Inequality and Responsible Investment. July 27, 2015 David Wood

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1 Inequality and Responsible Investment July 27, 2015 David Wood

2 What we study Responsible Investment Environmental, Social, and Governance Information Actors and Agency Finance and Society

3 Why inequality Topic in the news New research on economic implications Complex problem Finance and society Themes from today Opening up risk Space to think about the system Collective action

4 Why inequality? (Quick peak at the US) Piketty and Saez September 2013: The top 1% incomes are close to full recovery while bottom 99% incomes have hardly started to recover.

5 From the New York Times

6 From the Congressional Budget Office

7 What to make of inequality? For its own sake ethical imperatives and social norms The quality of life for the poorest 40%..is significantly lower than it could and should be. That is a bad thing in and of itself. (Little 2014) In relation to economic growth the consequences of inequality for the economy As a topic for investors how does inequality change the way investors view their portfolios, their relationship of investment and the economy, the world in which their beneficiaries live

8 A Global Trend Galbraith (2013): global macroeconomic, with an emphasis on financial governance and financial instability is the correct framework for coherently explaining the relationship between inequality, unemployment, and growth.

9 What has caused inequality to grow? Many theories: Technological change Winner take all economy Rent-seeking Political capture Financialization

10 Inequality and Growth OECD (December 2014): Drawing on harmonized data covering the OECD countries over the past 30 years, the econometric analysis suggests that income inequality has a negative and statistically significant impact on subsequent growth. It follows that policies to reduce income inequalities should not only be pursued to improve social outcomes but also to sustain long-term growth.

11 Inequality and Growth IMF (Ostry et al 2014): Our work built on the tentative consensus in the literature that inequality can undermine progress in health and education, cause investment reducing political and economic instability, and undercut the social consensus required to adjust in the face of shocks, and thus that it tends to reduce the pace and durability of growth. Redistribution appears generally benign in terms of its impact on growth; only in extreme cases is there some evidence that it may have direct negative effects on growth. Thus the combined direct and indirect effects of redistribution including the growth effects of the resulting lower inequality are on average pro-growth.

12 Inequality and Growth Washington Center for Equitable Growth (Boushey 2014) More and better economic research now documents that high and growing economic inequality is affecting our nation s economic growth, and even its stability. high inequality seems to be associated with less economic growth and more instability. They analyzed data from the Internal Revenue Service and other sources providing mobility data and a variety of other useful measures for the U.S. Their finding? Mobility nationwide between the 1970s and today is essentially flat in essence, more and more of us wind up not realizing the American Dream of moving up the economic ladder from the rung on which we were born.

13 Why might inequality reduce growth? Reduced demand Hanauer only needs so many cars Reduced investment in people Credit bubbles and instability Financialization and rent-seeking Political capture These should sound familiar

14 In Sum, What s Changed in the Discourse about Inequality? In-country inequality has risen sharply, in ways that are worrying Apart from its other social consequences, inequality can reduce economic growth More (or at least more attention to) evidence that inequality is a sign of instability, a consequence of rent-seeking and political capture

15 What does this mean for Investors? Inequality as a flagship secular trend the S in ESG Long-term investors internalize costs and run systemic risks Pension funds: Financialization Costs to beneficiaries Are PFs the tool of their own undermining? What is the investor s role in managing a social issue/secular trend?

16 What should RI do about inequality? Risk Management: Reputational risk and consumer sentiment Operational risk and precarious work Exposure to weak demand Through the looking glass: Plutonomy 2006

17 Inequality and Investment Strategy Focus on economic development Quality job creation (and privatization) Infrastructure ETIs and gaps in banking Bottom of the Pyramid Setting floors for inequality exacerbating performance (as with say human rights)

18 Investment Strategy even closer to home Asset owners and the agency chain: Fees Financialization Where do returns come from? Productive vs. rent-seeking investments Time horizons and benchmarking Roger Martin in HBR: Those with by far the greatest opportunity to contribute positively are pension and sovereign wealth funds.

19 The System Rewriting the Rules Shareholder value maximization Stable finance The political voice of long-term asset owners Pensions as an answer to inequality Indicative issues: Compensation, top and bottom Tax avoidance Financial transactions tax

20 Rewriting the Rules: Joseph Stiglitz, Roosevelt Institute

21 A conclusion of questions: Creating Context for Change Where in pension fund governance can these issues be addressed? What are the strategic implications and implementable actions that might emerge? Where in pension fund collaboration can systemic issues be taken on? How are funds being used as rhetorical tools in inequality discussions? Where can they make their voices heard?

22 Know what you own. Invest like it means something.

23 For More Information IRI Website: hauserinstitute.org/iri/