Talking Heads – Disuguaglianza: perché è importante per gli investitori?

This is an audio transcript of the Talking Heads podcast episode Talking Heads – Inequality: why does it matter for investors?

Daniel Morris: Hello and welcome to the BNP Paribas Asset Management Talking Heads Podcast. Every week, Talking Heads will bring you in-depth insights and analysis on the topics that really matter to investors. In this episode, we’ll be discussing inequality and inclusive growth. I’m Daniel Morris, chief market strategist and I’m joined today by Sindhu Janakaram, Equality Lead and ESG analyst. Welcome Sindhu, and thanks for joining me.

Sindhu Janakaram: Great to be here.

DM: Sindhu, we’ve been talking at BNP Paribas Asset Management about ESG – environmental, social and governance – for many years. The focus has been a lot on the environmental part, certainly around climate change. Today, we’d like to look more at the S, the social bit, and in particular inequality. Maybe you can help us out with the definition.

SJ: It’s true that the focus has been on the E for far too long. Our conviction is that inequality underpins and reinforces many of today’s social issues that investors have historically addressed in a piecemeal fashion like taking on working conditions and supplier factories, board diversity or corporate non-discrimination policies. Those all have to do with inequality.

We define it is the inequitable distribution of income, wealth and well-being. And we’re seeing right now that differences in income and wealth are at their greatest since the 1910s.

And that’s led to a loss of productivity as wages have failed to keep up with inflation, [and] as geopolitical shocks and COVID-19 have exacerbated health inequities. So, right now is a very pressing time for us to be discussing this issue.

DM: One response might be, though, Sindhu, is that inequality has always existed to one extent or another. But we’re an asset manager. Can you help us with the connection between inequality and why it matters to investors? Is it something that’s financially material?

SJ: It is financial material. And I’ll get to that in just one moment. We don’t want to challenge the benefits of our global capitalist system or the benefits of competition for wealth creation, for innovation, even for societal well-being as billions of people have been lifted out of poverty and competition naturally produces winners and losers. We seek to address unfair competition which produces fixed categories of winners and losers.

Structural inequality is what our strategy seeks to address. It robs us of two necessary preconditions for a healthy society and a stable economy, which are equality of opportunity and well-functioning social mobility.

Let me answer the financial piece. Our conviction is that inequality risk can manifest [itself] systemically in the market and at the company level, presenting both risks and opportunities for investors. First and foremost, it presents a systemic risk. It limits growth potential. It exacerbates vulnerabilities in the financial system. It multiplies threats both acute like COVID-19 and long term such as climate change. As fiduciaries, it’s important for us to explore and mitigate risks to the market. Second, and more concretely, inequality matters for individual company performance as well.

Our conviction is that companies that strengthen equality within their workforce through material benefits like living wages or strong values such as diversity, equity, [and] inclusion policies are more attractive places to work and should therefore be more likely to thrive in a competitive market.

Research suggests that high levels of employee satisfaction generate superior long-term returns. The evidence points [out] that when you have a more equal workplace and when companies value equality practices, that’s going to lead to financial outperformance.

DM: I mentioned at the beginning, that we were going to focus more on the S and sit on the E, but actually I would like to loop back to the environment.
Is there an impact of inequality on climate change?

SJ: Yes, Inequality and climate risk are intrinsically linked, and our ability to combat climate risk with climate action and climate policies is also impacted by inequality.

First, higher wealth correlates with higher per capita GHG [greenhouse gas] emissions, and poor countries that emit the least GHG emissions often bear the brunt of this impact. We’ve seen this in recent COP [climate] conferences when Caribbean nations banded together and said we can’t be expected to pay the cost without receiving any of the benefits of industrialisation. How does inequality impact climate change?

Inequality and climate change are inexorably linked. In their sixth Assessment Report, the Intergovernmental Panel on Climate Change, or IPCC, concluded that adverse impacts of climate change and inequality exacerbate each other, and these impacts disproportionately affect marginalised groups, amplifying inequalities and undermining sustainable development. The failure to address inequality can backfire, which undermines climate action. So, this double bind is why inequality must be included as a factor in any climate policies, and we at BNP Paribas Asset Management take it into account.

We saw that in recent farmer protests in the EU against the EU Common Agricultural Policy, which sets subsidies and environmental conditions for the sector.

People were driving their tractors onto the streets and highways to protest those agricultural policies which nominally reduce pesticide use and therefore [help] reduce greenhouse gas emissions globally, which has the effect of supporting the most vulnerable people. So, unless we use this just transition or, or way to include those that are left behind in the green policies that we’re enacting, we risk a climate action backlash, and we risk our ability to meet [the] net zero transition targets.

DM: Thanks, Sindhu

SJ: Thank you