Sustainability Reporting Among Smaller Companies

According to G&A Institute in 2020, as much as 92% of companies included in the S&P 500 Index had published at least one sustainability report.  KPMG found that 80% of a larger group composed of the 100 largest companies in each of 52 countries had adopted sustainability reporting.  While a larger sample of 5,200 than the S&P 500 Index, it still represents the apex of corporate leadership and probably economic strength. 

Smaller companies present a different picture. A survey conducted by business consulting firm White & Case in 2020, determined that of the 80 small- and mid-cap public reporting companies in the U.S., 51% provided some form of voluntary sustainability disclosure on their websites.  The results suggested an acceleration in adoption given that in 2019, the rate of sustainability reporting in the group was 35%.  We note that White & Case accepted a few paragraphs on a website page as evidence of sustainability reporting.

What may be more illuminating are the differences in reporting practices among industries.  Only one of the energy companies in the White & Case survey did not have a sustainability report.  Services companies were also well represented with 56% of the survey respondents providing at least some sort of website disclosures if not a full-blown sustainability report.  Technology companies were good performers with 46% of the group in the yes column.  However, the life sciences group was markedly deficient with only 17% making an effort to at least put a few words on the corporate website. 

The White & Case survey also provided insight into attitudes among smaller companies toward environmental topics.  It might be expected that the smaller the company, the less interest there might be in allocating precious capital and human resources to pursuits not directly related to the company’s critical product or service mission.  The group with market capitalization between $1 billion and $2 billion proved to be the most progressive, with 67% of the respondents in this group giving ‘yes’ survey responses.  Companies with market capitalization below $1 billion came in with a 50% positive response rate, proving that even small operations find environmental policies can be an important part of operations as well as corporate brand and image.

These small companies may have figured out that a sound sustainability policy can be an important competitive differentiator.  For example, the company can pass along significant value to customers in its supply chain, by lowering the carbon content of its products through a more efficient production process.   A study by business consulting firm McKinsey & Company found that establishing environmental, social and governance (ESG) policies can improve a company’s operating profits by as much as 60%.  Strong sustainability policies help increase efficiencies, reduce operating costs and increase employee productivity.  

The value creating potential in environmental policy is not lost on investors nor customers.  According to the Edelman Trust Barometer published in early 2022, 88% of institutional investors put ESG polices on equal level of importance to operational and financial analysis.   What is more, venture capital funds have begun adopting ESG benchmarks when selecting investments.  Consumers are less likely to buy products from a business with weak sustainability compliance and many are reluctant to put their consumer dollars toward unethical businesses.

Establishing sustainability policies and complying with the policies of up and down the supply chain is not an easy undertaking.  Reporting frameworks are fragmented and sometimes complex.  Small- and medium-sized businesses often do not have the human capital to devote internal resources to ESG reporting.  What is more smaller companies may not have the financial capital to hire specialized consulting firms.   

The world’s economies are made all the better for the attention that small- and medium-sized companies pay to the environment.  Smaller companies help drive job creation and income generation, contributing on average 45% of total domestic U.S. employment and 33% of U.S. national income.  According to the International Labor Organization, small- and medium-size businesses represent 90% of all firms globally, and contribute 70% of employment and drive 70% of global Gross Domestic Product.    

Clearly the stakes are high to reduce greenhouse gas emissions and halt global warming.  Leaving the climate crisis up to the top 100 companies in each country is not going to be enough.  Two important stakeholder groups  -  investors and consumers  -  rightfully expect small businesses to participate in the effort.  It is equally clear that small businesses have substantial economic importance.  Can they use this clout to bring about reduced carbon in products and production processes?         

Beginning in the next post we look at the environmental policies of three companies in the Crystal Equity Research coverage group.

 

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.