Do Financials Have a Role in Sustainable Equity Portfolios?

19 July 2023

5 min read

Daniel C. Roarty, CFA| Chief Investment Officer—Sustainable Thematic Equities

Sarah Tunnell, CFA| Research Analyst—Sustainable Thematic Equities

William Johnston| Senior Research Analyst—Sustainable Thematic Equities

Financial companies that help address some of the world’s most pressing socioeconomic challenges deserve attention from sustainability-focused investors.

When investors think about sustainability, environmental objectives and climate change are usually front and center. But social goals are also important, and financial companies play a vital yet underappreciated role in promoting sustainable development.

Financial firms are not often recognized as key players in addressing issues related to sustainability. Yet the United Nations Sustainable Development Goals (SDGs) highlight financial systems as targets for achieving important socioeconomic objectives. Oversight of financial markets and institutions, as well as access to financial services, are explicit sub-targets of several SDGs (Display). That’s because properly functioning financial markets are integral to empowering all members of society to increase their participation in the economy and improve their personal economic circumstances.

Several Financial Products and Services Support the UN SDGs

A table lists six key financial products and services, alongside the UN Sustainable Development Goal sub-target that the product supports.

Source: United Nations and AllianceBernstein (AB)

For investors with an environmental, social and governance (ESG) focus, these SDGs can serve as a roadmap to identifying financial companies whose products and services support sustainable development. Then, by researching their businesses and corporate behavior, we can identify SDG–aligned companies with competitive advantages that underpin attractive return potential. We believe equity investors can access attractive companies that support the SDGs in the following parts of the financial sector.

Financial Exchanges: Leveling the Playing Field

Beneath the surface of every economy and society, financial markets ensure that capital flows freely to and from businesses and people. Academic research has long established the importance of well-developed stock markets in fostering economic growth via improved resource allocation, competition and innovation. Exchanges also help manage risks by reducing volatility of asset price movements that could undermine monetary stability or employment.

When markets are destabilized, everyone pays the price. Banks scale back lending, first to individuals with lower credit health and to small and medium-sized enterprises. Asset prices collapse and payments are delayed. Stock market instability shatters confidence in the financial and economic system, with devastating consequences for people’s savings and pensions. Those with less of a financial cushion to fall back on often suffer most in a financial crisis.

Transparency and liquidity are the foundation of stable markets, creating a level playing field for all market participants, including people who are traditionally underserved or excluded from the financial system. To promote transparency and liquidity, exchanges collect a vast array of data from companies and market participants. In some cases, this information is provided to regulators to help them oversee markets. As an enforcer of rules and regulations, exchanges aim to ensure that market participants behave fairly and ethically, protecting all investors.

Critics might argue that exchanges only serve wealthy investors. We disagree. From individuals seeking a loan to buy a house or car, to a business seeking to access capital for growth, a functioning financial market and economic stability benefit everyone.

Financial Data Providers: Information Supports Inclusion

If transparency and liquidity are the heart of a healthy, functioning financial market for all of society, data are its lifeblood. Better financial data is an essential ingredient to promote financial inclusion.

About 1.4 billion people worldwide still lack access to basic financial services and almost 850 million don’t have official proof of identity according to Experian, the Ireland-based consumer credit reporting company. In Brazil, 63 million people have unmanageable debts that affect their credit ratings. And About 28 million people in the US and 4–5 million in the UK are “credit invisible” because their financial profiles are too limited for lenders to assess them, according to Experian. Without access to affordable finance, people can’t buy homes, secure healthcare, pursue an education or start a business.

Credit bureaus provide information on a borrower’s creditworthiness that enables banks to lend and set appropriate interest rates. Lower-income customers and small businesses often struggle to gain a credit profile because they lack a credit history and are invisible to the system. Yet today, credit bureaus have new ways to help people strengthen their credit profiles using utility bill payments and mobile phone data. Credit bureaus have started to allow individuals to opt in to sharing information about the payments they’re making on time to help build or boost their credit score. This enables individuals to connect to the financial system, access cheaper sources of financing and tap additional services.

Payment Technology: Expanding Access to Financial Services

Using data to improve credit profiles is a step in the right direction toward expanding financial inclusion, but too many people are still left out of the traditional financial system entirely.

Worldwide bank account ownership has improved over the last decade from 51% of adults over the age of 15 in 2011 to 76% in 2021, according to the World Bank. But in lower-income regions and countries, many people still lack access to the system (Display).

Financial Inclusion Has Improved, But Many Still Lack Access

Percentage of All Adults with Bank Accounts (Age 15+, 2021)

Bar chart shows the percentage of adults aged 15 and up that have bank accounts in different regions and with different country income levels.

Past performance and current analysis do not guarantee future results.
Based on The Little Data Book on Financial Inclusion 2022. Data shown for 123 countries.
*High income economies have a gross national income (GNI) per capita of $12,695 or more. Upper-middle-income economies are those with a GNI per capita between $4,096 and $12,695. Lower-middle-income economies are those with a GNI per capital between $1,046 and $4,095. Low-income economies are those with a GNI per capita of $1,045 or less.
As of December 31, 2021
Source: World Bank, The Little Data Book on Financial Inclusion 2022 (Washington, DC: World Bank), http://hdl.handle.net/10986/38148

Many governments have strategic plans to address the problem. However, like most of the world’s sustainability challenges, financial inclusion can’t be achieved by the public sector alone.

Payment technology companies are critical for those who lack access to traditional bank accounts. In 2021, 57% of people in developing economies used digital payments (Display), which are typically a gateway into other financial services, according to the World Bank. Mobile money is already commonplace in developed markets. These accounts help encourage saving and enable financial inclusion, particularly for lower-income people and women.

Digital Payment Use Has Grown Rapidly in Developing Economies

Segmented bar chart shows the increasing use of digital payment technology by consumers in developing economies and high-income economies, from 2014 to 2021.

Past performance and current analysis do not guarantee future results.
As of December 31, 2021
Source: The World Bank—Global Findex Database

Insurance to Microfinance: Supporting the Most Vulnerable

Financial security is a multifaceted objective that must be addressed by a range of financial services firms, each contributing a solution to a distinct part of the problem. Insurance companies help manage threats to health, income and property that can devastate personal finances instantly. Life and health insurers that provide affordable protection and target at-risk segments of the population help families prepare for unexpected financial emergencies. Social finance services support the achievement of positive social outcomes in areas including basic infrastructure, access to essential services, affordable housing, employment, food security and microfinance.

With these examples in mind, we think equity investors focused on sustainability should take a fresh look at the financial sector. Guided by the SDGs, financial firms can be found that address some of the most pressing socioeconomic challenges of our age, which ultimately help reduce poverty, promote gender equality, support upward mobility and improve economic participation.

Ultimately, improved financial empowerment creates a virtuous circle that enhances economic growth and delivers economic benefits to a broader cross-section of society. Quality financial companies with clear competitive advantages and solid business models can allow investors to participate in efforts to empower individuals and small business as they strive to build a better financial future.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.

About the Authors

Daniel C. Roarty, CFA

Daniel C. Roarty is the Chief Investment Officer of AB’s Sustainable Thematic Equities team, which manages a suite of geographically diverse strategies aligned to long-term sustainable themes. Over the years, Roarty has played an active part in the sustainable investing community, acting as a subject-matter expert around the globe, including speaking at the 2018 Sustainable Investing Conference at the UN. He joined the firm in 2011 as global technology sector head on the Global/International Research Growth team and was named team lead in early 2012. Roarty previously spent nine years at Nuveen Investments, where he co-managed both a large-cap and a multi-cap growth strategy. His research experience includes coverage of technology, industrials and financials stocks at Morgan Stanley and Goldman Sachs. Roarty holds a BS in finance from Fairfield University and an MBA from the Wharton School at the University of Pennsylvania. He is a CFA charterholder. Location: New York

Sarah Tunnell, CFA

Sarah Tunnell is a Research Analyst, responsible for covering the financial sector for the Sustainable Thematic Equities Portfolios. She joined the firm in 2017 and previously held the role of product specialist for AB's Sustainable Thematic Equities Portfolios. Prior to this, Tunnell worked in AB's Private Wealth Group. She holds a BS in business administration with concentrations in finance and information systems from the University of Pittsburgh, and is a CFA charterholder. Location: New York

William Johnston

William Johnston is a Senior Research Analyst for the Sustainable Thematic Equities portfolios. He joined AB in 1998 as a research analyst, and served as the financials sector head for the International and Global Growth Research teams prior to joining the Sustainable Thematic Equities team in 2013. Johnston was previously an analyst at Fleming Investment Management, where he covered UK banks, media, property and other financials. He also worked for the Industrial Bank of Japan in London as a qualified chartered surveyor on the Property Finance team, and in the Investment Banking division, advising on UK property finance and investment. Johnston holds an MA in history from the University of Cambridge and an MBA from City, University of London. He was nominated in Institutional Investor’s Best of the Buy Side survey in 2001. Location: London

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Do Financials Have a Role in Sustainable Equity Portfolios?

Financial Exchanges: Leveling the Playing Field

Financial Data Providers: Information Supports Inclusion

Payment Technology: Expanding Access to Financial Services

Insurance to Microfinance: Supporting the Most Vulnerable

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