Sectoral explanation of the gap in emissions intensity of small and large companies

We have previously highlighted the difference in issuance intensity between small-cap stocks (defined by the MSCI World Small Cap and MSCI Emerging Markets Small Cap indices) and large- and mid-cap stocks in developed markets (DM) and emerging markets (EM) (defined by the MSCI World and MSCI Emerging Markets indices, respectively). Small-cap issuance intensity exceeded that of larger-cap stocks over the four years ending March 2024.

Where does this break come from?

We traced the higher carbon intensity of DM small caps to the higher carbon intensity associated with most sectors in the MSCI World Small Cap Index. In EM, the higher carbon intensity of small caps was driven primarily by a few sectors, with energy being the leading contributor.¹ However, the difference in sector composition between small-caps and large- and mid-caps in emerging markets helped narrow the gap in emissions intensity.

In the DM, the higher carbon intensity of sectors in the small-cap universe accounted for 60% of the disparity between size segments. For example, overall, consumer discretionary stocks in the MSCI World Small Cap Index had more than twice the carbon intensity of their MSCI World Index counterparts (698 vs. 336 t CO2e/USD million enterprise value including cash (EVIC)), while small-cap energy stocks had about 20% higher carbon intensity than larger-cap energy stocks (3,186 vs. 2,523 t CO2e/USD million EVIC).

“Gap awareness” can help avoid a higher than intended portfolio carbon footprint

Investors who believe in the diversification benefits of adding small-cap stocks to their portfolios may — inadvertently — also be impacting the carbon footprint of their portfolios. Understanding the difference in sector emissions intensity between small- and large-cap stocks can help investors anticipate and better manage the carbon footprint of their portfolios as they actively incorporate climate concerns into their investment strategies.

The author would like to thank Rahul Suresh Kumar for his contribution to this short study.

The emission intensity of small-cap sectors is higher than that of larger-cap companies