ESG 2.0: Measuring & Managing Investor Risks Beyond the Enterprise-level

80 Pages Posted: 6 Apr 2021

See all articles by Delilah Rothenberg

Delilah Rothenberg

Predistribution Initiative

Raphaele Chappe

The Predistribution Initiative; Drew University

Amanda Feldman

affiliation not provided to SSRN

Date Written: April 6, 2021

Abstract

Do environmental, social, and governance (ESG) and impact investing practices in their current forms provide investors with sufficient tools to play a meaningful role in “Building Back Better” following the COVID-19 crisis? Many of our existing ESG and impact investing frameworks focus on issues at the portfolio company level, but they do not take into account potential negative impacts from capital structures and investors’ influence in shaping them. In this paper, the Predistribution Initiative (PDI) explores how the growth of institutional investors (asset owners and allocators) and certain asset allocation strategies can be in conflict with ESG objectives. The conflict materializes in various interconnected ways, particularly from institutional investors’ role in increasing global debt levels and fund manager and corporate consolidation, which in turn can create barriers for diverse fund managers and entrepreneurs, jeopardize quality jobs, erode the quality and affordability of goods and services, increase asset class correlations, reduce diversification opportunities, and ultimately fuel economic inequality and market instability. For long-term, diversified institutional investors, or “Universal Owners” of the market, these dynamics eventually translate into lower financial returns. For workers and communities, these dynamics translate into greater precarity and inequality.

This paper encourages such investors to consider how their activities may contribute to these issues and how they can improve their own practices to better manage systemic and systematic risks. We review the issues and then propose several preliminary paths toward solutions that we intend to workshop and fine-tune with investors and other stakeholders. Potential solutions focus on diversifying asset allocation to more regenerative investment structures and asset classes, building an enabling environment through adjustments to team incentive structures, performance reviews, benchmarking and valuation methodologies, and field-building.

Keywords: Non-bank Financial Institutions, Institutional Investors, Universal Ownership, Universal Owners, ESG, Impact Investing, Corporate Governance, Private Equity, Private Debt, Leveraged Loans, High Yield Bonds, CLOs, Asset Allocation, Systemic Risk, Systematic Risk,

JEL Classification: G11, G12, G23, G24, G30

Suggested Citation

Rothenberg, Delilah and Chappe, Raphaele and Chappe, Raphaele and Feldman, Amanda, ESG 2.0: Measuring & Managing Investor Risks Beyond the Enterprise-level (April 6, 2021). Available at SSRN: https://ssrn.com/abstract=3820316 or http://dx.doi.org/10.2139/ssrn.3820316

Delilah Rothenberg (Contact Author)

Predistribution Initiative ( email )

1000 Broadway
Suite #480
Oakland, CA 94607
United States

HOME PAGE: http://www.predistributioninitiative.org

Raphaele Chappe

The Predistribution Initiative ( email )

1000 Broadway
Suite #480
Oakland, CA 94607
United States

HOME PAGE: http://https://predistributioninitiative.org/

Drew University ( email )

Madison, NJ
United States

Amanda Feldman

affiliation not provided to SSRN

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