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Levelling up for a new social contract

The global financial crisis of 2007 and the COVID-19 pandemic widened social inequalities, with vulnerable communities hit the hardest. Governments, investors and companies all have a duty to address the issue.

Levelling up for a new social contract

Companies as well as governments have a role to play in reducing inequalities, yet a vast proportion of companies are not meeting their social responsibility to act in the interest of all stakeholders.

Major shifts are also changing the nature of society. Gone are the days when families had a male breadwinner while women looked after the young and the old, people married for life, and the skills learnt at school lasted a lifetime.

The loss of well-paid jobs is a significant driver of political discontent in advanced economies, while in some countries, like the UK, the cost of basic necessities such as housing, education and healthcare has risen so fast over the last 20 years that it has absorbed any gains in income, making households feel worse off.

Yet without reasonably performing economies and decent numbers of jobs, including high-paying ones with career opportunities, the ability to deal with associated social and community issues in struggling places will be undermined.

Why this matters for investors

If economic growth is weak, societies are unstable and poor policy decisions are made. That will impact most companies, reducing investment returns.

If economic growth is weak, societies are unstable and poor policy decisions are made

Governments have begun to recognise this threat and are putting measures in place to address it.

Companies – and markets at large – may also come under pressure from the public if people continue to feel they are behaving unfairly and serve only the wealthy.

Mending our social fabric requires investment

Governments should invest in training – skills of the future and lifelong learning in particular – to help underperforming regions gain a critical mass of higher-skilled, higher-paid jobs, so they can connect with the leading national centres of economic activity.

Governments should also improve infrastructure, from affordable housing to transport and digital connectivity.

High costs for a high return

Investing in health, housing, education, transport and connectivity will come at a significant cost. Companies and investors need to play their part by focusing on creating more winners and promoting innovation and productivity. While this can be achieved partly through regulation and public spending, the private sector has an important role to play, in terms of investment and economic activity.

Businesses can address concerns about social mobility by thinking about the basics

Businesses can address concerns about social mobility by thinking about the basics: where they set themselves up, who they hire, what kind of flexibility they give workers, what support is given to workers from different backgrounds, as well as fundamentals such as paying a living wage.

Governments and investors will need to incentivise this change, as well as investing in the infrastructure and workforce skills needed to revive communities. Much of the funding can be put to more efficient use if it is scrutinised by outside investors, including patient investors willing to provide seed money or finance long-term infrastructure projects.

Improvements in commercial real estate and public spaces are also required. These could include housing projects aiming to provide long-term, affordable rented housing for families, such as the ones in the Netherlands, Spain and the UK, as those who can no longer afford to buy increasingly move into long-term rentals.

Recognising the risks

The policy side is probably the area that presents the greatest risks, and continued dialogue with governments is important.

Governments must think carefully about how they replace closing industries

For instance, as net-zero industries develop and new jobs take the place of carbon-intensive ones, governments must think carefully about how they replace closing industries, particularly where one factory or industry is central to a community and its closure will create mass unemployment. At the same time, climate change could make some areas uninhabitable within a few years, due to rising natural disaster risks.

Short-term political and economic incentives also need to be better aligned with what we know we need to do in the long term: transitioning to a more sustainable world and levelling things up. Safeguards should be built into energy transition plans to ensure people aren’t placed into energy poverty.

Three points to remember

  • Inequalities have been widening for decades. The global financial crisis and the pandemic accelerated this trend
  • Inequality undermines economic growth and society, but it can be addressed through the actions of governments, companies and investors
  • Significant public and private investment will be required, together with incentives to change the way companies behave

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