How Big Finance Can Scale Up Sustainability

www.panfirnance.net

investors is therefore crucial. To that end, we should establish a high-profile, open-source clearinghouse of previous sustainable projects, including those that have been successfully funded and those that failed. This would be similar to many existing financial-sector databases but freely available, with reputable third-party oversight to ensure accuracy.

Third, the range of funding sources for sustainable projects needs to be expanded and made more transparent. Because sustainability investments may offer lower returns according to historic financial-market metrics, traditional asset-allocation practices, against the backdrop of “efficient markets,” would imply reduced attractiveness. But historic benchmarks do not sufficiently factor in the exploding field of impact investing, which embraces different return and time thresholds and now accounts for about $2.5 trillion of assets. Securitizing tranches of different kinds of impact investing could prove to be a game changer for sustainability financing.

It would thus make sense to create an opensource database of investor appetite – similar to the project database mentioned above – that is searchable by innovators and designers of new sustainable projects. This would make it easier to identify investors – equity, credit, or some hybrid – who might commit funding. The database could be housed in an organization such as the International Finance Corporation, the United Nations, or the Global Impact Investing Network.

There are encouraging precedents. The green bond market started just over a decade ago, and total issuance already could reach $1 trillion this year. And a critical mass of the financial world attended the UN Climate Change Conference (COP26) in Glasgow last November. Under the leadership of UN Special Envoy Mark Carney, the Glasgow Financial Alliance for Net Zero (GFANZ) has made $130 trillion in climate-finance commitments.

In 1983, Muhammad Yunus founded Grameen Bank in order to provide banking services, and especially loans, to individuals (primarily women) previously considered to be “un-bankable.” By the time Yunus won the Nobel Peace Prize in 2006, “micro-lending” had become a global phenomenon, with traditional financial institutions involved in securitizing these loans.

The financial revolution that Yunus started transformed retail lending, streamlined how such transactions are structured, and tapped a new source of scaled investment capital. To help address today’s existential sustainability challenges, capital markets and their major players need to be more innovative still and open the door to non-traditional, even disruptive, voices and ideas.

GLOBAL BUSINESS DIGEST & MARKET ANALYSIS PAN Finance Magazine Q2 2022

MICHAEL SPENCE

a Nobel laureate in economics, is Professor of Economics Emeritus and a former dean of the Graduate School of Business at Stanford University.

The Global Economy in Transition

Questions about economic growth, inflation, innovation, and the impact of the Ukraine war on the transition to green energy dominate discussions about the global economy’s condition and prospects. The picture that plausible answers paint is not bleak, but it’s not rosy, either.

Recent conversations about the global economy and markets have been defined by a set of recurring questions. While there are many moving parts that are difficult to capture in a single clear picture, it is worth attempting to bring some of the biggest issues into better focus.

The first question is straightforward: Is a recession looming? With authoritative growth forecasts like those from the International Monetary Fund having been revised significantly downward, and likely to be downgraded further, there is good reason to worry. But a global recession – defined as two consecutive quarters of negative GDP growth – remains unlikely, though a major shock, such as a dramatic expansion of conflict or a sudden and significant disruption in a key market like energy, could change this outlook.

Some economies, however, certainly will contract. Russia’s GDP will surely shrink, even with higher oil and gas prices, as a result of severe and most likely prolonged Western sanctions. Europe, too, is likely to experience a recession, owing to high energy prices, heavy dependence on fossil-fuel imports, and the (costly) imperative of rapidly weaning itself from Russian supplies. And many lower-income countries – for which soaring food and energy prices are compounding the effects of the pandemic – are facing harder times.

While the United States appears increasingly likely to face a major economic slowdown, a recession is not the most likely scenario. Similarly, China – normally a powerful engine of global growth – is set to experience low single-digit growth for at least a year, owing to the combined effects of COVID-19 lockdowns, low vaccination uptake among the elderly, some loss of investor confidence in high-growth tech sectors, and a real-estate sector beset by high debts and falling prices.

The second key question relates to the trajectory of inflation. The proximate cause of recent price increases is supply-chain blockages and imbalances between supply and demand. The war in Ukraine has intensified upward pressure on energy, commodities, and food prices. Some of this will be transitory, though it will last longer than initially expected. But inflation is also being fueled by secular trends that are not set to fade anytime soon. Populations representing about 75% of the global economy are aging, labor-force participation is declining, and productivity growth is trending downward. Moreover, unused productive capacity in developing economies – a key source of deflationary pressure in the past – is smaller than it used to be, and what there is remains unused. Add to that a coming policy-driven diversification of supply and demand linkages – a response to myriad shocks, from the pandemic and climate change to geopolitical tensions and conflict – and an extended period of supply-constrained growth with embedded inflationary pressures seems likely.

The third recurring question is: What is next for the tech sector and the digital transformation it is propelling? Lockdowns and other public-health measures spurred an acceleration in adoption of digital technologies during the pandemic. But, contrary to market expectations, this trend is likely to slow as pandemic restrictions are removed.

Amid overly optimistic growth projections, equity markets produced valuations that would

www.panfirnance.net

have been unrealistic in the best of times. At a time of surging inflation, monetary tightening, and falling growth projections, markets have begun correcting. Not surprisingly, growth stocks, whose value is derived from expected future cash flows, and which tend to be concentrated in the tech sector, have fallen particularly sharply.

These market gyrations do not mean that the digital, energy, and biomedical transformations that are underway lack substance, or that they will not have long-lasting economic effects. Markets naturally tend to be more volatile than the underlying economic reality they are supposed to mirror. Momentum incentives cause overshoots in both directions.

Higher market volatility will have important short-run consequences, because venture-capital and private-equity funding, which plays a vital role in supporting innovative, potentially high-growth companies, is not insulated from it. During upswings, valuations are rich, and some companies with dubious claims to durable growth dynamics are funded. During downswings, private valuations lag behind market adjustments by about 6-9 months (experts estimate), partly because both investors and companies resist adjusting valuations downward until the need to raise additional capital forces the issue. (Even now, growth companies are being urged to cut costs and conserve capital.) During this period, deal prices are out of line with realistic longer-term values, making funding difficult and impeding growth and innovation.

A final question that seems to be preoccupying minds lately is whether the war in Ukraine, Europe’s resolve to reduce its dependence on Russian oil and gas, and sky-high fossil-fuel prices will derail the low-carbon transition. Fortunately, there are good reasons to think that it might not, at least not in a lasting way.

For starters, high fossil-fuel prices create a strong incentive for countries and consumers to boost energy efficiency and invest in sustainable energy solutions. In this sense, they go some way toward offsetting the failure to establish an effective global carbon-pricing scheme.

High fossil-fuel prices will have adverse distributional effects within and across countries, resembling the impact of a regressive tax. But these effects can be mitigated, ideally through some form of income redistribution. What governments should not do is subsidize fossil fuels by regulating final prices below market levels, as this would weaken the incentive to pursue more sustainable options. There is a good argument for stabilizing energy prices to encourage investment in alternatives. But that does not mean cutting off the peaks while leaving the troughs in place.

Geopolitics is also bolstering the clean-energy incentive: unlike fossil fuels, renewables largely do not create external dependencies. The green transition is thus a powerful mechanism for increasing resilience and reducing vulnerability to the weaponization of energy supplies.

Ultimately, the green transition is a multi-decade process, during which the energy mix shifts gradually from fossil fuels to clean alternatives. In the near term, economies – especially Europe – might resort to “dirty” energy, including coal, to meet their needs. But this need not spell disaster for the energy transition, let alone the global sustainability agenda.

ECONOMY

PAN Finance Magazine Q2 2022

Champions League final 2022: the economic tactics that drive Liverpool and Real Madrid

Simon Chadwick

Global Professor of Sport | Director of Eurasian Sport, EM Lyon

Paul Widdop

Researcher of Sport Business, University of Manchester

Liverpool against Real Madrid in the Champions League final is a fixture for football fans to savour – two giants battling it out for one of the most prized trophies in the game. And regardless of the result, some will also see this match as a win for football over geopolitics and big money. For these two sides making it to the final means that other powerful teams were knocked out along the way. There is no Manchester City, a club much criticised for the lavish resources it receives from the Abu Dhabi governnment. There is no Paris St-Germain, which is funded by the vast wealth of Qatar.

www.panfirnance.net

ECONOMY

PAN Finance Magazine Q2 2022

No sign of Chelsea either, the defending European champions, who until recently enjoyed the financial backing of a billionaire with strong connections to Russian leaders and Russian gas.

So perhaps this year’s Champions League final is indeed a victory for football purists – a chance to support traditional clubs, untainted by the vast wealth and questionable politics of their rivals.

But before a wave of nostalgia washes over anyone, it is worth remembering that Liverpool versus Real Madrid is not a simple matter of old fashioned sporting values lifting up the beautiful game.

For a start, both clubs have traditionally had strong political associations; the Reds with the left and Los Blancos with the right. free market ideology, making them among the wealthiest clubs in the world. In the 2022 ranking of clubs by revenue, Real Madrid (which has topped the list 12 times in the last 25 years) ranks second, with earnings of €640.1 million (£544.2 million), while Liverpool are seventh with €550.4 million (£467.9 million).

Both teams, then, earn and spend vast amounts of money. For instance, Liverpool has one of football’s most commercially lucrative kit deals (with Nike), while Real Madrid still has an appetite for spending vast sums on top players.

And it would be naive to think that the clubs are uninterested in becoming even wealthier. Indeed, just over a year ago, Liverpool and Real Madrid were among the eight football clubs which announced controversial plans to form a European Super League. erate the flow of revenues into already rich clubs, at the expense of other sides across Europe.

Liverpool’s owners eventually stepped back from the proposal, at least for the time being. Real Madrid president Florentino Perez however, still seems intent on getting his way and launching a breakaway league.

So while it is true that neither of this year’s Champions League finalists are fuelled by oil and gas revenues, they remain prime examples of free market football, and the cash it brings in.

MONEYBALL

The graphics below allow us to take an overall view of the investments and sponsorship surrounding both clubs, all of which are in the public domain. Each circle represents an economic “actor” (a club, a business or an individ-

www.panfirnance.net

ual), while each connecting line represents a significant economic transaction.

A closer look at Liverpool’s most lucrative commercial deals reveals that the club’s owner, Fenway Sports Group, which also boasts the Boston Red Sox in its portfolio, has assembled a sizeable network of entertainment businesses and properties in the US.

This includes RedBird Capital Partners, a “high-profile dealmaker” in the professional sports world, and RedBall Acquisition Corp, spearheaded by Billy Beane (of Moneyball fame) and Gerry Cardinale, the co-founder of the Yankees Entertainment & Sports Network.

Another business of note is SpringHill Company, an entertainment development and production firm headed by basketball star LeBron James, which has tennis player Serena Williams on the board of directors. James is also a shareholder of Liverpool FC. Though not overtly political, Liverpool’s private ownership and US focused operations embody a free market ideology that has become increasingly prominent across European football over the last two decades.

REAL FORTUNES

At first glance, Real Madrid would appear to be a very different beast. The club is owned by its members – known as “socios” – who get to vote club officials into and out of office.

But the graphic of its commercial deals and relationship shows how closely linked to foreign wealth it has become. There are connections with Qiddiya, an entertainment “mega-project” under construction in Saudi Arabia, and with a Chinese bank which issues a Real Madrid branded credit card.

There are also commercial relationships with Abu Dhabi Bank and Emirates Airline in the UAE, Sela Sports, an event management company based in Saudi Arabia, and technology firms in South Korea and China.

Overall, there’s a lot of money invested in the two sides playing for the trophy. And the political side of the game is arguably more obvious than ever.

This year’s Champions League tournament started out with Russian energy giant Gazprom as a principal sponsor, with the final due to be held in Vladimir Putin’s hometown of Saint Petersburg.

After the invasion of Ukraine, the final was moved to Paris, and the deal with Gazprom terminated. So despite being sanitised of Russia’s influence and of fortunes made through oil and gas, the match still represents two of the key players in the modern game: politics and business.

ECONOMY

PAN Finance Magazine Q2 2022

John Luiz

Professor of International Business Strategy & Emerging Markets at the University of Sussex Business School, and the Graduate School of Business, University of Cape Town

Insights from Zimbabwe on how to link formal and informal economies

In 2003, Thabo Mbeki – then president of South Africa – described South Africa’s economy as being like a two-storey house. The top floor was quite plush, with all the fittings packed neatly together. He referred to this as the modern, diversified economy within South Africa. Below that level, however, was an informal economy where the poor were trapped in poverty, with little or no skills.

Mbeki’s analogy went further: there was no interconnecting staircase between the two floors. In effect, South Africa had two economies and there was no bridge between them.

What Mbeki was describing is a common problem in developing countries, including South Africa’s neighbour Zimbabwe. My colleague Baldwin Guchu and I recently conducted research on an initiative in Zimbabwe that is trying to address the problem. In the paper we examined the role intermediaries are playing in connecting formal and informal economies in the country. South Africa can learn from this. Since 1994 South Africa has built on the existing two-storey infrastructure without paying much attention to a stairway. At least, not one wide or sturdy enough to encourage upward movement. This poses a serious developmental problem – one shared by many developing economies.

Academic research typically labels this as being a function of dualism and the lack of institutional connections between these dual economies: although institutions establish the “rules of the game” governing economic activity in each of these economies, the institutions do not bridge the two disparate economies and so they coexist but in isolation.

How often do we hear the refrain that big business does not do business with small business?

The result of this missing link is that the two economies struggle to engage with each other, leading to inefficiencies and substantial lost opportunities. Worse still, it entrenches social and economic divisions, and deepens inequality. We see this manifest in various ways in South Africa.

South Africa has deep and liquid financial markets, together with a highly functioning and well-regulated banking industry, which means our top-floor financial system measures well against any of the leading economies around the world. Access to capital should therefore be widely available.

But it’s not. Swathes of small businesses fail to meet the criteria set for top-floor financing. In developed economies, small businesses have a range of alternatives for financing from banks or other capital markets, including secured and unsecured options.

How can this be fixed? Claiming “it’s the government’s job” ignores other players who have the ability to play a more innovative intermediary role.

If South Africa’s two-storey economy is pronounced, Zimbabwe’s is severe. Its house is pyramid shaped. Yet there are attempts un-

www.panfirnance.net

derway to connect the different levels. Our research looked at what these are.

THE ROLE OF INTERMEDIARIES

Zimbabwe has a reputation for weak and extractive political and economic institutions. The World Bank estimates that the informal economy makes up approximately 60% of the total economy; roughly 90% of those considered “employed” work in the informal economy.

This is especially true in the agriculture space, where the combined legacy of colonialism and more recently, land grabs, has carved a chasm between large-scale commercial farmers and small-scale, often subsistence farmers.

These smaller agriculture producers cooperate in their villages through a system of mutual trust, but this way of doing things does not extend beyond the villages. Tight legal contracts are needed to sell to the bigger retail industry players. In addition, small-scale farmers need some level of financing to ensure access to machinery, and a sustainable supply of input commodities necessary to plant, harvest, and store their crops.

This is impossible without collateral to guarantee a loan, or without buying contracts from retailers. The result is that they are trapped in a vicious cycle – they can’t borrow money to produce, nor are they able to produce to borrow money. That’s where an organisation like the private, for-profit entity Palladium can step in. Its approach is collaborative. In this case it backed a donor funded project, acting as a bridge between the formal and informal economies connecting small-scale farmers to formal markets. In other words, the staircase between the two floors.

Palladium functions as an intermediary in various ways. It facilitates contract farming by connecting input suppliers with small-scale farmers, who then agree to sell the produce back to them at a pre-agreed future price. This addresses input financing and provides a guaranteed market for the farmers’ output.

It also builds partnerships with the private sector to enable mobile buying systems. This frees farmers from having to find a market, and ensures them a fair price; furthermore, it relieves them of the problem of storage and packaging.

As part of a consignment stock initiative, the intermediary also keeps an electronic transaction history farmers can use to access credit in the future by providing records and information that would otherwise be missing.

SOLUTIONS

All these interventions are better served by intermediaries rather than through bureaucratic government overreach. This is particularly true where government institutional capacity is weak and corruption is common.

Governments with little or no entrepreneurial mindset fail at this because they don’t see a gap they can fill in a sustainable way. What governments can do is enable policies that support these intermediaries to function effectively, and to recognise that the traditional boundaries between the public and private sectors are increasingly blurred and hybrid partnerships provide the potential for innovative solutions.

For its part big business needs to realise that maintaining the status quo of dual economies delegitimises markets and results in lost opportunities.

The question for intermediaries is to imagine ways in which bridging support can extend beyond project initiatives. These projects are time-bound, with limited budgets. If not implemented with longevity in mind, such interventions can create dependencies rather than solve them. That’s why longer-term, more sustainable solutions must be imagined, to bring the formal and informal economies closer together. And also to ensure permanent integration.

Without this kind of lateral thinking countries like Zimbabwe and South Africa will continue to have two-storey houses with no stairway, leaving the majority of citizens stranded on the ground floor, looking upwards. Such structural inequality is unsustainable.

ECONOMY

PAN Finance Magazine Q2 2022

Veronika Dolar

Assistant Professor of Economics, SUNY Old Westbury

Why stagflation is an economic nightmare – and could become a real headache for Biden and the Fed if it emerges in the US

WHAT IS STAGFLATION?

Economists typically focus on the three big macroeconomic variables: gross domestic product, unemployment and inflation. Each measure tells its own important story about how the economy is doing. GDP – or the total output of all good and services produced – shows us what the broader economy is doing, unemployment tells us about the job situation, and inflation measures the movement of prices.

But their stories also overlap. And unfortunately, they usually don’t all tell us good news at the same time. offs. You usually can’t have a strong pace of GDP growth and low unemployment without suffering the pains of higher inflation. And if you’re able to keep inflation low, that usually comes at the expense of subdued GDP and possibly higher unemployment.

So, normally there is some good news and some bad news. But with stagflation, there is no good news.

Stagflation happens when the economy is experiencing both economic stagnation – stalling or falling output – and high inflation. Additionally, a struggling economy will drive up unemployment.

In other words, all three macroeconomic indicators are going in the wrong direction. HAS THE US EXPERIENCED IT BEFORE?

The last time this happened in the U.S. was in the 1970s, another period when energy prices were skyrocketing.

As a result of an embargo led by OPEC, a cartel of oil-producing countries, the price of crude doubled from 1973 to 1975.

Countries like the U.S. that imported a lot of oil experienced both high inflation and recession. The Consumer Price Index exceeded 10% for the first time since the 1940s, unemployment jumped from 4.6% in 1973 to 9% in 1975, and the GDP plunged.

The same events – OPEC pushing up prices, inflation soaring, economies sinking into recession – repeated just a few years later. Over