Are you looking for diversification benefits while simultaneously aligning your financial ambitions and societal values? Investing in a thematic strategy integrating environmental, social and governance (ESG) criteria, with a particular focus on inclusive rather than disparate growth, could be an attractive way to earn returns while contributing to efforts to tackle inequality and exclusion.
When it comes to investing, the ‘S’ in ESG – the societal side – has tended to get less coverage than the environmental and governance components of ESG. That makes little sense at a time when climate change, inequality, geopolitical tensions and demographics affect different strata of the population differently, often serving to highlight the need for action address these effects.
We believe investors have a role to play here through investing in socially responsible companies.
One of the overriding objectives for BNP Paribas Asset Management is to achieve sustainable investment returns for clients. Inherent in that focus on the long term is that we seek to invest in companies whose attitude to diversity and inclusion contributes to a sustainable business model that benefits all stakeholders including society as a whole.
There are various payoffs from an inclusive growth strategy. It helps to ensure that there are jobs for all, helps to improve working conditions and supports social progress on a wider scale. The economy benefits because there is more scope for talent to develop and for productive potential to be tapped. It contributes to easing social tensions that affect the business and investment environment.
Companies can take various actions, for example, through profit-sharing or by enforcing high standards in their supply chain. They can invest in social mobility through training and broadening access to education. They can ensure that products and services are affordable for all and that business ethics on taxes, lobbying, cartels and governance are respected.
When investing, we select an ESG indicator based on business relevance and good coverage. Questions include: Does the company pay fair wages linked to business performance? Does it develop employee skills to promote innovation? Do its products and services contribute to consumer wellbeing and by extension loyalty?
Environmental issues are part of the assessment. Is the company supporting the energy transition by offering low carbon products and services? Does it use resources efficiently? More broadly, does the company comply with regulations that should help put the world on a 2°C trajectory?
Our approach involves an inclusive growth scoring model using 20 metrics per sector with a preference for performance over policies. Metrics on human capital, clients and communities, the supply chain and diversity (‘S’) account for 65% of the score. Compensation, tax disclosure and board diversity (‘G’) have a 20% weight. Use of natural resources, climate change and environmental risk management (‘E’) make up the final 15%.
The result is an investment universe that is truly focused on the social aspect of ESG.
We are convinced that companies with an inclusive growth mind-set have opportunities to achieve better results. In our view, organisations that are more diverse will tend to beat their less diverse rivals in terms of both revenues and profits. Diverse management teams tend to more innovative.
For companies where the percentage of women or the diversity in terms of ethnicity, gender, social background, etc. in management teams is higher, all measured ratios are more favourable.
For example, among Fortune 500 companies, those in the top quartile with at least three women directors recorded a 42% higher turnover and a 53% higher return on equity (Source: Peterson Institute, Catalyst, BCG analysis, 2020).
More generally, if issues of diversity and inclusion are not dealt with properly, it can increase operational risk because of the negative impact on reputation, which can hit company finances.
In line with the UN, we believe sustainable development includes solving social challenges and adopting practices that improve health and education, favour economic growth, and aim to reduce inequality.
Read the animated paper Inclusive growth – Paving the way ahead
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.
Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.