With their entrepreneurship and innovation, many smaller companies have exited the Covid-19 pandemic stronger than before. They’ve gained market share and pricing power, while several now lead on sustainability.
In emerging economies, small and medium-sized enterprises (SMEs) have a particularly important role to play. They represent approximately 90% of businesses, provide more than 50% of employment and contribute around 40% to GDPi.
The challenge
The UN holds its dedicated ‘Micro, Small and Medium-sized Enterprises Day’ on 27 June. The aim is to highlight and further encourage the contribution SMEs make to sustainable development. Currently, smaller companies’ engagement with the UN’s sustainable development goals (SDGs) is more limited than it could be.
There are several reason for this. For example, there’s ‘small-cap syndrome’, whereby smaller-scale companies think they’re not in a position to drive change. Due to limited resources, they may lack awareness of their positive contribution and sustainability footprint. Many find introducing impact initiatives challenging due to the overwhelming amount of information available, the plethora of disclosure mechanisms and lack of uniformity across different regions.
What makes ‘small’ special?
However, smaller companies, by their very nature, have the potential to quickly transform into leaders in sustainability. As businesses, they tend to be more agile and adaptable than their larger peers, allowing them to adjust quickly to global developments. They’re also closer to stakeholders and local communities. When it comes to social responsibility, research suggests small-caps tend to listen more openly to the needs of their employees and the local communitiesii. As investors in smaller companies, we focus on finding the businesses that are already making a difference.
Smaller companies, by their very nature, have the potential to quickly transform into leaders in sustainability
How does this look in practice?
Founder and family-run firms often have a unique connection with local communities and actively support their wellbeing. Take Italian luxury brand Brunello Cucinelli. The company is a key employer in Umbria, where it places substantial importance on addressing community needs. It does so by recruiting locally and engaging with suppliers and various institutions. The company also provides opportunities for young people to work and advance in the business. It established the School of Arts and Crafts in Solomeo, which pays students a monthly wageiii. These factors mean Brunello Cucinelli aligns with SDG 8: decent work and economic growth.
Another interesting founder-run company is Dermapharm, a leading German manufacturer in generic (patent-free) branded pharmaceuticals. The business has five core segments: dermatologics, systemic corticoids, women’s healthcare, ophthalmologic products and vitamins. It’s focused on providing affordable medicines to patients, which aligns with SDG 3: good health and wellbeing.
In the area of water conservation and green energy, there is Israel’s Kornit, a leader in the digital transformation of textile printing. Digital printing has many environmental and economic benefits over traditional analogue printing – reducing water usage, as well as water waste and carbon emissions. The company also uses more eco-friendly dyes. The textile and fashion industry requires radical change to address elevated CO2 emissions and waste. Kornit recognises it can help drive this transition. By 2026, it aims to produce around 2.5 billion (bn) items of clothing in a responsible manner. This could potentially save 4.3 trillion litres of water and 17.2 bn kilograms of greenhouse gas emissions. Kornit is clearly aligned to SDG 6: clean water and sanitation.
What does this mean for investors?
It will require a huge amount of financing and investment to achieve the objectives of the UN’s SDGs. The World Bank puts the figure between US$ 80 trillion and US$ 200 trillioniv. As a result, investors have an important role to play by providing access to financial services and credit. This includes investing in assets best-placed to benefit from the sustainable economy and the transition towards a net-zero world.
Final thoughts…
We believe many SMEs, despite their smaller size, can be leaders in their industries. They aim to future-proof their operations and recognise the importance of conducting business responsibly and sustainably. Smaller companies are making a difference and have an important role to play in supporting the SDG goals and the sustainability agenda. Great things can indeed be achieved by a series of small things brought together.
Companies are selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance. Past performance is not a guide to future results.