Environmental, social and governance (ESG) ratings have taken precedence in investor portfolios in recent years, however, research on small-cap stocks around the globe is lacking. AllianceBernstein (AB) says that investors can still find ways to access robust small caps ESG data on such companies and make meaningful contributions towards sustainability.

Research done by the investment management found that smaller companies struggle to complete disclosures necessary to earn an ESG rating by firms such as MSCI and Sustainalytics. Edward Bryan, Portfolio Manager, and Daniel Roarty, Chief Investment Officer for Sustainable Thematic Equities, at AllianceBernstein write about the various challenges faced by small-caps ESG analysis.

A workaround for this, as seen by AB, is that asset managers must develop independent assessments to vet a company for sustainability. The investment management firm gives pointers on how to define this process in a blog.

Another aspect is mapping the company’s alignment with UN sustainable Development Goals. “Fundamental research conducted by sector analysts can help uncover important information that may otherwise be missed if depending on third-party ESG ratings,” says AB.

Additionally, the investment management firm sees that portfolio managers can engage with company management to gain insight into the companies’ future strategies and take better research decisions.

“By asking the right questions, portfolio managers and analysts can overcome the problems of scarce ESG data in small-cap markets. But in practice, simply adopting a formula won’t deliver the required results,” write Bryan and Roarty for AB.

View the complete insight here.