Introduction

The report highlights the financial risks that socioeconomic inequality poses to investors. It underscores how inequality contributes to systemic risks such as financial crises and slower economic growth, adversely impacting portfolios. A notable example is the 2007–2009 financial crisis, where inequality played a significant role. Investors are increasingly expected to address inequality as part of their fiduciary duty, reducing these risks and ensuring long-term returns.

Fiduciary duty and the obligation to act

Inequality is becoming a significant risk factor for investors, affecting corporate performance and financial stability. Initiatives like the Taskforce on Inequality and Social-related Financial Disclosures (TISFD) aim to provide investors with tools to manage and disclose inequality-related risks. Investors are encouraged to engage companies on issues such as CEO-worker pay gaps, living wage standards, and diversity, equity, and inclusion (DEI) initiatives. Addressing these areas aligns with their fiduciary duty to safeguard long-term returns and mitigate risks to corporate performance.

Portfolio-level risks of inequality

Inequality contributes to systemic risks within portfolios, exacerbating problems such as climate change, financial crises, and supply chain disruptions. The report notes that a 1% increase in the Gini coefficient can reduce GDP growth by more than 1% over a five-year period. Additionally, addressing the racial wealth gap in the US could increase GDP by 4-6% by 2028. These systemic impacts affect diversified portfolios, creating a need for investors to mitigate inequality-related risks across their holdings. Furthermore, supply chain vulnerabilities linked to poor working conditions and low wages are highlighted as major risks for industries reliant on low-wage labour.

What investors should do to reduce inequality

Investors are advised to adopt long-term engagement strategies that promote worker equity, such as employee stock ownership. For instance, addressing inequality through worker equity distribution can improve corporate transparency and resilience. Enhancing transparency on wage structures and addressing DEI issues can reduce risks and improve corporate performance. Investors should also push for fair wages, as failure to do so contributes to labour instability and supply chain disruptions. Reducing inequality within companies can help create more resilient supply chains and stable workforces, particularly in industries with vulnerable workers.

Recommendations

The report recommends that investors demand greater transparency in corporate pay structures, advocate for living wages, and support initiatives like the TISFD. Engaging on these issues not only aligns with fiduciary duties but can also improve overall portfolio performance by addressing the systemic risks posed by inequality. Investors are encouraged to use their influence to address CEO-worker pay gaps and push for comprehensive DEI practices to enhance long-term value creation.