Are ESG Investors Overlooking Small Cap ETFs?

Big institutional investors, corporate and public pensions, endowments, and foundations seeking to fill out an ESG mandate typically put their money into the largest public companies, Institutional Investor reports.

This trend may be partially attributed to the fact that ESG initiatives aren’t cheap and big public companies are better-equipped to dig deep into their pockets to adopt expensive reporting, standards, and disclosure programs, whether or not policies lead to better ESG outcomes. Moreover, larger companies are able to define some ESG best practices, like the optimal structure of a board, whereas those practices may not make sense for smaller companies.

On the other hand, this makes the small cap segment an open frontier that is relatively untapped.

Conrad Doenges, chief investment officer of small cap manager Ranger Investments, argues that many small cap companies are doing meaningful work around ESG, but they aren’t disclosing their practices.

“It’s more of a pull from investors than a push that many larger companies are able to do,” Doenges told Institutional Investor.

Doenges also added that small caps and micro cap companies get overlooked since many asset managers have made what he believes to be a false choice between making ESG investments in larger companies on public markets or buying into private businesses that focus on impact investing.

“While there is less data about small caps, it’s also in small-cap strategies where we see institutional investors perhaps pay a little more attention to engagement strategies and impact,” Valentin Allard, senior consultant at INDEFI, a Paris-based strategy consultant for global investment managers, told Institutional Investors.

“When you’re going down the market cap and you start investing in companies in which you’ll hold a non-negligible amount of floating shares, then that puts you in a position where you’re able to effectively deploy your engagement strategy. You’re able to discuss issues with management, influence some practices, and gather the data you’re lacking. So it’s up to managers to figure out how ESG can actually be a differentiator in small-cap strategies rather than using data as an excuse not to invest here,” Allard added.

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