When the European Union embraced the concept of double materiality in the Corporate Sustainability Reporting Directive, mandating that investors consider risks corporations externalize onto people, the business and human rights movement notched a significant win. Now the notion of double materiality is also taking shape in a different guise beyond Europe: in rising investor concerns around systemic risks, including inequality.

Systemic risks are risks that affect the economic system as a whole, creating "systematic portfolio risk" to an investor’s entire portfolio. Large institutional asset owners and asset managers, due to their size, own hundreds, even thousands of assets. Their portfolios mimic the market and give rise to their status as "universal owners." These financial players, who collectively own over 40 percent of the market, are less concerned with risks to individual companies than they are with systemic risks to the totality of their holdings. Extreme inequality is a systemic risk, along with climate change and the spread of authoritarianism.

Systems-level investing therefore means that for those who invest across the entire range of the global economic system, considering the impacts of climate or inequality only to the profits of a single company is insufficient to address total portfolio risk. More important are the risks the company poses to people and the planet that affect economic, social and environmental (ESG) sustainability.

If a company’s operations promote global inequality, they take away from the company’s ability to create value.

To help investors and regulators address the problem of systemic inequality and its destabilizing economic impacts, a Task Force on Inequality-related Financial Disclosures (TIFD) is being developed, which builds upon existing standard-setting efforts. Inspired by the successful uptake of the Task Force on Climate-related Financial Disclosures (TCFD), TIFD is a systemic risk management framework created through a collaboration among investors, civil society, business, financial regulators, policy makers, and academics to help all market actors know how to reduce inequality created by the private sector.

Read the full article about social inequality by Joanne Bauer and Paul Rissman at GreenBiz.