Rising inequality is posing a growing threat to the global economy.
The widening gulf between the richest and the rest; rolling cost-of-living crises; intergenerational tensions; the approaching artificial intelligence revolution – these are all contributing to intensifying social and economic pressures that are prompting a growing number of investors to begin to act on the issue.
However, much like climate change and nature loss, inequality is primarily a system-level risk. That makes it challenging – if not impossible – for large, diversified investors to effectively manage alone.
It requires system-level thinking, better information, and frameworks to support decision-making. And it requires a shared understanding and collaboration between investors, companies, policymakers and civil society actors.
Intensifying inequalities
Inequality is on the rise. The top 10 percent of earners globally currently receive 53 percent of total pay while the lowest-paid half of workers receives just 8 percent – and this gulf is widening.
The UN estimates that more than one billion working people globally – about one-third of the workforce – do not earn enough to afford a decent standard of living. Meanwhile, post-Covid asset-price inflation has seen the world’s richest become ever wealthier.
In many parts of the world, young people are accumulating wealth more slowly and buying housing later than previous generations. Economic and political power is increasingly concentrated in older cohorts, putting the social contract between generations at risk.
On top of this, AI threatens to up-end labour markets, reshaping skills requirements and how people work. While the impacts of AI are impossible to predict, its benefits are likely to be unevenly distributed and it risks widening existing gaps in income opportunity, job security and participation in the digital economy.
A system under strain
Individual companies’ actions – bearing down on wages, squeezing suppliers or outsourcing labour to the gig economy, for example – can be economically rational for them and entirely legal.
But these effects, aggregated at the system level, drive inequalities that erode consumer demand, reduce corporate profitability, and risk social and political instability.
This instability is putting entire political and economic systems in jeopardy. The political polarisation we are already seeing around the world has its roots in economic inequality – and it poses threats to financial and economic stability.
Instability makes companies less productive, strains supply chains and imperils efforts to forge consensus on global challenges like climate change and nature loss.
Unhedgeable risk
For many large investors, their fortunes are inextricably tied up with macroeconomic performance. Large pension funds, insurance companies and sovereign wealth funds invest across entire economies – such so-called universal investors are unable to hedge macroeconomic exposure, with their long-term performance tending to track the broader market.
Some of these investors are joining the dots between inequality and global economic performance.
For example, University Pension Plan Ontario has stated that addressing inequality “reflects our fiduciary duty and is in the best interests of our members”. Railpen in the UK includes inequality – alongside climate change and governance failures – in a recent report to help investors address financially material systemic risks.
And in his latest letter to BlackRock investors, the investment giant’s chair, Larry Fink, observed that wealth created over recent generations “flowed mostly to people who already owned financial assets”, warning that “AI threatens to repeat that pattern at an even larger scale”.
But these investors and others that are beginning to think about the systemic and financial implications of rising inequality face persistent obstacles. They lack the visibility they need to understand and manage these issues. They are grappling with an issue that lacks harmonised tools and metrics to enable them to understand company-level exposures and gauge changing performance.
A new framework to understand and address inequality
That is why a group of financial institutions, businesses, civil society groups and labour leaders came together to create the Taskforce on Inequality and Social-related Financial Disclosures (TISFD).
The taskforce is a global initiative to develop recommendations and guidance for businesses and financial institutions to understand and report on impacts, dependencies, risks and opportunities related to people.
We are following a playbook already deployed to address other system-level risks – those posed by climate change and nature loss. The Task Force on Climate-related Financial Disclosures (TCFD) and the Taskforce on Nature-related Disclosures (TNFD) have transformed investor understanding of, and engagement with, climate and nature issues.
Our approach mirrors theirs, and because people, nature and climate are deeply interconnected, it is designed to enable an integrated approach to the three issues.
A clearer dialogue with companies around inequality is not only of benefit to investors. There is evidence from other reporting frameworks and processes that they can impose discipline and rigour on how companies think about, identify, measure and manage issues that can have material impacts on their performance.
Promoting common metrics and disclosures can prevent the proliferation of enquiries and disclosure requests from investors, regulators and other stakeholders.
Framework release and consultation
On Tuesday, we released TISFD’s draft disclosure framework. It sets out conceptional foundations and a first draft of our disclosure recommendations. Later drafts will include an assessment methodology and a small number of core indicators and metrics.
Like TNFD, developing the framework will be an open, iterative process, involving piloting, consultations and extensive dialogue ahead of the publication of the final framework in late 2027, to ensure that it both achieves its purpose and is as practical, relevant and usable as possible.
As we embark on this process, we would encourage financial institutions, businesses, civil society and other stakeholders to review the draft, participate in our consultations and engage with us in this effort to address inequality and other people-related challenges.
It is only through collective effort that we can ensure that our economic and social systems are sustainable, build resilient businesses and portfolios, and enhance wellbeing and prosperity for all.
Simon Rawson is executive director of the Taskforce on Inequality and Social-related Financial Disclosures (TISFD).
