Can unabated climate change and rising inequality be tackled by reimagining capitalism as a more inclusive, sustainable, and trusted system?

This is what ‘inclusive capitalism’ seeks to achieve, and the idea is not new, according to Lynn Forester de Rothschild, Co-Founder and Managing Partner of Inclusive Capital Partners, who spoke at GIC’s Partnership Forum 2022, themed ‘A Sustainable & Inclusive Future’.

Put simply, inclusive capitalism is about creating a system that produces equitable and sustainable growth over the long term that benefits all stakeholders. It is what drives leaders like de Rothschild and others who are on a mission to see that the definition of modern-day capitalism is rehabilitated.

In her keynote speech, de Rothschild highlighted how capitalism had reformed itself countless times and argued that it was time for it to evolve and adapt to current needs and demands due to declining public trust in the system and its business leaders.

“The markets we know are the most powerful force in the world, and we have to make sure that they work for everyone,” said de Rothschild. “It doesn’t really matter how we label the market economy, but it does matter that the most powerful force in the world is a force for good.”

Getting to the root of capitalism

The term inclusive capitalism has its roots in the work of Adam Smith, the forefather of capitalist thinking. In Smith’s writings, The Theory of Moral Sentiments and The Wealth of Nations, he explains how human nature is underpinned by both self-interest and moral judgment which will ultimately create an inclusive social contract, providing the social framework for the free market.

In Smith’s view, market-based economies provide the essential conditions for economic progress while encouraging enterprise growth and rewarding individual initiative. Under these terms, those who partake in the economic system responsibly should be fairly rewarded for their effort, irrespective of socioeconomic background, gender, ethnicity, or religion. In other words, capitalism done right is synonymous with collaboration, opportunity, accountability, and innovation.

A quick look through the annals of history supports Smith’s belief that a version of capitalism, one that invests in economic and social capital, is possible. In the United States, pay and productivity climbed together until the late 1970s. Specifically, from 1945 to 1979, worker productivity grew by 118%, wages increased by 108%, and the stock market was up by 603%.

Rising inequalities

Despite Smith’s promising vision, the income gap in the United States is as vast as ever, with the wealth gap as high as it’s been since the late 1930s. The wealth of the top 1% of the population is more than that of the bottom 90% of the population combined. Those in the top 40% now have on average more than 10 times as much wealth as those in the bottom 60% – that is up from six times in 1980.

Existing global income and wealth inequalities have been exacerbated in the aftermath of the Covid-19 pandemic and a growing climate crisis. 2020, for instance, marked the steepest increase in global billionaires’ share of wealth on record.

The growing exclusivity of capitalism’s elite has created an environment of tension between financial market participants who no longer think of their roles as part of a broader system. By rebuilding a sense of responsibility for the system and those in it, actors will operate in ways that reinforce the bonds of social capital and inclusive capitalism, according to de Rothschild.

“It’s not surprising that people are angry about the social injustices that capitalism’s economic structure has created and reproduced; they don’t trust that capitalism is going to work for them; rather, they think that the system is rigged against them,” de Rothschild said. “This matters to the investment community. We cannot have successful companies or investments in a society that is broken down or in a world where the planet is on fire.”

Inclusive capitalism’s moral imperative

Social mobility was the great promise on which capitalism was sold; the idea that hard work will be rewarded with success and that merit, not pedigree, will allow for social mobility is a central tenet of capitalism. Therefore, relinking pay and productivity so that workers are able to reap the fruits of their labour is a key part of rebalancing the global economic system for widespread prosperity and equity.

This moral imperative serves as the basis for the Council for Inclusive Capitalism, a non-profit founded by de Rothschild in 2020. The organisation has nearly 400 members and its steering committee alone represents $10.5 trillion in assets, $2.1 trillion of market cap, and more than 200 million workers, and aims to galvanise the private sector to create a more inclusive and sustainable economy that addresses the needs of people and the planet. 

One such member is Bank of America which has pledged to provide $1 billion in financial support to help local communities address economic and racial inequality accelerated by a global pandemic. Additionally, the bank’s Pathways Program is a five-year commitment to hire 10,000 individuals from low- and moderate-income neighborhoods into its Consumer and Small Business division by 2023, and to provide skills training including with non-profit partners. 

The role of investors in driving inclusive capitalism

As tackling widening global inequality and the climate crisis is becoming ever more urgent, investors are placing an increasing focus on ensuring their portfolio companies are shifting to more sustainable business models while still achieving risk-adjusted returns.

In part, new sustainability-related regulatory disclosures have driven increased transparency over how companies are incorporating ESG considerations into their decision-making, providing investors with greater confidence in the role ESG plays in a company’s financial performance.

A joint study published in the Journal of Sustainable Finance and Investment looked at more than 1,000 peer-reviewed papers and 27 meta-reviews published between 2015 and 2020 to understand how ESG drives corporate financial and market performance.

Challenges to building an inclusive economy

Investors’ growing interest in sustainable and impact investing has helped kickstart efforts to build a more inclusive economy, but it has also presented new challenges, which will require greater accountability and collaboration of policymakers, leaders and businesses to address.

Today, greenwashing tactics are still prevalent. Experts in the financial sector, independent watchdog groups, and academics believe that unsubstantiated and exaggerated claims about sustainability and other green credentials are increasing in advertising and marketing materials, and on product labels due to growing interest from consumers and investors.

Additionally, investors face difficulty in evaluating sustainability performance and how it affects a company’s bottom line and reputation. This challenge is largely founded in the fact that there are no uniform requirements for reporting ESG information globally and companies thus rely on a number of different disclosure mechanisms to measure and report their impact.

De Rothschild recognises that integrating ESG into a business strategy and transitioning to a more sustainable business requires a long-term view. Not all companies are ready to tackle this issue equally and swiftly, particularly if they are facing pressure on their bottom lines.

“If the house is on fire, we’re not going to think about the best fire-proofing for the living room – we’re going to put out the fire,” said de Rothschild.

Importantly, reexamining a company’s purpose may allow businesses to better tackle the perceived barriers of entry to ESG and see the value that can be unlocked instead. Once purpose is established, de Rothschild believes it becomes clearer how ESG measures and a mission to do good can support the retention of shareholders and ultimately drive strong long-term profits.

“There are trade-offs in the beginning of building an inclusive business model,” de Rothschild said. “That’s why it’s really important that companies on this journey have shareholders who understand that perhaps there’s going to be a cost now, but the long-term return will be material.”