Business risks from socio-economic inequality
A scale-up of sustainable finance is urgently needed to respond to the challenges of our changing world: green and sustainable growth, health crisis recovery, reduced inequalities, and poverty, and more broadly, innovative solutions to achieve the 2030 Agenda. In recent times, while the discourse around environmental and climate risks have gained significant momentum from business community, policymakers and regulators, barring a few sporadic cases, the social side of the sustainability dynamic, including inequality, has not been explored comparatively at the same degree.
A new generation of severe inequalities in human development is emerging[1]. Inequality is one of the three pressing challenges facing society alongside the climate emergency and nature loss[2]. While decades of industrialization and growth have contributed to capital appreciation and immense wealth accumulation, these have been uneven and have come at a high cost. Although inequality between countries has declined in recent decades, inequality between people is close to its highest point in 150 years, the top 10 percent of the highest earners in the world now own 76 percent of all wealth, while the bottom 50 percent owns just 2 percent[3].
Further in the wake of the COVID-19 pandemic, not only has the socio-economic divide expanded, we more clearly see deep structural inequalities exacerbated by the global challenges of the last few years. The most vulnerable members of society are suffering the greatest impact. In 2020, extreme poverty rose for the first time in over 20 years, with approximately 100 million more people living on less than $1.90 a day[4]. For the poorest countries of the world, the impact of COVID-19 on poverty is not only still present, but it is worsening.
The “cascading and interlinked crises,” dominated by COVID-19, climate change, and conflicts, have reversed years of social and economic progress, putting the 2030 Agenda for Sustainable Development “in grave danger”, exposing the interdependence of commercial interests and the social agenda. As per estimates, the annual SDG financing gap has risen from $2.5 trillion to $4.2 trillion[5] due to pandemic-related financing needs and a drop in external private resources. By mid-2021, the number of people forced to flee their countries due to war, conflict, persecution, human rights violations, and events seriously disturbing public order had grown to 24.5 million[6]. The spread of COVID-19 has intensified structural and systemic discrimination and pervasive inequalities, which harm millions of people and hold back every society, with women and persons with disabilities at heightened risk. Labour income data shows that labour share of income declined from 54.1 per cent to 52.6 per cent[7] from 2014 to 2019, suggesting that workers are losing relative earning power over the long term, thereby putting upward pressure on inequality. Income inequality has increased in most developed countries and in some middle-income countries, including China and India, since 1990. Countries where inequality has grown are home to more than two thirds (71 per cent) of the world population[8].
Climate change has also been a major factor in rising inequality, with poorer citizens more likely to be affected by increasing natural disasters and pollution. As per the latest inequality report, the top 10 percent of earners emit close to 50 percent of carbon emissions, while the bottom 50 percent emits just 12 percent[9].
Inequality emerging as a systemic business risk
Historically, many businesses have contributed to, or benefitted from, inequality through unfair employment conditions, a poor environmental record and a lack of recognition of their impact on local communities. But, as businesses become bigger and more powerful, with more than two-thirds of the world’s 100 largest economic entities are now corporations as opposed to governments[10], businesses have come under greater scrutiny, with rising expectations of ESG standards.
Systemic inequality is becoming a source of risk not only for societal progress but also for success of business. It limits productivity and has the potential to constrain consumer spending and growth, destabilize supply chains, trigger political instability, and jeopardize their social license to operate. At the same time, addressing inequity is a business opportunity. The argument for wage parity is not simply a moral one; equity and a living wage benefits the economy as a whole. One US study predicted that closing the earnings gap between white and minority incomes would improve national earnings by 12 percent and increase GDP by US$1.9 trillion, with the earnings gain translating into more than $290 billion in additional tax revenue[11].
In economic theory however, the link between inequality and growth is somewhat imprecise. The bulk of the literature supports the theory that inequality has a negative impact on economic growth. Studies that found a positive relationship between inequality and growth were focused on the short term, and studies that found a negative relationship were focused on the long term. Empirical results have increasingly supported the arguments for impaired economic growth and a negative impact on productivity in the face of rising inequality. Societies with higher levels of inequality also tend to have higher levels of crime[12], healthcare issues[13], educational effects[14] keeping a larger share of the labour force from productive activities and decreasing potential growth. Also, with the increase in social instability, trust and social cohesion can erode, leading to conflict, political crises, and the resulting retraction of investments.
Therefore, with the growing influence and potential of the financial sector, it is imperative that stakeholders gain better understanding of the financial risk from inequality. This requires assessing and measuring the ways in which external risk factors can become important for a company and its balance sheet. For example, the potential cost of inequality to a company may depend on exposure of the company’s assets to disruption from political instability or sensitivity of its workforce productivity to economic drag. This requires data on the company’s exposure to adverse macroeconomic conditions, the effect of those conditions on its operations (including its stakeholder relationships), and its responses thereto.
[1] Human Development Report 2019 https://hdr.undp.org/content/human-development-report-2019
[2] “Vision 2050: Time to Transform”, March 2021, World Business Council for Sustainable Development https://www.wbcsd.org/Overview/About-us/Vision-2050-Time-to-Transform
[3] World inequality report 2022 https://wir2022.wid.world/www-site/uploads/2021/12/Summary_WorldInequalityReport2022_English.pdf
[4] Updated estimates of the impact of COVID-19 on global poverty: Turning the corner on the pandemic in 2021?, 24 June 2021, World Bank Blogs https://blogs.worldbank.org/opendata/updated-estimates-impact-covid-19-global-poverty-turning-corner-pandemic-2021
[5] OECD Global Outlook on Financing for Sustainable Development 2021 https://www.oecd.org/development/global-outlook-on-financing-for-sustainable-development-2021-e3c30a9a-en.htm
[6] Sustainable Development Goals Report 2022
https://unstats.un.org/sdgs/report/2022/The-Sustainable-Development-Goals-Report-2022.pdf
[7] ibid
[8] UNDESA World Social Report 2020 https://www.un.org/development/desa/dspd/world-social-report/2020-2.html
[9] World inequality report 2022 https://wir2022.wid.world/www-site/uploads/2021/12/Summary_WorldInequalityReport2022_English.pdf
[10] 69 of the richest 100 entities on the planet are corporations, not governments, 17 October 2018, Global Justice Now https://www.globaljustice.org.uk/news/69-richest-100-entities-planet-are-corporations-not-governments-figures-show/
[11] Turner, A. (2016) the business case for racial equity. National Civic Review, 105,1. pp21–29 https://onlinelibrary.wiley.com/doi/abs/10.1002/ncr.21263
[12] Poverty, income inequality, and violent crime, Hsieh and Pugh, 1993 https://psycnet.apa.org/record/1994-33910-001
[13] Income inequality and health: a causal review, Pickett and Wilkinson, 2015 https://pubmed.ncbi.nlm.nih.gov/25577953/
[14] Neckerman and Torche, 2007, Inequality: Causes and Consequences https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1077653
Photo courtesy: Harry Cunningham
