When the European Union adopted the concept of dual materiality in the Corporate Sustainability Reporting Directive, requiring investors to consider the risks companies outsource to people, business movement and human rights. man has won a significant victory. Today, the notion of dual materiality is also taking shape in a different form beyond Europe: in growing investor concerns about systemic risks, including inequality.
Systemic risks are risks that affect the economic system as a whole, creating “systematic portfolio risk” for an investor’s entire portfolio. Large institutional asset owners and asset managers, by their size, own hundreds or even thousands of assets. Their wallets imitate the market and give rise to their status as “universal owners”. These financial players, who collectively own more than 40% of the market, are less concerned about the risks for individual companies than about the systemic risks for their entire holdings. Extreme inequality is a systemic risk, along with climate change and the spread of authoritarianism.
Systems-level investing therefore means that for those investing across the entire global economic system, considering the impacts of climate or inequality solely on the earnings of a single company is insufficient to address risk. total portfolio. More significant are the risks the business poses to people and the planet that affect economic, social and environmental (ESG) sustainability.
If a company’s operations promote global inequality, it harms the company’s ability to create value.
To help investors and regulators address systemic inequality and its destabilizing economic impacts, a Financial Inequality Disclosures (TIFD) Task Force is being developed, which builds on the efforts existing standards. Inspired by the successful adoption of the Task Force on Climate-Related Financial Disclosures (TCFD), the TIFD is a systemic risk management framework created through collaboration between investors, civil society, businesses, financial regulators , policy makers and academics to help all market players. know how to reduce inequalities created by the private sector. In an effort to align with the Sustainable Development Goals (SDGs), the TIFD aims to launch in 2025 with guidance targets, metrics and thresholds for businesses and investors to measure and manage their impacts on inequalities, as well as the impacts of inequalities on the performance of companies and investors. . Stakeholders can use the TIFD to assess private sector performance and hold companies to account.
While certain types of investors may be looking for quick profits, their ultimate clients are often institutions with longer time horizons and broader goals. Universal owners such as large pension funds and sovereign wealth funds, which collectively account for $33 trillion, tend to have a better eye on systemic risks than their asset managers. The TIFD is well placed to involve those ultimate investors at the top of the “capital markets value chain” – the owners and allocators of assets – in assessing their long-term investment objectives and the impact of inequality on them.
When an asset manager contributes to inequality, or a universal owner such as BlackRock or Vanguard is slow to recognize its own interest in reducing inequality, trustees of pension funds and sovereign wealth funds have an interest, as trustees workers and citizens, to hold them accountable . Asset owners can influence the behavior of asset managers and companies through commitment, asset allocation, investment structuring, trading conditions, shareholder resolutions and votes for directors. With the TIFD in place, asset owners will have the tools to integrate inequalities into their goals, incentive structures and KPIs for asset managers and businesses.
When a universal owner such as BlackRock or Vanguard is slow to recognize its own interest in reducing inequality, administrators of pension funds and sovereign wealth funds have an interest in holding them accountable.
What is the place of human rights? Just as the human rights framework is an essential element for achieving the SDGs, international human rights are at the heart of the TIFD project. The TIFD uses the United Nations Guiding Principles on Business and Human Rights (UNGPs) to define normative thresholds of objectives and measures that will be communicated by companies so that investors know whether the company is operating in these limits. For example, a living wage indicator could serve as an inequality threshold when measured over a period of years and combined with other indicators such as within-company income inequality and union density. and collective bargaining coverage.
The judges who determine whether corporate impacts have exceeded human rights thresholds are the rights holders themselves. When human rights are respected and businesses operate within social foundations and ecological boundaries, they create value for society and ultimately for investors.
This is why the TIFD process must engage with rights holders. Most disclosure frameworks are designed by a select group of Northern technocrats, but technocrats are not well placed to fully grasp inequality and its root causes. To be effective and legitimate, it is those who experience inequality who must be around the table to define it. The TIFD will convene thematic working groups in which this diverse coalition of stakeholders will synthesize empirical evidence on the root causes of inequality with existing corporate and investor disclosure and risk management frameworks, fill gaps and will build on this work to define measures, targets and thresholds.
Upside-down risks — the risks that companies pose to socio-economic equality and human rights — are an issue of interest to investors. Even when considered from the point of view of the interests of investors, the double materiality is therefore self-evident.
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