“Our inclusive growth strategy is focused on creating a portfolio of companies with a sustainable business model and who contribute through their practices to inclusion and diversity.”
Maria Luz Diaz Blanco, lead portfolio manager at BNP Paribas Asset Management.
When it comes to investing, the ‘S’ in ESG – the societal side – has tended to draw less coverage than the environmental and governance components. This makes little sense at a time when climate change, inequality, geopolitical tensions and demographics affect various sections of the population differently, often serving to highlight the need for action to ad- dress these effects. We believe investors have a role to play here through investing in socially responsible companies.
For long-term sustainable returns, aim for inclusive growth
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 inclu- sive growth strategy. It helps to ensure that there are jobs for all, helps to im- prove working conditions and supports social progress on a wider scale. Companies can take various actions, for example, through profit-sharing or by en- forcing high standards in their supply
chain. They can invest in social mobility through training and broadening access to education. They can ensure that prod- ucts and services are affordable for all and that business ethics on taxes, lobbying, cartels and governance are respected.
Selecting inclusive growth leaders
When investing, we select an ESG indica- tor 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? Environmental issues are part of the as- sessment. Is the company supporting the energy transition by offering low carbon products and services? Does it use re- sources 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 perfor- mance over policies. Metrics on human capital, clients and communities, the sup- ply chain and diversity (‘S’) account for 65% of the score. Compensation, tax dis- closure and board diversity (‘G’) have a 20% weight. Use of natural resources, cli- mate change and environmental risk man- agement (‘E’) make up the final 15%.
The result is an investment universe that is truly focused on the social aspect of ESG.
Financial performance and inclusive practices are linked
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 revenues and profits.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.
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 1.
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.
A more equal balance of women in man- agement positions is one of the UN’s SDGs and while the proportion of women in senior roles is rising – reaching 29% globally in 2019 – this figure remained static in 20202 and the UN’s goal of achieving gender parity by 2030 seems a long way off.
We believe sustainable development in- cludes solving social challenges and adopting practices that improve health and education, favour economic growth, and aim to reduce inequality.
1) Peterson Institute, Catalyst, BCG analysis, 2020