Economic uncertainty and the rising importance of social risk for investors

Introduction

We are living through a period of profound economic uncertainty, marked by a cost-of-living crisis and widening income inequality. These pressures are reshaping consumer behaviour, labour dynamics, and political priorities thereby creating a complex risk landscape for investors.

The emphasis placed on corporate governance within an overall ESG assessment has long been the cornerstone of the Maple-Brown Abbott Australian small companies’ investment process, given its material impact on shareholder returns. While this continues to remain true, an emerging risk is gaining traction, one that investors may not be paying sufficient attention to.

In times of economic turbulence, social risks become more pronounced and often overlooked. Rising living costs, wage pressures, and affordability challenges can lead to labour unrest, regulatory intervention, and reputational damage for companies perceived as failing to act responsibly. Ignoring these dynamics exposes investors to material financial and governance risks.

Social license to operate – a term which refers to acceptance of a company by its stakeholders¹ is an important ESG risk to consider. Social risks are critical to monitor and manage. By understanding the interplay between economic anxiety, cost-of-living pressures, and inequality, investors can better anticipate emerging risks and position for resilience.

Key social risks for investors

Industrial action

Periods of economic stress often led to heightened industrial activity as workers collectively advocate for improved pay and conditions. In Australia, the proportion of employees who were trade union members has fallen from ~40% to ~13% between 1992 to 2022² although this trend has since reversed – union membership has subsequently grown by almost 200,000 members from 2022 to 2024, being a 12.5% increase.³
We are seeing an increased prevalence of companies being forced to negotiate union agreements for its workforce under Labor’s new multi-employer bargaining laws – a recent example is Chemist Warehouse, part of Sigma Healthcare, being directed by the Fair Work Commission (FWC) to start bargaining for a wage deal with employees in South Australia.

Industrial actions can be highly disruptive to business operations and may result in financially material consequences, especially if they continue for a prolonged period. Investors should closely monitor relations between companies and unions in sectors or at companies which are heavily unionised.

Affordability, reputational risk and social license

One of the most prominent debates in Australia has centered on allegations of price gouging by the two dominant supermarket chains. Even the perception of unfair pricing can cause significant reputational damage and trigger regulatory scrutiny. Recently the government implemented a ban on price gouging after an Australian Competition and Consumer Commission (ACCC) inquiry in 2024.⁴ Furthermore the opposition went to the last Federal election with its own policies of government intervention in the supermarket industry highlighting how these risks appear across the political spectrum.⁵

The loss of social license may seem intangible, but its impact is real. Community-driven campaigns can lead to reputational harm, reduced employee engagement, and even operational delays through protests or local opposition.

A recent example of a company managing reputation and social license risk is Netwealth Group (NWL) who have agreed to pay an estimated $101 million in compensation to members of the Netwealth Superannuation Master Fund who suffered losses from the collapse of the First Guardian Master Fund.

In addition, maintaining a compelling value proposition during inflationary periods is essential; failure to do so risks eroding consumer spending due to perceptions of diminished value. As investors, it’s imperative to systematically monitor consumer sentiment, recognising it as a critical component of social risk management within our ESG framework.

Government intervention

As discussed above, economic instability often provides governments with both political and public support to adopt more interventionist policies. During periods of economic uncertainty, citizens typically demand action from their elected officials, creating pressure for regulatory responses.

Accordingly, regulatory risk should be systematically incorporated into ESG assessments when evaluating industries or sectors, particularly those that are consumer-facing or deemed essential services. Some recent examples of government intervention include: (1) wholesale gas and electricity pricing caps to ensure consumer protection; (2) childcare fee increase caps in exchange for government wage subsidies to apply downward pressure of fee growth; and (3) government wage subsidies for aged care workers to cover FWC award wage rises, aiming to lift pay, improve retention, and ensure quality care.

Employee retention and talent mobility

In a cost-of-living crisis, remuneration becomes a primary concern for employees. Companies that fail to offer competitive compensation may struggle to retain talent, particularly in sectors with high wage competition.
In markets such as Australia, where metropolitan housing costs are prohibitive for many, companies face the risk of talent relocating to more affordable regions. Mitigation strategies include offering flexible work arrangements or establishing operations in lower-cost areas to attract and retain skilled employees. Organisations that provide these offerings such as NIB Holdings (NHF) whose head office is in Newcastle, may gain a competitive advantage in attracting and retaining human capital.

Human rights

Cost pressures during inflationary periods may prompt companies to switch suppliers without adequate due diligence. Prevailing economic uncertainty may compel workers to tolerate substandard working conditions and inequitable remuneration to meet basic living needs. This increases the risk of human rights violations, including modern slavery, if ethical standards are not rigorously maintained. As such, investors must place a heightened awareness and assessment of human rights risk in the supply chain of investee companies.

Conclusion

Economic uncertainty, driven by cost-of-living pressures and widening inequality, is reshaping the risk landscape for businesses and investors.
Industrial action, affordability concerns, government intervention, and the erosion of social license can all have significant financial and reputational consequences. In addition, workforce dynamics, human rights issues, and talent mobility present complex challenges that require proactive management.

For investors, integrating social risk analysis into ESG frameworks is essential for safeguarding long-term value and resilience.

1 Australian Institute of Company Directors (n.d.), Social licence to operate, 16 December 2025.
2 Australian Bureau of Statistics, Trade union membership, August 2024.
3 Australian Council of Trade Unions, Young workers powering growth in union membership, 27 February 2025.
4 Busch, B, 2025, The Sydney Morning Herald, ‘An uneven playing field: Supermarkets hit back at Labor’s price gouging ban’, 13 December 2025.
5 Fels, A 2025, Australian Financial Review, ‘No joy for supermarkets in the election but safeguards needed’, 31 March 2025.

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