ESG Investment in Small Caps in Spain: Analysis and Challenges

In the current context of financial markets in which size is fundamental in terms of visibility and access to investors and analysts, small cap companies now have to add to the new challenges that accompany the evolution of the ESG investment ecosystem: regulation, regulations, reporting, standards, ratings, access to capital, new management models or relationships with its stakeholders.

Investors, for their part, are not far behind when it comes to staying up to date. SFDR or Green MiFID are clear examples of the regulations that are implemented every day and continue to evolve.

Given this situation, it is worth asking ourselves, are small companies in Spain prepared to face investor scrutiny from an ESG perspective with guarantees? What are the main factors that an investor takes into account when analyzing (and eventually investing) in a small cap when analyzing it taking into account ESG factors?

With the aim of answering these questions and others, the ESG Consulting area of ​​LLYC has developed a study aimed at analyzing the approach of managers that invest in small capitalization companies from an ESG perspective.

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The result and its main conclusions are part of the new technical note published by LLYC entitled ESG investment in small caps in Spain: analysis and main challenges

Regarding the general state of the sustainable investment ecosystem, the regulations and their impact on investors and issuers, the comparability problems derived from the lack of clear standards for reporting and analysis of information or ESG ratings, which due to their own complexity and focus could be considered as a particular category are some of the main challenges.

Regarding small caps, what elements are key for this type of companies when analyzed by investors with an ESG perspective?

The keys, developed in the study about ESG investment, point to the following results:

• 80% of the participating managers have a specific manager or department in charge of ESG issues.
• 80% apply ESG criteria in all their investments.
• Responsible investment and risk/return, main reasons for 90% of managers when investing with ESG criteria.
• Having a clear ESG strategy is the most important factor when valuing a small cap from an ESG perspective for more than 50% of the participating managers.
• For 70% of managers, the communication of sustainability achievements (via reporting or report) is the main tool for small companies when it comes to gaining visibility in front of investors. In addition to the managers participating in the study, the conclusions incorporate the qualitative contributions of managers and institutions such as Sonsoles Santamaría, General Business Director at Tressis, Ana Escárrago, Partner – Director of Corporate Development and M&A at Lift AM, Beatriz Pérez Solana, Portfolio manager at Renta 4, Mercedes Azpiroz, Director of Investor Relations at Magallanes Value Investors, Pilar Lloret and Sergio Luján, General Director and Head of Communication and Investor Relations at Nao Sustainable AM, Pablo Esteban, Deputy General Director of Spainsif and Alfredo Echevarría, Director of Analysis at Lighthouse – Spanish Institute of Analysts.

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(Featured image by geralt via Pixabay)

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