The Predistribution Initiative Publishes Working Paper on "ESG 2.0: Measuring and Managing Investor Risks Beyond the Enterprise-Level"

NEW YORK, April 6, 2021 /PRNewswire/ -- The Predistribution Initiative, a multi-stakeholder effort working to improve investment structures and practices, today published a working paper titled: "ESG 2.0: Measuring and Managing Investor Risks Beyond the Enterprise-Level." The full report is available at http://ssrn.com/abstract=3820316. 

The paper analyzes existing approaches to asset allocation – from private equity and private credit to high yield bonds and leveraged loans – and finds that many of these high-risk investment strategies, executed at an institutional scale, are making the financial system and real economy more fragile by contributing to corporate and asset manager consolidation, increased global debt levels, higher rates of inequality, and market instability, among other negative impacts. The combination of these factors makes the system more susceptible to shocks like COVID-19 and climate change and conflicts with the corporate governance, ESG, and systematic risk management objectives of many institutional investors.

Investors may be unknowingly contributing to many of these structural dynamics. These system-wide risks eventually translate into lower financial returns for long-term, diversified institutional investors, or "Universal Owners" of the market, and into greater precarity for workers and communities – potentially systematically undermining even the most well-intentioned corporate governance and ESG interventions. ESG 2.0 is an invitation to achieve ESG and risk management goals by (1) considering investment structures and the practices that influence them and (2) aligning these activities with traditional corporate governance interventions at the portfolio company level. 

"We can't fix the financial system without first understanding how existing investment structures and approaches are contributing to the problem," said Delilah Rothenberg, Executive Director of the Predistribution Initiative and the lead author for the working paper. "It is important for investors to realize that their allocations to certain high-risk strategies can undermine their long-term commitments as responsible fiduciaries. But identifying the problem is just the first step--now we need institutional investors to join us in co-creating the solutions and helping move the investment management industry away from broken structures and misaligned practices."

Rothenberg and her two co-authors, Raphaele Chappe and Amanda Feldman, identify various interconnected ways in which institutional investors' asset allocation practices play a role in increasing global debt levels and fund manager and corporate consolidation. These developments can in turn have a host of negative impacts, including barriers for diverse fund managers and entrepreneurs, deterioration of quality jobs, erosion of the quality and affordability of goods and services, increased asset class correlations, reduced opportunities for investor diversification, and "debt traps" that foster macroeconomic instability. 

Importantly, the paper is not intended to offer prescriptive solutions, but rather to start a public conversation about preliminary ideas and raise awareness about risks. The working paper offers 11 specific proposals for an ESG 2.0 model, including:

• Diversifying asset allocation to smaller, emerging, and more diverse fund managers and investment opportunities, including those with more regenerative investment structures (e.g. revenue based financing, equity redemptions, and worker/community ownership vehicles)
• Alignment of valuation methodologies, benchmarking approaches, investment team incentives, and performance reviews with ESG goals and systematic risk management, such as placing less emphasis on time-value-of-money oriented approaches
• Evolution of financial analysis and interpretations of financially material risks to include a focus on systematic risk and return

ESG 2.0 is designed as a framing and discussion paper for the Predistribution Initiative's Asset Owner & Allocator Capacity Building & Research Project, which serves as a forum for developing a collective understanding of these issues and co-creating solutions. Supporting the project is a multi-disciplinary advisory board featuring experts with diverse expertise across subject matters covered in the paper. 

The Predistribution Initiative will host workshops throughout the year with investors, intermediaries, policymakers, regulators, civil society, labor advocates, and academics, providing an opportunity for different stakeholders to engage and collaborate. An Executive Summary of the working paper is available on the Predistribution Initiative's website.

This work was made possible by Laudes Foundation, an independent philanthropic organisation accelerating the transition to a climate-positive and inclusive global economy, as well as Omidyar Network, a social change venture that works to reimagine critical systems and the ideas that govern them, and to build more inclusive and equitable societies in which individuals have the social, economic, and democratic power to thrive. Early research for this paper was also partially supported through the Open Society Fellowship Program, part of the Open Society Foundations—the world’s largest private funder of independent groups working for justice, democratic governance, and human rights.  

About the Predistribution Initiative
The Predistribution Initiative is a multi-stakeholder effort to improve investment structures and practices so that: more wealth and governance influence is shared with workers and communities; investment teams have stronger incentives for environmental, social, and governance (ESG) integration; and systemic and systematic risks including inequality and climate change are addressed. Visit us at http://www.predistributioninitiative.org. 

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