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The macro challenge: worsening global income inequality 

We have an income inequality crisis and the trend is worsening.  Income inequality, that is the unequal distribution of income throughout a population, has become a ubiquitous challenge on a global scale; it is one of the Social Megatrends in the realm of ESG and sustainability.  The UK is no exception. 

Globally, according to the World Inequality Report 2022, the poorest 50% of the population own just 2% of total net wealth.  In the UK, reports from the High Pay Centre illustrate the ongoing trend of income inequality via the ratio of median pay of FTSE 100 CEOs to median UK wages, which has leapt from 1:11 in 1980 to 1:118 in 2022. By lunchtime on the 4th day of January this year, FTSE 100 CEOs earnt the UK average salary.  

Whilst governments have a pivotal role to play in reducing income inequality, corporations and the private sector must also take a role.  The World Inequality Report 2022 states that nations have become richer, but governments have become poorer, meaning that wealth is increasingly in private hands.  In the UK the average income hasn’t changed significantly in 40 years, meaning this privately held wealth is reaching only the higher echelons of society; i.e. the rich are getting richer. 

The World Inequality Report 2022 report shows this trend has escalated during COVID19.

Income inequality is a complex macroeconomic challenge, however one of the key drivers is access to equal opportunities. People from disadvantaged backgrounds have fewer opportunities to climb the socio-economic ladder.  The OECD, for example, estimates that it takes nearly five generations for children of low income families to earn their country’s average income.

The UK is the worst performing European OECD country when it comes to socio-economic equality, or social mobility.    

The UK’s struggle with social mobility

Access to quality education is a key challenge for individuals from lower socio-economic backgrounds (LSEB) in the UK who face many barriers to academic success, which has been exacerbated by the pandemic. The Social Mobility Foundation (SMF) found that those from disadvantaged or low-income backgrounds in England were less likely to have received the help they needed to restore learning lost during the pandemic, widening the gap between higher and lower SEB receiving top grades in the last two years. 

Although exam results may not matter significantly once you find a career, they are crucial in getting you in the room in the first place. This is especially the case for those from LSEB who typically lack the social network that can be pivotal to knowing a “professional” role exists in the first place, as well as the informal routes that networks provide in getting a foot in the door via an internship or graduate scheme.

And once in a role, there are further challenges encountered in career progression. Mind the Gap 2022 Social Mobility progress report states that social class is the biggest barrier to career progression compared with any other diversity statistic, and when combined with, for example, ethnic diversity, the impact is even greater.

All added together, this creates a real social mobility challenge. The 93% Club, a UK state school members initiative with a social mobility objective, states that although only 7% of the population has been educated in public and private schools, they account for 54% of FTSE 100 CEOs. 

The problem is particularly pronounced in the finance sector.  A report from The Bridge Group identified that 89% of senior roles in financial services are held by people of higher socio-economic backgrounds and that people of lower socio-economic backgrounds (LSEB) progress 25% slower than their peers, with no clear link to performance.  

Why does social mobility matter?

Improving socio-economic diversity goes beyond what is right and fair for individuals.

At a society level, research shows that countries with less income inequality are happier.

For companies, improving diversity of thought within an organisation has far reaching benefits, from improving innovation and creativity, bringing new products and services to new prospects and markets, to reducing costs by reducing attrition and increasing productivity.

A socially mobile UK will create a more resilient and long-term sustainable economy.  Oxera research for the Times Education Commission finds that increasing UK social mobility, even modestly, to the level that is average across western Europe, could increase annual GDP by £45bn, in the long term (cited as a conservative estimate). As the OECD states, income inequality is “not only a moral concern” it also “undermines economic and social prosperity.”  Additionally, research shows that countries with less income inequality are happier; which can help to reduce health costs and the wider challenges on the economy and society that unhappiness brings.

So why isn’t there more corporate focus?

In recent years, ESG and sustainability has been been rising up the priority lists for corporations, as they respond to pressures from stakeholders including regulators, investors, clients and employees; as well as developing a broader understanding of how these intangible assets, such as a diverse workforce and natural capital, can not just benefit and support an organisation’s strategy, but are increasingly understood as critical elements to long term survival and success.

However, social mobility is often not considered as a priority or focus in ESG strategies. Environment has evolved the furthest, perhaps because the threats posed by environmental impacts have been better quantified, priced into valuations and increasingly embedded into regulation. The “S” of ESG has increased focus on Diversity Equality and Inclusion (DEI) initiatives, but these have overwhelmingly focused on Gender, as the only mandated reporting requirement for UK firms with and typically easier to collect data and monitor.

Data, reporting standards and regulation are typically the common denominators in affecting change. Whilst social mobility has been traditionally data poor and the subject of few requirements, there is reason to believe this is changing.

In 2024, signals of increased scrutiny on diversity are mounting

The end of 2023 and the beginning of 2024 has seen a series of updates and consultations signalling regulators and corporate governance alliances getting serious about diversity in new ways. The latest QCA Corporate Governance code which will come into force in 2024, has an increased focus on diversity and independence of boards, pushing the need to avoid groupthink, and specifically calls out socio-economic diversity alongside gender, ethnicity and other diversity factors as critical to good practice decision making. The updated FRC UK Corporate Governance code similarly has language indicating that firms are expected to “value diversity” if they are to succeed in the long term.

For financial service firms, consultations by the FCA and PRA at the end of 2023 propose a new regulatory framework which would place a great emphasis on diversity, not only to enrich decision making, but also to reflect the need for the sector to understand and provide for diverse consumer needs.   Key features of these consultations are an expectation of enhanced employee data gathering across a range of demographic characteristics and the setting of diversity targets to address underrepresentation, overseen by the board. Whilst not all firms will be considered in scope for target setting, and the regulators will not prescribe which areas of diversity a firm must focus on, these consultations are the clearest indication that social mobility is likely to come under increased scrutiny; organisations that can anticipate reporting requirements and embed diversity across corporate and ESG strategies are likely to minimise the impact of this scrutiny to business as usual and reap the benefits outlined in the earlier half of this article.  Furthermore, the Asset Owner Diversity Charter has recently added socio-economic diversity to its Asset Manager Diversity and Inclusion Questionnaire, which aims to standardise complex diversity metrics beyond just gender to improve on disclosures.

Social mobility can form a key part of a company’s ESG reporting

The case for focusing on social mobility is underscored by increasing investor and governmental focus on ESG reporting requirements. The world of ESG and sustainability reporting has boomed in recent years and thankfully since COP26 in 2021, there has been a focus on global consolidation. There are three leading global reporting initiatives

• Global Reporting Initiative (GRI) -The GRI standards offer global guidance to advance the practice of sustainability reporting. They are voluntary but seek to provide consistent information by sector and topic on how to effectively disclose sustainability information. They also provide a framework to link disclosure to the UN Sustainable Development Goals (UN SDGs) 

• European Sustainability Reporting Standards (ESRS) – The EU’s Corporate Sustainability Reporting Directive (CSRD) requires companies incorporated in, or doing significant business in the EU, to publish regular reports on the social and environmental risks they face, and on how their activities impact people and the environment.

• IFRS sustainability standards, alongside SASB (which are being incorporated) – Provide a framework for reporting financial materiality in the context of sustainability factors on short, medium and long-term enterprise value. Currently voluntary, the UK Government and FCA are reviewing the IFRS standards (S1, S2) alongside existing, overlapping environmental reporting requirements for firms. Updates are expected in July this year.

Each of these frameworks outline an expectation that firms will focus on making progress with the “S” factors of ESG that are most important, or material. Materiality is unique to a firm, and considers a firm’s sector, country, products, supply chain, and stakeholders. However, given that 51% of the UK working population are considered lower working, higher working or intermediate occupational class³, socioeconomic diversity at all levels of an organisation is increasingly being examined by regulators, and the benefits for firms are far reaching, there is an argument that all firms should be developing a social mobility strategy as a priority.  

What should companies do?

Whether it is the ethical and/or commercial argument for focusing on social mobility, increased regulatory scrutiny or meeting ESG reporting requirements, companies must start with understanding where they are today to take action. Both the ESRS and IFRS standards require companies to determine the material ESG issues to focus on; for many, social mobility should be high on the agenda. At the highest level: 

1. Define and Baseline: 

• Decide how you will define and categorise employee socioeconomic backgrounds. There are various metrics used given the multifaceted nature of an individual’s background however the Social Mobility Commission recommend to use parental occupation of the main household earner when aged 14. Companies should review discussions on the subject and chose the most appropriate definition
• Collect and interrogate data covering recruitment, staff levels, progression. There is increasing good practice guidance available on how to calculate socio-economic pay gap which continues to be a meaningful metric for change in gender equality 
• Understand the current company culture as it relates to social mobility – review formal and informal networks, role models, recruitment and progression practices 

2. Set Meaningful Goals:

• Understand what peers and leaders are doing. Organisations like Progress Together and Addidat can help collect data and benchmark against peers.
• Set meaningful, data driven targets and track progress against them at board level 
• Drawing on ESG common practices and reporting frameworks can be useful in this phase in ensuring any focus on social mobility is more than words delivered in a presentation. The ESRS, SASB and GRI frameworks offer useful guidance on good practice employee demographic reporting, extensible to social mobility

3. Awareness, Honest Review & Action

• Communicate data, goals and plans transparently and often 
• Pay particular attention to people development processes including recruitment, onboarding and performance management. Where companies recruit individuals from under-represented socio-economic backgrounds but fail to offer ongoing support, the mid and long term success is limited. More than this, failure to provide this support may decrease social mobility in the longer term
• Take advice from excellent initiatives that focus on this subject. From support with inclusive recruitment, apprenticeship and internship good practice to advice on socioeconomic data collection and measurement, Diversity Project, Social Mobility Commission, Progress Together, Sutton Trust, Bridge Group and many others continue to provide resources for companies to take meaningful action

Summary

The UK’s social mobility crisis comes at a cost to the economy and to UK companies, but the issue remains an aspect of ESG on which businesses have struggled to adequately engage.  At a macro level, there is a business case for focusing on socioeconomic diversity linked to the  productivity that comes with adequate alignment of talent to jobs.  For individuals and companies, social mobility should be considered alongside the wide reaching benefits of maintaining a more diverse workforce, including innovation, higher retention rates and  increased employee wellbeing and engagement.  Companies should also consider the opportunity to embed this aspect of the “S” of ESG into their overall reporting strategy to learn from established reporting practices, make progress quickly and get ahead of any inbound investor scrutiny on the issue over the coming years.  By using data effectively, driving transparent measurement and disclosures, setting realistic goals and committing to repeated scrutiny of the topic, companies can affect wider societal benefits, whilst gaining access to a potential commercial boon. 

Links to references

1. World Inequality Report, 2022 https://wir2022.wid.world/executive-summary/
2. Harvard Business Review:  Income Inequality Makes Whole Countries Less Happy https://hbr.org/2016/01/income-inequality-makes-whole-countries-less-happy
3. Social Mobility Commission, State of the Nation 2023 report assets.publishing.service.gov.uk/media/64f853399ee0f2000fb7bf80/state-of-the-nation-2023.pdf