“Great things do not come about through impulse alone, but are a series of small things brought together into a whole.” – Vincent Van Gogh.
Thanks to their entrepreneurial and innovative spirit, numerous smaller companies have emerged stronger from the corona pandemic. They have gained market share and pricing power, and many are now at the forefront of sustainability.
Small and medium-sized companies play a particularly important role in emerging markets. Because they make up 90% of all companies there, 50% of jobs and about 40% of GDPi out.
The challenge
On June 27, the United Nations celebrated Micro-, Small and Medium-sized Enterprises (SME) Day to highlight their contribution to sustainable development and encourage their efforts . Smaller companies’ commitment to the United Nations Sustainable Development Goals (SDGs) is lower than it could be.
There are several reasons for this. One of them could be the “small cap syndrome,” which makes smaller firms think they don’t have the resources to drive change. With limited resources at their disposal, they are often unaware of their positive contribution and sustainability footprint. It can also often prove difficult to implement impact initiatives due to the overwhelming amount of information, the countless disclosure mechanisms and the lack of uniformity in different regions.
What is special about small businesses?
However, smaller companies certainly have the potential to quickly become pioneers in the field of sustainability. They tend to be more flexible and able to adapt to global developments faster than their larger competitors. They are also closer to stakeholders and local communities. Research has also shown that they tend to be more responsive to the needs of their employees and local communities as part of their social responsibility.ii As an investor in small-cap companies, we focus on identifying companies that are already making a difference today.
Smaller companies definitely have the potential to quickly become pioneers in the field of sustainability.
How does this work in practice?
Founder and family-run businesses often have a unique connection to local communities and actively contribute to their well-being. An example is the Italian luxury brand Brunello Cucinelli. In Umbria, the company is one of the main employers that pays great attention to local needs, hiring locally and collaborating with subcontractors and numerous institutions. In addition, it offers jobs and career opportunities to young people and founded the School of Arts and Crafts in Solomeo, where students are paid a monthly salary.iii Brunello Cucinelli thus fulfills SDG 8 (decent work and economic growth).
Another interesting example of a founder-managed company is Dermapharm, a German manufacturer of generics (off-patent drugs). The company specializes in five key areas: dermatologicals, systemic corticosteroids, women’s health products, ophthalmics and vitamins. Since Dermapharm attaches great importance to offering patients affordable medicines, it meets SDG 3 (health and well-being).
Kornit deserves a mention in the field of water saving and green energy. The Israeli company is a leader in the digital transformation of textile printing. Digital printing has many ecological and economic advantages over conventional analog printing: less water consumption, water wastage and CO2-Emission. The company is also increasingly using more environmentally friendly paints. A radical change is needed in the textile and fashion industry to combat high CO2-Tackle emissions and waste. And Kornit knows how to lead this change. By 2026, Kornit aims to have sustainably produced around 2.5 billion garments, potentially saving 4.3 trillion liters of water and 17.2 billion kg of greenhouse gases. The company is clearly aligned with SDG 6 (Clean water and sanitation).
What does this mean for investors?
Achieving the Sustainable Development Goals will require immense financing and investment, estimated by the World Bank at over US$80 trillion and US$200 trillion respectively.iv Consequently, investors play an important role here, providing access to financial services and credit, and investing in assets best positioned to benefit from a sustainable economy and the transition to a zero-emission world.
Final considerations…
We believe that many SMEs, despite their smaller size, can be leaders in their industries. Since they want to continue to exist in the future, they attach great importance to responsible and sustainable corporate management. Smaller companies make a difference and play an important role in achieving the SDGs and the sustainability agenda. Indeed, great things can be achieved through a series of small things combined into a whole.
The company selection is intended solely to illustrate the investment management style described herein and does not constitute an investment recommendation or an indication of future performance. Past performance is not an indication of future performance.
i World Bank SME Finance: Development news, research, data | World Bank
ii A. Venturelli, S. Principale, L. Ligorio, S. Cosma, Walking the talk in family firms. An empirical investigation of CSR communication and practicesCorporate Social Responsibility and Environmental Management, 28(1)(2021), pp. 497-510.
iii https://www.brunellocucinelli.com/en/solomeo-school.html
iv www.un.org/sustainabledevelopment/wp-content/uploads/2019/07/UN-SG-Roadmap-Financing-the-SDGs-July-2019.pdf
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