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Raymond Greaves 
Head of Research
finnCapp Ltd

24 Sep., 2020

ESG ratings, which used to be the exclusive property of major companies, are now essential for small and medium-sized companies as well.


Advice for small and mid-cap companies aiming to achieve ESG goals

Over the past few years, there has been a rapid increase in the number of fund managers and individual investors scrutinizing companies' ESG initiatives. The coronavirus crisis is not the only factor accelerating this upward trend. Furthermore, intergenerational wealth transfers are occurring. Over the next 30 years, 5.5 trillion pounds ($7 trillion) of wealth held by baby boomers will be lost to millennials and Gen Z (mid-1990s - generation born in the early 2000s).  In 2019, $200 billion was drained from traditional equity funds as many investors considered assets invested in carbon-heavy industries to be “negative assets,” while ESG-focused Almost $70 billion has flowed into type funds. Given that the coronavirus panic has accelerated this gap widening by shifting investment funds towards long-term ESG compliance indices, it is easy to see why companies across sectors are devoting resources to improving their ESG ratings.


The general view is that this prevents investors from leaving the company and reduces the risk of the new coronavirus. In fact, the MSCI ESG Index, which includes companies with high scores measured annually across 1,000 data points and 37 key issues, has outperformed the MSCI Global Index year-to-date. proves this. However, this is also a source of concern for small and mid-cap companies. Portfolio reviews (including portfolios emphasizing long-term passive strategies) are beginning to shift towards emphasizing ESG compliance, and in this environment, smaller companies are continuing to demonstrate their ESG eligibility. They have to make a lot of effort and are having trouble securing resources. This is the case even for companies that have placed ESG factors at the heart of their organizational structure. The reality is that these companies lack thousands of data points and are unable to dedicate resources to quantifying the true impact of each factor in their supply chain.

The Quoted Companies Alliance's (QCA) Corporate Governance Code for AIM and Small Cap Listed Companies, which came into force in 2013, has gone some way to addressing this issue. Companies can use the aforementioned 10-principle governance code as a rough guideline to ensure progress towards achieving their ESG goals.  

Interestingly, a recent survey of small-cap fund managers conducted by finnCap found that a majority (versus a minority three years ago) of managers say they use ESG factors in their portfolio decisions, with a clear increase in the index. compliance is becoming stronger. Therefore, we need a clear and sophisticated system for assessing the ESG of small and mid-cap companies in a manner similar to the MSCI, FTSE, Russell, S&P and Sustainalytics ratings that fund managers use to evaluate large companies. It has become.

finnCap's ESG Scorecard can help companies do this with rigor, and our early results from the 102 companies we ranked suggest it can be used to improve by companies in a variety of industries. The scorecard consists of the following 15 items that can be easily measured and implemented regardless of the size of the company.

1. Energy measures
2. Carbon dioxide countermeasures 
3. Water measures
4. Waste management
5. Does the company have an environmental policy or sustainability policy?  

6. Employee turnover rate 
7. After-tax profit margin
8. Is there a policy regarding discrimination? 
9. Is there a local contribution activity policy? 
10. Presence of ethical policy 

11. Percentage of women on the board of directors 
12. Ratio of outside directors on the board of directors 
13. What multiple of the UK median salary is CEO pay?
14. Are the roles of CEO and chairman separated? 
15. Compliance with applicable corporate governance codes (such as QCA codes)

To achieve a high score, companies need to address all three areas: E, S, and G. It is also important to consider all aspects of your output when trying to improve your score, as the scorecard is equally weighted, so if one element is worse than another, your rating will be lowered. It is.

Our research found that different sectors have strengths and weaknesses in obtaining scores in each category. For example, consumer-related industries had relatively high governance scores, ranking first ahead of technology, industrials, support services, finance, life sciences, and energy. On the other hand, the score for S (social studies) remained at 3rd place.  

For example, service sectors that serve casual consumers tend to have higher turnover rates than life science sectors that require specialized experience. While these factors can be explained by the characteristics of each sector, if the score drops due to unavoidable sector characteristics, there is room for recovery in other areas such as community contribution activities. (In the consumption sector, only 50% are aware that they are contributing to the local community)

Similarly, support services industries that score well in environmental and social areas are generally held back by governance scores. Less than half of the sector's boards are independent directors, and only 14% of directors are women.


In addition to the rapid change in strengthening evaluations of ESG in general, as the method of implementing this evaluation measurement shows, it will be important in the future to improve scores by examining these factors. According to feedback from fund managers, there is currently a tendency to focus only on the governance element (G) of ESG. However, with a highly environmentally conscious and socially conscious investor base, environmental (E) and social (S) factors will likely catch up with governance (G) in the near future.

Rather than focusing on just one element required by their industry, companies should conduct detailed self-analysis of all environmental, social, and governance aspects and ensure that they improve in each area. Dew. This is because all elements will definitely be included in the evaluation points in the coming years.  

(This article is distributed only in Japanese with the permission of UK IR Media.)

​Original articlehere

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