The Impact of Inclusion

The great instability represents a time when we face many challenges for our societies and economies globally – climate change, inequality, geopolitical tension and demographics. While these issues have all existed for some time, the coronavirus crisis and the racially inspired protests of 2020 have pushed the topic of equality to the fore. People, governments and companies are starting to take notice of the need for improved inclusion measures, as has the investment world. So, will 2021 be the year when the ‘societal’ aspect of ESG (Environmental, Social, Governance) is firmly addressed within our portfolios and can capturing inclusive growth opportunities benefit investors?

The issue of inequality started being widely discussed in investment circles in 2014, upon the release of French economist Thomas Piketty’s treatise on wealth and income inequality, Capital in the Twenty-First Century. Piketty highlighted the widening divide between the ‘haves’ and the ‘have-nots’, a wealth gap that has certainly increased over the last 20 years and has given rise to increased social tensions – social inequality was considered a key contributor to the UK’s decision to leave the EU and President Trump’s election victory in 2016.

Aside from the clear social injustice, inequality can affect the business and investment environment too. For example, unemployment often has a higher impact on certain key demographic groups, such as people with disabilities, women, young people, ethnic minorities and immigrants. Reducing these social inequalities within the workforce has been shown to have a positive impact on business profitability and can be aligned with the UN’s sustainable development goals (SDGs).

2020 was a year when, for many people, the subject of inequality came to their attention. The pandemic highlighted many social disparities. Key workers – those responsible for keeping the economy running and supporting our health systems during the crisis and who faced greater exposure to the virus – were overwhelmingly shown to be from lower-income households and were disproportionately female and/or from ethnic minorities.

Even for those workers lucky enough to be able to work from home there were clear socio-economic challenges such as access to high-speed broadband, the availability of home-office workspaces and the often unfair division of childcare and home-schooling responsibilities. On the other hand, the prospect of greater workplace flexibility going forward through ongoing remote working could be of great benefit to many working parents, as well as workers with disabilities.

At the same time, the killing of George Floyd in the US thrust racial injustice back into the spotlight, adding weight to the Black Lives Matter movement and sparking protests across the globe.

While initial efforts to manage the pandemic prompted a quarter of organisations worldwide to put all or most of their diversity and inclusion (D&I) initiatives on hold¹, ultimately the events of 2020 forced many business leaders to look more closely at whether their D&I efforts were adequately supporting their staff and whether they were having a positive impact on wider society, and this is expected to continue.

As well as the moral imperative to address inequality, there are also attractive economic benefits that should encourage businesses to take action. Research suggests that diverse organisations tend to beat their less diverse peers both in terms of revenue and profits².

Gender diversity has been shown to be particularly impactful, with the OECD suggesting a gradual reduction of gender-based discrimination could increase the global GDP growth rate by 0.4% annually over the next 11 years, adding almost USD10,000 of GDP per capita by 2030³.

A more equal balance of women in management 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 2020⁴ and the UN’s goal of achieving gender parity by 2030 seems a long way off.

Christine Lagarde, former managing director of the IMF and the first female president of the European Central Bank, added her voice to this argument, stating: “Empowering women is critical and is a global issue. If countries around the world aspire to solid, sustainable, and inclusive growth, then empowering women and making sure that they contribute fully to the economy is key.”⁵

The risks for businesses of failing to act on diversity are not only financial but could also be reputational. In this social-media-savvy world, reports of companies with poor D&I policies can face significant backlash from consumers.

The negative impact on a business’s reputation can also prove to be a hindrance when seeking new talent – millennial employees, in particular, are less likely to join a company that is not seen to be inclusive and trustworthy –a recent survey suggested a staggering 87% of millennials want to work for a company that engages in corporate social responsibility⁶.

Moreover, diverse and inclusive companies are often seen to perform better in terms of innovation and resilience – qualities that will be much in demand during the recovery from the pandemic as businesses seek to position themselves for growth and renewal.

There is clearly a link between the financial performance of companies and inclusive practices, but the investment community can take more responsibility for advancing this cause. Engagement between asset managers and companies can play an important role in encouraging them to evolve and improve their social behaviour.

Such engagement should focus on several key actions:

• Creating a safety net for the most fragile – providing decent pay, job security, profit-sharing, pensions and healthcare schemes for companies’ own employees and those in their supply chain.
• Investing in social mobility – training, skills development, broadening access to education.
• Giving access to primary goods – quality products and services affordable for all, providing access to healthcare, water, sanitation, energy, housing etc.
• Respecting business ethics – transparency on tax practices, alignment of lobbying practices with public claims, avoiding cartels and monopolies, corporate governance.

Diversity will not produce better results automatically, this will only happen if it is managed well. The investment community is well place to help steer the organisational competencies of companies striving to achieve diversity and inclusiveness. On top of that, such engagement is a key way for companies and investors to get the best returns on their investments.

The disruptive events of 2020 have shone a spotlight on the world’s socio-economic inequalities and have underlined the need for diversity and inclusivity policies. And it is this type of instability that creates a platform for change. By focusing on the ‘S’ in ESG investors now have a real opportunity to create an impact on inclusion, diversity and gender equality, as well as achieving attractive investment returns.

At BNP Paribas Asset Management, we use our investigative skills to understand whether a company’s diversity approach is an act of window-dressing or a roadmap to a true collegial culture. Our inclusive growth strategy solely focuses on companies that contribute to diversity and inclusion and promote a sustainable business model. We believe such a strategy not only appeals to long-term investors looking for diversification benefits, but also to those who wish to align their financial ambitions with societal values.