RI Quarterly - Social cohesion and inclusive growth: Investment risks and opportunities
Social cohesion is an increasing concern in the investment sphere, skewing traditional notions and models. Three panellists: Helga Birgden, Partner at Mercer; David Wood, Director of the Initiative for Responsible Investment (IRI), Harvard Kennedy School; and Sustainability Strategist for Man Group, Jason Mitchell, took to the stage in a packed conference room at PRI in Person to discuss social cohesion and inclusive growth. Moderating the session was Georg Kell, Chairman of Arabesque Partners, who opened the discussion by asking how investors could and should react to today’s global geopolitical challenges.
The panel’s ideas were timely, coming just days after the German elections which saw Chancellor Angela Merkel and her centre-right Christian Democratic Union (CDU) party secure a fourth term. This was, however, at the expense of gains made by the far right Alternative for Germany (AFD) party, which took 12.6% of the popular vote, making it the third-largest party in parliament. Against this backdrop was Merkel’s strong and positive stance on immigration, which has seen Germany take more refugees than any other EU country since 2014.
Economic inequality is a paradigmatic issue to the “S” like climate has become to “E” in ESG
In a lively discussion, the panellists first looked at the issue of why economic inequality is important and how it affects investment and investors.
Wood, whose recent focus has been on researching social inequalities, began by challenging why investors should care about this topic. He argued that a key reason is because it has become politically salient, suggesting that the first obvious manifestation of this was Occupy Wall Street, which then-US president, Barack Obama, branded “the defining issue of our time.”
"Inequality is the measure of success of the financial system"
Research increasingly suggests inequality can harm growth, and excessive inequality is a burden on growth, which, in turn, is a burden on investment. Indeed, inequality can depress growth; Wood argued that this is because it depresses demand, meaning mass consumers have less money. He suggested it also potentially allows for rent-seeking and political capture, allowing people with the means to control the political system to keep these means, stifling innovation and economic change.
Wood has also been researching social cohesion, which new thinking suggests is essential to economic health. He cited the period since the US presidential elections and post-Brexit Britain as examples, highlighting that threats to social cohesion create economic problems. Economic inequality is an indicator that something is going wrong with societal cohesion.
Birgden, a leading expert on migration, focused on what issues such as involuntary migration mean for companies and how traditional investment thinking can – or in many cases, cannot – be applied to this type of social issue.
“As investors, we are framed by our thinking. We need to build new ways of thinking about the economy and the investment process.”
She revealed that investors largely disregard the issue of involuntary migration, even though it impacts business, government and policy. In her work, she follows four steps: she begins with investment beliefs, incorporates this into social system issues like migration, considers policy settings and asks whether they are capturing these wider issues. She then looks at the investment process and tests whether something like social migration is being incorporated into the portfolio.
This has prompted her to question traditional beliefs surrounding capitalism, which views it as a model that generates wealth, to the point where Birgden argues that capitalism is in fact spurring exponential inequalities.
Instability, diminishing opportunities and trade flows
Mitchell brought a stark, first-hand perspective to this argument. He has spent the last two-and-a-half years covering the migrant crisis, travelling from Calais to Lesbos to northern Turkey, and most recently off the Libyan coast.
Eurosceptic parties, indeed the politics of populism, represent a destabilising force for national markets and beyond, and for financial markets. There is continued momentum behind far-right parties. But what does the inflow of migrants and refugees – and Mitchell underlined the fluidity of these terms – mean for markets? There will be market-positive stimulus, and he pointed to the example of Germany, where authorities have set the limit at two million refugees and committed to spending €12,000 per refugee, which he argued equated to roughly €30 billion of financial support. This translates into 15-20 basis points of GDP growth stimulus. However, integration takes time, a situation that is problematic in the face of growing questions from the electorate about these policies.
Mitchell also raised the important issue of moving beyond a European lens for the migrant crisis as there are significant implications for emerging markets. He questioned the extent to which the crisis represented diminishing opportunity, particularly in frontier markets of Sub-Saharan Africa. Emerging markets investors are keenly aware of understanding country, governance and sovereign debt risks, and consider institutional strength, transparency and accountability. Investors should be concerned by cuts in multilateral funding – for institution-building, for instance – as this will impact future migrant flows.
The role of investors
The panel argued that while inequality is a structural issue, and that investors can’t and shouldn’t be responsible for fixing the political and economic issues that are driving this change, they are “on the hook because they caused a lot of this inequality.”
In an attempt to redress the situation, considering ESG factors offers an answer. For Wood, economic inequality looks like a term that covers a lot of the “laundry list of topics in the S of ESG.” He suggested investors needed to look at how they evaluate what they are investing in; for compensation, for the right to work, for the right to collective bargaining, and labour rights. These are all issues that allow investors to assess how a corporation or firm is contributing to inequality and potentially causing long-term instability.
Financial system failure is impacting policy, prompting investors to increasingly consider geopolitical issues. Investors are starting to ask for evidence in investment management processes for identifying social factors like human rights abuses and labour issues.
To address this sea change, Birgden argued that investors “need new lenses to sort these things out and we need to identify our blind spots.” She called for geostrategic themes to be incorporated into macro-economic research and pointed to the need for new models. For her, “beliefs drive models...these need to change,” with the story of disruption included in them.
In his summation, Kell highlighted the paradoxical nature of our world, which is increasingly inter-dependent while, at the same time, our collective ability to proactively tackle some issues is lacking, and multilateral systems are weakening. With this in mind, he suggested that investors had another key role to play – that of stewardship, including formulating their codes. He argued that this approach could be aligned with the work of the PRI and the UN’s Sustainable Development Goals (SDGs) to amplify the underlining key messages.