Interview with Delilah Rothenberg, co-initiator of TIFD

"Everyone is better off when we share "

Delilah Rothenberg plays a central role in connection with the Task Force on Inequality-Related Financial Disclosures (TIFD). In the interview with CRIC, she talks about TIFD itself, inequality, resource conflicts, social tensions, capital markets and the influence of investors. The financial expert will speak about inequality as a systemic risk at the CRIC conference Money and Peace on December 1.

CRIC: Besides your commitment to TIFD, you are co-founder and managing director of the Predistribution Initiative (PDI). What do you understand by pre-distribution, possibly in distinction to redistribution, and what are PDI’s objectives?

Delilah Rothenberg: Predistribution is a concept that envisages rewarding all stakeholders more appropriately for the value they create, so that they do not have to rely on redistribution later on. Predistribution can be a mechanism that continuously contributes to addressing economic inequality.

To give an example: If workers are paid well for the value they create in the first place, they will not need transfers or assistance later. This also strengthens individuals' room for action and voice opportunities, because in redistribution, other people decide what aid is provided and how. This means people can't really choose and decide for themselves.

The distribution of value creation and returns in society is strongly linked to financial and capital markets. To be able to act on inequality, it is important to look beyond companies in the value chains of capital markets.

Firstly, corporations obviously have an impact on economic inequality, and often, not always, in a negative way. This may stem from the fact that they are pressured by investors to achieve a certain rate of return, or from the fact that the CEO has an incentive to achieve high returns because compensation is via shares. And this is where investors have influence.

Investors also have a very direct influence. For instance, fund managers in impact investing and ESG also receive extremely high compensation in some cases. On average, corporate executives in the US are paid approximately 320 times the average employee, while fund manager executives are often paid much more – for instance, executives of the largest private equity fund managers are often paid 1000 times.

In addition to questions about executive pay relative to other employees, we also look at issues such as financial engineering and others. Many structural problems are related to the capital market.

CRIC: One of the four work areas of PDI is called "Improving standard setting and disclosure". And part of this is the Task Force on Inequality-related Financial Disclosures (TIFD). PDI and you personally played and continue to play an important role in the creation and work of TIFD. Why do we need this initiative?

Delilah Rothenberg: When we think about, for example, peace, the value of nature and inequality, both personal experience and academic papers show that it can lead to social instability when people have to fight over resources. The overexploitation of nature, massive climate risks, and use of resources to disproportionately benefit the few negatively impacts the majority of people, and this in turn leads to social tensions being exacerbated, and eventually a negative feedback loop that hits everyone. 

It's important that we ask ourselves how we can value resources appropriately and ensure that they are well distributed. There is a direct link here to peace that deserves to be highlighted.

PDI itself is one of the four members of the TIFD Interim Secretariat. We call it the Interim Secretariat because we don't want to appoint ourselves the secretariat of a joint initiative that is co-created by and for a broad base of diverse stakeholders globally. We were simply the ones who took the initiative to get TIFD started, and we are working to be good stewards, but it will eventually have an inclusive democratic governance structure. In addition to the PDI, the other three members are:

Two of these four organizations published an article in May 2020, It is time for a Taskforce on Inequality-related Financial Disclosures, calling for a TIFD to be created. This has been met with great interest from many.

We are currently in discussions with other partners and with a growing coalition of allies from business, finance, civil society, academia, and other stakeholders to build and develop TIFD together.

CRIC: We have already learned quite a bit about inequality – including, for example, the connection with resource conflicts. Some might still ask: Don't we now need to focus on climate change or ecological challenges in general? Why is inequality an issue we should pay more attention to?

Delilah Rothenberg: Let's start with inequality itself. We've already talked about how inequality can lead to social instability, which in turn is not good for markets and not good for portfolios.

There are studies that show that inequality can lead to secular stagnation in the economy. The marginal propensity to spend of the wealthy is much lower than of those less well off, so there is less commerce. Some studies suggest that the wealthy may be financing the debt spending of the poor, which contributes to debt traps and issues with interest rates, ultimately contributing to unstable markets and social instability.

When investors and the wealthy invest more in shares and real estate, their value is driven up. Prices go up and it becomes more difficult for other individuals to invest in the market or buy a home, for example. This can set in motion a downward spiral. We have seen in many places in the world, for example in Germany, that economic insecurity leads to polarization and drives people into extremism.

Climate change is an existential threat to everybody. At the same time, there are many people who have been suffering from economic insecurity for decades. This is an existential threat for them. So which problem should be given priority? Should it be given exclusively to the one that also affects the wealthy?

If one threat is addressed but not the other, this leads to distrust of the rich, the politicians and those in power. And frustration spreads about the fact that there is a focus on climate protection while people's everyday needs are ignored. We see this, for example, in the "yellow vests" in France, but also in protests in Germany, the UK, the US and other countries. People oppose climate protection measures because they fear that they will increase their cost of living.

CRIC: The concept of systemic risk plays an important role in TIFD's work. Can you explain this a little more in detail – perhaps even with examples?

Delilah Rothenberg: There is a book that came out some time ago. It's called Moving Beyond Modern Portfolio Theory: Investing That Matters, and it was written by Jon Lukomnik and James P. Hawley. In it, they explain the concepts of systemic risk and universal ownership and show that the majority of a diversified investor's returns are actually derived from systemic and systematic factors in the markets.

Individual investors who are diversified over the long term should pay attention to the health of the overall market and economy because markets depend on the economy and the economy depends on the health of society and human and natural systems. That's what we should focus on rather than just prioritizing alpha and ignoring externalities that destabilize the whole system. It is very important for diversified investors to reduce systemic risks and externalities in their portfolios.

CRIC: What is TIFD currently working on, what are the next steps, and are there opportunities to get involved?

Delilah Rothenberg: There are many ways to get involved. People and organizations can support TIFD as allies, which I would recommend. There are no obligations from this, you can signal your support, participate in the global meetings, and get involved in the working groups that are being established.

We are also in the process of setting up a technical working group that will develop the TIFD conceptual framework and methodology. Thematic Working Groups will then go through existing disclosure frameworks on inequality, bring them together, identify gaps and work to close them. Alongside this, we are building a research council with academics and other knowledge partners around the world to support us in our work.

TIFD differs from other disclosure frameworks in several ways. First, we see ourselves as a systemic risk management framework rather than a pure disclosure framework. This means, for example, that we also want to provide guidance on what good results could look like, what appropriate targets are and where we want to go.

Another difference is that we are not focusing on companies, but also on investor disclosure, including issues such as financial engineering, tax structuring, political lobbying and political spend, as well as compensation. We will also build in voice of people from civil society, the Global South, and marginalized people because it does not make sense to develop such a framework without the impacted stakeholders. I think it is important to make a very intentional afford to hear their voices, as they understand inequality in ways that investors and companies can’t. There is a saying from the disability rights movement, “nothing about us without us,” and we very much go by that motto.

CRIC: Lastly, a more personal question: Is there a particular connection to the issue of inequality that motivates you to work on the topic?

Delilah Rothenberg: I've been thinking about this a lot lately, and I think it has much to do with my upbringing. I am Jewish and grew up in a Jewish household. I learned a lot about the Holocaust and that has been very much on my mind, and also the question of why this all happened in Germany.

I believe that the root is economic inequality. When people are struggling for economic resources and feel economically insecure or there is a fear that something could be taken away from them or their family, that can create a lot of fear, hostility, and “scapegoating”. That's a big reason why I choose to do what I do in my life. Everyone is better off when we share. Sharing is caring. 

CRIC: Thank you for the interview.

Delilah Rothenberg: Thank you for inviting me.

The interview was conducted by Gesa Vögele.

Eine deutsche Version des Interviews findet sich hier.

Note: For the interview in both the German and English versions, support from DeepL has been used in part.

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