The Gini coefficient is often used as a measure of economic inequality: a low coefficient means low income inequality. According to an OECD analysis, a 1 Gini point reduction in inequality would translate into an increase in cumulative growth of 0.8 percentage points in the following 5 years. A more recent World Bank study also shows that a 1% annual decline in each country’s Gini index would have a bigger impact on global poverty than if each country were to experience annual growth that is 1 percentage point higher than expected.
Next to this, economic inequality also has an adverse impact on political stability. It can lead to social unrest, undermines democratic institutions, breeds populism, and contributes to protectionism, all of which is observable in many countries in recent years.
Investors are taking note of the risks of inequality
The above discussion implies that extreme and rising inequality will ultimately also impair financial markets and investments. A PRI study hints at a potentially negative impact on long-term investment performance, changes in the risk and opportunity patterns of the investment universe and instability in the financial system.
In the sovereign bond space, for example, there tends to be a correlation between countries with greater inequality, lower political stability and higher country risk premiums. In view of these potentially adverse implications for the financial performance of their assets, investors are thus well advised to integrate income inequality considerations into their decision making.
Income inequality has always been an important ESG element in our proprietary Country Sustainability Ranking model. This model integrates the ESG features that are most likely to have a material impact on the long-term performance of government bonds. And, in our emerging market equities strategies, the country ranking is also used as one of the elements to determine the country risk premium.
Furthermore, reducing inequality is key to achieving the Sustainable Development Goals (SDGs), with SDG 10 aimed at reducing inequalities within and among countries. Hence, also in this regard, sustainable investing should seek to promote both sustainability and financial performance, to align the interests of investors with societal preferences in the long run.
Engagement on labor rights in a post-Covid world
Robeco has for many years engaged on labor rights and living wage programs. Our engagement program on this critical topic was expanded during the pandemic. We have begun talks with eight companies in the retail and hospitality sectors and the wider ‘gig economy’ in Europe, North America and Asia. The gig economy refers to that portion of the labor market where workers do not have fixed-term contracts guaranteeing certain rights, such as paid holidays or healthcare; it has grown dramatically during the pandemic. Our priorities will be to promote decent work and fundamental workers’ rights, such as social dialogue, wages and benefits, and occupational health and safety. We will also target strong human capital management strategies, including diversity and inclusion, human capital development and employee engagement, all of which are aimed at reducing inequality in multiple facets of society and the economy.
