null Episode 17: Income Inequality and Stimulus
Double Take podcast

Episode 17: Income Inequality and Stimulus

00:45:01
Double Take podcast Audio Responsible Investing Equity Multi-Asset Index
April 2021
Episode 17: Income Inequality and Stimulus

Our latest episode of Double Take explores the role of private corporations and policymakers in addressing the growing gap in income inequality.

Rafe Lewis: Hello and welcome to Double Take, episode 17. I'm Rafe, your co-host and director of Mellon's investigative research team.

Jack Encarnacao: And I'm your other cohost and investigative researcher, Jack. Today, we plumb the depths of a topic that for the long and storied existence of Wall Street has rarely entered into the minds of investors and traders, income inequality.

Jack: But I think it's safe to say the days when investors can stick their heads in the sand and ignore what's happening on Main Street are rapidly receding.

Rafe: That's right, Jack. It feels like the COVID 19 pandemic and the resultant economic recession, they've surfaced income inequality as a front burner concern for investors, as shareholders increasingly focus their attention, not only on returns and dividends, the classics, but on the real world impacts of the companies in which they invest.

Jack: Exactly. And it's a topic that the United States government is increasingly casting an eye towards too. Exhibit number one came in October, 2020 when the president of the San Francisco Federal Reserve Bank, Mary Daly, gave a speech in which she acknowledged that the Fed has much more to do to ensure that America achieves full employment and price stability in the U.S. economy. In essence Daly was saying, unless we hit a 2% inflation rate, the Fed will not take its foot off the gas to stoke economic growth, because so many Americans have no savings, few opportunities to generate wealth, and fewer skills to offer employers.

Rafe: So we're going to try to explore this theme with a couple of fantastic guests who should offer some great nuance takes on this.

Rafe: From outside of Mellon, we bring you Megan, she's a senior fellow at Harvard University's Kennedy School, where she's working on a book examining the gaps between theory and reality in economics today, and how they prevent us from addressing the biggest economic, financial, political, and social issue of our time, which is inequality.

Rafe: And then from inside of Mellon, we're going to bring you the incomparable Julianne McHugh, who's a senior portfolio manager here, and she happens to also be the chair of our firm's ESG Council. That's Megan.

Jack: Megan, welcome to Double Take.

Megan Greene: Thanks for having me.

Jack: Oh, it's our pleasure. So maybe we can start kind of at a fundamental level. How can you convey to our listeners state of income inequality measurement? How is it measured right now? Has income inequality gotten worse by all measures? Is there a debate there?

Megan: So I think in economics everybody likes to think that we know how to measure everything, and that's broadly not true across the board. We economists have a really hard time measuring inflation, GDP growth, and it's the same story with inequality as well.

Megan: And there are of course, a number of different kinds of inequality. You mostly see studies about income inequality, because even though we have trouble measuring it, it is the easiest type of inequality in some ways to measure. And there are a bunch of different ways of going about it.

Megan: So one way is to look at people's tax records. And so to get tax data, and try to apportion incomes to everybody in society. This is something that a bunch of French academics, Thomas Piketty who wrote a really famous book on inequality, Emmanuel Saez, and Gabriel Zucman are kind of the front runners on this one.

Megan: And they basically take IRS data in the U.S., apportion it to people. But what they find is that there's a huge chunk of GDP growth that goes missing when they do this. And so they end up having to make a whole bunch of assumptions about this so-called missing GDP growth in order to figure out who's benefiting exactly how much from growth to measure income inequality.

Megan: And so inherent in making all of these assumptions, and they're pretty clear about the assumptions, which is fair enough, but you get questions about whether they're the right assumptions. So they kind of assume that if you're making a certain amount, but you don't show up in the tax data, you're probably behaving as your peers who are appearing in the tax data, things like that.

Megan: They make assumptions about whether it's important to look at individuals or households. They also make assumptions about whether we should look at pre-tax earnings, or post-tax and transfer earnings. So whether we should consider other benefits in addition to just your income, and they've found that inequality has increased quite a lot in the U.S.

Megan: So it started increasing long before this crisis, long before the last financial crisis. In fact, it goes back to the 1980s pretty much, and has been on a fairly steady upward march since. So in 1980 the income share of the top 1% of society, after taxes and transfers, was around 9%. And by 2015, it had risen to about 16%. So that's a pretty significant increase that they find.

Megan: There's another big study by Auten and Splinter, two well-respected academics who also look at tax records, and they actually decide that inequality hasn't increased quite as much. In fact, it's barely increased between 1980 and today.

Megan: And then there are others who don't look at the tax data specifically, but they look at survey data, and they make assumptions about the distribution of incomes in the U.S. economy that way. And they also find that income inequality has increased over the past couple of decades.

Megan: So I think the take home message here is that it's really difficult to measure income inequality. There are also questions about whether you should look at the income share of the top 1%, or the top 10%, or the top 0.001%, which the most important metric is. But using all those metrics, and using all these different methodologies, the take home message is that income inequality has risen in the U.S., the question is just by how much.

Megan: And I think this has really been hit home in the COVID crisis as we watched food delivery people and garbage removal people pretty much hold our economies together while we were locked down. They were complete heroes, and not only had to go out and risk their lives to do these jobs, but certainly aren't remunerated as heroes.

Megan: And so I think finally there is kind of a general discourse in the U.S. in particular, suggesting that we've got a problem here, inequality has risen. And some of these workers are really vital and we're just not paying them accordingly. So what can we do about that?

Rafe: And can you explain a little bit why inequality is bad in a society? And is it also something that is just marbled into capitalism, or is it something about American society in particular?

Megan: Yeah. So I'm going to start with the last part of your question, which is how the US compares to other countries. Because, as you mentioned, I'm writing a book on this and I've been desperately trying not to write a book just about the US. I wanted it to be kind of a global take looking at developed countries. But the reality is, actually, that the US if you look at the data is really an outlier on this front.

Megan: This is an issue across the developed world, and also across some emerging markets. So China, increasingly sees a divergence in terms of incomes. So income inequality is rising there too. But the US stands out especially. And one argument is that, that's just a brand of our Anglo-Saxon shareholder capitalism that we practice in the US. But you could also argue that the UK practices that too, so why are they looking a bit better than we are in the US?

Megan: I think there are a couple of reasons for why the US stands out. One comes down to worker power. So a really important study came out this year by Larry Summers and Anna Stansbury, looking at worker power. They argue that this is the biggest reason for income inequality, it's the biggest driver. And essentially their argument is that worker power has decreased, largely as unionization has decreased in the US. And so if you unionize, you have certain protections and are in a better position to negotiate for higher wages. And because unionization has fallen so much in the US, unlike in other parts of the world like Europe, workers have lost those protections and are in a worse position now than they were for example 50 years ago, in terms of being able to negotiate for higher wages.

Megan: Also, there are things like misclassification of workers that happen much more often if you don't have unions to protect workers. So essentially, companies will say, "We want to bring you on, but we'll bring you on as a contractor and we're not going to give you any of the other benefits that a full-time employee would get." And so that also puts workers in a poor position to negotiate for themselves in terms of higher benefits and higher incomes.

Megan: There's a super interesting article that was in the New York Times that compares a janitor who worked for Kodak, who worked her way up to being a corporate executive. So she was in the C-Suite by the end of it, and she talks about how Kodak had given her all these benefits, they paid for her education in some cases to up-skill so that she could take advantage of these opportunities and end up where she was. Versus, the janitor for Google today, who doesn't have any sick pay, certainly doesn't have any budget for re-skilling or up-skilling. And was terrified in the face of this crisis to have to miss work to take care of her kids, because they were home being homeschooled. And, because she would have to go without pay and could lose her job in that case. So the contrast is really stark, and this is a much bigger issue in the US than it is in the rest of the developed world.

Megan: The second issue I think that sets the US apart is competition. So the US initially had been the bastion of competition. The other developed countries were trying to emulate what we had created here with antitrust in the US, and that was at one point back in the 1950s the case. But while no one was really paying attention, actually, the US has significantly lost competitiveness and Europe, the EU in particular, has actually increased competitiveness.

Megan: So now the EU is more competitive than the US, which most people don't think of when they think of these two different regions. And the result is that in the US you have an increasing concentration in markets. So you get these firms that end up being superstar firms in their industries, and they kind of buy up any potential competition and dismantle them essentially, so that their dominance isn't ever really threatened. And if you think about the tech sector, or if you look at healthcare, these are all classic examples of the US of industries that have superstar companies that end up in a kind of winner takes most or winner takes all scenario.

Megan: And so if you're a worker and you work in one of these industries and you want to leave your job, you don't have that many options for other employers. And so if you manage to get a job offer from one of these other superstar firms, you can't really go back to them and say like, "Actually, I don't think that's a fair contract. I think you should be paying me more, giving me more benefits," because that employer knows that you don't have many options. And so that also exacerbates income inequality in the US much more than what we've seen in other developed countries. So the US really is a front runner on that.

Jack: Megan, it strikes me that we're in a really interesting time for this discussion. With all of the fiscal stimulus that was pumped directly into pocketbooks and wallets over the course of the Coronavirus pandemic, continuing through into the first half of 2021, is this tipping the scales at all in your view? In terms of income inequality, is this setting up a regime where there's going to be a hunger for stimulus every 6, 12 months going forward?

Rafe: Or ultimately, a universal basic income?

Megan: Yeah, that's a great question. So I think one thing we can say is that the balance of supporting Main Street versus Wall Street has been a bit better this time around than it was following the global financial crisis. So some lessons were learned from the fiscal authorities, at least. We could talk about the monetary authorities as a separate issue. But. In terms of government stimulus, I don't think anybody thinks that all the money just went to a sector or the banks this time around. A lot of checks were mailed directly to individuals, unemployment insurance was beefed up to support vulnerable workers who were having trouble finding work. And then also there's been support in the PPP loans for small businesses. So there has been a real effort to try to offset some of the implications of income inequality in this particular crisis.

Megan: And what we see if we look at them micro data... So if you look at data by my colleagues, Raj Chetty and a few others, on opportunity insights you can look at spending based on income. And you can see that actually low income spending is above where it was before the pandemic hit. So poorer people are having to continue to spend money to make ends meet. They're spending on things like rent and food.

Megan: It's actually for high-income people that spending has fallen quite a lot. I think it's down around 10% since before the virus hit. Which just suggests that discretionary spending has been cut. And that just shows that actually, for all the arguments that the government's getting money out to people who don't need it, low-income families, they're spending is still up. So, they clearly need this money.

Megan: Overall personal savings have increased significantly during this crisis as a result of these checks in particular, but also unemployment insurance benefits that in some cases are more generous than the wages that some people were making before they lost their jobs. And so there is a concern because people have just squirreled away the money, that we're getting too much money to people who don't really need it. And that people might not be going back into the labor market, or might not actually.

Megan: And that people might not be going back into the labor market or might not actually be trying to find a job or accepting jobs because it's easier just to stay on the dole. All these programs have an expiration date embedded in them, and there's really no guarantee that there will be the political capital to re-up on any of them at any point in time. We've seen that with each new fiscal package that's been negotiated, so I don't think people are really thinking, "I'll just live on unemployment insurance forever." I don't think anyone could expect that. And the government's gone in really big this time around with the most recent $1.9 trillion package. It will be followed up by a, in my view, much more important package, the Build Back Better package, later this year.

Megan: And then I don't think we can expect there to be further rounds of stimulus. There's already vibrant debates among the economics community in whether we're already spending too much. And what we saw after the global financial crisis was that the Obama folks kind of put through a stimulus package, thought it wasn't big enough, but they would do more later and found later that there just wasn't the political capital to get more done, and so they fell short. We've learned that lesson this time around, and so the government's gone big on a fiscal stimulus, but I think there are a number of economists and others who are worried that it's too big. And so expecting this to just happen in perpetuity, I think, is completely unrealistic.

Megan: I mentioned that the Build Back Better program, in some ways, is the more important one, and I mean that for the economy but also for income inequality. The Build Back Better package will take much more of a medium- to long-term view, and the cornerstone of it will be infrastructure spending, and particularly, green infrastructure. But what we know about infrastructure projects is that they're worker intensive, and goods-producing jobs like infrastructure projects tend to be high wage, high hour jobs. And for the past decade, we've mainly been creating services jobs, which makes sense because we mostly consume services, but those jobs tend to be low wage, low hour jobs.

Megan: And so a big piece of what I think the government's trying to do in this Build Back Better package is to not only address issues with infrastructure, but also to upgrade our labor force, essentially, so to create the kind of jobs that we want to so that people can make ends meet just by doing their job. And I think that's a fundamental, positive thing. There's a lot more that needs to be done. Taking all of these people who used to work in industries that are just never coming back, like brick and mortar retail, I think, will have a big challenge trying to rebound, and even once we go back to normal, so to speak, and so having to re-skill and retrain those people so that they're able to go into high wage, high hour jobs is a real challenge.

Megan: And I don't know any country that handles this well, but in the US, we have over 15 different agencies where you can go for retraining and retooling, and they're very difficult to navigate. And usually, you have to be able to quit your job and not work while you get this training, which very few people can afford to do. That's an area where I think we should still put an emphasis and a lot of effort and money behind.

Rafe: Oh, that's great stuff. And I think that's a good moment to segue, I think, to the Federal Reserve Bank. Right? Because one of the things we think about is when we came out of the, or frankly, when we went into the Great Recession, that's really when the central bank decided to bring us pretty much into a zero interest type regime, which has been now going on for a while. It's made access to capital really easy, really cheap, so corporations have been able to pour tons of money into research and development, into M&A, just growth. Right? And so the benefits, I'm assuming, accrued mostly to capital and to asset owners. I guess my question is whom does the Fed serve? Is it all of the American people? Is it employers? Is it capital and asset owners? Can you help us out with that?

Megan: Yeah, so the Fed has a very clear dual mandate, so regardless of whom they're meant to serve, the Fed doesn't want to be choosing winners and losers. They just want to be trying to work towards an average inflation of 2% and full employment, so that's their overall mandate with sort of financial conditions and financial stability mandate embedded in that. You rightly pointed out that during the global financial crisis, the Fed stepped in with all kinds of unconventional measures, and while there were concerns about bond buying driving up inflation, it never showed up in consumer price inflation. It showed up in asset classes. And so you basically won if you held those assets. If you are sitting on an asset that the Fed then says they'll buy, you win.

Megan: And we've found that to be even more the case in the Fed's response to this crisis, the COVID crisis, and that they've moved even further out of their comfort zone of just hiking and cutting rates and have engaged in asset buying, but also credit easing. They've supported markets they never would have dreamed of supporting beforehand because these markets stopped functioning, and it is their job to ensure some level of financial stability, so it fell within their mandate. But it also has meant that you've had this huge divergence between what's happening on the ground and what's happening in the markets, so there's been this incredible equity market rally in the US, starting shortly after the virus actually hit last year, as the Fed stepped in.

Megan: It was the day after the Fed said that they would buy up debt that the equity market rallied, and that's not a coincidence. The message was clear that the Fed will have investors' backs. And so if you've held assets, then you've done really well for the past year. If you're a worker, you haven't done well at all on average, given what's happened in the labor market. It plunged initially, and then has been sort of slowly recovering ever since. And I think it will take a while for the labor market to fully recover so that there isn't scarring anymore. Long-term unemployment falls back to where it was before the crisis, the number of permanent unemployed falls back to where it was before the crisis, as well.

Megan: And so the Fed, once again, has stepped in to do what they had to do, but it's probably exacerbated income inequality. Now, to the Fed's credit, they're fully aware of this, and it makes them deeply uncomfortable. They're just not really sure what they're supposed to do about it because they have this mandate, and that's what they have to pursue. And so it's not very clear exactly what tools the Fed should be employing to address higher income inequality because they do have to support financial stability. They are trying to hit these mandates. The way that the Fed has kind of tried to do it is through the full employment piece of their mandate, so they've tried for the past decade, really, to run the economy a little bit hot so that they can pull in marginal workers off the sidelines and encourage them to look for jobs so that they can improve the labor market. And hopefully, that could eventually drive up wages and address income inequality, so that's the one tool that they know they have.

Megan: I do think that the Fed is insistent that it's a monetary policy authority and that's right, but increasingly the Fed has kind of moved into the fiscal policy realm. So the Fed isn't supposed to make decisions about asset allocation, but the reality is that everything is Central Bank does picks winners and losers. If you hike rates, then you know, you benefit savers. If, if you cut them, you benefit borrowers. So even just their most basic move picks winners and losers. And since the Fed and other major central banks have all moved further into this gray area between monetary and fiscal policy, I don't think they're ever going to manage to get out of it, and that makes them worry a lot about their independence in particular, and they use this kind of argument that they don't pick winners and losers, but that's patently untrue.

Megan: And so, I do think that there is potentially a role for the Fed and other major central banks to play in inequality. They just have to get comfortable with the fact that then they're engaging in quasi fiscal policy if they're going to do that. And the Fed in particular is just absolutely not there right now. I think the ECB for example, is a little bit more comfortable with that idea. So right now in the US, I think the prevailing thinking is that actually inequality is an issue that fiscal authorities are going to have to address and Central Bank should stay out of it. And if I were to set up a perfect system, I think that's how I would set it up, to be honest, but here on planet Earth, I think it's worth thinking about pulling on all the levers we have, because I think this is a pretty dire situation. In which case we should have the fiscal authorities try to address income inequality. And I think they are, if you look at the top economics hires for the Biden administration, particularly at the beginning, they were mostly domestic labor economists. So Biden is taking this issue very seriously in a way the previous administration just wasn't. But I also think there could be a role for the Fed to play, they're just really far off from figuring what exactly that could be, and how they might be comfortable with that.

Jack: Let's have you take out your crystal ball for a minute, and look out, I don't know, a year or two years. We've gotten back to somewhat full employment, or something that looked like America before the crisis, the world, in fact, before the COVID crisis, do you think we'll look back on all of the actions that fiscal authorities and the Fed and others are taking as really temporary stop gap, emergency measures, designed to counteract a clear and present danger, or do you think anything that we're seeing take shape before our eyes, it feels like every week during this crisis are going to result in anything permanent that we'll look back on and say, "That was a key turning point," as opposed to just a short-term response to an overall short-term problem?

Megan: So, so far in the US, I would say that what we should consider the fiscal packages that have already been passed to be is not really a fiscal stimulus, so much as catastrophe mitigation measures. In which case I think a lot of it is really sort of stop gap measures to get money to the most vulnerable, and try to keep everyone afloat until we can get to the other side of this bridge.

Megan: What I think will make a fundamental difference is the Build Back Better package, and the whole point of that package is to take a more medium to long-term perspective, where I do think we are going to look at how to upgrade our labor force, how to address things in the tax system that might be exacerbating inequality as well, for example. So that's the much more structural piece, and I think that everyone is going to end up having to do this. You'll note that in Europe, the number of countries that mentioned that they are trying to build back better as well is significant. So this phrase has caught on globally, and it represents this idea that there's going to have to be structural changes, and I think that that is undeniable.

Megan: So as much as I would love to believe this narrative that we'll disseminate a vaccine quickly, and then we can all go back to normal, I think there are a lot of signs that there's fundamental scarring in the economy, just as there was after the Global Financial Crisis. Our spending patterns, I think, have fundamentally changed in some ways. There are some industries that just aren't coming back, there are some companies that just aren't coming back, and I think it's going to take a little bit of time for us to kind of make that transition, and some of these medium to long-term programs like the Build Back Better program hopefully will help facilitate that adjustment. So, so far, mostly we've looked at stop gap measures, but looking ahead, even to later this year, I think we'll see more structural packages on the table.

Jack: Oh, it sounds like we should call President Biden's Built Back Better plan, maybe we should call it the, "Not So New Deal" or, "FDR Part Deux" it sounds like a big jobs program that's supposed to get us through a hard patch, and move into a whole new paradigm. Well, Megan Greene of Harvard's Kennedy School, thank you so much for joining us here on Double Take.

Megan: Thanks for having me.

Jack: Okay. So we've heard from the esteemed scholar, Megan on income inequality and the US federal government's tools and desire to combat it. So now let's turn to Julianne McHugh, a senior portfolio manager at the firm, who chairs our ESG Council, to spin the conversation in a new direction, how and whether income inequality matters to equity investors. Julianne, welcome.

Julianne McHugh: Hi, glad to be here.

Rafe: Excellent. Oh, I'm so glad to have you here, Julianne. So I think it's fair to say that the public view of equity investors, equity investing is that we simply don't care about anything but profits, dividends, capital gains, irrespective of the impact a public company has on society and environment on the people within it. Put bluntly, this is my question to you, should investors care about income inequality? And if so, is that because income inequality could actually matter to our returns, the dividends we collect, the share prices or is it just because income inequality is a negative outcome of capitalism?

Julianne: So first of all, that hurts that I don't care or that we don't care. I think that there are investors and investment strategies that do focus on outcomes. What I'm going to talk about a little bit more is the input and how that impacts the outcome. So it's not focusing on it because we want to feel good about it ourselves. It's focusing on it because it really creates risks and opportunities when we're investing. So if we think about the risks of having inequality in income is, if the company doesn't pay well, that could have impact employee morale, which would potentially impact turnover, which would then result potentially in lower productivity, hence impacting returns in the stability of returns and operations. Not only that, but the company could put themselves more exposed to potential regulatory changes that would require them to pay higher or disclose more, and then again, impacting future returns. So investors really need to consider about these potential liabilities when evaluating and assessing investments.

Julianne: But there's also opportunities. So besides the increased employee loyalty and brand reputation that you might get and hence better sales in stability, there's also those companies that are offering products and services that help close the income gap. So whether it's products that may be educational or retraining, that enables people to get better paying jobs, whether financial institutions that provide credit to marginalized groups, these are companies that can differentiate themselves and then create a strong brand loyalty that then result in stable growth prospects. So it does really matter.

Rafe: So it is material. And yet when I think about some of the most successful companies that shall go nameless in this venue, but many of them have gotten successful largely through kind of engineering strategies for their employees, where they would be paid as little as possible, perhaps they're treated as contractors or part-time or they're offshoring them all together to avoid the high wages in the United States say versus some country in Southeast Asia. So it seems like that's been a successful strategy for years, but are you saying that that equation is changing?

Julianne: Well, I think that it depends on the situation and what we're looking at. When we do proxy voting, we do look at the pay gap and we look at even, let's say the people who have changed their compensation because of COVID, is that fair or not? Are they just trying to put more money into the executives pocket and that's selfish? Or are they creating a lower cost structure that will then enable them to provide products and services more reasonably priced and affordable so that the lower income can get it? So if it's a lower cost structure that then enables you to provide access to people because of affordable product, maybe it's okay. If it's just so that the executives can get richer, probably not okay. So it depends on the context.

Jack: That's interesting. And there are trade offs here, to the extent investors need to weigh the benefits of doing something about income inequality and the capital gains they reap from their investments. Can you talk to us a little bit more Julianne about the trade offs the public companies make in counterbalancing shareholder demands and their place as a force for good or evil in society and really how those trade-offs can be measured?

Julianne: I think that this kind of rhymes with what we heard Megan talking about, that it's really difficult to try to have a simple rule to measure it, because it depends on what you're trying to measure and what the impact is. So take example I think, Rafe you started talking about this, is that a large company, consumer good company, that maybe pays minimum wage to employees, are tough negotiators with suppliers and as a result, you would think, all right, they're not providing financial opportunities to their employees, they're bad. But because of that low cost structure, they're able to provide product to 260 million people a year to that wouldn't otherwise be able to get paid. So are they a hero? So what is good and what is evil. Similar to payday lenders, really bad reputation because they exorbitant fees that a borrower would pay. They don't pay on time, but what about those people who need that bridge for a day or two, just to pay their rent or buy groceries. Is it good or bad that this service is there for them?

Rafe: That's a really good segue to the question that was knocking around between my years, which is kind of what are the ways that public companies, large companies, big employers, how can they address income inequality and can they actually have real impact?

Julianne: I think there is a couple of different ways that we can look at this. We can look at this with regards to companies that do no harm and therefore promote equality via the practices and the policies that they have in place. Whether it's pay, whether it's training, those are people who are supporting, trying to minimize the gap. There's also though those companies that maybe are trying to actually make an impact to intentionally reduce the gap by the products or the services that they provide to marginalized groups that provide access or affordability.

Julianne: One category of companies that might do this are those that are targeting to improve economic opportunities, maybe providing the finance that we talked about earlier, or the training and education, or maybe it's those companies that are redesigning the supply chain and that way promoting better access and business opportunities to local or small farmers or business owners. So these practices will drive improved economic opportunities and minimize poverty and promote economic growth in productivity. Lending to the unbanked, affordable vocational training.

Julianne: So another category of groups maybe would be those that are providing infrastructure to connect rural communities or underserved via communications. I see this a lot in the emerging markets, where there's really poor legacy infrastructure, whether it's the internet or roads or transportations, and so that these rural communities that are already suffering, it's a circular argument of downfall that they continue to suffer more. But a company that provides them with broadband, provides them with access to banking, provides them access to healthcare, provides them access to education, therefore breaking those barriers that are reinforcing the cycle of poverty.

Jack: That's great stuff. And we've seen the dramatic rise in assets under management globally that are labeled ESG strategies. Does this create a tailwind, Julianne, for companies who really are trying to do well by doing good?

Julianne: Yeah. I might even take a different perspective and say, maybe it even raises the bar for what we're demanding from companies. Money has been flowing into the ESG and sustainable strategies, but there really hasn't been great oversight to prevent potential greenwashing. And so what you're getting now is potentially more people who are going to ask questions to prove that it's not just greenwashing and that they really are doing good. As a money manager we're increasingly asked how our investments aligned with promoting the UN Sustainable Development Goals and how we incorporate social or environmental or governance considerations into our investment decisions. And because there's not a broad availability of quality comparable data being provided by companies, even those things that are potentially quote unquote, easy to measure such as carbon emissions let alone the less tangible topics like income inequality or social metrics, we're being asked it. So we're asking for that increased disclosure from companies.

Julianne: And the other aspect is consumers are demanding companies act more responsibly, and you're seeing that in what is being demanded by the products and services that they buy. So as consumers want to reduce their carbon footprint or feel good, they're going to ask people to show that and have their companies and put their money into selling these products. So I think that the rise and the interest to invest in companies that promote strong environmental, social governance practices could actually have a very positive, reinforcing aspect to make people make they really are doing good and defining it and giving it the data.

Rafe: If I'm kind of standing at the drawing board or at the marketing nerve center of an asset management firm like ours, I mean, you have to sit here wondering, is there a market, is there demand for investment funds that specifically target income inequality? And then if there is, I wonder if there are enough public companies to fill that basket.

Julianne: I think, again, it goes back to it's difficult to measure, it's difficult to either show here's a company that's doing no harm or company that's actually making an impact. I do believe that there has been a lot of focus in the past on environmental issues and solutions. I think that some of the events from 2020 are going to bring the social considerations much more to light, whether it's the inequalities that were expanded as a result of COVID or whether it's the continued injustice that prompted the Black Lives Matter demonstrations, people are asking questions. And I think they're going to be looking for companies that are willing and able to address solutions to these issues and these inequalities.

Julianne: This augments the already existing interest that we get asked a lot with regards to companies that are promoting the UN Sustainable Development Goals, many of which target inequalities. So I do believe that you will see a growing number of public companies that are targeting specific social objectives, in addition to those that are supporting them.

Jack: That's wonderful. And you mentioned the environmental piece. Do you see an intersection between the climate crisis and income inequality? Are they one in the same in some ways in terms of discussion?

Julianne: No, but they definitely interrelate. So poor and developing countries are probably among the most affected by climate change because pollution results in lower air quality which can impact the fresh water, food security, and the developing countries are probably not as capable to cope with these issues. Think about the farmer, if your crops are being impacted because of climate change, then the farmers can't make an income and then the surrounding community has less access to nutritious food. So it's a reinforcing negative loop. And I think this is part of what the UN Sustainable Development Goals attempt to address.

Julianne: But I'll give you another example maybe closer to home is climate change is resulting in a lot of droughts and increased intensity of storms. If you have money, you have better access to insurance to protect your properties. You're also more likely to be able to get a hotel room or find alternative housing if you get displaced. But what if you can't find someplace else? What if you don't have many options and then your savings gets diminished and that could impact your ability to remain healthy and productive. So the economic disadvantaged groups are going to suffer disproportionately more from these adverse effects from climate change.

Julianne: And I mean, I guess that just illustrates how interconnected, not only environmental issues could be with social, but you could walk through it with governance, et cetera. That as investors, as stakeholders, as members of the global society, we need to think more holistically. And I think that that would end up with higher returns for us all.

Rafe: The complexity of this issue is amazing as I'm sitting here thinking about it, you could have a company that is offshoring and kind of firing a bunch of employees in the United States, obviously not good for their income. And then offshoring that work to a country where they would pay above market wages and elevating those citizens in that country, tough to judge from the investment professionals point of view. I find this absolutely fascinating, the amount of analysis that has to go into it by someone like you, Julianne McHugh, our ESG champion here at Mellon. Thank you so much for joining us today on Double Take, it was great.

Julianne: Thank you for having me. Thank you very much for having me guys.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Mellon Investments Corporation (“Mellon”) is a registered investment advisor and subsidiary of The Bank of New York Mellon Corporation (“BNY Mellon”). Any statements of opinion constitute only current opinions of Mellon, which are subject to change and which Mellon does not undertake to update. This publication or any portion thereof may not be copied or distributed without prior written approval from the firm. Statements are correct as of the date of the material only. This document may not be used for the purpose of an offer or solicitation in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or not authorized. The information in this publication is for general information only and is not intended to provide specific investment advice or recommendations for any purchase or sale of any specific security. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by Mellon. Mellon makes no representations as to the accuracy or the completeness of such information. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment and past performance is no indication of future performance. The indices referred to herein are used for comparative and informational purposes only and have been selected because they are generally considered to be representative of certain markets.  Comparisons to indices as benchmarks have limitations because indices have volatility and other material characteristics that may differ from the portfolio, investment or hedge to which they are compared. The providers of the indices referred to herein are not affiliated with Mellon, do not endorse, sponsor, sell or promote the investment strategies or products mentioned herein and they make no representation regarding the advisability of investing in the products and strategies described herein. Please see mellon.com for important index licensing information.