Stuart Empson, Vaidehee Sachdev, Matt Kirby and Richard Saldanha explain how investments in companies that protect and support social equality can deliver robust returns.
The last few decades have seen rising inequality within countries: globally, 630 million workers live in moderate or extreme poverty.1 Yet inequality can impede growth and fuel social unrest.2 A study by the Organisation for Economic Cooperation and Development (OECD) across its 38 member countries showed a one per cent increase in inequality lowers GDP by 0.6 per cent.3
We believe markets will increasingly price in the risks and opportunities related to social trends. Policy is shifting, consumers increasingly want to spend money with companies aligned with their values, and companies that treat workers well benefit from increased engagement and productivity (see ‘Global megatrends: How climate, nature and social change will reshape economies’).4
Additionally, investing in companies that protect and support social equality, as well as those providing solutions to improve people’s access to education, health and finance, can deliver robust returns.
Social risks and investment opportunities
Social inequality creates macro- and micro-level risks for companies out of step with the public and policymakers on their treatment of people – employees, customers, people in their supply chains and local communities.
Social inequality creates macro- and micro-level risks for companies
At a macro level, social inequality and an unstable business environment can limit companies’ ability to grow, restrict their customers’ spending power and disrupt supply chains. Inequality hinders economic growth directly and indirectly, increasing the probability of financial crises, poor public policy decisions and social unrest. The sum of these possibilities constitutes a systemic risk to economies.5
At a micro level, companies with poor pay and working conditions can exacerbate disparities in society. This is increasingly drawing scrutiny from lawmakers and policymakers across Europe.6
To mitigate those risks, companies must cultivate mutually beneficial relationships with four key stakeholder groups: workers, supply chains, customers and local communities. The good news is companies that deliver best practice in those areas also present investment opportunities.
Workers
If management invests correctly in human capital, the returns can be significant
Fundamental shifts towards a knowledge-based economy have resulted in a greater reliance on the workforce as a driver of innovation and economic growth. If management invests correctly in human capital, the returns can be significant.7
Supply chains
Companies that invest in improving worker conditions in their supply chains can benefit from lower reputational and operational risks, as well as increased productivity. This feeds through to more sustainable margins and lower financial risk (Figure 1).
Figure 1: The case for sustainable supply chains
Source: Aviva Investors, BSR, December 20106
Customers
How a company treats its customers, and how customers perceive a company’s social practices, can drive revenue growth – and share prices. Between 1997 and 2003, the top 20 per cent of companies in the American customer satisfaction index earned nearly double the returns of the Dow Jones Industrial Average.9
Local communities
How companies affect communities can have a direct impact on a company’s share price. It can also draw the attention of governments, buttressing or impeding its social licence to operate.
Delivering returns through socially positive investments
The Aviva Investors Social Transition Global Equity strategy seeks to outperform broader global equity markets, as measured by the MSCI All Country World Index, by two per cent per annum gross of fees over three-year rolling periods while supporting the transition towards a more socially equitable economy through investments in solutions and transition companies.
Solutions
Solutions companies help tackle inequality through products and services that provide or improve access to health, education and finance.
Solutions companies help tackle inequality through products and services
We consider companies that generate revenues above a minimum threshold in one of those three areas, offering products or services that address a clear social need. They must also commit to increasing their reach to the target group and be transparent about their efforts.
Transition
We invest in companies transitioning their business towards a more socially equitable economy by respecting human rights, promoting decent work and demonstrating responsible corporate behaviour.
This is crucial as regulation and consumer expectations are demanding greater equality and respect for human rights. Treating key stakeholders well also creates significant opportunities for firms to improve their productivity and customer satisfaction and ensure sustainable revenue growth.
Five buckets of businesses
We identify companies across five types of business, each of which is influenced by different social considerations that, in turn, shape important financial metrics.
- Sustainable production companies deliver high-quality products, increase supply-chain transparency and source products and services responsibly.
- Just energy transition companies place emphasis on transitioning their workforce as well as energy systems, investing in employees, contractors and suppliers and working with communities.
- Technology transition companies are technology service providers demonstrating strong people management and employee training and engagement.
- In the shift from ownership to usership, a key component of the net-zero transition, we look for product quality, best practice in labour standards and robust diversity and inclusion policies.
- Responsible access companies improve access to health, education and finance through product access and affordability and focus on customer welfare and regulatory alignment.
Leveraging our influence to maximise value
By investing in these companies, we can drive a larger impact throughout the value chain via our bespoke engagement programme, which entails company-level engagement and macro stewardship.
Company engagement
Our engagement focuses on two essential building blocks to a more equitable economy
Our engagement focuses on two essential building blocks to a more equitable economy. The first is ensuring companies address their adverse impacts on people through human rights due diligence. The second is implementing living wages across the value chain. We track companies’ progress over time to determine which warrant further engagement and potential escalation.
Macro stewardship
We actively engage with governments, policymakers, NGOs, academics and other key stakeholders to try to correct market failures. Encouraging governments and supranational institutions to tighten standards and implement regulation is important in incentivising companies to adopt behaviours that can drive investment returns and support a socially equitable economy.
Key takeaways
Download Investment opportunities in social equity to understand:
- Why social inequality can hamper future economic growth
- The factors that underpin the investment case for social equity opportunities
- Why and how the Aviva Investors Social Capital Transition Global Equity strategy invests in solutions companies and transition leaders
Discover our Social Transition Global Equity strategy
An equity strategy seeking positive social outcomes while delivering long term capital growth.
