ESG: the key to unlocking opportunities in Small Caps
How can small caps capitalize on ESG to find tomorrow's winners according to our analysis?
While ESG rating coverage differs among traditional third-party ESG ratings providers, small and mid-cap companies generally have lower ESG ratings than larger market capitalization companies. In this paper, we explain why, given the specificities of the small cap segment, a combination of "best-in-universe " and "best effort " approach with an internal rating scale based on ESG analysis may be beneficial. We believe that such an approach eliminates size and information bias, which is essential for risk mitigation and value creation in the small cap segment. This text is based on many years of ESG research at ODDO BHF Asset Management.
In our article you will get more information about the following points:
- Traditionally, small cap companies tend to allocate fewer resources to ESG topics, primarily because they are in a different financial maturity cycle than larger companies
- Private founders or management tend to hold a significant stake in small and medium-sized companies
- Corporate Governance may be a key source of risk mitigation
- Human Capital (part of the Social factor) may be a driver of innovation and long-term performance, particularly in the small cap segment, according to our analysis
- In the small cap segment in particular, dialogue and shareholder engagement can have a substantial impact on company strategy and ESG commitment.
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