Inequality of opportunity: The case for investors and corporationsMay 1, 2020By Anne Matusewicz, CAIAResponsible Investment Strategist, Calvert Research and ManagementBelow find the second installment of our Inequality Series, published on the first Friday of every month. Washington - Is inequality one of the defining issues of our time? We at Calvert certainly think so. Global events like Occupy Wall Street, civil protests in Chile and Brexit suggest this may be the case, as they are considered to have been fueled by inequality. The COVID-19 outbreak has further placed inequality in the spotlight by exposing inequalities beyond income and wealth, as we discussed in the first article of our Inequality Series. Previously, we defined inequality of opportunity as the unfair distribution of opportunities due to circumstances that are beyond control of the individual, like ethnicity and gender, and can have an impact on an individual's achievements in life, thereby significantly compromising social mobility and contributing to income inequality.In this article, we discuss the case for companies and investors to address inequality of opportunity. While the social benefits of the private sector addressing inequality are clear, the economic rationale for tackling social problems is not always well understood. Given their influence, resources, multinational reach and capacity to innovate, companies and investors are in a position to drive economic growth that both integrates and promotes greater equality of opportunity. The case for companiesIn the ESG space, issues that are less understood and harder to quantify, like inequality, may have their materiality underestimated. Until now, the financial materiality of ESG factors has generally been discussed in binary terms, whereas in reality it is dynamic - something that changes over time and in response to global trends and events. But materiality does not always have to be manifested by way of cause and effect to affect a company's business model. If inequality threatens the fundamental pillars of a business (e.g., supply chains or the political environment), then there will always be an element of materiality to it, whether that materiality is recognized or not. Companies must be involved in determining the financial materiality and strategic relevance of social issues for themselves since investors may not have access to company-specific information regarding value drivers and key stakeholders. Therefore, providing tools for companies to properly evaluate the materiality of complex issues such as inequality is of paramount importance.As part of our work, we investigated if large and publicly listed companies have identified inequality of opportunity as a strategic and material issue in corporate communications. Our research found that:Senior leaders from the world's largest companies are increasingly vocal about the responsibility of the private sector to promote equality of opportunity because it will benefit the global economy and catalyze growth. These companies have started quantifying the social impacts and business benefits of acting on inequality of opportunity.The Sustainable Development Goals (SDGs) can offer a useful framework for companies to start measuring their societal contributions and link their efforts to corporate strategy.The ambition to generate social impact can lead to innovative and profitable new products and services.Increasing opportunity for employees can offer a competitive advantage and improve talent attraction and retention as well as employee engagement.Although many avenues to address inequality are company- and industry-agnostic (such as providing minimum wage and health care coverage), the role that a company can play in tackling this systemic issue differs based on the business model, industry and location of operations. Simply increasing the minimum wage likely won't effectively drive positive outcomes over the long term - systemic change is needed to have a lasting impact. Companies with a better understanding of societal values in a community (as well as drivers of social inequality) can provide more value to employees in those communities while aligning actions with strategy. Companies should evaluate their performance not only by the efforts they undertake (their "inputs"), but also by the trajectory of the issues they seek to impact (their "outcomes"). Only when more companies move away from approaching social impact as a philanthropic issue, and instead integrate equality of opportunity into their business strategies, will we likely start seeing scalable solutions and lasting impact.The case for investorsIncreased inequality represents a systemic risk factor with significant negative implications for economic activity and financial stability. As witnessed in conjunction with the spread of COVID-19, severe inequalities related to the opportunity to be healthy, educated and employed can further hinder the ability of communities and businesses to cope financially. Additionally, inequality of opportunity can represent an important driver of uncertainty, especially for large investors and asset owners that depend on long-term economic growth. Thus, inequality of opportunity, as both a local and global challenge, might alter the risks and opportunities that help us assess potential investment opportunities.Investors require data to be able to analyze a company's performance against a certain issue. Although current reporting and ESG scoring frameworks include a social category, our research has found a relatively limited number of metrics that meaningfully capture company performance on reducing inequality. Investors interested in evaluating private sector impact on inequality of opportunity need to engage with companies and ask the right questions to get quantifiable information and to encourage prudent and targeted disclosure of inequality of opportunity-related issues. Bottom line: Calvert has partnered with KKS Advisors1 to develop a comprehensive framework for better understanding the drivers of inequality and actions that companies and investors can pursue together and individually, in an effort to start a new dialogue on how to embrace inequality of opportunity as a systemic issue. We envision a future in which actors collaborate on common challenges to yield the highest long-term social impact and value. This framework seeks to provide a helpful tool for companies and investors to start shaping their strategies with inequality of opportunity top of mind.