As an example, across our investment strategies, the percentage of companies that published sustainability reports rose to 42% in 2022 from 29% a year earlier.
This significant investment of time and resources from small-company executives demonstrates a commitment to establishing ESG goals and priorities. What accounts for the growing embrace by small American companies on sustainability initiatives? For one, leaders at these companies are increasingly aware of the potential financial returns and impact of their plans. The enhanced disclosures explaining efforts at incorporating sustainability objectives can help all stakeholders get a better sense of how they manage ESG risks and opportunities in their businesses.
Engagements with small companies have provided the following insights, based in part on surveys done of our portfolio companies over the past two years to learn how they manage environmental and social factors in their businesses.
First, in conversations with management teams, most managers believe executing on their sustainability goals strengthens the culture and mission of their companies. It resonates with employees and has the potential to lower employee turnover over time. In a post-COVID world, many employees have a broader sense for how work fits into their lives, and they have a stronger desire to work for a company that places a priority on its larger role within the community. Less turnover can result in revenue opportunity from better customer service and lower training costs.
Second, we rarely found a management team that shies away from these initiatives because of cost. Most managers view the proposals as an investment in the growth of the business with a marginal cost that can enhance shareholder returns.
Third, in the age of social media there is heightened scrutiny on whether a company is genuinely serving its community. Most managers believe that better disclosure around corporate practices resonate with customers and other stakeholders.
In our inaugural climate survey of 49 companies in 2021, more than 70% of the respondents consider their management of climate-related factors to be a competitive advantage. In 2022's inaugural DEI/human capital survey, fully 100% of the 47 companies surveyed in 2022 indicated management of DEI/human capital factors can be a competitive advantage. Consider, for example, if a company indicated that another business factor, such as a nimble supply chain, gave them a key operational edge and created the opportunity for better inventory returns. Most asset managers would agree they would do themselves and their clients a disservice by ignoring that data in their analysis of the company.
Relevant topics, ranging from board oversight and structure, executive compensation, leadership diversity, and energy/resources usage to employment recruitment and retention programs, are brought up in nearly half of our management meetings. This is the highest number since we began gathering data on sustainability issues in 2019. Management teams are initiating these conversations more often, which indicates the increased prioritization across our coverage universe.
Contrary to popular belief, asset managers that integrate financially material analysis into their process typically don't make broad exclusions to their investment universe because of some viewpoint or "agenda" on a particular topic or issue. And the political controversy caused by an acronym could diminish research on business strategies and obscure the fact that small companies are grappling with issues of sustainable advancement because they are financially material for their ongoing and future operations. It would be foolhardy for their investors to do otherwise.
Unfortunately, the pro- and anti-ESG rhetoric is unlikely to subside any time soon. As such, both companies and investors can play a role in clearing the air to promote a deeper understanding of how the integration of meaningful sustainability initiatives into company strategy and investor decision-making can lead to better financial and social outcomes. For example, effectively managing climate risks will help companies minimize long-term costs and business risk. Managing DEI/human capital factors can help improve employee turnover and lower costs, while building a positive company culture. Successfully managing these factors optimizes their ability to attract and retain key stakeholders.
ESG is now a lightning rod and politicized symbol of divisiveness among constituencies. While that acronym may serve as a perceived symbol of an agenda, the coinage for many fundamental investors is rooted in analyzing and identifying companies with quality financial metrics and operational best practices. By keeping the focus on material risks and opportunities, companies and investors can cut through much of the superfluous commentary and home in on topics that are important to enhancing shareholder value. Engaging on sustainability matters is mutually beneficial as a reinforcement mechanism to keep these objectives grounded in financial materiality.
Conrad Doenges is portfolio manager and chief investment officer and Jeff Dalton is manager of sustainable investing and risk analysis at Dallas-based Ranger Investments, a small- and microcap equity manager. This content represents the views of the authors. It was submitted and edited under Pensions & Investments guidelines but is not a product of P&I's editorial team.
