Major extremes of wealth and poverty have the potential to destabilize the financial and social systems in which institutional investors operate, and should be treated as a long-term risk like any other, according to a new report by the United Nation’s Principles for Responsible Investing.
Between 1988 and 2008, 44 per cent of rises in global income have gone to five per cent of the world’s population, noted the report. In response, the group has collaborated with the Investment Integration Project to produce a guide for how institutional investors can address income inequality.
“The PRI has been making economic inequality more of a focus with our blueprint for responsible investment, recognizing the need for investors to contribute to a more prosperous world for all,” said Fiona Reynolds, chief executive officer of the PRI, in a press release. “We have been tackling issues from an investor perspective on overly aggressive tax practices which can fuel inequality, along with issues such as human rights, labour rights, executive pay and fair wages and conditions for all workers.”
The guide addresses three specific areas: employee relations and the structure of labour markets, corporate tax policies and practices and levels of chief executive officer compensation. It examines how aspects of each area exacerbate income inequality and how institutional investors can contribute to more modern frameworks.
“As we look across many parts of the globe today, it is clear that the economy is not working for the many, but for the few, with Oxfam figures showing us that one per cent of the world’s population holds over 35 of the wealth, and that the eight wealthiest men in the world have the same wealth as 3.6 billion of the world’s poorest people,” said Reynolds. “It is a stark reminder that trickle-down economics has failed, and more needs to be done by government, business and the investment community to address and bring about economic change.”
In general, there are many benefits of taking income inequality into consideration, according to the PRI. Investors taking a more holistic view of their allocations, rather than simply focusing on maximizing value for shareholders, can have a positive impact on employee wages, benefits, training, unions and their representation and disparity between the extremely wealthy and the rest of society. Left unaddressed, however, rising income inequality can lead to economic stagnation and financial crises, the report noted.