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For long-term profitability, inclusive growth matters

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BNP Paribas Asset Management
 

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Companies focused on inclusive growth could stand to benefit in the long run. Investment specialist Ramon Esteruelas and environmental, social and governance (ESG) research analyst Delphine Riou explain why and how investors can target this theme.

What is inclusive growth? What makes this an investment opportunity?

This theme fits in with BNP Paribas Asset Management’s goal to contribute to an economy that is sustainable and inclusive. For us, equality and inclusive growth is a key area of sustainability next to the energy transition and environmental sustainability. It has become even more of a topic over the course of the COVID-19 pandemic. This has widened the gap between those that have and those that have not, be it earning a living wage, having a job, being in good health, being able to afford a healthy diet, access to education and training, or even getting a vaccine.

The IMF has also voiced its concerns: it has said the economic consequences of COVID-19 were a severe setback to improving average living standards. As a result of greater inequality, there is a greater risk of fractured societies and weaker economic and business growth.

A focus on inclusive growth goes hand in hand with a focus on long-term performance based on stability and efficiency. It seeks to mitigate social tensions in the company, promotes a meritocratic approach to resources and talent, and improves the climate for doing business and investment.

We believe there is an opportunity here for investors as companies identify and tackle social issues, both in the world of business and in the wider society. We believe that companies with an inclusive growth mind-set have opportunities to achieve better results. As an example, including women on the board of directors has been shown to be good for business. Executive teams where women account for more than 30% of the total are more likely to outperform those with fewer or no women. [1]

How can you as an investor capture this opportunity?

We have identified five pillars that link company practices and inclusive good practice.

  1. Robust social standards such as decent jobs for company employees and employees in the value chain are inclusive
  2. Companies should invest in social mobility, for example, by developing employee skills
  3. A quality offering of products and services that is accessible to as many people as possible is inclusive; for example, products and services that lay at the basis of social progress: healthcare, education, energy and housing; this can extend to digital access or access to mobility
  4. A focus on the long-term interests of the company, the community and society; for example, through appropriate compensation schemes, doing business ethically: respecting the principle of free competition, paying fair and equitable taxes, avoiding lobbying, etc.
  5. Addressing climate change, which is a major risk to vulnerable populations; for example, by promoting decarbonisation and the protection of biodiversity.

We score companies on our investment universe [2] in these five areas within an ESG framework, with a particular focus on the ‘S’ – the social dimension – which has a 65% weight in our data model. We use data from various providers, making them comparable so that we can ensure that we are using the best dataset available. The scores range from zero to 100. Companies with a score below 20 are excluded. The resulting investment universe is truly focused on the ‘S’ and on inclusive practices.

Should investors worry about sacrificing performance when they invest in inclusive growth?

No, we are convinced that companies with an inclusive growth mind-set have opportunities to achieve better results. There are many ways in which they can do this:

  • By developing employee skills, to enhance innovation
  • By paying fair wages to support employee engagement
  • By fostering workplace diversity so that employees understand the needs of various consumers better and can turn underserved markets into successful business segments
  • By forging long-term relationships with suppliers to ensure supply chain quality and safety
  • By respecting ethical rules of conduct to safeguard a company’s social licence to operate.

Research has shown that companies that best manage their environmental and social impact and have better governance practices are more profitable in the medium to long term. Reliable research by Oxford University and others confirms that good sustainability and ESG practices correlate with lower operating costs, better profitability and superior share price performance.

inclusive growth exhibit 1 NA

There is also a question of business risk. By not paying attention to social issues, a company can expose itself by consumer criticism, or even a buyers’ strike or boycott. It risks reputational damage. Ethical practices are attracting more and more attention from the media and investors. For many investors, this has become a mainstream issue that also concerns their own reputation as responsible investors. So, there are good reasons to focus on inclusive growth.

Of course, our assessment incorporates in-depth fundamental research, a look at the growth prospects and the sustainability of the company’s strategy, its financial position and overall ESG profile, and the skills of the management team. At the end of the selection process, we have a diverse investment portfolio of 40 to 60 stocks without sector bias and with a more favourable ESG score and a lower carbon footprint than its benchmark.

It is aligned with the UN Sustainable Development Goals which recognise that for a sustainable future, ending poverty and other hardships, improving health and education, reducing inequality, and spurring economic growth are essential. We believe that this is to the benefit of investors and society in general.

[1] Study by McKinsey & Company, “Diversity wins: How inclusion matters”, May 2020. A) Likelihood of financial outperformance vs. the national industry median, calculated as earnings before interest and taxes (EBIT) margin over 2014-2018; B) Based on 365 US and UK companies from the Diversity Matters dataset, diversity figures as of 2014.

[2] MSCI World Developed Countries index


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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.

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