Introduction – Economic inequality: The common denominator of systemic risks

Climate change and biodiversity loss are increasingly recognised as systemic risks to companies and financial markets. Growing economic inequality is now receiving comparable attention, with the Taskforce on Inequality and Social-related Financial Disclosures (TISFD) laying the conceptual foundations for a disclosure framework. Influential financial figures, including Ray Dalio, Bill Ackman, Jerome Powell, and Janet Yellen, have warned that unchecked inequality poses a threat to capitalism and the broader economy. Inequality can directly destabilise markets by concentrating wealth and power, interlinking with price stability and interest rates, and contributing to asset bubbles.

Understanding inequality & social risks

Disclosure frameworks distinguishing between financial materiality and impact materiality are critical. Impact materiality refers to issues affecting corporate stakeholders such as workers, communities, and consumers. When considered together, this is known as double materiality. Companies depend on human and social capital to thrive; senior executives frequently acknowledge that people are a firm’s greatest asset. However, if workers do not have robust incomes, a negative feedback loop is created that affects consumer bases and corporate performance. Negative externalities, such as paying below a living wage, can accumulate into systemic financial risks. Large, long-term investors are particularly exposed, as more than 75 percent of return variability is caused by systematic risk.

Various facets of inequality

Economic inequality is defined as disparities in income, wealth, living standards, and access to opportunities. It is understood across vertical dimensions (inequalities between individuals or households) and horizontal dimensions (inequalities between groups). Inequality manifests within companies through executive-to-worker pay ratios, across capital value chains, between large and small firms, and across urban and rural regions. Market imbalances occur when human and social capital are undervalued relative to financial capital, shifting uncompensated risk towards workers. Currently, modern finance lacks tools to sufficiently factor externalised costs into risk-return analysis, and returns to capital have significantly outpaced returns to labour.

Inequality as a systemic macro-financial risk

Inequality leads to societal instability, with history showing clear tipping points when economic disparity is no longer tolerated. Recent polling indicates a clear majority of people believe the main divide in society is between ordinary citizens and the political and economic elite. This distress can lead to protectionism, geopolitical conflict, and mistrust in the private sector. Furthermore, inequality acts as a common denominator for the “polycrisis,” contributing to political gridlock on global challenges like climate change. Wealth concentration also drives financial instability; excess savings among the wealthy can suppress interest rates and fuel debt dependency among lower-income groups, a dynamic that contributed to the 2008 Global Financial Crisis. Concentrated market power yields systemic costs, with the world’s largest firms charging markups averaging 43 percent since 1995, compared to 24 percent for the smallest firms.

Conclusion: Recommended next steps

The urgency of addressing inequality is accelerated by rapid technological advances. A robust effort is needed to develop new financial analysis tools and methodologies that integrate the assessment of externalities and macro-financial risk into investment decision-making. Accounting tools at the corporate level should be enhanced to better value human, social, and natural capital. It is essential that these efforts involve co-creation and draw from the lived experiences of workers and communities to avoid reproducing existing hierarchies. Only through balanced collaboration across sectors can society begin to confront the polycrisis.