Responsible investors can help businesses tackle inequality

Inequality in income, wealth and well-being has been increasing for the past 40 years. But the economic disruption caused by the continuing effects of the COVID-19 pandemic, combined with the war in Europe, adds new urgency to the challenge.

Inflation has been running at levels unseen in most countries for decades, forcing families to choose between fuel bills and feeding themselves. Wage growth for people in higher-paying jobs outstrips that for low-paid workers, while inflation also hits poorer households harder.

The Business Commission to Tackle Inequality’s introductory report makes clear that inequality is a systemic risk. It undermines social cohesion, erodes trust in institutions and fuels unrest. When we reduce inequality, everyone is better off.

Investors and their asset managers can and must help businesses tackle inequality—and it is in their own interest to do so.

Creating decent work is fundamental

As the Commission’s framework sets out, there are several ways in which businesses can act on inequality, but perhaps the most fundamental relates to companies’ treatment of their workforce.

Decent work means people and their families have an income that covers the cost of living; it means people enjoy a secure form of employment as well as safe working conditions. It’s about equal opportunities and fair treatment for all.

The Good Jobs Institute at MIT Sloan School of Management has a wealth of evidence on the positive relationship between job quality and business success. But, despite the strength of the business case, many companies continue to provide low-paid and insecure work, seeing the workforce as a cost to be minimized rather than an asset in which to invest.

Investors have an interest in tackling inequality

Pension funds held over USD 35 trillion in assets in 2020, according to the OECD, and more than a third of all assets under management in the financial sector. The many millions of workers contributing to these pension funds have a strong interest in decent work and reduced inequality both during their working lives and later in their retirement. Indeed, pay and conditions for workers came top in the list of environmental and social issues that people want their pension fund to consider when deciding whether to invest in a company.

The rise in passive investing—where funds track indexes, now accounting for a quarter of assets under management globally—has led to ever greater asset diversification in portfolios. One thing you can’t diversify away from are the macro-economic costs of low-paid, poor-quality work, which is a drag on economic performance in all economies.

Moving investors to action

At ShareAction we’re working to transform the investment system to serve our planet and its people. Responsible investors consider the negative impacts of their investments on people and planet, taking them as seriously as financial returns.

Since 2013, our Good Work investor coalition has been in active dialogue with the UK’s biggest employers about living wages and decent work. Thanks to that engagement, today, more than half of FTSE 100 companies are accredited Living Wage employers, among over 10,000 other employers in all sectors across the UK.

However, there remain sectors of the UK economy where low pay dominates. Grocery retail is one of these. Last year, 42 percent of workers in the sector earned less than the real living wage. Investor members of our Good Work coalition have therefore escalated their engagement with supermarkets and, as part of that, filed a shareholder resolution at Sainsbury’s—the first such resolution of its kind. Achieving 17 per cent support, we have shown both that there are enlightened institutional investors willing to challenge poverty pay but also that we have much work to do.

The Workforce Disclosure Initiative (WDI), which we founded in 2016 with support from the UK government, has developed the world’s leading framework for corporate reporting on workforce risks and impacts. The initiative generates high-quality, comparable data that investors can use to make investment decisions and inform their dialogue with investee companies.

Nearly 200 of the world’s biggest companies already report data to the WDI—a number that is growing year on year, as companies respond to shareholder and widespread demand for transparency about the quality of work, they offer their people.

Facing the challenge of a rising cost of living

As families struggle with the rising cost of living, there is a growing sense of unfairness in the current compact between business and workers. We face and must answer fundamental questions about how companies distribute value and risk.

Should companies treat workers as a resource, from which to extract maximum value at minimum cost? Or should workers receive a fair share of the economic value they help to create? Should it be the lowest paid workers in our economies who shoulder the greatest burden as the cost of living increases?

By paying living wages, companies enable workers to not only survive but to participate as full members of the societies they belong to. This matters to all of us.

Investors have started in earnest to tackle the climate impacts of their investments. The challenge of this moment is to tackle the deep injustice of inequality.

Catherine Howarth is Chief Executive of ShareAction. She coordinates civil society activism to promote responsible investment.