Case study by BNP Paribas Asset Management
In the spirit of showcasing leadership and raising standards of responsible investment among all our signatories, we are pleased to publish case studies of all the winning and shortlisted entries for the PRI Awards 2021.
Introduction: provide a short overview of the practice, process or product that is being proposed for the award
In the world of ESG, considerable attention has been paid to the environment and governance pillars. For many investors, the COVID‐19 pandemic has been a wake‐up call on the importance of social issues. In addition, inequality, leading to social tensions, can affect the climate for doing business and investing.
BNP Paribas Asset Management’s Inclusive Growth is a global equity strategy, managed within its Fundamental Active Equities group, with a solid ESG incorporation process. The firm believes the strategy gives investors the opportunity to identify and invest in companies that tackle social issues, both in the world of business and in wider society. The fund focuses on companies that implement best practices that contribute to inclusive growth, and it does so by identifying companies that create opportunities and help to build successful, more inclusive and sustainable societies. Underpinning the strategy, the firm has developed a proprietary data model to incorporate an Inclusive Growth assessment in its investment practice.
Process, practice or tool: Provide a description of the innovative approach to ESG incorporation, its coverage within your firm, why you decided to undertake this approach and the value it provided preferably using a practical example of how you have applied your approach to an investment (security/issuer/sector/asset class/portfolio)
Social inequality can have detrimental economic impacts. It not only deprives companies of potential talent, but growing income gaps reduce both social mobility and future prosperity. This observation led to BNP Paribas Asset Management placing equality and inclusive growth at the heart of its approach. In its Global Sustainability Strategy, published in 2019, equality and inclusive growth was identified as one of the three critical pre‐conditions for a more sustainable and inclusive economic system.
The firm’s approach relies on an innovative proprietary Inclusive Growth scoring model: Derived from its internal ESG data model, the firm developed a proprietary scoring model to construct its Inclusive Growth investment universe that is specifically designed to identify inclusive companies.
There are many ways for corporates to address inequality while at the same time contributing to long-term profitability. Within BNP Paribas Asset Management’s Sustainability Centre, the first stage of the analysis was to identify five main pillars of action for companies to contribute to inclusive growth: safety nets for the most fragile; social mobility; access to primary goods; business ethics; and decarbonisation. The analysts then translated these pillars into relevant common and sector specific ESG metrics, using a combination of external and internal data sources.
With the help of its Quantitative Research Group, the firm’s analysts tested the quality, coverage and differentiating properties of each metric to focus on the most insightful ones. This included customised analysis on some metrics, for example the ratio of women in management to overall employment, tax disclosure or CEO to average pay ratio. On average, the firm used 14 social metrics, four governance metrics and four environmental metrics per sector. In addition, it factored in controversies for each pillar.
The final Inclusive Growth score emphasises the predominance of the social dimension, which has a 65% weight. In addition, the construction of the Inclusive Growth score enabled the firm’s analysts to shed light on the availability of social data. Indeed, the firm’s ESG analysts and portfolio managers will engage with companies for which social data is not available.
BNP Paribas Asset Management’s philosophy is aligned with the UN Sustainable Development Goals (SDGs). The SDGs recognise that ending poverty and other hardships must go hand‐in‐hand with strategies that improve health and education, reduce inequality and spur economic growth. This means these SDGs are addressed by its proprietary methodology.
The firm applied this approach to build a portfolio of Inclusive Growth leaders: from a global investment universe of more than 1,600 companies in developed and emerging markets, including small/mid cap stocks, it first selects companies based on their Inclusive Growth score. Companies with a score below 20 are excluded from the investment universe, leaving an Inclusive Growth universe of about 1,000 companies. Next, in the idea generation process, quantitative screens and internal and external expertise are applied to obtain a more focused list of investment candidates. This is followed by in‐depth fundamental research, assessing the growth prospects and the sustainability of each company’s strategy, and other aspects. The portfolio comprises 40 to 60 stocks.
This ESG incorporation process helped the firm to construct a portfolio of Inclusive Growth leaders whose practices contribute to diversity and inclusion. This portfolio has a more favourable ESG score than its benchmark and a lower carbon footprint. Lastly, the approach, which combines both financial and extra financial analysis, allows BNP Paribas Asset Management to select companies with the aim of making a better social contribution than the benchmark.
Outcomes, benefits, challenges and next steps: provide an example of the outcomes, outline the benefits and challenges associated with the introduction of this initiative and what you have learned from this approach that can be applied more broadly. How might you intend to develop the process or practice?
BNP Paribas Asset Management’s Inclusive Growth assessment allows it to identify companies that have the most inclusive practices. Applied to a fund, it offers an investment product which targets inclusive businesses. This contributes to reorienting capital towards socially‐positive pathways.
The firm’s incorporation initiative not only focuses attention on the social pillar, which is often underrepresented in investors’ capital allocation, but it also addresses broader social issues to tackle diverse sources of inequality. Moreover, this ESG incorporation helps to highlight the link between inclusive practices, corporate long‐term targets and financial performance.
BNP Paribas Asset Management is convinced that companies with an Inclusive Growth mindset have opportunities to achieve better results. And there is proof: organisations with greater diversity beat their less‐diverse counterparts on a range of measures. For example, Fortune 500 companies with at least three female directors have achieved a 53% higher return on equity, the Peterson Institute for International Economics found, while companies with above‐average diversity in their leadership team have been able to generate 9 percentage point higher earnings, the Boston Consulting Group found. Inclusive practices can contribute to achieving corporate long‐term targets in a number of ways, for example by making it easier for firms to attract employees and by reducing turnover.
The main challenge BNP Paribas Asset Management faced was access to relevant data. On company training, for example, there was a lack of concrete information to enable the quality of corporate programmes to be judged. To tackle this challenge, the firm’s Quantitative Research Group tested the quality, coverage and differentiating properties of each metric to focus on the most insightful indicators. Its analysts also developed customised analysis for some indicators.
The firm learned a great deal about what collaboration between different teams can bring to the accuracy and the effective implementation of a project, as this work results from the collaboration between its Sustainability Centre, the Quantitative Research Group and its investment teams. In addition, it found considerable investor interest in social topics. According to a recent survey by BNP Paribas Asset Management and Greenwich Associates, 80% of investors think that taking social criteria into account in their investment policies has a positive impact on risk management and long-term performance.
BNP Paribas Asset Management now intends to incorporate Inclusive Growth analysis in its social bond funds and social bond analysis. It also plans to improve data coverage and data quality through the use of artificial intelligence, with the help of the firm’s quantitative analysts.