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Bigger not better – sustainability and the opportunity within company size bias

17 October 2022

The current lack of small-cap coverage is not reflective of inferior or lacking underlying ESG principles but simply uncharted territory yet to be fully mapped.

By Cordelia Tahany,

Unicorn Asset Management

The proverbial “bigger is not always better” does not properly convey the real insight and value add opportunity from an environmental, social and governance (ESG) perspective for small-cap companies. Traditionally, smaller companies have been overlooked due to their limited disclosure and public information. Company size bias has resulted in relative valuation discounts against the likes of multinationals who enjoy AAA ESG ratings.

Nevertheless, this oversight creates an opportunity for these under-researched ‘winners,’ whose growth potential has not yet been wholly understood – an information gap opportunity for unrealised value.

Our process is to evaluate fully a company’s underlying sustainable fundamentals and have conviction in the long-term strategy and management team driving the business. The current lack of small-cap coverage is not reflective of inferior or lacking underlying ESG principles but simply uncharted territory yet to be fully mapped. James Cropper is an example of such a business.

Whether it be the Remembrance Day red poppy or the iconic Selfridges yellow bag, James Cropper has been a UK specialist manufacturer of high-quality coloured paper products for more than 175 years. A world class company with an award-winning commitment to the highest standards of sustainability.

Not only does this sixth-generation family-run business offer leading innovation and pioneering manufacturing technology, it also lies at the heart of Burneside's local community, with more than 70% of employees living within 10 miles of Cropper – otherwise commonly referred to as the ‘Burneside Triangle,’ where the former local school, cemetery and paper mill co-exist side by side.

Sustainable manufacturing, responsible business practices and its people underpin the Cropper vision. There has been a continued focus on reducing primary energy usage and the company currently has one of the UK's largest roof-mounted Photovoltaic systems.

Its sophisticated R&D plan has enabled new technologies for both energy generation and optimising usage - together with pledging net zero on direct emissions by 2030.

More than 91% of water abstracted is returned clean to the river and there is zero waste to landfill in Cropper’s paper operations, with the capacity to upcycle 500 million cups per year into paper products and packaging – the world’s first recycling process dedicated to upcycling take-away coffee cups. Around 2.5 billion cups are thrown away each year in the UK and Cropper’s CupCycling facility is able to remove the plastic lining during the process, meaning that 95% of this cup waste can be converted back into paper.

Colourform, the newest division within the Cropper business, offers a sustainable, plastic-free alternative to traditional single use packaging. Technical Fibre Products (TFP), now the biggest of the company’s three business divisions, is helping to evolve Cropper into a global paper and technology business and has been supporting the development of green energy technologies for the last three decades.

TFP’s materials and products are facilitating the energy transition and are used in applications such as renewable energy, carbon capture and light weighting. Currently, 50% of the world's fuel cells incorporate its materials.

James Cropper’s heritage and strong underlying fundamentals, alongside its commendable and proven ESG indicators across operations, reflects both a sector market leader but also an exemplar business that strives to meet the triple bottom line – profit, people and planet.

Small-cap investors have a significant shareholding within a business and therefore the capability to engage with – and if necessary – hold management to account. Over the past decade Unicorn has held Cropper across various portfolios and has benefitted from frequent interactions with management, both at the Group level and across all subdivisions, whilst also recently visiting its Burneside HQ, which accounts for the majority of the company's manufacturing operations.

This insight and accessibility have enabled a more comprehensive understanding into the culture of the business, how it operates and its overall environmental and social impact – something which is not nearly as practical when analysing larger cap companies with extensive teams and vast operations spanning the globe.

Cordelia Tahany is an ESG and investment analyst at Unicorn Asset Management. The views expressed above should not be taken as investment advice.

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