The Investment Integration Project (TIIP) defines system-level investing as the intentional consideration by investors of the bigger-picture environmental, social, or financial system context of their security selection and portfolio construction decisions. The financial community relies on these systems for profitable investment opportunities and to maintain stable business operations and functioning financial markets.
First coined by Robert Monks and Nell Minow, “universal ownership” suggests that certain institutional investors have reached such size and scale that they own every industry, asset class, and geography in their portfolios, thereby owning the market, which is a reflection of the economy. As Jon Lukomnik and Jim Hawley note in their book, Moving Beyond Modern Portfolio Theory: Investing That Matters, the health of the overall market and economy affect an investor’s returns more than security selection or portfolio construction. If an individual investment results in negative externalities to the economy, and therefore the market, even if that produces a near-term return for that individual investment, it may not be in the interest of the investor’s portfolios.
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Helping Investors Align Their Internal Investment Practices With Long-term Sustainability
Together with Impact Frontiers, PDI is jointly facilitating the creation of an open-access resource to support investors with measuring, managing, and reporting their positive and negative contributions to systemic and systematic risks.
PDI produced a series of animated videos about how investors can improve investment structures to better account for systemic and systematic risks.
The Predistribution Initiative (PDI) is a nonpartisan, multistakeholder non-profit designed to co-create improved investment structures and practices that share more wealth and influence with workers and communities. We believe this is the best way to address systemic risks like inequality, biodiversity loss, and climate change, which manifest as systematic risks in markets and investors’ portfolios.
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Institutional investors are increasingly concerned about systemic risks—including climate change, inequality, and biodiversity loss—which manifest as systematic risks in financial markets and in investors’ portfolios. Investors need to address these risks head-on to protect their returns and to ensure a sustainable and equitable future for all.
PDI supports investors in co-creating new approaches that align their internal investment governance and financial analysis practices with the principles of system-level investing, Universal Ownership and intergenerational fiduciary duty.
The Investment Integration Project (TIIP) defines system-level investing as the intentional consideration by investors of the bigger-picture environmental, social, or financial system context of their security selection and portfolio construction decisions. The financial community relies on these systems for profitable investment opportunities and to maintain stable business operations and functioning financial markets.
First coined by Robert Monks and Nell Minow, “universal ownership” suggests that certain institutional investors have reached such size and scale that they own every industry, asset class, and geography in their portfolios, thereby owning the market, which is a reflection of the economy. As Jon Lukomnik and Jim Hawley note in their book, Moving Beyond Modern Portfolio Theory: Investing That Matters, the health of the overall market and economy affect an investor’s returns more than security selection or portfolio construction. If an individual investment results in negative externalities to the economy, and therefore the market, even if that produces a near-term return for that individual investment, it may not be in the interest of the investor’s portfolios.
How We Do This
We specifically focus on four overlapping and complementary workstreams.
Click on a puzzle piece to learn more about each workstream
We work with investors and their stakeholders to create a shared understanding of how investors can reduce their contributions to systemic risks and inequality-related risks and enhance positive impacts.
The TIFD Project: As part of TIFD’s Interim Secretariat, PDI is working to co-create metrics and frameworks for inequality-related risks.
Investor Contribution 2.0 Project: Together with Impact Frontiers, PDI is developing guidance that would enable investors to improve their internal governance, financial analysis, investment structuring, and asset allocation practices.
Given that making shifts at large institutions requires a tone from the top and structural policy adjustments, investment governance is a key starting point for tangible change. Adjustments to the investment belief statement, investment policy statement, and other policies and procedures which flow from these standards can support an institution in fully aligning with the principles of Universal Ownership and systematic stewardship.
We are actively working with industry leaders — The Investment Integration Project (TIIP), Jon Lukomnik of Sinclair Capital, and Keith Johnson of Global Investor Collaboration Services — to develop investment governance guidance that enables institutional investors to adjust their practices.
We work with investors and their stakeholders to create a shared understanding of how investors can reduce their contributions to systemic risks and inequality-related risks and enhance positive impacts.
In partnership with the Responsible Asset Allocator Initiative (RAAI) and Paul O’Brien (a Trustee of Wyoming’s retirement system and former Deputy Chief Investment Officer of the Abu Dhabi Investment Authority), PDI is collaborating with institutional asset owners and allocators to integrate consideration of externalities into financial analysis and asset allocation.
Highlight regenerative investment structures and the risks of consolidated capital flows
A key finding of PDI’s flagship ESG 2.0 working paper is that institutional investors are consolidating their investments with the largest fund managers and companies, which squeezes out opportunities for emerging fund managers and small and medium-sized enterprises (SMEs) while also contributing to procyclical market behavior that can lead to asset bubbles and credit crises. Investors have responded well to our proposals that more regenerative investment structures are needed and that they need to deconsolidate capital flows, but seek more examples of “what good looks like” and how to access these opportunities. Our efforts aim to not only document what models currently exist, but how they can scale with integrity to meet the allocation needs of institutional investors, as well as what practical opportunities exist for institutional investors to adjust their allocation practices.
Highlight regenerative investment structures and the risks of consolidated capital flows
“Reimagining Investment Structures”
“Reimagining Investment Structures” is a series of animated videos about the need to improve investment structures so that investors can align their internal investment governance and financial analysis practices with the principles of system-level investing and Universal Ownership. Part one focuses on the issue of inequality and how workers have lost economic power due to the “labor squeeze.” Part two focuses on risks relating to existing investment structures, such as leveraged buyout strategies used by some private equity firms. Part three looks at the role that investors—particularly Universal Owners—can play in building a better financial system by taking into account issues like fund manager compensation, financial engineering, and tax structures.
Part 1 — The Labor Squeeze: How Workers Are Losing Economic Power
Part 2 — The Potential for More Sustainable & Regenerative Investment Structures
Part 3 — Structuring Finance to Work for All Stakeholders
The Predistribution Initiative is devoted to reducing inequality by changing the basic business practices of Wall Street. What will it take for it to succeed? Delilah Rothenberg has obsessed over inequality since her college years at NYU, where she studied neo-colonialism and neo-imperialism as a triple major in history, politics and African Studies [...] Rothenberg quit her private equity job in 2018 to co-found The Predistribution Initiative, devoted to reducing inequality by changing the basic business practices of Wall Street. “It’s complex and it’s not something you can show a picture of in real life like a hungry child or a vulnerable woman,” Rothenberg says.
Predistribution Initiative, a US-based non-profit organisation supporting financial industry reform, is helping to launch the framework to help reduce “systemic risks to the health of the overall economy”, Delilah Rothenberg, the group’s executive director, told New Private Markets in an interview in January.
TIFD is not expected to launch for a few years. In the meantime, Rothenberg said more work is needed to better understand which practices are fair or foul.
“The industry needs to think about how the funds of private equity managers are structured and whether those funds are structured to avoid paying taxes,” she said. “Where do you draw the line between taxefficiency and irresponsible tax practices?”
“The private equity industry is growing in importance. In recent years, companies have remained private longer. Furthermore, limited partner (LP) allocations to private markets continue to increase as underfunded pensions and endowments search for yield in a low interest rate environment, and in pursuit of diversification as the universe of public companies shrinks. From our past work with general partners (GPs), we recognise the industry is making progress on ESG integration. This is an excellent reason to celebrate, but increasingly, the private equity industry is suffering from a deteriorating public image. The issues driving this are multifaceted, ranging from founders evading tax, to the impact on inequalities from compensation structures. There is also increasing debate and some emerging evidence that certain private equity strategies may not outperform public markets net of fees.
Should we worry that non-financial corporate debt is at a historic high (both in absolute terms and relative to GDP)? Though in theory financial vulnerabilities should be of concern, there are reasons to think that alarm bells may not be ringing quite yet. In a recent opinion brief, Robert Armstrong has recently looked at this issue, and come out not “terribly inclined” to put corporate debt on his list of pressing worries. As a starting point, consider that non-financial corporate debt is low relative to the market value of corporate equities. Hans Mikkelsen, credit strategist with Bank of America, has highlighted that the ratio is currently at 25%, at the low end of the historical range. This leads him to some comfort that leverage ratios are not concerning given that “U.S. corporate bond investors have never been backed by more equity value”. Of course, this might simply indicate that stock prices have risen faster than levels of debt, which is, as Armstrong points out, hardly reassuring.
As the world emerges from the pandemic with high inflation, vast inequalities, and rising oil and gas prices, it seems timely to ask how much we can expect of investors and businesses in our current system. While individual investors — people and firms — are taking on climate change and other systemic risks like inequality and biodiversity loss, they are doing so in a system where the odds are stacked against them. The very nature of the system resists change in ways that non-financial disclosure and policy and regulation alone cannot solve. Financial decisions are based on financial analysis, and the current system lacks a mode for accounting for externalities in the calculation of returns. In our current economic system, companies and asset managers are expected to maximize their financial return to investors.
