360 Report $CompanySectorName$ $StoryName$$ReportType$ Inequality: An investor guide Social & Business Ethics 7 April 2016 Inequality What’s it all about? From the Occupy movement to Piketty’s bestseller, Capital, inequality has become a pervasive economic theme since the financial crisis. In this report, we launch the Kepler Cheuvreux Inequality Footprint to highlight the risks to business and their influence on factors of socio-economic Main author inequality. Our focus covers not just wealth inequality but also the material Sudip Hazra Head of Sustainability Research impacts from corporate misconduct, the facilitation of social mobility, & Responsible Investment sustainable supply chains, underserved product areas and emissions [email protected] reduction which affect both shareholder value and levels of social and +33 1 70 81 57 61 income disparity significantly. The cross-sector framework includes the consumer, banking, capital goods, telco, extractives and pharma sectors. ESG research team Biographies at the end of the report IMPORTANT. Please refer to the last page of this report for keplercheuvreux.com “Important disclosures” and analyst(s) certifications. This research is the product of Kepler Cheuvreux, which is authorised and regulated by the Autorité des Marché Financiers in France. Social & Business Ethics 360 in 1 minute Key findings of the report Wage inequality already a shareholder issue The CEO Pay Ratio could be hailed as the inequality metric of our time. Through the SEC’s disclosure requirement on a median wage to CEO pay multiple, inequality of income is being established as an indicator for investors. Sectors with large low-wage contingents are responding to numerous forms of wage pressure, whether regulatory (UK “Living Wage” law), or as responses to business pressures (e.g. Walmart and McDonald’s in the US). Gender pay disclosure requirements are also gradually gaining momentum. • Indirect sphere of influence on inequality remains neglected Corporate conduct has systematic impacts on numerous forms of inequality beyond direct transfers of capital. Inequality can be influenced through practices in hiring which enable social mobility, supply chain requirements, product and service range and business ethics. The wage share of value added in many regions has fallen despite productivity rises. In absolute terms, the consumer spending upon which certain segments of earnings growth may depend may be impacted. • Market opportunities for underserved populations Access to medicine, the digital divide, bottom of the pyramid markets: increasing access to underserved consumers presents a long-term opportunity in numerous sectors and bridges socio- economic disparity. • Increased wealth doesn’t have to mean increased emissions The largest GHG emitters have been the richest nations, while the future impact is felt most by the poorest through rising sea levels and extreme weather events. Companies positioned in emissions reduction and adaptation technologies have a key role in levelling this global inequality implicit in climate change. • Asset owners and listed firms - the world’s wealth redistributors Large global companies are both repositories for global wealth creation and instruments of its distribution, through large direct employee bases, often much larger dispersed supply chains, tax payments to national and local governments and above all returns to executives and owners of capital. The inequality theme could become a major long-term concern for both asset owners and managers, and responsible investment will be central in the manner in which capital is allocated. 2 keplercheuvreux.com Social & Business Ethics Kepler Cheuvreux Business Ethics Series Kepler Cheuvreux’s Business Ethics research combines a top-down approach, taking into account regulatory changes and trends in litigation, and breaks these down into company-specific impact analyses, highlighting company positioning in the most relevant areas. In a series of recent reports that have spanned corruption, anti- trust, tax avoidance, conflict minerals and soft law for investors, we focus on the material impacts of business ethics issues from several angles applied to the listed equity domain. Beyond this, the objective is to provide frameworks for investors to constructively engage with companies that are part of their investment processes. We draw on the expertise of 75+ Kepler Cheuvreux analysts and our global network of partners and specialists including NGOs, academics and industry experts. Antitrust & cartels: from cooperation to collusion: Document link Tax me if you can: game over: Document link Corruption indices: from disclosure to risk exposure: Document link Soft law liability & violation : Document link 3 keplercheuvreux.com Social & Business Ethics With thanks to: High Pay Centre, London – Paul Marsland Oxfam - Rachel Wilshaw, Ruth Mhlanga, Radhika Sarin, Kaori Shigya ShareAction - Lisa Nathan 4 keplercheuvreux.com Social & Business Ethics Thematic context in six charts Chart 1: Reducing inequality - key impacts Chart 2: Rising spotlight of inequality - media hits since 2000 Source: Kepler Cheuvreux Source: Bloomberg Chart 3: Productivity disconnected from wage gains Chart 4: Interconnected investor risks from inequality 118 Labour productivity 115 index 112 109 106 103 Real wage index 100 Source: ILO Source: WEF Chart 5: Lifestyle emissions tied to inequality Chart 6: Staff costs adjusting in VA distribution of banks 60% 150% 40% 100% 20% 0% 50% -20% -40% 0% Tax / Op. Profit Investment / Op. Profit Dividends / Op. Profit Staff costs / Added Value eq. (RHS) Source: Oxfam Source: Kepler Cheuvreux 5 keplercheuvreux.com Social & Business Ethics Contents Kepler Cheuvreux Business Ethics Series 3 Thematic context in six charts 5 Stakeholders: inequality in their own words… 9 Executive summary 10 Banks 12 Consumer sectors 12 Healthcare 13 Extractives 13 Capital goods 13 Telecoms & ICT 14 Reduced inequality need not conflict with shareholder returns 15 Risks and opportunities overlap 16 An opportunity for asset owners 19 Responsible investment has a central place in Piketty’s R>G observation 20 Is there a fiduciary duty to reduce inequality? 20 Inequalities of wealth and income 22 US and UK inequality outliers among OECD countries 22 Lower-income households: greatest impact on inequality 23 Middle-class consumers: narrowing the gap 23 Negative impact on economic growth 25 “The rich are different from you and me…” 25 From minimum wages to living wages 26 Living wage: Motivating employees and shareholders? 27 The pay ratio: a metric for our times? 28 Broadening the context: inequality’s multiple forms 32 Income and social disparities: beyond economic indicators 32 Capturing intangibles: Social Progress index 32 Distributing value: a changing balance 34 Does corporate philanthropy still have a place? 34 Value-added distributions: Kepler Cheuvreux universe 37 Measuring net impacts: a framework 39 The inequality portfolio is a set of interlinked thematics 39 Enabling social mobility and human capital 42 Automation creates value but also extremes of wealth 42 6 keplercheuvreux.com Social & Business Ethics Non-standard work in low-paid sectors 43 Education and training - the key to social mobility 43 Diversity - casting the widest net for talent 44 Youth opportunity and long-term human capital impact 45 Business ethics, misconduct and socio-economic impacts 49 Snowball effects of systemic impacts resulting from misconduct on inequality 49 Accountability for transactions – lax KYC propels inequality 50 Tax minimisation – aggressive forms sustain wealth disparities 50 Corporate bribery: distributing wealth upwards 51 Squeezing the poor: anti-competitive behaviour 51 Tax: inequality’s pivot point 52 Income inequality increases business human rights risk 55 European migration: emerging risks 58 We follow the rules (that we make): influence and lobbying 61 Shareholders and unions: a shared concern? 63 Environmental impacts: unequal exposure 67 Resilience to climate change impact correlate to levels of inequality 71 Underserved and lower-income consumers 72 Low-cost products and the supply chain squeeze 72 Sector analysis 77 Private banking and luxury goods 77 Banks 78 Telecoms, ICT and the digital economy 89 Consumer sectors 94 Food & beverages 99 Healthcare 104 Extractives 112 Capital goods 119 Appendix 124 Investor engagement guide 125 Inequality Footprint Screening 126 Green Impact Universe 128 Research ratings and important disclosures 132 Legal and disclosure information 135 7 keplercheuvreux.com Social & Business Ethics 8 keplercheuvreux.com Social & Business Ethics Stakeholders: inequality in their own words… Bank Chief Executive Officers “There might be an Einstein or a Steve Jobs out there, and if we fail to give them a chance to realise their potential, it hurts our economy—and our society… we would like to see more collaboration between government and business. We’re all talking about improving income inequality and expanding opportunity…It is true that income inequality has kind of gotten worse…you can take the compensation of every CEO in America and make it zero and it wouldn’t put a dent into it.” Jamie Dimon, CEO, JP Morgan “It’s not a business issue. This is a moral and society issue. Businesses work on behalf of their shareholders with proper governance, regulated by a regulator. This is a broader society issue.” Morgan Stanley CEO, James Gorman ”We've done a better job in this country at creating wealth than we