Accounting & Inequality: Tackling Moral Progress Through Accounting

I would like to start with a quote from A. C. Grayling, accomplished philosopher and author. “Anything that can be done, will be done if it brings profit or advantage to whoever can see that it’s done. On the other hand, some things that can be done, won’t be done, especially if there is something to lose for some”. This essentially to me is the reason why some of the global crises have and will continue to exacerbate inequality. Climate change is one example. The pandemic was another.

Defining Inequality

When we think about what is just, we think about who gets what? A distribute of paradigm looks at wealth levels, material goods, and social position to evaluate the well-being of society. The term inequality refers to a lack of equality between different groups within society and asks whether it's just. For many, inequality is one of the greatest challenges facing humanity in the 21st century because it erodes prosperity and destabilises society. How can we tackle the shared problem of climate breakdown when society is seriously stratified? Many of us can recognise inequities in everyday conversation, whether about race, gender, climate, or the historical geographies of inequality caused by colonialism. Inequality is another word for the serious social challenges facing human society, which are systemic and woven into the very fabric of daily life and are deeply unjust. Those least responsible for society's ills are suffering disproportionately. This only breeds further division in society when we need greater cohesion to solve collective problems like climate change and a viral pandemic.

There's a little doubt that Thomas Piquetti's 2014 book, Capital in the 21st Century, is a key text shaping present-day concerns about inequality, or at least what made inequality a key concern of elites. His book presented evidence from decades of historical tax records, showing how the poles of inequality move further apart and closer together. His central argument is a distributive one, that when returns to capital from wealth, surpass those from employment income, inequality worsens. This simple idea is very controversial among economists, as well as politicians, who believe that inequality is tied to the opportunities provided, not the outcome of government policy.

Income and wealth inequality are deeply entrenched in our modern world. Stark disparities persist both within and between nations, affecting billions of lives. According to the Global Wealth Report 2022, the wealthiest 1% of the global population owns more than 43% of the world's wealth, while the bottom 50% holds just 1.6% of it. In developed countries, the income share of the top earners has soared over the past few decades, while wages for the majority of workers have stagnated. The World Inequality Database reveals that the top 1% of income earners in the United States captured more than 20% of the national income in 2020, a level not seen since the 1920s.

Such disparities have far-reaching consequences, leading to social unrest, political instability, and diminished economic growth. The accounting profession must employ its expertise to highlight these trends, as they significantly impact financial reporting, corporate performance, and regulatory compliance.

Inequality, also as an impediment to meritocracy, stifles performance and productivity. Bias and discrimination hinder individuals from reaching their full potential, limiting the diversity of thought and innovation essential for progress. Studies have shown that diverse teams outperform homogenous ones by up to 35% in terms of financial returns. Yet, inequality often leads to unequal representation, hampering the full utilisation of human capital. In the business and accounting field, the International Ethics Standards Board for Accountants (IESBA) emphasises the importance of promoting ethical behaviour, including the fair treatment of all individuals, regardless of their background. Encouraging anti-discriminatory practices and implementing diversity and inclusion policies and targets can lead to a more equitable workplace that fosters creativity and innovation.

Sustainable Development Goals addressing inequality

The United Nations' Sustainable Development Goals (SDGs) present a transformative agenda to address inequality and promote sustainable development worldwide. As accountants, we can play a pivotal role in aligning corporate strategies and financial reporting with the SDGs. Integrating these goals into our practices can facilitate positive social and environmental impacts, fostering a more inclusive and equitable society.

The Global Reporting Initiative (GRI) provides guidelines for organisations to disclose their environmental, social, and governance (ESG) performance, aligning their efforts with the SDGs. By measuring and reporting on key indicators related to inequality, businesses can proactively address social and economic disparities. Several of the United Nations Sustainable Development Goals (SDGs) address inequality in various forms. Here are some of the SDGs that specifically focus on reducing inequality:

1. SDG 1: No Poverty - This goal aims to end poverty in all its forms, including extreme poverty, and ensure that all people have access to basic resources and services.
2. SDG 5: Gender Equality - This goal aims to achieve gender equality and empower all women and girls, promoting equal access to opportunities and eliminating discrimination and violence against women.
3. SDG 10: Reduced Inequalities - This goal directly targets inequality and aims to reduce inequalities within and among countries. It addresses issues such as income inequality, social inclusion, and access to basic services.
4. SDG 16: Peace, Justice, and Strong Institutions - This goal aims to promote peaceful and inclusive societies, providing access to justice for all, and building effective, accountable, and inclusive institutions.

These goals are interconnected and addressing one can often contribute to progress in others. Reducing inequalities is a critical aspect of achieving sustainable development and ensuring that no one is left behind in the pursuit of a better world for all.

Inequality as it relates to our First Nations Peoples

The Closing the Gap strategy and reports indicate the continued inequality issues faced by our indigenous community. Some statistics of inequality are presented below.

•      Indigenous Australians experience a life expectancy gap of approximately 8.6 years for males and 7.8 years for females compared to non-Indigenous Australians. (Source: AIHW, 2021)

•      The mortality rate for Indigenous infants is twice that of non-Indigenous infants, reflecting the persistent health disparities. (Source: AIHW, 2021)

•      Only 36.6% of Indigenous Australians aged 20-24 have completed Year 12, compared to 65.6% of non-Indigenous Australians in the same age group. (Source: ABS, 2019)

•      The overall unemployment rate for Indigenous Australians is 9.4%, significantly higher than the 4.6% rate for non-Indigenous Australians. (Source: ABS, 2021)

•      Indigenous Australians are over-represented in the criminal justice system, comprising 28% of the adult prisoner population, while representing only around 3% of the total Australian population. (Source: AIHW, 2021)

•      In remote and very remote areas, 31% of Indigenous households experience overcrowding, compared to 4% of non-Indigenous households. (Source: ABS, 2018)

•      Indigenous Australians make up 3% of the Australian population but account for 27% of homelessness. (Source: ABS, 2016)

•      As of 2020, only 44.8% of Indigenous Australians aged 15-64 were employed, compared to 74.3% of non-Indigenous Australians in the same age group. (Source: ABS, 2020)

•      Indigenous Australians own only 0.2% of Australia's total land area, highlighting ongoing land rights and ownership issues. (Source: AIATSIS, 2021)

•      Approximately 17% of Indigenous Australians do not have access to clean drinking water, further impacting health and wellbeing. (Source: ANU, 2020)

Inequality as an issue for long term focus

We have a moral obligation to consider the well-being of future generations and to mitigate potential inequalities that may arise as a result of our actions today. Present-day inequalities can have lasting effects on future generations, perpetuating social and economic disparities beyond our lifetime. The importance of inter-generational equity, which involves ensuring that future humans have a similar chance to flourish as current generations needs to be considered. We have obligations to help those currently suffering from poverty and inequality, we also have an obligation to prevent or mitigate potential inequalities that future generations may face.  Effective altruism is one mechanism, which encourages individuals to use their resources and efforts to make the most significant positive impact on the well-being of others, including future generations. Much more focus needs to be paid to the importance of reducing existential risks, such as climate change or nuclear warfare, that could have catastrophic consequences for future generations and exacerbate inequality. Policymakers should consider the long-term consequences of their decisions and adopt measures that prioritise the well-being and fairness for future humans. There is also a need to invest in solutions that address the root causes of inequality and foster sustainable and equitable societies for the long run.

Climate change and inequality

In an increasingly interconnected world, the ramifications of climate change ripple far beyond environmental concerns, transcending into the realms of social and economic disparities. This multifaceted crisis not only amplifies pre-existing inequalities, but also gives rise to novel forms of injustices, underscoring the urgent need to address the intricate interplay between environmental degradation and societal stratification. As temperatures rise and weather patterns shift, the vulnerable are disproportionately affected, heightening disparities in access to resources, opportunities, and security. Meanwhile, emerging challenges brought about by climate change introduce uncharted territories of inequality, demanding comprehensive and equitable solutions that bridge the gap between environmental sustainability and social justice. Following are examples of where climate change creates new inequalities and inequities, but also exacerbates existing inequalities. 

Creates Inequalities:

Access to Resources:

•      According to the United Nations, by 2050, an estimated 200 million people may be displaced due to climate change impacts, leading to resource competition and potential conflicts in vulnerable regions.

Infrastructure and Urban Planning:

•      In low-income countries, only about 10% of urban areas have proper drainage systems, leaving millions of people at risk of flooding and other climate-related disasters. (Source: World Bank)

Adaptive Capacity:

•      Developing countries that contribute the least to climate change often have limited financial resources to adapt. The Global Commission on Adaptation estimates that investing $1.8 trillion in adaptation measures by 2030 could generate $7.1 trillion in net benefits.

Exacerbates Inequality:

Food Systems:

•      The Food and Agriculture Organisation (FAO) estimates that climate change could lead to a 2% decline in global food production per decade, while demand is projected to increase by 14% per decade. This threatens food security for vulnerable populations.

Livelihoods:

•      Climate change is projected to reduce the income of the world's poorest 10% by up to 20% by 2030. (Source: World Bank)

Health:

•      The World Health Organisation (WHO) estimates that between 2030 and 2050, climate change is expected to cause approximately 250,000 additional deaths per year due to malnutrition, malaria, diarrhea, and heat stress.

Mortality:

•      A study published in The Lancet estimates that climate change is responsible for over 150,000 deaths per year, and this number is expected to rise substantially in the future without effective climate action.

Sea Level Rise:

•      According to the Intergovernmental Panel on Climate Change (IPCC), sea levels are projected to rise by 0.29 to 0.59 meters by 2100. This poses a significant threat to coastal communities, many of which are low-income and vulnerable.

Displacement and Migration:

•      The Internal Displacement Monitoring Centre reported that in 2020, 30.7 million new displacements were recorded, primarily driven by weather-related disasters such as storms and floods.

Gender Inequality:

•      The United Nations estimates that women and children represent 80% of those who are displaced by climate-related disasters.

Indigenous and Marginalised Communities:

•      Indigenous peoples occupy 22% of the world's land surface but are often disproportionately affected by climate change due to their reliance on natural resources for livelihoods and cultural preservation. (Source: World Bank)

Emerging threats such as artificial intelligence and inequality

To address these potential inequalities, it is essential to develop AI and machine learning systems that prioritise fairness, transparency, and accountability. Regulation, diversity in AI development teams, and ethical guidelines are critical to mitigating AI-driven inequality and fostering a more inclusive and equitable technological landscape. Some of the potential inequality challenges from AI are outlined below.

•      Bias in Data and Algorithms: AI and machine learning models are trained on historical data, which may contain inherent biases. If the data used to train these systems reflects existing inequalities, AI can perpetuate and amplify these biases, leading to discriminatory outcomes.

•      Access to AI Technology: The deployment of AI systems requires access to data, computational resources, and technical expertise. Organisations and individuals with greater financial resources and technological capabilities are more likely to benefit from AI, exacerbating the digital divide and widening the inequality gap.

•      Job Displacement and Skills Gap: As AI and automation replace certain jobs, individuals with less access to education and reskilling opportunities may find it difficult to transition into new roles, leading to unemployment and wage disparities.

•      Surveillance and Privacy Concerns: AI-powered surveillance technologies can disproportionately impact marginalised communities, leading to heightened scrutiny and potential privacy violations. These systems can reinforce existing power dynamics, affecting personal freedoms and civil liberties.

•      Automated Decision-making in Services: AI-driven automated decision-making in areas like healthcare, lending, and criminal justice can lead to unequal treatment, as algorithms may inadvertently favour or discriminate against certain groups based on historical data patterns.

•      AI in Education: The integration of AI in educational settings can raise concerns about access to quality education. Students from disadvantaged backgrounds may have limited access to AI-powered educational tools, potentially widening the educational attainment gap.

•      AI in Healthcare: AI applications in healthcare may result in unequal access to advanced medical technologies and treatments. Marginalised communities could be left behind in benefiting from AI-driven healthcare innovations due to disparities in healthcare infrastructure and resources.

•      AI in Financial Services: AI algorithms used in credit scoring and lending decisions can perpetuate financial inequalities by relying on biased historical data, leading to discriminatory practices and limited access to credit for certain groups.

•      AI Concentration of Power: The concentration of AI capabilities in a few dominant companies or governments may lead to centralised control and further entrench existing power imbalances, limiting opportunities for smaller players and individual innovators.

•      Disinformation and Manipulation: AI-driven misinformation campaigns and deepfakes can disproportionately impact vulnerable communities and lead to the spread of harmful narratives, influencing opinions and reinforcing prejudices.

•      AI and Value Lock-in: Value lock-in refers to the unintended entrenchment of biases, prejudices, or normative patterns within AI systems. When AI algorithms are trained on biased or incomplete data, they can inadvertently perpetuate or even amplify existing societal inequalities, leading to discriminatory outcomes. Value lock-in can occur due to several factors, including biased training data, algorithmic biases, lack of diversity in development teams, or flawed evaluation metrics. Unconscious biases in the design process can lead to AI systems that discriminate against certain individuals or reinforce existing power imbalances. Value lock-in can exacerbate societal inequalities by perpetuating biases against marginalised communities, reinforcing discriminatory practices, and entrenching existing power structures. For example, biased AI algorithms used in recruitment processes can lead to unfair advantages for certain groups, perpetuating gender or racial biases. Value lock-in can limit individual agency by shaping and influencing human behaviour in ways that align with predetermined values. When AI systems dictate choices without considering individual preferences, privacy, or autonomy, they can inadvertently restrict personal freedoms and limit human decision-making.

Addressing inequality

Addressing inequality globally requires a multifaceted approach involving various mechanisms and strategies. Below are some key mechanisms that can help tackle inequality on a global scale:

• Social Safety Nets: Implementing social safety nets, such as cash transfer programs, food assistance, and social insurance, can provide a safety net for vulnerable populations, helping to reduce poverty and inequality.
• Progressive Taxation: Progressive taxation, where higher-income individuals and corporations pay a higher proportion of their income in taxes, can help redistribute wealth and reduce income inequality.
• Universal Access to Quality Education: Ensuring access to quality education for all, regardless of socioeconomic background, can empower individuals and provide them with better opportunities for social mobility.
• Equal Employment Opportunities and Fair Wages: Promoting equal employment opportunities and fair wages can help narrow the wage gap and reduce income inequality.
• Access to Healthcare: Universal access to healthcare services can improve health outcomes and reduce disparities in health and well-being among different populations.
• Gender Equality and Women's Empowerment: Empowering women and promoting gender equality can lead to more inclusive and equitable societies.
• Land Reform: Implementing land reforms that provide secure land tenure and equitable distribution of land can address issues of rural poverty and inequality.
• Financial Inclusion: Expanding access to financial services and promoting financial inclusion can help marginalised populations participate in the economy and build assets.
• Decent Work and Labour Rights: Ensuring decent work conditions and protecting labour rights can improve the lives of workers, reducing inequality in the workplace.
• Inclusive Economic Growth: Fostering inclusive economic growth that benefits all segments of society, especially the most vulnerable, can help reduce disparities in wealth and income.
• Support for Marginalised Groups: Targeted support for marginalised groups, such as indigenous populations, refugees, and persons with disabilities, can address specific forms of inequality and discrimination.
• Global Cooperation: International cooperation and partnerships are essential for addressing global inequalities, as many challenges, such as climate change, migration, and trade, require collective efforts.
• Corporate Social Responsibility: Encouraging businesses to adopt socially responsible practices and consider their impact on society and the environment can contribute to more equitable outcomes.
• Public Policy and Governance Reforms: Transparent and accountable governance, along with evidence-based public policy, can create an enabling environment to address inequality effectively.

What’s the role of the accounting profession?

Addressing global inequality is a complex and ongoing endeavour that requires collaborative efforts from governments, international organisations, civil society, and the private sector. By combining these mechanisms and strategies, progress can be made towards a more equitable and sustainable world.

• Inclusive Metrics for Inequality: Accounting can play a crucial role by developing inclusive metrics that go beyond traditional GDP-based measures. For instance, the Genuine Progress Indicator (GPI) takes into account factors like income distribution, social and environmental costs, and wellbeing. Countries like Bhutan have adopted the Gross National Happiness (GNH) index, emphasising holistic development. By incorporating such metrics, policymakers can gain a more comprehensive understanding of inequality and design targeted policies. (Case Study: Bhutan's GNH Index)
• Corporate Social Responsibility Reporting: Companies can contribute to addressing inequality by transparently reporting on their social and environmental impacts. Social audits, like the one done by Danone, reveal how a company's practices align with its mission and social values. This enables stakeholders to hold corporations accountable for their contributions to inequality and encourages responsible business practices. (Case Study: Danone's social audit)
• Taxation Reforms for Wealth Redistribution: Accounting can support progressive taxation reforms to redistribute wealth and address income inequality. For example, implementing a wealth tax, as proposed in some countries, could help fund social programs and reduce the wealth gap. Countries like Norway and Denmark have effectively used progressive taxation to achieve greater income equality. (Case Study: Tax reforms in Norway and Denmark)
• Impact Assessments for Policy Interventions: Accounting methods can be employed to conduct rigorous impact assessments of policy interventions targeted at reducing inequality. By measuring the effectiveness of social programs, policymakers can refine and allocate resources more efficiently. For instance, Brazil's Bolsa Família program has successfully lifted millions out of poverty, aided by careful impact assessments. (Case Study: Bolsa Família in Brazil)
• Environmental Accounting for Climate Justice: Accounting for environmental externalities, such as carbon emissions and pollution, can help address climate-related inequalities. By assigning a price to carbon emissions, the polluter-pays principle can be upheld, encouraging companies to adopt sustainable practices. The European Union's Emissions Trading System (ETS) is an example of such an environmental accounting approach. (Case Study: European Union's Emissions Trading System)
• Integrated Reporting for Stakeholder Value: Adopting integrated reporting frameworks that go beyond financial metrics allows companies to consider a broader range of stakeholders. By acknowledging social and environmental impacts, organisations can create shared value and contribute to reducing inequality. Unilever's Sustainable Living Plan demonstrates how integrated reporting aligns business goals with societal well-being. (Case Study: Unilever's Sustainable Living Plan)
• Inclusive Budgeting and Fiscal Policies: Governments can utilise accounting practices to design inclusive budgets and fiscal policies that prioritise social spending and reduce inequality. For instance, South Korea's National Happiness Fund allocates resources to improve public welfare and quality of life. (Case Study: South Korea's National Happiness Fund)

By incorporating better measurement, adopting progressive financial policies, and promoting socially responsible practices, accounting can become a powerful tool in addressing inequality, fostering more equitable and sustainable societies. These examples showcase the potential impact accounting can have when applied to wicked inequality issues.

The Taskforce for Inequality Related Financial Disclosures (TIFD)

TIFD comes about at a time when there is increasing focus on inequality as an economic and social ill which is already causing significant disruption around the world to the stability of our economies and societies. Inequality is intertwined with other global goals, and we can’t achieve the global goals without also addressing inequality.   

The Task Force on Inequality-related Financial Disclosures (TIFD) is conceived as an explicit systemic risk management framework that can reduce inequality created by the private sector. A collaboration among a broad range of stakeholders, TIFD will provide guidance, thresholds, targets, and metrics for companies and investors to measure and manage their impacts on inequality, as well as inequality’s impacts on company and investor performance. 

The Taskforce on Inequality-related Financial Disclosures (TIFD) and the organisations preparing a Taskforce on Social-related Financial Disclosures (TSFD) – two initiatives that have been developing in parallel – are now consolidating efforts into a single initiative. The shared vision for the Taskforce's mandate is to develop a global framework for financial disclosures with a scope that provisionally encompasses social- and inequality-related risks and opportunities affecting financial stability and long-term enterprise value creation. Recognising market demand for harmonised disclosure guidance, the Taskforce will leverage third-party research and collaborate with existing initiatives to build convergence and identify critical gaps.

The disclosure framework will be designed for consideration in the future work of standard-setting bodies and designed to ensure interoperability with the frameworks of the Task Force on Climate-related Financial Disclosures (TCFD) and the Taskforce on Nature-related Financial Disclosures (TNFD). The Taskforce will be constituted and operated in a manner that enables a co-creation process in which those advocating for the people most impacted by inequality have an explicit role in building the framework alongside investors, companies, regulators, academics, and other stakeholders. An early priority will be to develop an inclusive governance structure that includes a balance of these stakeholder representatives.  Further information about the Taskforce, including propositions regarding its governance, processes, and substantive work, will be shared for public consultation.

TIFD is led by an Interim Secretariat that includes the Argentine Network for International Cooperation (RACI), Predistribution Initiative (PDI), Rights CoLab, Southern Centre for Inequality Studies (SCIS), and United Nations Development Programme (UNDP). The proposal to create a TSFD was initiated by the Business for Inclusive Growth (B4IG) coalition together with its strategic partner, the OECD. The creation of the consolidated Taskforce is also supported by the World Business Council for Sustainable Development (WBCSD), the Council for Inclusive Capitalism (CIC), Shift, and investor- and labour-focused organisations that are pursuing particular bodies of work that are aligned with the long-term vision for the Taskforce.

This paper was presented at Monash Business School Accounting Week, 14th August 2023, Terence Jeyaretnam