Measure and manage investor risks beyond the enterprise level “
NEW YORK, April 6, 2021 / PRNewswire / – The Predistribution Initiative, a multi-stakeholder effort to improve investment structures and practices, today released a discussion paper titled: “ESG 2.0: Measuring and Managing Risk investors beyond the enterprise level. ”The full report is available at http://ssrn.com/abstract=3820316.
The article analyzes existing approaches to asset allocation – from private equity and private lending to high yield bonds and leveraged loans – and finds that many of these high risk investment strategies , carried out on an institutional scale, make the financial system and the real economy more fragile by contributing to the consolidation of companies and asset managers, to increasing levels of indebtedness in the world, at rates of higher 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 goals of many institutional investors.
Investors can unknowingly contribute to many of these structural dynamics. These system-wide risks ultimately translate into lower financial returns for long-term, diversified institutional investors, or ‘universal owners’ of the market, and greater insecurity for workers and communities – potentially systematically undermining even corporate governance and ESG interventions. ESG 2.0 is an invitation to achieve ESG and risk management objectives by (1) considering the investment structures and practices that influence them and (2) aligning these activities with traditional corporate governance interventions. at the level of portfolio companies.
“We cannot 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 lead author of the discussion paper. “It is important for investors to realize that their allocations to certain high-risk strategies can undermine their long-term commitments as responsible trustees. But identifying the problem is only the first step. create the solutions and help move the investment management industry away from broken structures and misaligned practices. “
Rothenberg and his two co-authors, Raphaele Chappe and Amanda Feldman, identify various interconnected ways in which the asset allocation practices of institutional investors play a role in increasing global debt levels and consolidating fund managers. and businesses. These developments can in turn have a multitude of negative impacts, including obstacles for various fund managers and entrepreneurs, deterioration of quality jobs, erosion of the quality and affordability of goods and services, increased correlations between asset classes, reduced opportunities for investor diversification, and “debt traps” that foster macroeconomic instability.
It is important to note that the document is not intended to offer prescriptive solutions, but rather to start a public conversation about preliminary ideas and to raise awareness of the risks. The working document proposes 11 specific proposals for an ESG 2.0 model, including:
- Diversify asset allocation to smaller, emerging and more diversified fund managers and investment opportunities, including those with more regenerative investment structures (e.g. income-based financing, buyouts worker / community ownership shares and vehicles)
- Alignment of assessment methodologies, benchmarking approaches, investment team incentives and performance reviews with ESG objectives and systematic risk management, for example with less emphasis on approaches focused on the time value of money
- Evolving Financial Analysis and Interpretations of Financially Significant Risks to Include a Focus on Systematic Risk and Return
The ESG 2.0 is intended as a scoping and discussion document for the Predistribution Initiative Asset Owners and Allocators research and capacity building project, which serves as a forum for developing a collective understanding of these. problems and co-create solutions. The project is supported by a multidisciplinary advisory board made up of experts with diverse expertise on the subjects addressed in the document.
The Predistribution Initiative will organize workshops throughout the year with investors, intermediaries, policy makers, regulators, civil society, labor rights advocates and academics, providing an opportunity for different stakeholders to engage and collaborate. A summary of the discussion paper is available on the Pre-Distribution Initiative website.
This work was made possible by the Laudes Foundation, an independent philanthropic organization that is accelerating the transition to an inclusive and climate-positive global economy, as well as by Omidyar Network, a social change company that strives to reinvent critical systems. and the ideas that govern them, and build more inclusive and equitable societies in which people have the social, economic and democratic power to thrive. Early research for this article was also partially funded by a grant from the Open Society Foundations, the world’s largest private funder of independent groups working for justice, democratic governance and human rights.
About the Predistribution InitiativeThe Predistribution Initiative is a multi-stakeholder effort to improve investment structures and practices so that: more wealth and influence over governance is shared with workers and communities; investment teams have greater incentives for environmental, social and governance (ESG) integration; and systemic and systematic risks, including inequalities and climate change, are taken into account. Visit us at http://www.predistributioninitiative.org.
Media contact17 Communications Dmitri Ioselevich[email protected]
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SOURCE The Predistribution Initiative