ESG Focus | An ESG handbook and toolkit

An ESG handbook and toolkit

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• Key Environmental, Social and Governance (ESG) policies, standards and frameworks reviewed
• Who is measuring ESG and what metrics they look at
• Growth in ESG-driven investing: who is doing it and how it has performed
• A simple 15-factor ESG scorecard for companies and investors to start making their own assessments
• Analysis of how sectors currently measure up, leading to some key observations and recommendations
• Fund manager survey highlighting the momentum behind ESG adoption

This report is essentially an ESG handbook and toolkit. We explain what we think are the key ESG policies, standards and frameworks. We look at who is measuring ESG and which metrics they look at. We look at the growth in ESG-driven investing, who is doing it and how it has performed. We then zone in on smaller companies specifically. We have drawn up a simple 15-factor ESG scorecard which companies (or investors) could use as a start in understanding how they score on key aspects. We have collected these data points on 102 companies under our coverage and analysed how sectors are currently measuring up. This leads us to some key observations and recommendations. We have surveyed small-cap fund managers to understand their attitudes towards ESG and which factors they currently look at and which they are likely to look at in the future. Our key conclusion? If smaller companies follow our three recommendations, they should be able to look forward to the forthcoming growth in ESG scrutiny with confidence. 

Forward from Sam Smith, CEO, finnCap Group

Companies are far more aware of their responsibilities today

It was the landmark legal case of Salomon v Salomon in 1897 that decided the eponymous shoe business owner could not be held liable for the debts of his company, and consequently established the concept of the ‘company’ as a separate legal entity with its own rights – and its own responsibilities. Yet, for most of the 20th century, these responsibilities remained solely towards a company’s shareholders in its pursuit of maximising profits for the benefit of its owners. Barely any consideration was given to the ‘greater good’ of the wider stakeholder community, employee rights, community affairs or environmental concerns – unless, of course, it affected the bottom line. Thankfully, that is now changing. Companies large and small are reflecting societal developments and placing ESG at the heart of their business models.

Growth of ESG reflects fundamental issues we all face

The greater focus on ESG today represents a widespread response to challenges people across the world are facing. Humanity is attempting to slow down the alarming rate of climate change and the destruction of natural environments. Across the developed and developing world, there is a new sense of urgency around upholding human rights.

Expanding awareness of business ethics, global diversity and income inequality, meanwhile, has put corporate structures and decision makers under new levels of scrutiny. The devastating social and economic fallout from the pandemic has only served to put these factors into sharper relief and accelerate the rate of change.

Investors are a key driver of change

Investors, both institutional and retail, are likewise playing a prominent role in putting ESG at the top of corporate agendas. Across the developed world an intergenerational wealth transfer is happening on an unprecedented scale. In the UK, for example, £5.5tn is estimated to be passed down over the next 30 years. The main beneficiaries – Millennials and Generation Z – are making ESG central to their investment approach, and
they want to invest in companies that reflect their values and that positively impact the planet and society.

The future is about sustainable growth

Companies now recognise that environmental, social and governance (ESG) concerns are no longer simply a way to signal a company’s caring credentials – they are a fundamental part of sustainable business success. As we look to recover from the pandemic and restore economic growth, ESG should be a hallmark of our approach – ensuring that the growth that is delivered is more responsible, sustainable and for the benefit of all.

In this report, we put the UK smaller companies market under the ESG microscope, giving useful insight into how institutional investors are thinking about these issues as well as providing a simple, practical approach to assessing companies with our finnCap Scorecard.