sustainability: ROI advantages for small & mid-cap companies

In previous posts, I addressed increasing evidence that there can be real R.O.I. advantage to companies that include E.S.G./Sustainability as an integral part of competitive strategy. The next few posts will revisit R.O.I. to look at strategic E.S.G./Sustainability program efforts and communications R.O.I. 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 E.S.G./Sustainability
• Find yourself in sudden E.S.G. 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 anticipated to be impacted by MiFID II.

To catch up without exhausting your staff and budget, look for “low-hanging fruit” to capture R.O.I. quickly.

A couple of ideas:

Top Line: B2B supply chain sales

As highlighted in a recent Gartner supply chain research commentary:

“E.S.G. 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 E.S.G. disclosure) that nobody wants?  What are your customers (and competitors) focusing on in their E.S.G./Sustainability disclosure and supplier questionnaires?

AlphaSense search on ‘E.S.G. Sustainability AND Profitability’ for the latest 12 months found 56 small and mid-cap companies across ten 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 [$TTEK] and Goodyear [$ G.T.], 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, E.S.G. has become an increasingly important talking point across sectors and market capsize. The C.F.A. Institute has found over 73 percent of investors now consider E.S.G. indicators in their decision-making processes.

S&P and Fitch just announced they are adding E.S.G. 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 be covered by 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 E.S.G. practices can lead to higher profitability and better long-term investments.

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

Pamela Styles is principal of Next Level Investor Relations L.L.C., a strategic consultancy with dual Investor Relations and E.S.G./Sustainability specialties.