There’s as yet no equivalent to “net zero” for the reduction of income inequality, but the systemic risks posed by the income gap are no less real than those of climate change.
Excessive income inequality “slows economic growth, leads to more frequent and deeper recessions, limits upward mobility, aggravates social cohesion, and exacerbates political polarization,” The Investment Integration Project, or TIIP, writes in Confronting Income Inequality. “It is a systemic risk that cannot simply be diversified away.”
The report diagrams how investors can extend conventional investment techniques to include issues of income inequality and offers “advanced” techniques to build the field, enhance investments and generate opportunities. Among them:
- Call for fair compensation and a living wage. A collaborative of 15 financial institutions have adopted the Platform Living Wage Financials to encourage garment, footwear, food and other companies using manual labor to offer pay that covers basic living expenses.
- Ensure corporations root out abusive and illegal practices in their supply chains. Investors can urge publicly traded corporations to pressure their vendors to improve their pay and working conditions. Last year, the Principles for Responsible Investment launched a four-year effort to ensure signatories align with the U.N.’s Guiding Principles on Business and Human Rights.
- Advocate for boards to consider workers in compensation and benefits policies. Shareholder have the right to non-binding votes on executive compensation at least every three years. Investors can press the board to add employee-relations or labor experts to the compensation committees.
- Press for representation of women and underrepresented groups on boards and in management. Norway, Italy, France, Germany, Belgium, Pakistan, Israel, India and Spain have board-representation laws. California’s 2018 board-diversity requirement is being challenged in court; Illinois and Washington have also passed board diversity laws.
- Support pay equity. This includes factors that create a general wage gap between men and women, including discrimination in advancement, the tendency toward lower pay in female-dominated professions and expectations of women as primary caregivers. A 2017 law in the U.K. requiring companies with more than 250 employees to report on their employee pay gaps each year is credited with reducing the gender pay gap from 17.4% in 2019 to 15.% in 2020.
- Require standardized disclosure of labor-related data. The Workforce Disclosure Initiative of nearly 50 institutions with $6.5 trillion in assets provides investors with the results of its surveys corporations on their employment policies and records .
- Demonstrate demand for green, social and sustainable bonds. These bonds are frequently oversubscribed bonds, encouraging issuers to increase their supply. The Climate Bonds Initiative estimates that in the first half of last year, approximately $30 billion in social bonds, $70 billion in pandemic bonds, and $250 billion in green and sustainability bonds came to market.
- Adjust fixed-income allocations to maximize positive impact in income inequality. Well-developed bond markets finance affordable housing, local economic development, small businesses and those owned by women and underrepresented groups, infrastructure projects and poverty alleviation, among other things.
- And finally, implement fair labor and employee relations policies at portfolio companies. Private equity investors acting as direct owners or general partners can directly address labor issues and serve as models for integrating issues of income inequality into private markets generally (see, “This private-equity giant has distributed more than $500 million – to hourly employees”).
Join TIIP’s webinar to learn more about why investors should care about income inequality and what they can do about it, Tuesday, June 22, 2021 at noon ET