As an Investor, Why Tackle Inequality?

The private sector can be a force for lifting people out poverty. But recent analysis suggests that big multi-national corporations may be doing more harm than good in the fight to against inequality and poverty.  Companies can contribute to inequality in a host of ways: through recruitment, promotion, compensation, and how they treat people in their jobs. Companies can drive inequality in how they manage their supply chains, ensure product access, complement or displace local entrepreneurship, lobby and fund political activity, price gouging, avoid taxes, and create sacrifice zones, where the most vulnerable in society bear the brunt of environmental and health-related damage.

The private sector has long justified activities that produce negative externalities as beneficial to their bottom line. Short-term profit no doubt offers benefits to shareholders, but new data, regulations and evidence is slowly emerging that clearly demonstrates that inequality can hurt investment performance in the long term.

A discussion paper co-authored by Oxfam and Rights CoLab, The Investor Case for Fighting Inequality: How Inequality Harms Investors and What Investors Should Do About It, explores recent developments, data, and academic studies that demonstrates the risks inequality presents at both the firm and system levels.

Low bar company practices can have adverse effects on investment portfolios, with companies exposed to increased risks from reputational damage, exposure to litigation and regulatory sanction, reduced productivity, operational disruptions owing to strikes, protests, and other work stoppages, and broader systemic harms to the macroeconomy that companies and investors must absorb.

Slowly but surely, many investors are using their power as fiduciaries to address both the macroeconomic and broader market risks of inequality. Recent shareholder proposals calling for reducing inequality within corporations received substantial support and sometimes won majority votes. Investor coalitions have sprung up to address inequality-related topics such as living wage, CEO-worker pay gaps, racial justice, and worker organizing rights. There was even a boardroom battle to elect labor-friendly directors at Starbucks, led by a union-affiliated pension plan, resulting in a settlement to negotiate labor agreements.

But is that enough? The largest mainstream asset owners and managers have been slow to consider corporate impacts on inequality. An obstacle to more forceful mainstream investor engagement is a dearth of solid data on the financial risks that rising inequality presents — an oft-cited impediment to stronger stewardship on social issues generally.  In the United States, investors’ need for solid evidence of the financial materiality of inequality is magnified as fiduciary duty is more narrowly construed; fiduciaries can harness investment strategies to improve social and environmental outcomes, but only if their actions are consistent with their commitment to protect client and beneficiary financial risk-adjusted returns. They need to be equipped with decision-useful evidence to guide their actions.

Risks of Inequality

Until recently, investors have had to rely on cherry-picked, decontextualized data to justify their engagements with companies on socio-economic inequality topics. That has changed.

There is mounting evidence that inequality is a systemic risk that affects the financial system, the macroeconomy, and the total portfolios of large, diversified investors. Inequality generates systemic risks to the wider economy, contributing to financial crises and slowing economic growth, while also impacting and being impacted by other systemic risks such as climate change, pandemics and other health burdens, social unrest, corruption, and rising authoritarianism. These systemic risks in turn create systematic risks within investors’ portfolios.

Yet firm-level risk and return remain important considerations for investors with concentrated portfolios, such as those managed by private equity funds. Even mainstream diversified investors often regard their fiduciary duty as operating on a firm-specific level, although many are now shifting emphasis to a more balanced approach.

Any disturbances in the external operating environment, such as labor shortages and supply chain disruptions, can bring financial setbacks, while uncertainties related to labor strikes can lead to fluctuations in asset values. Furthermore, as instances of corporate misconduct accumulate and garner greater consumer attention, shifts in social expectations and the enactment of new legislation give rise to reputational and legal risks for organizations. Though, evidence of the material impacts of inequality on individual company performance is mixed, due in part to data, effects may manifest over a longer time frame than is typical in academic research, making them especially challenging to measure.

What Investors can do to Reduce Inequality

Researchers have found that diversified investors vote against the most egregious corporate pay discrepancies, and it appears that they may in part be responsible for the decline in CEO compensation by 9% in 2022. Diversified investors also seem to be driving progress in applying a systemic risk lens to their corporate engagements, counteracting concentrated investors’ meagre interest in unequal pay.

There are many ways investors can engage to address inequality – investors should adopt a long-term outlook when engaging with their portfolio firms on these issues and encouraging transparency including by supporting initiatives for greater disclosure. Moreover, they should be alert to corporate lobbying that works against corporate commitments to addressing inequality. Another way is to support the Taskforce on Inequality and Social-related Financial Disclosures (TISFD). It was launched last month, providing a disclosure and risk management framework that addresses the systemic and idiosyncratic risks of inequality. Lastly, but as importantly, investors must also recognize their own contribution to inequality and seek ways to stem that.

This article is based on The Investor Case for Fighting Inequality discussion paper which was written by Joanne Bauer, Paul Rissman and Silvana Zapata-Ramirez of Rights CoLab with substantial input from Irit Tamir and Sharmeen Contractor of Oxfam America.  

About Rights CoLab
Founded in 2018, Rights CoLab is an experimental platform for expert-level collaboration across the fields of civil society, business and finance. Rights CoLab develops and drives new approaches that leverage markets to advance human rights in the face of today’s urgent challenges.

About Oxfam
Oxfam is a global organization that fights inequality to end poverty and injustice. We offer lifesaving support in times of crisis and advocate for economic justice, gender equality, and climate action. We demand equal rights and equal treatment so that everyone can thrive, not just survive. The future is equal.