With their entrepreneurship and innovation, smaller companies have exited the Covid pandemic stronger than before, gaining market share and pricing power, and many now lead in the area of sustainability. As the painter Vincent Van Gogh expressed it: ‘Great things are not done by impulse, but by a series of small things brought together.’
In emerging economies, small and medium-sized enterprises have a particularly important role to play. There, they represent approximately 90% of businesses, provide more than 50% of employment and contribute around 40% to GDP[i].
June 27th is the UN’s dedicated micro, small and medium-sized enterprise (SME) day, to highlight and further encourage the contribution made by SMEs to sustainable development. Currently, engagement with the UN’s sustainable development goals (SDGs) by smaller companies is more limited than it could be.
Reasons for this may include: the ‘small-cap syndrome’ that leads smaller-scale companies to believe they are not in a position to drive change. Due to limited resources, they may lack awareness, both of their positive contribution and of their footprint. It can also be challenging to bring in impact initiatives because of the overwhelming amount of information available, the plethora of disclosure mechanisms and lack of uniformity across different regions.
However, the very nature of smaller companies means they have the potential to quickly transform into leaders in the field of sustainability. As businesses, they tend to be more agile and adaptable than their larger peers, allowing them to adjust quickly to global developments. They are closer to stakeholders and local communities and the research suggests that they tend to listen more openly to the needs of their employees and the local communities around corporate social responsibility[ii]. As investors in small-cap companies, we are focused on finding the businesses that are already making a difference.
Founder and family-run firms often have a unique connection with local communities and actively support their wellbeing. Take, for example, the Italian luxury brand Brunello Cucinelli. In Umbria, the company is a key employer and it places substantial importance on addressing local needs by recruiting locally and engaging with suppliers and various institutions. This means it aligns with sustainable development goal number eight (for decent work and economic growth). The company 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 wage.[iii]
Another interesting, founder-run example 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 is focused on providing affordable medicines to patients, so it aligns with SDG three (good health and wellbeing).
In the area of water conservation and green energy, the SME Kornit comes to mind. Kornit is an Israeli company leading in the digital transformation of textile printing. Digital printing has many environmental and economic benefits over traditional analogue printing – reducing water usage, water waste and carbon emissions. The company is also using more eco-friendly dyes. Radical change is needed in the textile and fashion industry (figs here around CO2 and waste) and Kornit recognises how it can lead the transition. By 2026, Kornit aims to enable around 2.5bn items of clothing to be produced in a responsible manner, saving 4.3 trillion litres of water and 17.2 bn kgs of greenhouse gas emissions. The company is clearly aligned to SDG six (water and sanitation).
Achieving the objectives of the SDGs will require a huge amount of financing and investing, with World Bank estimates at over US$ 80 trillion and US$ 200 trillion.[iv] As a result, investors have an important role to play by providing access to financial services and credit, and by investing in assets best-placed to benefit from the sustainable economy and the transition towards a net zero world.
All of the companies mentioned, despite their smaller size, lead in their industries. They aim to be future-proof and they 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 are by a series of small things brought together.