ESG Spotlight: Diamonds in the Rough—Finding Value in Small-Cap with NLP (AMMP.CN, JMAT.GB, PLUG, ELME)

March 20, 2023
Samuel Leavitt
Tech4Fin

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Smaller companies are often overshadowed by narratives from larger firms, especially during earnings season. This makes it difficult to measure performance, unless you can leverage NLP. Using data from Symphony’s ESG platform and further analyses, we highlighted narratives from smaller firms that showed significantly more growth in the past year compared to large-cap firms.

Three ESG topics showed significantly more growth in the past year amongst small-cap stocks than in large-cap stocks: green hydrogen, carbon capture, and financial inclusion. These three topics have gained prominence in recent years, and we can see that part of the driving force is small-cap companies. In our analysis we defined small-caps in our models as companies at $4B market valuation and lower.

There could be a few reasons why small-cap stocks are more closely tied to green hydrogen, carbon capture, and financial inclusion. The primary reason may be that for some of these companies, their entire business is focused on one topic (like green hydrogen). Another reason is companies are pivoting towards these topics as a means of diversification, such as an energy company developing carbon capture or green hydrogen. Lastly, the smaller size of these companies may make it easier for leadership to take risks and adapt towards incorporating emerging technologies and ideas. For these reasons and more, small-cap companies have been mentioned prominently in tracking these topics.

ESG Platform: Small Cap vs Large Cap, ESG Topic Changes, Past 365 Days (Compared to 365 Days Prior)

Green Hydrogen

The topic of green hydrogen has received a lot of attention recently, and rightfully so. Hydrogen fuel cells produce energy from hydrogen through a chemical process rather than combustion. Heat and water are byproducts in this reaction. Hydrogen can also be used interchangeably with natural gas in some applications.

However, the process of creating hydrogen is not always a sustainable one. Each hydrogen production method has a color assigned to its underlying energy source. For instance pink hydrogen is produced using nuclear energy, blue hydrogen uses natural gas. Green hydrogen refers specifically to hydrogen created from renewable resources.

Over the past two months, a handful of small-caps have surfaced on our ESG Insights Platform in conjunction with the topic of green hydrogen. In February, AmmPower (AMMP:CN) signed an MoU to provide green hydrogen for the Port of Corpus Christi in Texas. This is not the first time we have seen a major port adopt green hydrogen use cases, as only a few months ago the Port of Antwerp-Bruges signed a similar agreement with large hydrogen producer Plug Power (PLUG:US).

Among other things, hydrogen is seen as a fuel of the future for the shipping industry with several use cases already being developed. Johnson Matthey (JMAT.GB) has also been involved with green hydrogen, agreeing to a partnership to supply Plug Power with a variety of industrial components for electrolyzers and fuel cells to drive expansion of hydrogen production and infrastructure.

Another company of note, German-based Enapter AG (H20:DE), produces electrolyzers for hydrogen production. In February, it began a project to establish a hydrogen learning center in Thailand in partnership with a German state organization and Chiang Mai University’s Energy Research and Development Institute of Nakornping. The learning center will provide job training and career development for a variety of roles in the green hydrogen and energy space. The investment in the region will undoubtedly be followed by more development of the green hydrogen economy in Thailand. In 2015, the Enapter pilot project Phi Suea House in Chiang Mai became the world’s first self-sufficient development based on green hydrogen energy storage.

Carbon Capture

Carbon capture is another novel technology gaining traction. The concept is fairly simple—to trap carbon emissions at the source and prevent them from causing pollution. The captured carbon can then be used after it is converted to a solid state. In recent months, the most mentioned company in the small-cap space for this technology is Aker Carbon Capture ASA (ACC:NO), previously a division of Aker Solutions. Aker Carbon Capture has two carbon capture projects under construction currently in Norway. The company also discussed selling carbon capture as a service in their recent earnings call, and it sees the emerging field of turquoise hydrogen as a segment to target. (Turquoise hydrogen is produced from natural gas combined with carbon capture to make it zero emissions.)

Another Norwegian company, Horisont Energi (HRGI:NO) has also been involved in the carbon capture space. Horisont is partnering with E.ON and Neptune Energy to create a European carbon capture and storage value chain. Horisont is awaiting approval of the Errai project, which is designed to store carbon in an on-shore terminal in the short-term, and there are long-term plans to store carbon in subsea reservoirs. As carbon capture develops, there will be increasing debates on what to do with the captured carbon and how safe it is, particularly in the case of storing it in the seabed via reservoirs.

Financial Inclusion

Moving away from the environmental side of ESG, many small-cap companies are working on social issues as well. Lately, financial inclusion and participation in the digital economy have been a strong point of focus for many real-estate and consumer-minded financial institutions. Washington Real Estate Investment Trust (ELME:US), now known as Elme Communities, outlined in their earnings call that renters will be able to boost credit scores for paying rent on time and that the company would submit these records to major credit bureaus on their behalf. The ability to raise credit scores has often been a difficult process for many. By giving consumers another way to demonstrate creditworthiness through rent, Elme Communities is empowering their renters to take control of their credit scores.

In Egypt, Network International Holdings (NETW:GB) is helping small businesses use digital payment options through their new service, Networkpay. Using a direct-to-merchant payment feature, Networkpay is cutting out the intermediaries traditionally used to facilitate such payments. This will eliminate service fees that intermediaries charge, making digital payments a more affordable and convenient option for small businesses.

It's the Little Things

Small-cap companies are, in fact, at the cutting edge of some of the more important and influential topics in the ESG space. From carbon reduction strategies like green hydrogen and carbon capture, to financial inclusion measures, small-cap companies are moving the needle in ESG. Today we chose to highlight companies that pertain specifically to themes with large percentage increases in discussion, but small-cap companies are taking action across the whole breadth of ESG topics.

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