This asymmetric impact on employment, earnings and wealth leads us to expect a further rise in inequality during this pandemic, thus adding to the socioeconomic and political concerns that prevailed even before 2020. At Robeco we are well aware that the uneven distribution of resources has serious consequences for societies and economies. That is why we have always treated income inequality as a key component of our Country Sustainability Ranking and of our engagement program.
The gap between rich and poor is now at its highest in 30 years
The pandemic has exposed and aggravated existing inequalities in various segments of society, as well as across sectors and regions. While official data on income inequality is published with a lag, observations from the labor market suggest that the impact of Covid-19 has been highly unequal across different groups of workers. Lower-skilled employees, youth and women have been hit much harder than the highly educated. This asymmetric impact on employment and earnings leads one to expect that inequality is set to rise further.
This development had already been evident for quite some time before Covid-19 in most advanced and larger emerging market economies. Indeed, in the majority of OECD countries, the gap between rich and poor is now at its highest level in 30 years. The richest 10% of the population earns 8.6 times more than the poorest 10%, compared with a ratio of 7:1 in the 1980s.1 The adverse impact of the pandemic will also reverse – at least temporarily – a positive trend observed in many emerging market and low-income developing countries over the past three decades, where within-country income inequality had been steadily declining, albeit from high levels.2
Wealth disparities are even more extreme
Some data indicate that the repercussions of Covid-19 have led to a widespread rise in wealth inequality in 2020 both within and between countries. What’s more, inequality in wealth is even more extreme than in income. According to Credit Suisse’s Global Wealth Report 2021, the wealth share of the top 10% increased by 0.9 percentage points in the past year and the share of the top 1% by 1.1 percentage points.3 With one single exception – the share of the top 1% in 2014 – last year’s rise in inequality was considerably greater than in any year in this century. The number of ultra-high-net-worth-individuals increased by 24%, while the number of dollar millionaires expanded by 5.2 million to 56.1 million, equivalent to roughly 1% of the world’s adults. The same report estimates that the top 10% of adults owned 82% of global wealth, with the top 1% alone owning almost half (45%).
A further widening of the wealth gap in 2020 could also be observed on a regional basis. Europe and North America accounted for the bulk of the wealth gains last year, whereas India and Latin America were among the losers.
There is a growing consensus that excessive inequality, left unmitigated, poses the threat of disruption to the economy, to our social fabric and to political stability.
Rising inequality has serious implications for society and the economy
The impact of inequality on growth, politics and society has become the subject of increasingly heated debate in recent years. Sure, inequality is an inherent part of a market-based economic system, resulting from differences in effort, individual preferences, luck, opportunities or talent. And an increase in inequality can be a catalyst for growth by fostering incentives to invest in one’s own human capital, to promote savings and investments, and to take risks. On the other hand, there is a growing consensus that excessive inequality, left unmitigated, poses the threat of disruption to the economy, to our social fabric and to political stability.
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.4 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.5
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 systemThe 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.6
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.7 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.
1 OECD, Income Distribution Database, July 2021 & “Focus on Inequality & Growth”, December 2014
2 IMF, Fiscal Monitor, April 2021
3 Credit Suisse Research Institute, June 2021. “Global Wealth Report 2021”
4 Cingano, F., 2014. “Trends in Income Inequality and its Impact on Economic Growth”, OECD Social, Employment and Migration WP, No. 163
5 Lakner, C. et al., June 2020. “How Much Does Reducing Inequality Matter for Global Poverty? World Bank Global Poverty Monitoring Technical Note 13
6 PRI, 2018. “Why And How Investors Can Respond To Income Inequality”
7 Engaging to improve labor practices in the post-Covid world