Getting ahead of the curve on dynamic materiality: How U.S. investors can foster more inclusive capitalism
This discussion paper highlights tools and opportunities for US investors to foster sustainable and responsible value creation in order to support more inclusive and thriving economy. It also discusses the risks posed to portfolios by social and environmental risks and how diversified investors can mitigate them.
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OVERVIEW
This discussion paper highlights the importance of staying ahead of the curve on dynamic materiality, as environmental, social and governance (ESG) risks are increasingly posing financial risks to portfolios. Investors need to recognise the implications of social and environmental risks and displacement of externalities that their portfolio investments may create. The report advocates for ‘Dynamic Materiality’ where investors not only consider the current financial implications of ESG factors but also consider forward-looking risks.
Are long-term diversified investors by default aligned with their stakeholders?
The discussion paper highlights the disparity between long-term investors and the interests of their stakeholders, such as their customers, suppliers, employees and the broader public. The report emphasises that investors can help prevent, mitigate, and prepare for ESG risks by re-evaluating their investment decisions and by fostering more diversified and inclusive business models. The report suggests that investors should actively engage with stakeholders and consider the ESG impacts and risks of their investment decisions.
Mechanisms investors can use to engage and share wealth and influence
The report highlights examples of some tools and opportunities for investors to foster sustainable and responsible value creation, such as grievance mechanisms, freedom of association, and collective bargaining, HRDD, and FPIC, adding workers to boards, and structuring worker and community ownership models. The report suggests that investors should adopt these mechanisms to reinforce stakeholder engagement, ensure that investment and engagement decision-making considers diverse perspectives, and have a fuller picture of the dependencies, impacts, risks, and opportunities of their investments.
Government oversight is essential to economic stability
The report emphasises that the government needs to take a more active role in regulating corporate accountability to mitigate social and environmental risks. The paper highlights various regulatory initiatives that can support stakeholders in the public and private sectors, such as legislations for social impact and responsible investing and public procurement policies that prioritise ESG considerations.
Conclusion
This discussion paper provides practical recommendations for investors to foster sustainable and responsible value creation, to rectify the social and environmental imbalance, and to promote a more inclusive economy. The authors suggest that investors need to recognise the implications of ESG factors and operate with dynamic materiality. Investors should adopt mechanisms that reinforce stakeholder engagement and consider diverse perspectives to have a fuller understanding of risks and opportunities. Financial regulation of corporate accountability is an essential aspect of fostering inclusive capitalism.