Field Notes: Inequality in the Age of Financialization

With the gap between rich and poor growing, a new paper offers four potential avenues investors might consider to bridge the economic divide.

In this discussion paper from the Initiative for Responsible Investment, Harvard’s David Wood looks at four potential avenues investors can take to close the growing wealth gap. Wood argues inequality can negatively affect economic growth in several ways:

Reduced consumer demand: the wealthy tend to save more than other consumers, so wage stagnation and the resulting inequality may reduce the spending power of the poor and middle classes; in addition to reduced ability to save for retirement.

Increased economic instability: inequality may drive bubbles, as those without economic resources take on debt for consumption.

Rent-seeking and political power: concentration of wealth may lead to increased political power and influence, capturing economic rents at the expense of productive activity.

Exacerbation of social instability: as the gap between the haves and the have nots grows, so might social tension, and political and social instability. Inequality can even directly harm human well-being, being linked for instance to poor health outcomes, and reduced investment in education and development.

Similarly the report offers four avenues for investor engagement on inequality.


Social issues related to inequality may already be integrated into responsible investment analysis and risk management tools used to inform investment decisions and determine shareholder engagement. Related issues include: excessive or poorly aligned executive compensation within firms; efforts to improve corporate reporting on disparities between executive and worker pay; workforce relations and management practices (using indicators such as stable fulltime employment, health and safety performance, corporate strategy that views labor as a source of value creation rather than simply a cost center and worker engagement as proxies for quality of management and potential predictors of future performance). In these cases, inequality becomes a central organizing theme linking diverse aspects of investor analysis and engagement.


Bottom of the Pyramid strategies that focus on the delivery of goods and services to the poor have been put forward as a means to mitigate poverty and so reduce inequality. Institutional investors, frequently labor-affiliated, have introduced responsible contractor policies particularly to engage private equity, real estate, and infrastructure funds on labor practices, and in the process have helped give rise to investment vehicles that explicitly call for fair labor standards, access to collective bargaining and quality job creation. These may be seen as addressing the “hollowing out of the middle class” associated with growth in in country inequality.


One familiar line of argument to responsible investors is the link between short- termism in the market and inequality. The fees paid for financial services have received considerable attention since the financial crisis, as compensation schemes – which at the higher end of finance have become emblematic of increasing inequality – are linked to short-term risk taking and speculative investing at the expense of long-term productive activity. This charge extends beyond the finance industry itself. The link between executive compensation and share price performance may encourage short-termism and inequality generating compensation schemes by corporate executives. Cash allocation practices, such as share buybacks, may extract value from companies in the short term at the expense of wage increases and other investments that might drive long term value creation…The links between financialization and inequality may bring responsible investors to look at their own role in (de)stabilizing the system.


There are also specific topics emerging in public discourse in which investors may find a prominent role. One example is the intense focus on tax evasion and avoidance over the past few years, exacerbated both by public sector austerity programs and new availability of information on the scale of the issue. To the extent that tax evasion and avoidance drive inequality and are a sign of rent-seeking and political capture that distinguishes productive from unproductive economic activity, they become important issues for longterm investors concerned with ESG issues.

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