Companies with successful business models and positive social practices – those that address issues such as inequality and social mobility – are well placed to generate value over time and demonstrate resilience. We believe our approach can identify companies that fit the bill and stand the test of time.
Inequality is rising. Today, 44% of the world’s population earns less than $6.85 [1] a day – that is, less than a living wage. While just 10% of the world’s population owns 76% of total household wealth and captures 52% of total income, the bottom 50% owns a mere 2% of the wealth and just 8.5% of total income. [2]
In recent years, there has been a growing consensus among the public, governments, companies and investors that unequal access to opportunity and a lack of social mobility pose threats – to social cohesion, trust in institutions and overall economic health.
In our view, it’s clear this isn’t purely a societal or ethical issue. Inequalities result in tensions and resentment that can affect the climate for investment and business. As a consequence, talent may be under utilised and productive potential squandered.
Discrepancies and opportunities
There is economic potential in taking on inequality: we estimate that closing the living wage gap around the world could generate an additional $4.5 trillion every year through greater productivity and spending. Investing in upskilling employees on a wide scale could boost economic growth by $6.5 trillion by 2030. [3]
Companies addressing inequality are not just doing good—they are contributing to their long-term corporate targets including financial performance and risk mitigation.
That is why taking an inclusive growth perspective matters to investors: it can underpin resilient returns. By promoting inclusion, mobility and equality, companies have an impact on employees, customers, suppliers, and on their local communities.
We believe inclusive practices have long-term benefits such as:
- A more stable business environment
- Greater employee engagement and commitment
- Improved product innovation from a more varied pool of employees
- Higher brand loyalty and trust from consumers
- Lower regulatory and reputational risks.
Financial benefits
The financial benefits are clear. Research has found that companies with superior ESG profiles tend to have lower earnings volatility.
In short, investing in inclusive growth isn’t just about ethics – it’s also about unlocking new sources of return and mitigating risk.
Integrating the relevant criteria
Here are the key steps implemented [4] in our inclusive growth strategy:
- Screening the investment universe: The starting point is a global group of 1 600 companies scored on their extra-financial performance with a focus on social practices. For our portfolio, companies are picked from the best one-third.
- Detailed company research: Corporate strategies are assessed for their quality and sustainability, as well as the skills of management teams. The research also covers company finances. Sources can include external reports.
- Risk monitoring: Stock and portfolio level risks, and extra-financial indicators including carbon footprint, are watched closely.
- Portfolio construction: Our strategy favours stocks with high-end inclusive growth scores and considers regional and sector diversification.
Here are examples of companies with high inclusive growth scores:
- Wolters Kluwer: This publishing company has a strong focus on social mobility and decent work. The percentage of women employees in the workforce is high at 46% as is the number of minorities (31%).*
- Intuit: Reflecting its commitment to social mobility and decent work, Intuit has 42% women employees and 40% female executives.*
These companies have been found to have successful business models and positive social practices, which we believe contribute to robust risk-adjusted returns.
Scoring companies on their inclusive growth practices
Our proprietary scoring model allows us to identify about 500 companies with the best social practices – this universe gives us ideas for building a thematic portfolio. Here are the key criteria:
- Decent work: We evaluate how well a business treats its staff including in its supply chain. Factors include fair wages, job security, and employee wellbeing.
- Social mobility: We assess how well a business invests in social mobility and aspects such as career progression, upskilling, and social advancement.
- Accessibility: This measures how well a business provides access to quality and affordable products and services. It includes factors such as client and community engagement.
- Business ethics: This includes transparency on tax practices, lobbying integrity, avoidance of cartels and monopolies, and corporate governance.
- Decarbonisation: This includes factors such as low carbon products, sustainable operations including the use of renewable energy and recycled materials, and net-zero commitment.
Scores based on these criteria range from 0 to 100.
We also conduct fundamental – financial – analysis at a company level as part of our investment process.
Robust risk-adjusted returns
The outcome of our investment process is a well-diversified inclusive growth portfolio that combines positive social practices and successful business models for robust risk-adjusted returns.
We believe that implementing the best inclusive growth practices enhances risk-adjusted returns. Historically, the performance of companies meeting our criteria shows smoother risk-adjusted returns than peers in the long run.
*References to specific securities are for illustrative purposes only and should not be considered as a recommendation to buy or sell, or investment advice. No investment decision should be made solely based on this information. BNP Paribas Asset Management may or may not hold positions in the companies mentioned.
[1] Source: https://ourworldindata.org/grapher/share-living-with-less-than-550-int–per-day
[2] Chancel, L., Piketty, T., Saez, E., Zucman, G. et al. World Inequality Report 2022, World Inequality Lab (wir2022.wid.world). Measured at purchasing power parity (PPP)
[3] Business Commission to Tackle Inequality (BCTI). 2022. Tackling Inequality: The Need and Opportunity for Business Action
[4] For more on why equality matters for individual company performance and how investors can integrate inequality into their investment processes, watch this video on our Equality Roadmap.
