Inequality is a systemic risk threatening the political and economic fundamentals that business depends on to operate, innovate, and grow. Tackling inequality is an important driver for long-term, sustainable economic growth. We must act to reinforce the “S” in ESG – a critical pillar of action that has been overlooked for too long. The cost of inaction will increase dramatically as the consequences of inequality continue to unfold.
Inequality undermines human dignity and social progress. It is a systemic risk that not only threatens individual communities or companies, but entire societies and the economy. It erodes trust in our political and economic systems, , increases the damage that crises like COVID-19 and climate change cause, constrains economic growth, and undermines our collective capacity to tackle complex global challenges. So, it represents a significant and mounting business risk impacting business performance, limiting productivity and innovation, destabilizing supply chains and dampening consumer confidence and spending.
Our world today is characterized by severe inequalities of income, wealth, and wellbeing:
- The top 10% earners take home 52% of total global pay, while the lowest-paid 50% receive just 8.5%. Meanwhile, the richest 10% of the world’s population owns over three-quarters of all wealth, while the poorest 50% own a mere 2%*
- 19% of all workers worldwide earn less than they need to escape poverty*
- Inequality-related issues are literally killing one person every four seconds*
Business risks caused by inequality
Businesses provide the lion’s share of the products, services, and jobs people need to sustain themselves and their families, so the business case for tackling inequality is fundamentally about mitigating both systemic and business risk:
- Increasingly volatile operating environment – difficult long-term strategic planning.
- Supply chain insecurity – companies are only as resilient as the ecosystems, communities, economies, and societies in which they operate. When workers and farmers in supply chains are unable to meet their basic needs and are vulnerable to shocks, companies run the risk of supply shortages, price swings and other disruptions.
- Erosion of productivity and innovation – wide disparities in income and wealth impact workers motivation while also limiting access to education and skills – reducing labour productivity and contributing to significant skills shortages. When people with diverse backgrounds are not represented in business at the same level as in the population at large, companies miss out on their talent and perspectives in developing new products, services, and business models.
- Regulatory and compliance risks – in the face of mounting systemic risk, many governments around the world are facing calls to take decisive action on inequality in ways that will change the context for business in the years to come. Governments are for example tightening regulations around unacceptable labour practices, such as forced labour and child labour, through mandatory human rights due diligence initiatives and import restrictions. Over 15 countries across Europe, Asia, and North America have already instituted supply chain transparency legislation.
- Reputation risk – as the systemic risk of inequality becomes more acute, so too does the scrutiny around corporate conduct and the role of business in society more broadly. Social controversies now account for 67%* of all ESG controversies faced by companies globally – by far outpacing environmental and governance controversies. If a business is not perceived as being part of the solution, then it will be seen as part of the problem and will face mounting challenges in terms of its long-term license to operate, innovate, and grow. At the individual company level, those businesses that are not seen to be taking action in support of efforts to tackle inequality will struggle to attract and retain talent and may also be held to account by consumers.
- Access to capital – +220* investors have now signed up to UN PRI’s Advance initiative, which seeks to promote respect for human rights and positive outcomes for people through investor stewardship. Meanwhile, topics such as living wages and diversity, equity and inclusion are increasingly emerging as key areas of focus for shareholder resolutions and, therefore also a central consideration when it comes to the cost of equity and debt.
The cost of inaction
The cost of action must be balanced against the cost of inaction, which can dramatically increase as the consequences of inequality continue to unfold.
Many leading companies are already embracing their role by working to level the playing field. The call to action now is for all businesses to maximize their potential to head off the risks posed by mounting inequality and ensure that equal opportunities and better outcomes are available for all.
Digital transparency and access
Technology can deliver the needed trust and business accountability, enhancing an organizations’ ability to identify, prevent, and mitigate human rights risks through an integrated value chain. Digitally driven business processes can enable transparency and accessibility across the complexity of global human and labour rights regulations and standards, distributed data, and stakeholder collaboration. Companies need to re-evaluate their entire business process, policies, and practices and make respect for human dignity the core of the company culture of how business gets done.
Tackling inequality can strengthen the operating environment by building trust, enhancing social and political stability, and containing crises. There is also mounting evidence that tackling inequality is an important driver for long-term, sustainable economic growth. Company-level benefits associated with efforts to tackle inequality include attracting and retaining talent, winning consumers, building resilient supply chains, and staying ahead of policy and regulatory change.
We must act proactively and purposefully to reinforce the “S” in ESG – a critical pillar of action that has been overlooked too long. Tackling inequality now is a critical investment in sustained business success.
By Gitte Winther Bruhn, Global Head of Social Responsibility Solutions at SAP
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*Source: “Tackling inequality: An agenda for business action” by The Business Commission to Tackle Inequality (BCTI) set up by World Business Council for Sustainable Development (WBCSD). Published May 3, 2023.