Values Over Value: Why Microcaps Need to Think About Social Responsibility

In recent years, we’ve witnessed a rise in social consciousness on several important fronts. Social media has driven awareness in terms of discrimination, harassment, inequality, and plenty of other societal ills. As a result, Americans (especially the younger ones) are demanding more of the companies with whom they do business.

We see this reflected in consumers’ buying habits. According to a survey done by Aflac, 77% of consumers “are motivated to purchase from companies committed to making the world a better place.” In general, 49% of Americans believe that a company should be more committed to improving the world than making money for their shareholders.

Although this values-over-value mindset seems to defy what we’d normally expect from a for-profit enterprise, the numbers suggest that 73% of investors agree with and favor a more socially-responsible outlook—particularly millennials. 41% of millennial investors put significant effort into assessing a company’s social responsibility before choosing to invest, compared to 27% for Gen X and 16% of baby boomers.

In other words, today’s investor is starting to care more about how a company behaves than how much money it makes. Even more so for tomorrow’s investor, no level of profitability or anticipated return will outweigh a company’s failure to act responsibly.

If microcaps want to attract investment in this new environment, they have to conform to the new canons of social responsibility, sustainability, and diversity. Thankfully, this isn’t just the right thing to do; it’s the profitable thing to do as well.

Values Drive Value

Companies are increasingly adopting environmental, societal, and governance (ESG) practices as a path to responsible corporate citizenship. These practices include sustainable development, intentional inclusion of minorities at the board level, and the robust development and execution of policies against discrimination and harassment.

Although ESG lacks a central set of standards by which we might judge any particular company, investors have nonetheless focused significant attention on those who commit themselves to practices within this same somewhat-nebulous ballpark. Consequently, investment companies have taken to offering funds focused specifically on ESG.

Demand for ESG has steadily grown over the years, even despite the pandemic and the stress it placed on mainstream investment. According to Morningstar, amid a $384.7 billion outflow in the overall fund universe, sustainable funds collected $45.7 billion in net inflow. Especially in Europe, sustainable funds have come to dominate the scene.

Driving this inflow into the future, Brown Brothers Harriman have found that an estimated 74% of global investors plan to increase their ESG ETF allocation in the next year. One out of every five plan to allocate between 21% and 50% of their portfolios to ESG within the next five years.

ESG is here to stay, but it should be noted that those investors who’ve thrown in their lot with the socially-conscious aren’t acting against self-interest. They’re motivated by the basic principle that “doing good” can (and should) translate to “doing well.”

So far, the response from consumers and investors is proving this principle correct. If microcaps want to reap the benefits on both fronts, they need to begin thinking seriously about how they can bring themselves into line with the latest ESG criteria.

A Necessity, Not a Nicety

Whether microcaps buy into the promise of ESG and their need to conform, regulatory rumblings at the SEC suggest that they may not ultimately have much of a choice. In early July, an advisory subcommittee of the SEC recommended that fund boards “be required to disclose information on the gender and racial diversity of their directors.”

The rule change is part of a larger push intended to motivate more inclusive recruitment efforts on the part of all those companies who ultimately wish to be traded on the NASDAQ. For microcaps with dreams of “graduating” from OTC trading to the NASDAQ, this means they better start implementing ESG practices as soon as possible.

The response to these developments in society, the market, and regulation seems almost too simple to say: do right by the world and the world will do right by you. There’s much more we could say in terms of the ordinary dynamics of business, but the market is clamoring for companies who devote themselves not just to profits but to progress.

If a microcap is going to garner the investment it needs to accomplish its mission, then that mission must be cast in terms that connect it to the greater good. Perhaps more importantly, microcaps have to be willing to align their internal structures, processes, priorities, and goals to reflect their genuine interest in making this world a better place.