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Small Caps’ High Emissions Intensity — Turn Lemons into Lemonade?

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Small Caps’ High Emissions Intensity — Turn Lemons into Lemonade?

 

Saurabh Katiyar
June 19, 2024

Small-cap stocks across both developed markets (DM) and emerging markets (EM) (proxied by the MSCI World Small Cap and MSCI Emerging Markets Small Cap Indexes) have had higher carbon footprints compared to their larger counterparts.

For the four years ending Q1 2024, small caps’ emissions intensity was consistently above that of DM and EM large- and mid-cap stocks (proxied by the MSCI World and MSCI Emerging Markets Indexes). The gap was present when measured with Scope 1 and 2 emissions as well as when we added Scope 3 emissions. The proportion of small-cap firms that have adopted science-based targets (SBTs) to reduce greenhouse gas emissions was also notably lower than for larger-cap firms.

Small-cap companies, in aggregate, also trailed their larger-cap peers in the proportion of green revenues. Green revenues gauge a company’s alignment with environmentally friendly products, services and initiatives.

Small caps — low-hanging fruit in decarbonization?

Institutional investors have proactively engaged large emitters, encouraging them to reduce their carbon footprint. Perhaps these investors also have a role to play with small-cap companies as they seek to advance the transition to a sustainable, low-carbon economy. Considering small-cap firms as possible candidates in the adoption of low-carbon business models has the potential to widen this opportunity set for investors who seek to align their portfolios with climate targets and decarbonization commitments.

Large corporations may also consider smaller firms that demonstrate a commitment to reducing emissions intensity and increasing green revenues as attractive additions to their value chains as they seek to manage their total carbon footprint.

Small-cap firms that move to adopt SBTs and increase green revenues could be viewed by some investors as turning the lemons of high emissions into the lemonade of actively advancing the low-carbon transition.

The author would like to thank Rahul Suresh Kumar.

Small-cap firms’ emissions intensities exceeded those of larger-cap peers

Data as of end of March for each calendar year. Hatch marks indicate Scope 1 + 2 emissions. Emissions intensity is calculated as carbon emissions Scope 1 + 2 (and Scope 1 + 2 + 3) t CO2e/USD million enterprise value including cash (EVIC).

Small caps were behind mid and large caps in green revenues and SBTi-approved targets

Data as of March 29, 2024. Green revenues are calculated as the weighted average of index constituents reporting green revenues. Science Based Targets initiative (SBTi)-approved targets are in line with limiting global warming to 1.5°C above pre-industrial levels.


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