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ESG and impact investing organizations are taking note as America's fourth biggest pension system acts against the movement.

Investors need better tools to measure and manage responsible tax practices.

Many impact investors want to address the growing wealth gap that is undermining democracy and economic stability in the U.S. But if employees get a small percent of the equity shares in a private equity portfolio company, while executives get a lion’s share, the wealth gap will continue to grow. “This is not the solution,” says Delilah Rothenberg of The Predistribution Initiative (PDI).

From the Great Resignation to the historic worker-organized unionization of an Amazon warehouse in Staten Island, N.Y., worker empowerment represents an increasingly important lever for corporate accountability. The bottom-up grassroots energy, combined with top-down government action, creates a unique opportunity to advance the conversation around the role of corporations in society and the ‘S’ in ESG […] As we consider the multiple dimensions of private sector activity with social impacts, it is important to not only look at companies, but also account for investor-level influences, which can often disincentivize or inhibit companies from acting responsibly, says "the Predistribution Initiative’s Delilah Rothenberg.

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.

The Predistribution Initiative, a US-based non-profit organisation seeking to create a more equitable global financial industry, hosted the virtual discussion, which covered recent and upcoming rules proposals from the US Securities and Exchange Commission […]

According to Delilah Rothenberg, The Predistribution Initiative’s executive director, regulatory loopholes do not stop at environmental reporting.

“Inequality is growing at a systemic level,” Rothenberg said. “If portfolio companies are burdened with too much debt, will they be in a position to offer quality jobs and affordable goods and services?”

She added: “Is extracting value from companies taking away from the company’s ability to operate and serve its corporate purpose... is fund manager compensation growing at an exponentially faster rate than for workers of portfolio companies and beneficiaries of the LPs?”

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?”

A group of organisations dedicated to improving economic inequality throughout global markets is preparing to launch a new reporting framework that will push for more expansive financial disclosures from private investors.

The framework will provide institutional asset owners, government policymakers and other stakeholders with guidelines for collecting data about how the investment structures and business practices of capital managers impact economic growth and mobility, according to Delilah Rothenberg, executive director of the Predistribution Initiative.

The US-based non-profit organisation, which seeks to create a more equitable global financial industry, is leading efforts to form the Task Force on Inequalityrelated Financial Disclosures alongside Rights CoLab, a civic engagement group focused on human rights and sustainability. TIFD is also receiving support from the Argentine Network for International Cooperation and the Southern Centre for Inequality Studies at the University of Witwatersrand in South Africa.

Income inequality needs to be dealt with in a similar manner as climate change because they are both systemic problems. Income inequality affects companies in every industry and all asset classes, harming long-term valuation creation and hindering investors’ returns. Like climate change, this problem transcends portfolios, and creates a ripe opportunity for investors, and the broader financial community, to engage at a systemic level to solve…

As the PreDistribution Initiative argued in the report ESG 2.0, allocations “…to higher risk asset classes has also meant increased global debt burdens, corporate and fund manager consolidation, and risk across capital structures, resulting in fragility for companies, the real economy, and the stability of financial markets.” It’s the investor’s job to leverage the functional capabilities of each asset class and consider its shortfalls to best address the issue of income inequality.

Much has been written about the negative consequences of public companies focused on short-term returns. Investors focused on quarterly earnings are usually blamed, along with the structure of executive compensation plans and pressure from the board of directors. The concern here is that companies are inhibiting investors’ ability to produce sustainable long-term returns. This debate is an important one, but it is incomplete. It ignores the overall asset allocation strategies of investors across all asset classes. Investors include both asset owners and asset managers, but little can be done without substantial changes by the asset owners, who sit at the top of the “capital markets value chain.” This issue is addressed in great depth in the Working Paper “ESG 2.0: Measuring & Managing Investor Risks Beyond the Enterprise-level” by Delilah Rothenberg, Raphaele Chappe, and Amanda Feldman of The Predistribution Initiative (PDI).

It’s clear that the funds currently tying carry to impact are pioneers – and, as with any innovation, there will be wrinkles to iron out. Yet some believe it’s just too early to align impact performance to carried interest. Many are waiting to see what happens, but there are voices that suggest a fundamental rethink of private equity metrics is necessary to make this work.

“As it currently stands, the measurement frameworks are not sophisticated enough and can be easily gamed, ” says Delilah Rothenberg, co-founder of the Predistribution Initiative and former ESG and impact adviser to funds. “But actually, [all the] while we have metrics like IRRs, which incentivise driving returns over the short term, there is an inherent conflict with trying to achieve long-term sustainability.” 

Instead, Rothenberg advocates that GPs, LPs, civil society and academics work together so that potential pitfalls and unintended consequences are avoided. “Most GPs are well-intentioned, ” she says. “But we need to act with integrity not urgency when it comes to areas such as compensation. Sometimes when you act quickly, you can do more harm than good.”

Delilah Rothenberg tells Environmental Finance that in her previous work in private markets fund management she noticed that "a lot of the mega fund managers had practices that were undermining their stated ESG and impact goals".

"I was looking at how we could help workers in our portfolio companies build wealth: can we pay them a living wage, can we give the workers a stake in the equity of the portfolio company that they work for?”

"However, most of these private equity firms are focused on portfolio company operations. There are some issues at fund manager level that are starting to get a lot of attention in the impact investing space, like diversity, equity and inclusion at the fund manager level... but I would say that for the most part, there's a lack of understanding of how investment structure can support or inhibit portfolio companies from operating responsibly.”