Unfairness in carbon emissions

Like so many things in our world, there is an unfair distribution of carbon emissions. That’s clearly true between countries but it’s true, starkly, within countries too. In emissions terms, not all people are created equal. As we come to think about paying for climate change mitigation and financing a just transition to the decarbonised world that we need, those differentials will increasingly matter. The rich will need to pay more; fortunately, they can afford to.

While some measures of per capita carbon intensity focus on fossil fuel producing nations, for fairness we should really be thinking about measures of intensity based on consumption. As a recent academic study trying to understand the differing carbon footprints of consumers puts it: “It is widely accepted as a basic principle of fairness that those benefiting from an activity, like the GHG emission that drive climate change, should bear some responsibility in mitigating the damage caused by those activities.” Those who benefit from the use of goods should shoulder the burden of the carbon emissions associated with their production.

It’s for this reason that arguments that population growth is the most significant driver of increases in carbon emissions are largely wrong. While population growth doesn’t make the challenge of attaining the absolute drops in emissions that we need, it isn’t the fundamental driver, for the simple fact that the countries with the greatest growth in population are among those whose people consume the least and so have lifestyles responsible for less emissions. That’s particularly true following the recent news that China’s population has already started to fall. China is the most carbon polluting nation in the world, though that is mostly due to its (albeit diminishing) role as factory for the world. It is lower in the rankings on a consumer measure of carbon intensity, but actually on a per capita basis it is above the average across the world (7 tonnes a head against 4.7 tonnes, according to Our World in Data).

The range in this consumer intensity measure across the world is remarkable, from 25 tonnes in Qatar and over 15 in the US, to just 1% of that US number – 0.13, 0.16, 0.17 and 0.17 tonnes – per head of population in Malawi, Rwanda, Uganda and Ethiopia respectively. Each individual in India, perhaps already the world’s most populous nation, is responsible for just a tenth of the emissions attributed to a citizen of the US; two other countries with large and growing populations, Indonesia and Nigeria, are also well below the global average, at 2.3 tonnes and 0.6 tonnes respectively.

These ranges are stark, but the ranges within countries are if anything more remarkable. That’s where the recent academic study comes in. Lifestyles and levels of consumption drive striking differences. As shown in the chart above, the academics estimate the carbon footprint of different income groups across the US, and reveal a range in emissions from 17 tonnes for the poorest households to 950 tonnes for the wealthiest 0.1% (note that these numbers are not directly comparable with those above as they are household rather than individual figures). That doesn’t tell the whole story, though: there are a group they dub ‘super emitters’, just 1.5% of the wealthiest 0.1% – around 1900 households – whose emissions are in excess of 3000 tonnes. The recent pictures of the ranks of private jets at Davos remind us that some people live in a different world – or live taking an unfair portion of the resources of our shared world.

Referencing a 2021 paper, which suggests that each US billionaire has a carbon footprint in excess of 8000 tonnes, the academics argue that their estimates for super emitters “are reasonable and possibly conservative”. They certainly seem more reliable numbers than the remarkable 3 million tonnes of carbon which Oxfam America attributes to billionaires in its recent Survival of the Richest report on inequality (the charity appears to attribute significant footprints based on investment holdings of fossil fuel businesses, rather than base its numbers on household consumption).

Andrew Fanning of the Doughnut Economics Action Lab and Leeds University has produced this striking visualisation of the academic study’s results:

Unfortunately, this unfairness in emissions is getting worse. The study notes that in 2019 the average US household was responsible for the emission of 41.7 tonnes of CO2, a reduction of 16% from the 1996 figure. All income groups show a consistent reduction in their carbon footprints – with the exception of the richest. They suggest that the top 1% were responsible for an emissions increase of 23% over that same period – with the top 0.1% behind the bulk of that, because their emissions went up by fully 50%.

The authors make a link to the ‘loss and damage’ agreement that was the sole real progress made at the COP 27 climate conference. Under this, wealthy nations undertook to pay funds to support poorer countries already suffering significant physical impacts of climate change. The richest acknowledged that they are responsible for the bulk of the change in climate, and need to pay to reflect this; the richest within countries, the academics suggest, should similarly step up. They can afford to, because while there is remarkable inequality in emissions, this inequality is less than that for income: “The Gini coefficient for the emissions distribution is 0.35. For comparison the US income distribution Gini coefficient is 0.49.”

This reflects the findings of a study from last year, a meta-study of the existing literature on the relationship between household carbon footprints and different incomes and expenditures – the income elasticity and expenditure elasticity of emissions, to use the jargon. As this chart shows, while footprints increase they do not match increases in expenditure, let alone the steepness of the increases in income.

The study suggests that the elasticity measures more nearly approach 1 – in other words, the steepness of the increase in the emissions slope more closely matches the income and expenditure increases – in countries where electricity and transport have seen carbon reductions. This makes sense: if the baseline economic activities that are largely common across income groups – heating and lighting housing, and the basics of transport – have been largely decarbonised, the emissions footprints of individuals will much more closely mirror their overall expenditure levels.

Even if this does happen as we decarbonise the economy, and the steepness of the slope showing an increase in carbon emissions does begin to match that for expenditure, it will still be a long way short of the increase in incomes. The unfairnesses in the income distributions will continue to outstrip the unfairnesses in emissions. This strongly suggests that the richest should have excess money to be able readily to afford additional payments to reflect their greater carbon footprints. However, like the loss and damage agreement for nation states, we will have to see whether the rich do indeed step up to this particular challenge. A just transition will need them to.

See also: Just transitions and gilets jaunes

Sea level rise: the most unjust transition

Assessing US consumers’ carbon footprints reveals outsized impact of the top 1%, Jared Starr, Craig Nicolson, Michael Ash, Ezra M. Markowitz, Daniel Moran, Ecological Economics 205 (2023) 107698

Our World in Data

The outsized carbon footprints of the super-rich, Beatriz Barros, Richard Wilk, Sustainability: Science, Practice and Policy 17 (2021) 316–322

Survival of the Richest, Oxfam America, January 2023

Doughnut Economics Action Lab

Loss and Damage agreement, UN FCC, November 2022

Expenditure elasticity and income elasticity of GHG emissions – a survey of literature on household carbon footprint, Antonin Pottier, Ecological Economics 192 (2022) 107251

But is it FAIR?

Information technology often, sadly, fails to be fair. Some in the sector, though, are trying – and even occasionally beginning to gain traction.

It’s what makes the FAIR Principles (sometimes called the FAIR Data Principles) so interesting. The abbreviation stands for Findability, Accessibility, Interoperability and Reusability, and it’s a set of standards for datasets that are used in analytics. If data lives up to these principles, it is more likely to be capable of reuse and thereby enable others to test if results are replicable – one of the foundations of the scientific method. Allowing others to reuse data and to attempt to replicate results may help remove some errors from new technology – including creating or perpetuating unfairnesses. At present for example, there is a tendency to ossify past unfairness through the biases embedded in the data that is used to train artificial intelligence.

The FAIR principles were launched in a 2016 paper. This makes clear that the ambition for the principles extends beyond narrow definitions:

“Importantly, it is our intent that the principles apply not only to ‘data’ in the conventional sense, but also to the algorithms, tools, and workflows that led to that data.”

The creators of the FAIR Principles appear to have a touching confidence in the ability of the human mind to deal with data in context and to understand nuance, which feels a little like overconfidence to me. But the point of the principles is the recognition that modern techniques rely on machines (they use the term to cover the wide spectrum of technologies that might be applied) to deal with the vast quantities of data that are available, and those machines are usually even less good than humans at grasping context and nuance. The FAIR Principles won’t change that, but they provide enough visibility for other scientists to probe and test the extent of the errors that will have arisen because of those failures, including errors of unfairness.

While the FAIR Principles are not explicitly expected to be fair, their nature and application should lead to fairness as well as FAIRness. ‘Findable’ requires data to have rich metadata attached, which needs also to be ‘Accessible’ by enabling universal free and fair access; ‘Interoperable’ and ‘Reusable’ mean that the data is in a form that can be widely understood and applied and put to use by others without inappropriate restrictions. It’s a level playing field for data availability and use – ensuring that fair access can enable ongoing checking and testing.

Others have since taken the concept further, such as the Dutch moves to create a data stewardship profession that reflects the FAIR Principles. This profession would take responsibility for the shared endeavour that good data stewardship requires, across time and involving individual researchers, other scientists in the research project, their sponsoring body or institute, and indeed from the funders of the research. Recent presentations as part of this project, including ones dated October and November of this year, suggest strong progress in acceptance of the Principles (at least in the healthcare data sector that is the project’s initial focus) but also that there is much more to be done.

A further development has been a move towards automated testing of the FAIRness of datasets. This aims to avoid the significant workload implied by the prior manual approaches to such assessments. The range of 17 core metrics developed by the team helps mitigate against the risk of a single measure being applied to a complex area, which would lead to less insight being offered – as well as the risk of gaming. Each core metric has between one and three practical tests that can be applied to test whether it is met or not.

The initial test, on some common datasets, wasn’t encouraging, with around average expected scoring on findability and interoperability, and significantly below average scores for accessibility and reusability (though the academics note that the particularly poor accessibility result is based just on a single metric, which every dataset failed – they were only applying 13 out of the total 17 metrics at this stage):

The good news is that after engagement with the data repositories and subsequent relatively straightforward improvements to the metadata, the results improved notably (though the result for reusability oddly seems to show a little deterioration in quality by a fifth of the data at the top end):

Applying transparency and accessibility standards more broadly in the data and technology world is of growing importance. Citizens often feel disempowered and disenfranchised in the face of the technology that is all around us. Making tech, including the underlying algorithms that shape our modern experience of the world, more transparent is a necessary step to build confidence and to prevent democratic backing for technology further eroding.

This matters. The algorithm is the echo chamber. It ushers and tempts us from the babble of the town square down narrower side-streets, sometimes forcing us into the most squalid and awful thoroughfares with a one-way traffic of angry bile. Unless we have sufficient transparency to understand how algorithms usher and force people in these ways we cannot address and reverse the harms that they are causing. Unfairness makes people more prone to accept conspiracy thinking, and at present social media algorithms are feeding and exaggerating that process. FAIRness may help fairness over time.

See also: The failures of algorithmic fairness

Learning from the stochastic parrots

This blogpost was originally written for Data Ethics Club and also appears among its papers.

The FAIR Guiding Principles for scientific data management and stewardship, Mark Wilkinson et al, Nature Scientific Data, March 2016

Professionalising data stewardship: Dutch projects

Towards FAIR Data Steward as profession for the Lifesciences, Salome Scholtens et al, ZonMw/Zilveren Kruis, October 2019

FAIR data stewardship: the need for capacity building & the role of communities, Mijke Jetten, E4DS Training, October 2022

An automated solution for measuring the progress toward FAIR research data, Anusuriya Devaraju, Robert Huber, Patterns 2, 100370, November 2021

The Gini in the executive pay bottle

What’s the best way to assess the fairness – or unfairness – of executive pay? It’s a lively debate around the world. It has a particular bite in countries where overall inequalities are especially pronounced.

Usually that fairness is assessed, or at least made manifest, through disclosure of pay ratios. The US, France and the UK now both require disclosures by public companies of the ratio between the CEO’s total pay and that of the median worker* (the US requires the comparison to be across the global employee base, with some limited exclusions permitted, the UK only considers the UK employees; neither considers the circumstances of the workforce who are not employees). Campaigners and legislators have focused on this ratio: see, for example, San Francisco’s Overpaid Executive Gross Receipts Tax, which imposes additional taxation on companies that pay their CEOs more than 100 times their median employee; and the Max 12:1 campaign. But there are broader measures that could be considered.

For various reasons I have read a few South African annual reports of late, for the first time for some years. And I was very struck by some of the disclosures made by miner Impala Platinum (usually called Implats for short). There is an explicit section of its latest Annual Report called ‘Our approach to fair pay’ which also references the company’s Fair Pay Policy Statement. This policy statement includes Guiding Principles, among them Principle 3 on Equity, ‘Reward given to different employees is fair, consistent, and justifiable’:

  • Principle 3a: All jobs are appropriately graded to reflect required technical knowledge, skills and experience
  • Principle 3b: Reward policies are designed to enable necessary variation depending on local contextual factors, such as in hardship locations, fragile states or absence/scarcity of necessary skills
  • Principle 3c: There is a commitment to policies being applied systematically

These fine words also appear to be reflected in practice. The annual report notes recent pay deals both for its refinery workers and its miners, and asserts that “The Implats guaranteed minimum wage for permanent full-time employees remains significantly higher than a ‘living wage’, and in addition our employees are eligible for progressive variable pay arrangements which are generally above the median for the industry.” The pay ratio that it discloses is between the CEO and the lowest paid employee, and is 58:1. While this is far above the 12:1 some campaigners are seeking, many US, French and UK companies report pay ratios far in excess of this – and those are ratios to the pay of the median employee, not to the lowest paid.

But still more unusual are the company’s disclosures of income inequality metrics most often applied by economists, the Gini coefficient and Palma ratio (both explained at the foot of the image):

All of this discussion of fairness in executive pay is a response to the expectations of South Africa’s corporate governance code, the latest update of which – referred to as King IV – was published in 2016. As some of the introductory wording to the new Code states: “An important introduction in King IV is that the remuneration of executive management should be fair and responsible in the context of overall employee remuneration. It should be disclosed how this has been addressed. This acknowledges the need to address the gap between the remuneration of executives and those at the lower end of the pay scale.”

And fairness is in fact included in King IV’s Glossary of Terms:

“Fairness refers to the equitable and reasonable treatment of the sources of value creation, including relationship capital as portrayed by the legitimate and reasonable needs, interests and expectations of material stakeholders of the organisation.”

Putting this into practice, Principle 14 reads “The governing body should ensure that the organisation remunerates fairly, responsibly and transparently so as to promote the achievement of strategic objectives and positive outcomes in the short, medium and long term.” Under it, recommended practice 27 states: “The governing body should approve policy that articulates and gives effect to its direction on fair, reasonable and transparent remuneration.” And one expected disclosure in remuneration reports is: “An explanation of how the policy addresses fair and responsible remuneration for executive management in the context of overall employee remuneration.”

This focus on fairness matters particularly in South Africa, which because of the unfairnesses of its past is one of the most unequal societies in the world. The nation’s Gini coefficient and Palma ratio are still worse according to the OECD than those set out in the Implats annual report, though the calculations are from 2017 rather than the latest years: 0.62 and 6.9 respectively. In both cases, the nation sits at the most unequal spot among those countries for which data is disclosed. It is recognised that business must play a significant role in addressing this unfairness.

Not all South African companies agree though that disclosure of these ratios for their employees is the best way to express their attempts to press for fairness. The most blunt that I found was this from the annual report of retailer Woolworths: “While the Gini coefficient or index is widely considered to be the most scientific and accurate measure of income disparity and many commentators use it as a proxy for fair and responsible remuneration as envisaged by King IV, the committee agreed to focus on strategic initiatives to drive and address fair and responsible pay.” It emphasises that it is not tied to South Africa’s minimum wage, nor even to the concepts of a living wage, but rather is aiming for a ‘just wage’, “informed by many data points, including minimum wage rates, market rates, CPI, and our EVP [Employee Value Proposition – the firm’s overall approach to staff retention and reward] strategy”.

Woolworths also produces a striking waterfall chart showing the impact of its own approach:

I have railed previously about the problems that come from a focus on just one metric, and I’ve suggested that the fact considerations of inequality are often reduced simply to a discussion of the Gini coefficient is narrowing and unhelpful. So I don’t rush to approve of Implats’ disclosure of Gini. But it is very clear that disclosing the Gini coefficient, as well as median pay ratios and pay ratios to the lowest paid employee, and also the Palma ratio, offer a much richer understanding of the spread of pay across the whole organisation than disclosing any one of those numbers alone. The US and UK requirements to disclose pay ratios are positive, but it is becoming harder to say that they go far enough; what they do indicate is that many companies have many more issues of unfairness than both Implats and Woolworths seem to have, notwithstanding the difficult and unfair national context that both of those companies face.

It’s particularly welcome that both companies looked at in a little detail for this post disclose their number of employees and that all of them receive at least the living wage. As I’ve said in a previous blog, I think all companies everywhere should be disclosing these datapoints as the start of baseline information on social factors that can be aggregated across portfolios. The South African remuneration approach pushes companies to think much more about fairness, and companies are rising in a variety of positive ways to this challenge. Other countries have something to learn from King IV’s call for fairness, and companies elsewhere in the world from how South African businesses are responding to that call.

* ‘median worker’ is clearly a shorthand for the worker who is at the middle of the pay distribution (often calculated by shorthand methods). No worker is average.

See also: The social footprint, and Maundy Thursday’s gifts

Fairness – the human lens for addressing our current challenges

The madness, let alone unfairness, of US executive pay

San Francisco’s Overpaid Executive Gross Receipts Tax

Max 12:1 Campaign

Impala Platinum Annual Report 2022

Impala Platinum Fair Pay Policy Statement and Guiding Principles

King IV Corporate Governance Code, Institute of Directors South Africa, 2016

OECD data: income inequality

Woolworths Annual Report 2022

Political fairness: a failure

The latest polls carried out under the banner of Lord Ashcroft have just been published. The title They think it’s all over suggests that the news for the ruling UK Conservative Party is not good. Ashcroft is a former treasurer and deputy chair of the Party – often informally called the Tories – and in recent years has mapped its decline. The subtitle of the report Can the Tories turn it round? shows Ashcroft’s own focus. But really the news from much of the polling is bad for any politician: there is not much eagerness and positivity around any party, or the overall political process.

One result in particular stands out for this blog: responses to the question of whether people believe that either the Conservatives or their rivals in the Labour Party ‘stand for fairness’.

It’s welcome that Ashcroft asks this question. With a cost of living crisis and worrying inequalities all around us this could be, perhaps ought to be, the political assessment of our times. Fairness could be an issue that plays for either end of the political spectrum: it isn’t clearly either a left- or a right-wing issue.

The polling result is terrible news for the Conservatives. They face a 25% deficit on the issue, their second largest gap overall, outdone only by the 36% margin on the question of which party wants to help ordinary people get on in life. Only 4% of voters believe that the Conservatives stand for fairness. The underlying data that Ashcroft also discloses reveals that only 9% of those who voted for the party in 2019 believe that they stand for fairness, and just 17% of those expecting to vote for them at the next election do.

But the poll result is also pretty bad news for Labour. Their lead is impressive, but it more reflects the dire result for the Conservatives than a positive view of Labour. Overall, only 29% of people believe that they stand for fairness. Even among their supporters only a small majority believe that they do: 56% of those who supported them in 2019, and 59% of those likely to vote for them next time around. Under half of every other group of voters thinks the Labour Party stands for fairness.

This is surely a political failure. On a crucial issue of public concern that is central to the problems our nation and the world are facing, neither party is demonstrating real leadership.

It does leave an opportunity: seizing and deploying the language of fairness and expressing it through policies could resonate deeply with voters over the next couple of years. Either party could use the concept as a rallying point, indeed potentially a focal point for their manifesto. Will either rise to that challenge?

They think it’s all over, Lord Ashcroft Polls, November 2022

Underlying data tables

Investor actions to drive value and fairness through the Rule of Law

Investors can preserve and enhance value – and also enhance fairness – by building considerations of the Rule of Law into their investment approaches. If they act to reinforce the Rule of Law, there’s scope for them to bolster returns. If they don’t, they risk a significant loss of value over time.

Economies work better when the Rule of Law is in place. More commerce happens because businesses can trust each other, with the legal regime as something to fall back on if need be. Business occurs in the formal sector rather than informally, bolstering tax revenues and the overall robustness of the system. Investors can invest more because they have greater certainty that they will be able to retrieve their investments as well as make a fair return upon them.

The Rule of Law is fairness. By requiring that all, even the most powerful, are subject to the legal system, it ensures that governments and officialdom need to act fairly between parties and not in an arbitrary way. It is the basis on which commerce can happen without weaker parties fearing that they will be exploited by stronger ones in an excessively unfair way. It underpins capitalism by allowing us to believe it is worthwhile to agree contracts and to trust that they will be fairly enforced, and to believe that our property rights will be protected. The counterfactual of an absence of the Rule of Law makes for riskier business and riskier investments, and simply fewer investment opportunities because economic activity shrinks without these protections being in place.

Investors thus need to work to reinforce and bolster the Rule of Law so that their investments can prosper and flourish:

“This paper attempts to draw out the interdependence between economic prosperity, long- term investment and ESG, and the Rule of Law. It offers investors insights into the ways in which their ESG activities already interact with Rule of Law concepts and delivery. It seeks to develop ways in which this background issue can be brought more into the foreground of investor and company ESG activities.”

This quote is from my recently-published discussion paper for the excellent Bingham Centre for the Rule of Law. The paper also sets out concrete actions that investors can take to deliver on bolstering the Rule of Law. Among the tools available within the paper are a set of questions that investors might ask as part of these efforts. Reflecting the different roles in the investment chain, these questions come in different sections. Most notable are questions from asset owners to their fund managers, and questions from fund managers to their investee companies and other assets.

Among the questions for asset owners to ask their fund managers are:

  • Which countries, if any, would you avoid investing in because of Rule of Law concerns? If none, why not? Why do you believe that you have sufficient protection for your investments in the absence of confidence in the Rule of Law?
  • We note your increased exposure over the period to investments in [country XXX]. What due diligence have you done to be confident that the Rule of Law is sufficiently in place in that country for you to be assured of the returns you hope for from those investments?
  • How do you integrate Rule of Law considerations into your stewardship activities, either in terms of activities to deliver against Principle 4 of the UK Stewardship Code 2020 or in your dialogues with investee companies?
  • What are you doing to help ensure a fair playing field for companies that are seeking to maintain high ESG standards across their activities and supply chains, so that they are not undercut by less scrupulous competitors? How do you avoid investing in those less scrupulous competitors?

The questions that asset managers might ask their investee companies include:

  • Which countries, if any, would you avoid investing in or working with suppliers from because of Rule of Law concerns? If none, why not? Why do you believe that you have sufficient protection for your investments and stakeholders in the absence of confidence in the Rule of Law?
  • Which countries do you operate in where you are most concerned about your ability to rely on the legal system to enforce your rights?
  • Are you confident about your ability to repatriate cash from your operations in [country YYY]?
  • Where do you see legal and regulatory frameworks eroding that you believe may be a cause for concern in future years?
  • Which countries do you operate in where you are most concerned about the extent to which the law allows others to outcompete on the basis of treating stakeholders less well than you believe is appropriate for your business?

The Rule of Law is fairness. It underpins good business. Smart investors who want to have good businesses and strong economies to invest in therefore have a clear interest in reinforcing the Rule of Law. Asset owners need to include this in their oversight efforts.

See also: The Rule of Law is fairness; Dobbs isn’t

Board actions to drive value and fairness through the Rule of Law

The Rule of Law and investor approaches to ESG: Discussion paper, Paul Lee, Bingham Centre for the Rule of Law, September 2022

Board actions to protect value and boost fairness through Rule of Law

Board directors need to think about their company’s exposure to countries with a weak Rule of Law. If they don’t, they risk a significant loss of value to their business over time.

The risk to value from getting this wrong is substantial. One of the case studies in my recently-published discussion paper for the excellent Bingham Centre for the Rule of Law highlights a backdoor to cyber-attack that some companies opened up through operating in a country with weak Rule of Law. When the cyber-attack came it was one of the costliest in history. At least five major multinationals have each acknowledged losses of hundreds of millions of dollars from the attack; the total cost is estimated at $10 billion. The loss of confidence in affected businesses was on top of these high financial costs. Boards need to be giving this active consideration, or they risk substantial losses of value.

As well as value, the Rule of Law is fairness. By requiring that all, even the most powerful, are subject to the legal system, it ensures that governments and officialdom need to act fairly between parties and not in an arbitrary way. It is the basis on which commerce can happen without weaker parties fearing that they will be exploited by stronger ones in an excessively unfair way. It underpins capitalism by allowing us to believe it is worthwhile to agree contracts and to trust that they will be fairly enforced, and to believe that our property rights will be protected.

The Rule of Law is thus a basic foundation for companies to be confident in doing business in a country. Companies, and their boards, need to work to reinforce and bolster the Rule of Law so that their businesses can flourish. Some seek to sidestep local Rule of Law issues by contracting under the law of other jurisdictions (most usually either England or New York). But even when this is done risk exposures remain, and boards need to understand those risk exposures and to reassure themselves that those risks are understood and managed – and that efforts are in place to minimise them over time. Supply chains extend many companies’ risk exposures into markets where their direct control will be minimal.

My recent paper highlights all of this, and sets out concrete actions that boards can take to deliver on it. Among the tools available within the paper are a set of questions that board directors might ask executive management to gain reassurance and also to influence a greater effort to bolster the Rule of Law by their companies. These questions include:

  • Which countries do we operate in where it is most difficult to work according to the standards we aspire to? What can we do to address this and alleviate any risks that arise, reputational or otherwise?
  • What countries are we exposed to through our supply chains where the standards are lower than we might expect? What can we do to address this and alleviate any risks that arise, reputational or otherwise?
  • What frameworks can we choose to apply in those countries to ensure that we are living up to the standards that we believe are necessary? Who else should we work with to build such frameworks if they do not exist?
  • Are our pay and incentive structures right in markets where there is a high perception of corruption risk? How can we be confident that our staff will not be tempted to behave inappropriately?
  • Are there any particular cyber security issues that arise from our operations in individual countries? Could our protections be enhanced by better regulations or other standards, and heightened enforcement? What could we do to support such steps?

The Rule of Law is fairness. It underpins good business. Good businesses therefore have a clear interest in reinforcing the Rule of Law. Boards need to include this in their oversight efforts.

See also: The Rule of Law is fairness; Dobbs isn’t

Investor actions to drive value and fairness through the Rule of Law

The Rule of Law and investor approaches to ESG: Discussion paper, Paul Lee, Bingham Centre for the Rule of Law, September 2022

An index of fairness

One reason I favour the concept of fairness over discussions of inequality is because of its imprecision. Fairness is a sense, a feeling – unfairness generates a visceral discomfort, waking primaeval emotions bred into us by millennia of successful evolution. Inequality is dully a number, usually reduced to a single economic metric, most often the Gini coefficient. The unmeasurable is more powerful, I believe, than the measured.

So I was wary when the excellent Fairness Foundation announced plans for a Fairness Index. Would they be trying to reduce fairness to a similar single number, ignoring the power of it as a driving force for change? I should, of course, have had more confidence.

What the Fairness Foundation has done is much, much richer than trying to develop a single index metric. Rather, it has gathered three headline measures under each of its five fair necessities – Fair Essentials, Fair Opportunities, Fair Reward, Fair Exchange, Fair Treatment.

Here are two samples of these measures, first those under the banner of Fair Opportunities:

And second, the measures regarding Fair treatment:

But the Fairness Foundation recognises that even having 15 headline metrics doesn’t go far enough to capture the emotional richness that is the sense of fairness. Instead, it goes further, and proffers underlying statistics to enable us all to gain greater understanding of what drives the headline metrics and where the levers might be to start addressing the unfairnesses that they reveal.

It goes further still, though, by providing what it calls ‘Substance’, a collation of major studies and reports that capture deeper insights into the problems of fairness that we currently face. These are from groups such as the Child Poverty Action Group, the Joseph Rowntree Foundation, the Resolution Foundation, the High Pay Centre and many more. It also offers ‘Solutions’, under three headlines:

  • Making Jobs Better
  • Making the essentials affordable
  • Taxing wealth better

There are also a survey of public sentiment – which showed the following striking difference between sentiment of those questioned before seeing the Index measures and those surveyed after seeing them – and further perspectives and resources. It is a rich seam of materials.

The richness of this suite of data and insights means that the Index, rather than being a single number, provides real and fresh insights, and possible ways forward too.

Speaking at the launch webinar, Torsten Bell, CEO of the Resolution Foundation, noted the danger of headline numbers that normal indexes and averages can provide. Policymakers often miss trends and shifts by focusing on averages, he said, referencing as an example the home ownership crisis for younger people having been masked by headline numbers on ongoing rises in ownership overall. To avoid such failures to notice problems, he argued, policymakers need to look within averages rather than simply focus on the averages. Of the Fairness Index, he said: “This index does a good job of providing lots of different cuts of the data to try to discourage us from missing important trends hidden by averages.”

The Fairness Index isn’t an index. In many ways, the individual measures and their collation aren’t indices either. Rather they are indicia – a set of indicators – that collectively reveal something much more. They’re all the better for that, rather than trying to distil fairness to a single number which would remove meaning and risk masking trends. That richness of information gives us a good chance of understanding the sense of fairness and being moved to try to address current unfairness.

See also: What gets measured gets managed – unfortunately

Fairness Foundation

Fairness Index

Fairness Index launch webinar

Taxes to drive fair growth

Closing gaps in taxation is a necessary step to fairness. It can also boost growth, according to recent work from the IMF:

“Increasing the efficiency and equity of revenue collection is therefore crucial to help mitigate the negative distributional effects of the pandemic and higher commodity prices. A more efficient tax system would help boost revenue and fund social and infrastructure spending, which can spur growth and reduce inequality of opportunities.”

As it happens, the paper is focused on challenges in the Middle East and Central Asia, but it is clear that the arguments apply elsewhere too. We know generally that fairer tax systems are better for growth than those favouring the wealthy. And the prescriptions that the IMF staffers produce certainly seem to have application beyond the region:

  1. Reducing tax exemptions on personal and corporate taxation
  2. Removing inefficient corporate tax incentives and improving corporate tax design
  3. Increasing progressivity in personal income taxes
  4. Improving the design of value added taxes (VAT)
  5. Developing taxation of wealth

They also make a series of recommendations that effectively centre on bolstering the Rule of Law and increasing trust in institutions.

I won’t comment on all of these potential prescriptions. I’ve argued strongly before of the need to equalise capital gains taxation with income tax rates: the persistence of capital gains strongly suggests it is much more income-like in practice than its favourable tax treatment would imply. I’ve also argued that companies need to consider fairness in their approaches to taxation. I won’t repeat those arguments here. Instead I’ll look briefly at two further areas that may also be worthy of attention from policy-makers: progressivity in personal income taxes and closing VAT loopholes.

On both personal taxation and corporate taxation, the paper makes clear it is not so much the headline top rates of tax that matter, but the rates that individuals and companies in practice face. The existence of exemptions and incentives can distort effects, and it’s the overall structure of the tax is what matters. This chart, on personal income tax rates in what the IMF calls advanced economies, is particularly striking:

What the chart calls ‘redistributive capacity’ really means the extent to which redistribution is in practice delivered by the tax system – countries below the line are failing to deliver fully on their opportunity for more fairness through the tax system, while those above the line are delivering more fairly. There must be real value in exploring how those above the line are delivering greater efficiency in terms of the progressivity – fairness – of their personal tax systems. Others could follow.

To turn to VAT: sales taxes are usually deemed regressive, because they apply to sales whether they are to the poor or to the wealthy. However, a study by Rita de la Feria – recognised as one of the world’s leading experts on sales taxes – and Australian colleague Michael Walpole that considered European and Australian experiences with VAT and the ways in which the taxable base is manipulated argues convincingly that this is not true: “since consumption, even of essential items, is overwhelmingly by the highest income households, when there is a VAT reduction—assuming this reduction is passed-through—it is those households that primarily benefit from VAT decreases”. They note that this will be particularly true in developing economies with significant informal economic sectors (as in such situations, many transactions by poorer people will never be subject to sales taxes while the wealthier are much more likely to trade in the formal sector), but it is true more broadly.

Their conclusion on this is therefore:

“reduced rates of VAT…effectively subsidise the consumption of the households at the higher levels of the income distribution. This in turn means that, contrary to intuition, reduced rates of VAT, as with any other exclusions from the base, do not necessarily reduce the regressivity of the tax, but can, on the contrary, increase it.”

Clearly, the progressive impacts of sales tax increases (by removing distorting lower rates, including zero rates) will be bolstered if the increased revenues are used to enhance welfare payments or otherwise support poorer families. The study argues that this may be needed to overcome the likely arguments against reform, which will tend mistakenly to misuse fairness arguments. The study sets out a large range of ways in which sales tax systems around the world have embedded unfairnesses based on arbitrary distinctions between products that lead to significant differences in the taxable rate. This opens a significant opportunity.

The IMF team states: “Disruptions in lives and livelihoods as a result of the pandemic and, recently, the war in Ukraine have made revenue mobilization more pressing to fund critical infrastructure and social spending and support inclusion.” That’s true around the world. Rising to the challenge of tax fairness is a challenge for global governments, not just those in the Middle East, and it will help unlock growth.

See also: Taxing gains, closing loopholes

Talking with the taxman about fairness

Fair growth

Revenue Mobilization for a Resilient and Inclusive Recovery in the Middle East and Central Asia, Geneviève Verdier, Brett Rayner, et al, IMF Departmental Paper, July 6 2022

Middle East Needs Fairer Taxes to Aid Growth and Ease Inequality, Jihad Azour, Priscilla Muthoora , Geneviève Verdier, IMF blog, July 6 2022

The Impact of Public Perceptions on General Consumption Taxes, Rita de la Feria, Michael Walpole, December 2020, British Tax Review 67/5, 637-669

Fair growth

“It will trickle down”

Nope. They’ll build spaceships with it.

So reads a popular message on social media. We know that the wealthy live in a very different world from the majority, and experience things like inflation differently. It means that tax cuts for the wealthy may bring some growth – but it is likely to be a very different form of growth from that which would come from poorer members of society having more money (whether that might be through lower taxes, more social security benefits, or simply being paid higher salaries). Even those who believe that growth in GDP (a very narrow definition of human success) is a good and desirable thing need to be thinking about not just growth but fair growth.

In considering whether growth is fair, we also need to consider what actions may best deliver greater growth. And there is strong evidence that lowering taxes for the wealthy leads to much lower growth than more broadly-based tax reductions.

In a 2019 study Owen Zidar, now Professor of Economics and Public Affairs at Princeton University, used differences between the distribution of incomes in different US states to provide a series of natural experiments giving insight into what the impact of changes in tax rates at different parts of the pay scale are on growth.

Zidar’s conclusion is simple:

“If policy makers aim to increase economic activity in the short to medium run, … tax cuts for top-income earners will be less effective than tax cuts for lower-income earners.”

He also finds:

“the positive relationship between tax cuts and employment growth is largely driven by tax cuts for lower-income groups and the effect of tax cuts for the top 10 percent on employment growth is small.”

This shouldn’t be surprising – the growth sparked by lower income households having higher spending capacity is likely to be spent locally, rather than spent on more esoteric, often imported high status goods or international experiences (let alone spaceships!). Growth sparked by lower income households is also certain to be more geographically spread across a given country given the way the wealthy concentrate themselves in a limited number of places (a physical reflection of the metaphorical different world in which they live). Given the way we define GDP, shifting activity back into the economic zone from charitable activity – such as buying goods in supermarkets rather than reliance on foodbanks – will also be reflected in growth figures.

The world is worried about anaemic growth. In large part, this has arisen because of the persistent downward pressure on middle class pay levels. Addressing that directly may offer a better response to the challenge than any other. Fairer pay for these workers – whether or not sparked or supported by tax or social security changes – may provide the best route to fair growth.

See also: Inflation’s two separate worlds (at least)

The growth myth

The centre cannot hold

Tax Cuts for Whom? Heterogeneous Effects of Income Tax Changes on Growth and Employment, Owen Zidar, Journal of Political Economy, 2019, vol. 127, no. 3

Hopes for fair pensions

“low-paid workers continue to face a greater risk of receiving a pension that delivers an inadequate standard of living in retirement”

It’s the starkest of the conclusions of a new analysis of pension saving. This Resolution Foundation work reveals we are a long way away from having fair pensions.

If you talk to pensions specialists about making pensions fairer they tend to think immediately of GMP Equalisation – the arcane process of addressing historic gender inequalities in pensions. Though the issue has been known for some years, the complexities of addressing it mean it is far from finished working through the system. But huge though this unfairness is, there is a much greater issue out there: whether future pensions will be enough to avoid significant proportions of the population retiring into poverty. People may be being fooled into the current minimum savings requirements into thinking they will achieve the fair and comfortable retirement that people expect at the end of their working lives.

Unfortunately, the Resolution Foundation analysis on Living Pensions suggests that many will instead retire into destitution. The Living Pensions work is so-called because of its association with the Living Wage Foundation, which presses that pay should at least reach a minimum threshold that enables people to live a decent life. By analogy, the Living Pensions analysis seeks to identify levels of pension saving that should enable people to live a decent life in retirement – and it identifies how far away saving levels are currently from those needed to deliver that fair outcome.

The work on the Living Pension is based on the new world of pensions. I explain this new world briefly at the foot of this blog to avoid the details getting in the way of the message about fair pensions, and our current lack of them.

The Resolution Foundation’s work identifies minimum necessary savings levels of 11.2% for those saving for their whole working lives, or 16.1% for those starting to save later (in effect, some time in an individual’s 30s). In 2019, the minimum contribution level as a portion of salary that must be paid under auto-enrolment rose to 8%. Even though this 8% falls below the levels estimated necessary to achieve a Living Pension – it is notably half the rate estimated to be required for those who do not save for the whole of their working lives – it isn’t being achieved. “Given the influence the auto-enrolment scheme is having on workers’ contribution rates, it is not surprising that we find relatively few workers are saving at or above the [Living Pension] benchmarks,” says the Resolution Foundation. Statistics suggest saving levels for the poorest – where a fair pension threshold must matter most – may be as low as 3-5% on average.

Even with auto-enrolment, the Resolution Foundation analysis of ONS data shows that fully 35% of workers are still not saving into a pension at all. That number rises to 74% for those in the lowest fifth of earners – nearly half of whom do not earn enough to reach the threshold at which they must be auto-enrolled (£10,000; and contributions are only made on earnings above £6,240).

And that is before the cost of living crisis fully kicks in and makes more people study carefully every item of their expenditure, which may include paying into pensions. While every employee must be auto-enrolled into a DC scheme, everyone can choose to opt out and stop their contributions. Anecdotes suggest an increase in opting out has already begun.

The overall statistics show, positively, an increase in overall levels of pension saving (though this is before any impact from the cost of living crisis). But they also show just how far below the necessary levels of saving we are overall:

Retirement savings rates, Living Pensions, Resolution Foundation

No wonder that a number of pensions experts are very worried. Particularly striking was a recent LinkedIn post from Charlotte O’Leary, CEO of Pensions for Purpose, which began “I cried yesterday…”. Charlotte wonders if it will take a generation retiring into poverty before we as a nation begin to save more appropriately for our pensions.

Helpfully, the Living Pension calculations are not just based on percentages of salary but also offer absolute rates of saving necessary to build funds sufficient for a decent living standard in retirement. These are £2,100 a year for those saving for their whole working lives, and £3,000 for those who only start to save later. This has to make sense, and fits with the heritage of the Living Wage Foundation. Only real levels of cash can be lived off, not percentages of variable salaries over a working life. A Living Pension is only fair and can only amount to that baseline necessity if it provides an absolute threshold of cash that will keep people at a decent level of living.

Unfortunately, under 20% of us are reaching these thresholds for saving. The Resolution Foundation says: “82 per cent of workers (again, approximately 16 million) [in] 2018-20 were saving at or below the ‘whole career’ cash benchmark, and even more (89 per cent, or 18 million) were saving below the ‘all age’ cash benchmark.” Most of those saving at these levels are earning significantly more than the real living wage – almost all are in the top two-fifths of earners – so even those who are meeting the Living Pension cash thresholds risk finding their spending ability in retirement being much more constrained than they are used to. As with previous failures to deliver pension fairness, there is also a major gap between the sexes: 23% of men meet the ‘whole career’ cash benchmark, while only 15% of women do. We are storing up real problems for fairness in the future.

This point that calculating pensions merely as a percentage of salary may give the wrong answers and that we need to consider much more actively absolute numbers has a counterpoint at the upper end of the pay scale. Investors have pressed hard that executive directors should not receive pension benefits that go beyond those of the wider workforce – and now, some four years on from this being specifically referenced in the UK Corporate Governance Code and in investor expectations, this has largely been delivered (in the UK at least; elsewhere is another story) – at least in terms of the percentage of salary. But any fair assessment of whether the pension benefits go beyond those enjoyed by the broader workforce surely needs to go beyond just percentages: if percentages don’t tell the whole story regarding fair pensions at the bottom end of the pay scale, then perhaps we shouldn’t be so satisfied just with aligning percentages at the top end. Any company that is aspiring to be a fair wage employer needs also to consider being a fair pension one too, and that probably requires considerations of minimum cash payments into staff pension pots, not just percentage payments that may or may not match those enjoyed by the boss.

There is also a structural complexity to delivering fair pensions. My old pal and former colleague David Pitt-Watson made the point in questions at the launch event that the Living Pensions calculations entirely miss longevity risk – the pensions jargon for those who live longer than expected. Living longer is obviously a wonderful thing for the individual and their families in general terms – except that if their pension is based on a fixed pot of money, living longer risks individuals falling into destitution. Because they are based on average necessary pension pots, and based on a regulatory system that means every individual’s pension pot belongs to them alone, some of those with Living Pension average pots will die prior to their pension pot being used up and some will die after. Those who live longer risk having used up their pension pot before death and so having years where their pension isn’t fair, even if they have in fact reached the Living Pension threshold. The Living Pension in the context of the current defined contribution (DC) model may not turn out to deliver on the name even for half of those who achieve the threshold savings levels and fund value.

David has a long heritage in the world of pensions, and has helped lead work, not least at the RSA, on a new form of pension for the UK, Collective Defined Contribution (CDC). CDC pensions have just been given initial regulatory approval and we are likely to see the first launched shortly. CDC offers some opportunity to address this problem with the defined contribution world. The collective element of CDC allows pooling of longevity risk; it is only with such pooling that the unfairness of pots running out before an individual dies can be addressed.

In a personal conversation, David summarises the position simply: “It isn’t a pension if it’s just a cheque.” The work by industry body the Pensions and Lifetime Savings Association on its Retirement Living Standards re-emphasises this: its work on living standards in retirement is all about income not pension pots, and suggests a ‘minimum’ income in retirement needs to be £10,900, or £16,700 for a couple.

It seems that in a post-defined benefit world only within the context of CDC can fair pensions actually deliver on the promise of a Living Pension.

In brief: the new world of pensions

There are three aspects to the new world of pensions: the move from the historic Defined Benefit (DB) structure to a Defined Contribution (DC) approach; pension freedoms; and the requirement that all employers now offer all staff a workplace pension, through so-called auto-enrolment.

Defined Benefit pensions – sometimes called final salary schemes – were the promise from an employer that they would pay a fixed annual pension to former employees, based on their years of service and usually the final salary that they were paid. For example, many individuals built up promises worth a sixtieth of their salary for each year of service (though some schemes were based on fortieths or eightieths) – the benefit was the fixed element and employers promised to provide the funding necessary to support this. DB now feels like ancient history, partly because its implicit assumption of working for one employer for much of one’s career now seems an anachronism and partly because people lived a lot longer than expected, making the pensions promise much more expensive than planned. Companies have regretted their generosity and the balance sheet risks that such pensions brought and have largely withdrawn from offering defined benefits – though many are still funding those past promises. In large part, DB pensions are now only available in the public sector.

In the DC world the only thing that is fixed is, as the name suggests, the contribution – the amount of money put aside each month. This is used to buy investment products that hopefully will perform well enough to provide scope for pension payments after retirement. Individuals face much more risk in the DC world, especially investment risk over their lifetime of saving. While death, like taxes, is a certainty, its timing isn’t, and individuals in a DC world also take on the financial risk that a long life may bring, that even the largest pension pot may run out, with no sharing of risks and no backstop (other than state pension provisions).

Former chancellor George Osborne took the further step along this line of seeing pension saving just as the creation of a pot of money rather than a later-life income stream. In 2015 he announced what were billed as pensions freedoms – releasing the obligation to use pension pots to buy annuities (rights to income payments) and allowing people to unlock their pension pots for other purposes at the age of 55. Many have used this freedom wisely, but many have found it is a freedom to lose money through mistaken investments and fraud. Often it seems the wealthy have paid for valuable advice and the less well-off have been exploited by fraudsters. The full consequences of these freedoms are yet to be seen.

Automatic (usually auto-) enrolment is the requirement since 2012 that every employer should offer all staff paid more than a minimal level some form of pension provision. Minimum levels of saving are 8% of qualifying earnings (between £6,240 and £50,270), at least 3% from the employer and the remainder, up to 5%, from the employee (when first introduced the total auto-enrolment minimum was 2%, 1% from each party). This has helped drive much broader pension saving, and led to the creation of a number of specialist workplace pension providers, such as Nest and NOW Pensions. Nest in particular, the largest of the new providers, is now a substantial financial institution with £24 billion assets under management.

Full disclosure: I am a Nest customer and have provided some stewardship advice to NOW. I have also provided advice to a trustee of the likely first CDC pension provider.

Living Pensions: An assessment of whether workers’ pension saving meets a ‘living pension’ benchmark, Nye Cominetti, Felicia Odamtten, Resolution Foundation, July 2022

“I cried yesterday…”, Charlotte O’Leary, CEO, Pensions for Purpose, LinkedIn post, 3 August 2022

UK Corporate Governance Code 2018, Financial Reporting Council

Investors to Target Pension Perks and Poor Diversity in 2019 AGM Season, the Investment Association, 21 February 2019

On track for fair pensions launch event, 28 July 2022

Collective Defined Contribution Pensions Forum, RSA

A new third way for pension savers, Guy Opperman, Pensions Age, 1 August 2022

Retirement Living Standards, Pensions and Lifetime Savings Association

Should people be saving more for retirement?, Institute for Fiscal Studies podcast, 10 February 2022