NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Investors have increasingly begun to realize that income inequality – or the gap in income and wealth between the very affluent and the rest of society – has become one of the most urgent socioeconomic issues of our time. It has the potential to negatively impact institutional investors’ portfolios as a whole; increase financial and social system-level instability; damage output and slow economic growth; and contribute to the rise of nationalistic populism and tendencies toward isolationism and protectionism.

A new report by The Investment Integration Project (TIIP)—in collaboration with the Principles for Responsible Investment (PRI)—aims to deal with this challenge. Titled “Why and How Investors Can Respond to Income Inequality,” the report calls attention to the potential risks of income inequality for investors — particularly to long-term investment risk management and the overall stability of societal systems and financial markets. It also offers practical insights on how investors can contend with such a complex challenge.

While the report covers a number of the many causes of income inequality—from employee relations and the structure of labor markets, to corporate taxation and levels of CEO compensation—few stand out as significantly as those related to gender discrimination.

The High Price of Gender Inequality

Researchers at Oxfam point to a series of major factors contributing to gender inequality, including “more men than women own land, shares and other capital assets” globally; “men are paid more for doing the same roles as women”; and “men are concentrated in higher paid, higher status jobs.”

The results of this imbalance are threefold: wage gaps exist between men and woman, including unequal pay for the same work; women are more likely to work in the informal sector where earnings are often lower and less predictable; and unequal access to education, health services and finance generates unequal access to opportunities.

And these results don’t touch upon other areas of inequality, like dangerous working conditions, sexual abuse in the workplace, and a general lack of rights globally that disproportionately affect woman. The most recent Corporate Human Rights Benchmark, released in November 2018, examines 101 companies in the agriculture, apparel and extractive industries, noting how poorly all three sectors are performing around basic human issues. These issues are more likely to adversely impact women, underscoring the need for government to set legal standards and enforce such standards in the workplace.

How Investors Are Responding

Beyond the obvious questions of morality and fairness that gender inequality raises, a clear economic case can to be made for investor action.

The vast majority of consumer decisions are made by women. In addition, diversity in the workplace helps investors identify quality management teams. Private wealth held by women grew from $34 trillion to $51 trillion between 2010 and 2015, as did women’s share of all private wealth (from 28 percent to 30 percent). And because much of the work done by women around the world is in the informal sector, their contribution is often obscured. Unpaid care work by women in Peru, for example, could represent as much as 20 percent of GDP. What’s more, given the concentration of women in low-paying occupations and industries, the right to form unions and engage in collective bargaining is vital in order to increase pay and working conditions.

A number of investors are pursuing solutions to this issue. For publicly held companies, the Thirty Percent Coalition is a network of investors promoting gender diversity, including women of color, on corporate boards. Board diversity has been identified as a factor with correlation to improved shareholder value and company performance. Institutional investor members of the network include asset managers like Boston Common Asset Management, the Sumitomo Mitsui Trust Bank and Walden Asset Management; pension funds like California State Teachers Retirement System, Japan’s Government Pension Investment Fund and Ohio Public Employees Retirement System; and city and state treasurers like Treasurer of Illinois, Comptroller of New York City and Treasurer of Washington.

ShareAction’s Workforce Disclosure Initiative (WDI) is another such group. The initiative is bringing together investors “to request comparable data from companies via an annual survey. Its ultimate goal is to improve the quality of jobs in multinational companies’ operations and supply chains.” Backed by over 100 investors with over $12 trillion in assets under management—including APG, Lombard Odier Investment Management and UBS—the WDI surveys corporations to generate greater corporate disclosure of human capital data. Examples of the types of information requested include “the percentage of total employees by gender and at each level of seniority”; “the company’s average gender pay gap”; and “percentage of total supply chain workers by gender for each supplier type.”

In 2017 the Global Impact Investing Network (GIIN) launched a two-year initiative to explore the opportunities to scale gender-lens investing within the impact investing sector. Under the guidance of an advisory committee that includes investors like Calvert Impact Capital, the Gender Secretariat at International Finance Corporation, Investing in Women, Phatisa and RobecoSAM, the initiative examines investment strategies that “seek to intentionally and measurably address gender disparities” or “examine gender dynamics to better inform investment decisions” [emphasis in original].

In addition, investors including Royal Bank of Canada, UBS, FTSE, Bloomberg, Veris Wealth Partners, U.S. Trust and others have launched gender-lens focused investment products in recent months.

Part of the reason efforts by the Thirty Percent Coalition, WDI and the GIIN are important is because, if they’re successful, investors will be able to better understand the companies they invest in, and how deeply the disenfranchisement of women is embedded in the economic system. As covered in the report by TIIP and PRI, this knowledge helps answer questions like what data is needed to best serve investors, how can this data be translated into action, and what are its implications for action with regards to workplace and public policies—all viewed with a goal of fundamentally shifting the paradigm of gender inequality.

Gender discrimination is closely related to questions of discrimination of other sorts as well—including those based on race, ethnicity, sexual preference or religion, and including the inherently discriminatory lack of access to healthcare, education, finance and other basics necessary for the advancement of low-income and historically underserved populations.

A deeper understanding of how investors can address this complex of system-related issues will complement the actions proposed in the report by TIIP and PRI, and enhance societies’ overall efforts to manage the risks of income inequality.

William Burckart is the president and COO of The Investment Integration Project (TIIP), and a visiting scholar at the US Federal Reserve. Michael Musuraca is Strategic Advisor of ESG and Labor at Blue Wolf Capital Partners LLC. Steve Lydenberg is the founder and CEO of TII, and a partner at Domini Impact Investments.

Image courtesy of Pexels.