Small caps, large climate data gaps: disclosure shortfalls and investment implications amid regulation retreats
Huong Dieu Dang, Jan HeldmannPurpose
This study aims to establish small-cap investment relevance, examine portfolio risk exposures of small-cap stocks screened by environmental data availability, and explore disclosure coverage under three Corporate Sustainability Reporting Directive (CSRD) threshold specifications.
Design/methodology/approach
This study analyses MSCI index returns during 2001–2025 and 2023 Scope 1–3 emissions data availability for 7,895 constituents. We constructs value-weighted portfolios of disclosed and non-disclosed small-cap firms, estimates risk exposure differences using Fama–French six-factor models, and compares climate–data coverage across three CSRD threshold specifications.
Findings
Small-cap indices recorded higher returns and risk-adjusted performance than mid + large-cap peers, though firm size is not a causal driver. Emissions coverage is lower among small caps, especially for Scope 3 and in Emerging Markets. Non-disclosed-minus-disclosed small-cap portfolios have positive monthly alphas of 1.0–1.5 percentage points and exhibit systematic differences in growth, momentum and, in Developed Markets, profitability exposures. These estimates reflect portfolio-selection effects rather than a causal disclosure effect and may capture omitted firm characteristics or model specification. Applying the original CSRD (the relaxed Omnibus) thresholds leaves 0%–4% (48.5%) of small-cap (Emerging Markets small-cap Scope 3) market value outside the reporting perimeter.
Practical implications
Climate-conscious investors using climate-data disclosure-based screens may take unintended factor positions when seeking market exposure or benchmark tracking. Lower reporting thresholds expand small-cap coverage, while wider exemptions preserve climate–data gaps. This study’s findings relate to climate accountability (SDG 13) and international disclosure coordination (SDG 17), but not to effects on financing, employment or inequality.
Originality/value
The study integrates small-cap performance, climate–data availability, portfolio screening and regulatory coverage.