How responsible investors can help combat wealth inequality
Globalisation and technological developments have had a dramatic impact on wealth inequality across the world in recent decades.
Many developed economies have become significantly less equal in this time, with a small proportion of wealthy households receiving an increasing share of total income and wealth.
Within the 35 member states of the Organisation for Economic Co-operation and Development (OECD), income inequality today is at its highest level in the last half century1.
The UK is no exception.
While the UK became a more equal nation during post-war years, since 1979 the trend has reversed sharply2.
Today, compared to other developed countries, the UK has a very unequal distribution of income and wealth, with the seventh-highest rate of inequality among the 35 OECD countries3.
UK wealth inequality statistics are alarming.
According to The Equality Trust4, in 2016, the poorest 10% of the population had an average income of just £4,436, while the top 10% had an income 24 times larger at
£107,937.
The poorest fifth of society had just 8% of the total income, whereas the top fifth had 40%.
Wealth across the UK was even more unequally divided than income, with 45% of total wealth being held by the richest 10% of households.
In contrast, just 8.7% of total wealth was owned by the poorest 50% of households.
According to a recent report from the Joseph Rowntree Foundation5, one in five people in the UK live in poverty at present.
That includes eight million working-age adults, four million children and nearly two million pensioners.
The report listed high housing costs, rising inflation, high debt levels and low pension savings as contributing factors.
Devastating effects
The effects of wealth inequality can be devastating to a country.
It has the potential to destabilise society and can severely hamper economic growth in the long run.
At a very basic level, it can affect spending power and thus consumer demand, cutting off an economy’s growth engine.
Yet, the problems run much deeper than that.
Wealth inequality can diminish education opportunities, which in turn can keep the level of human capital and the level of specialisation at a lower-than-optimal level.
Wealth inequality can also have a negative effect on health, which can diminish productivity and growth, while increasing healthcare costs.
There is also some evidence to suggest that income equality can increase the likelihood of financial crises6.
Several renowned economists have argued that income inequality can result in financial instability by increasing leverage in the economy and encouraging risk-taking.
So, what can investors and philanthropists do to make a difference, given these challenges?
Responsible investment
By considering environmental, social and governance (ESG) factors alongside financial factors in the investment decision-making process, investors have the opportunity to mitigate some of the worst aspects of the growing wealth inequality divide.
By focusing on ESG factors, and integrating poverty and development issues into investment decisions, investors can improve the lives of millions of people, while also generating attractive long-term investment returns.
Shareholders can encourage companies to make decisions that reduce the gap between the rich and the poor.
For instance, in the UK, there is increasing pressure from investors on companies to pay a ‘real’ living wage to employees.
While there are clear direct costs associated with this, the benefits of enhanced wages are significant.
Not only do increased wages counteract some of the worst consequences of wealth inequality, but they can also potentially lower employee turnover and absenteeism, thus boosting productivity.
Increased disposable income may also be spent elsewhere in the economy, benefiting other sectors.
Executive remuneration is another hot topic.
The Equality Trust7 recently found that over two-thirds of FTSE 100 CEOs are paid more than 100 times the average UK salary, with ninety percent being paid more than 100 times the National Living Wage.
Many shareholders believe that executive pay should be more aligned with the long-term fortunes of the company.
Other ESG factors that can reduce poverty and inequality include eradication of slave and child labour, respect for basic human rights, and the development of a more diverse workforce.
On the philanthropy side, many large institutions today work with innovative charitable organisations that focus on addressing social challenges and providing opportunities for disadvantaged groups.
The ultimate goal is to enable more people to share in the rewards of a growing economy and improve quality of life worldwide.
Understanding and addressing wealth inequality at its core is the key to making lasting change.
The potential to do so through responsible investing and philanthropy presents great opportunities.
1 https://www.oecd.org/social/inequality.htm
2 https://www.equalitytrust.org.uk/how-has-inequality-changed
3 https://www.compareyourcountry.org/inequality?&lg=en
4 https://www.equalitytrust.org.uk/scale-economic-inequality-uk
5 https://www.jrf.org.uk/report/uk-poverty-2017
6 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2520434
7 https://www.equalitytrust.org.uk/pay-tracker-comparing-ceo-pay-ftse-100-average-pay-and-low-pay-uk
Paul Connolly
Paul Connolly has been a journalist for more than 20 years, as a reporter and editor for Argus Media, Reuters, The Times, Associated Newspapers and The Guardian. He has covered Islamic Finance for Reuters in the 1990s. Paul has since helped launch three newspapers, as well as reported from Tokyo, Los Angeles and Stockholm.
