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Martin Todd, Federated Hermes

Why sustainable investment should tackle financial inclusion


Henry Biddle and Martin Todd, Sustainable Global Equity Portfolio Managers, at the international business of Federated Hermes write that to do good while doing well through their portfolio, investors should consider broadening financial inclusion as a sustainable investment theme

Almost two billion people around the world still don’t have a bank account, are uninsured, or without assets or savings. Half of those are from the poorest 40 per cent of the population, despite global poverty falling over recent decades. Bringing those people into the financial system through what is known as ‘financial inclusion’ is a key way to tackle inequality and drive economic growth. 

Whether they are small businesses or low-income households, those without access to formal financial services have suffered disproportionately during the Covid-19 crisis. If we are to ‘Build Back Better’, as several Western politicians promised their electorates at the height of the pandemic last year, then it is vital to improve financial inclusion.

Financial inclusion is a logical theme for investors wanting to do good and do well. It has been shown to reduce inequalities, eliminate hunger and improve wellbeing. Access to formal financial services can in turn boost access to clean water and sanitation, affordable energy, and quality education. No wonder that The United Nations has linked financial inclusion to progress on 13 of its 17 Sustainable Development Goals. 

Boosting financial inclusion is a significant economic opportunity. Bringing up to 1.7 billion people, or a third of the world’s population, into the financial system has the potential to generate 95 million jobs as well as boost global GDP by USD3.7 trillion by 2025. That is an attractive proposition for investors, at a time when the world economy is being held back by a worsening health situation in developing countries and supply chain disruptions.

Financial inclusion is also a way of accessing economies with unfulfilled potential and cheap, accelerating growth. Many healthcare and environmental names sit on lofty multiples acknowledging the significant total accessible market ahead of them, yet banks and insurers exposed to emerging market growth often trade on low teen multiples and are less susceptible to valuation risk in an inflationary or rising rate environment. While payment companies sit on higher multiples, they also have high returns on equity, generate significant cash flow, and tend to hold up well during drawdowns.

There is no single approach to investing in financial inclusion, but there are various factors to take into account when exploring this theme. Is it materially inclusive? Can it offer sustainable growth? Does it have the margins to invest in its business? If it’s a case of providing capital, has that capital been tested historically against the cohort? And last but not least, is the valuation attractive?

While materially improving people’s lives, addressing financial inclusion offers a wide investment opportunity set. The types of businesses that can be held in a financial inclusion-focused portfolio include banks, insurers, homebuilders providing affordable housing, credit bureaus, and fintech companies driving innovative solutions to entrenched issues. 

Opportunities to invest in financial inclusion exist in both fixed income and equities markets, although it is challenging to find pure ‘financial inclusion plays’ in corporate bond markets. Mastercard is a leader in financial inclusion, and issued a $600 million sustainability-linked bond earlier this year. Leading life and health insurer Prudential has a strong position in at least 15 Asian markets, giving access to an immense growth opportunity.

There are also opportunities in the US high-yield bond market. These are typically, though not exclusively, specialised lenders. Ally, one of the largest car finance companies in the US, has invested in financial education through its grants and ‘Wallet Wise’ programmes. It is not categorised as high grade by ratings agencies, but is recognised as being in the top decile for financial inclusion. The firm is on positive watch at Moody’s to become ‘high grade’, which would lower its cost of funding. 

OneMain Holdings (OMF) lends to non-prime customers and is tackling financial inclusion using a data-driven approach. The company has originated $145 billion of business from underserved customers since 2006. In 2020, OMF contributed $2 million to supporting financial literacy, community and economic development, pandemic relief, as well as racial and social justice initiatives. In June this year, OMF issued its first USD750 million bond out of its ‘Social Bond Framework’. 

In equities markets, leading Indonesian bank Bank Rakyat is bringing millions into the financial system through microfinance loans and bank accounts. It also has a solid financial track record, having compounded book value at mid-teens over the last decade. Ally Financial, Prudential and Mastercard are also strong equities propositions.

There is a robust investment case for putting financial inclusion at the heart of a sustainable approach. Addressing financial inclusion could support the livelihoods of billions around the world and global economic growth. With smart asset allocation, this theme also has the potential to generate strong prospective returns.

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