World Finance Winter 2021-22

THE VOICE OF THE MARKET Winter 2021–22 | worldfinance.com

Calling the shots

Plus TIKTOK PENSIONS AFGHANISTAN VEGAN MARKET

Pfizer CEO Albert Bourla rallied his workforce to break records

Handle with care

The supply chain crisis has driven up prices and caused huge delays

Trouble in China

The country’s largest corporations hit by ongoing regulatory changes

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THE MAN BANKING ON A CLIMATE FOR CHANGE Following a show of strength at COP26, the United Nations’ Special Envoy for Climate Action and Finance, Mark Carney, is leading a coalition of banks, pension funds and other financial institutions with his sights set firmly on tackling the climate crisis BARRY EICHENGREEN

ANDREW DEUTZ

ROBERT SKIDELSK Y

SIMON Z ADEK

PUBLISHED BY WORLD NEWS MEDIA

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L AURA FRENCH

The fuTure has landed The arrival of the all-new Gulfstream G800™ and G400™ elevates the strongest and most advanced fleet in Gulfstream history. Our newly expanded portfolio offers an aircraft for every mission.

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Contents

Winter 2021–22

Features

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40 Carney’s critical challenge It appears, post-COP26, that a shared desire exists to create a better world.

Could Mark Carney and his $130trn coalition of banks and pension funds be the catalyst for sustainable change?

Bitcoin journey continues

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Cryptocurrencies demand to be taken seriously and a potentially huge step was taken when El Salvador became the first country in the world to adopt bitcoin as an official currency. So, what next?

112 A buzz around pensions The pensions industry is undergoing an overhaul, aided by more accessible offerings, with digital developments at the forefront. PensionBee founder, Romi Savova, spoke with World Finance

140 China’s corporate crackdown What is the reasoning behind the Chinese government targeting its own big corporations, and how will these new policies affect the country’s ongoing attempt to open up its financial markets?

DESIGNER:

Editorial:

Contributors:

Business Development:

Sam Millard

Jo Caird Lana Crowe Laura French Courtney Goldsmith Adrian Holliday Alex Katsomitros Natalie Keffler Ruth Kibble John Muchira Nicholas Otieno Selwyn Parker Rachel Richards David Worsfold

Andrew Deutz Barry Eichengreen Rebecca Farrington Jürgen Galler Angelica Krystle Donati Nathalie Nahai David Orrell Eveline Pupeter Axel Schulz Robert Skidelsky Jan van Vonno Paddy Vishani Simon Zadek

Mustapha Belkouche Bryan Charles Tom Crosse Terry Johnson Julia King Monika Wojcik

reprographer:

Robin Sloan Production manager:

Richard Willcox Web and Mobile Development:

Scott Rouse video producer:

Paul Richardson

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| Winter 2021-22

youtube.com/worldfinancevideos

164 Solving the weakest link The world’s supply chains are in crisis – from computer chips to cars to shipping containers. Prices are soaring and some businesses are closing. Is there a supply chain fix, and what might it look like?

188 Trying to meat halfway The rise of the vegan market offers an increasing amount of investment opportunities. With lab-grown meat becoming a reality, what is on the horizon in this billion-dollar industry?

The information contained within this publication has been obtained from sources the proprietors believe to be correct. However, no legal liability can be accepted for any errors. No part of this publication may be reproduced without the prior consent of the Publisher.

World Finance World News Media Ltd 40 Compton Street London EC1V 0BD United Kingdom

IllustratorS:

Richard Beacham Jim Howells

© World News Media Ltd, 2021 Printed in the UK. ISSN 1755-2915

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Editorial on pages 32–39 & 55 © Project Syndicate, 2021

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Regulars

Banking

Wealth Management

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46 Digital Banking

84 Wealth Management

The Ledger Financial news, expert opinion and analysis of the financial markets

24 Global Review An informative ranking of how startupfriendly different countries are

Developments in the digital realm are improving the banking sector for customers across the globe and opportunities abound

58 Investment Banking

28 Profile Albert Bourla, Pfizer’s CEO, was instrumental in the company’s successful mission to find a COVID-19 vaccine

32 Comment Barry Eichengreen on the IMF’s special drawing rights, Andrew Deutz examines a low-carbon economy, Robert Skidelsky explores quantitative easing and Simon Zadek ponders a sustainable food system

194 The Econoclast

90 Tax & Legal

The financial landscape in Kazakhstan continues to go from strength to strength, with the implementation of securitisation

26 Financial History From the credit crisis of 1772 through to the 2020 pandemic, there has been a long history of financial crises

Debt forgiveness, the digital revolution and investors’ expectations are all examined in closer detail

60 Retail Banking

The high-profile leaks of financial documents in recent years have led to increased scrutiny over the payment of taxes

92 Investment Management

Boosted by a €33bn funding package the future for investment in Greece is appealing

64 Islamic Finance Having weathered the pandemic storm the banking sector in Kuwait is looking ahead to 2022 and beyond with innovative evolution

66 Private Banking Unity and hard work have been required this last year and looking forwards are goals of sustainability and financial inclusion

72 Financial Recovery A look at how the banking industry is bouncing back from the global pandemic

The theme of taboo economics is examined

Digital developments, strategic planning and fintech education come under the microscope

98 Silicon Valley The rise and subsequent fall of Theranos has cast a long shadow. But it also presents opportunities for new start-ups

100 Insurance The rise of AI and the risk of climate emergencies; the industry continues to provide opportunities and challenges

110 Mergers & Acquisitions What exactly are ‘killer acquisitions’?

Markets

Analysis

Str ategy

118 Forex

146 Afghanistan

170 Recruitment

With the ‘new normal’ well and truly upon us new and different strategies are required to better navigate the markets

120 Technology

After the Taliban takeover, what does the financial future hold for Afghanistan?

148 Germany What legacy has Angela Merkel left and what impact will her departure have on the German economy?

What role will artificial intelligence play in the future of the financial industry?

124 Space Tourism

Malta offers an extremely appealing residency-by-investment programme

128 Focus: Africa Hybrid financing might provide the key to recovery for SMEs in Africa

130 Energy An overview of two transformational energy projects as well as the latest activity in the Gulf of Mexico and the future of the hydrogen industry

172 Focus: TikTok There is a strong consumerist slant to TikTok, and brands that are able to achieve viral success on the app often see this online enthusiasm translate into real-life sales

150 Disaster Planning

The final frontier has been a dream destination for many and a new era of space tourism may finally be ready for lift-off

126 Focus: Malta

Despite massive fluctuations in the jobs market due to the pandemic, the senior end of the market has remained consistent

All savvy businesses have disaster recovery plans but what recourse do we have if something even more threatening happens?

152 Outsourcing The pandemic has radically reshaped the world of outsourcing and companies will need to adapt

154 Construction We explore sustainable buildings and the resurgence of the railways as a source of low and zero-emission travel

160 Cost of Pandemics We take a look at the economic cost felt from five previous epidemics and pandemics

174 2021 Awards World Finance looks back at the year gone by and honours those that have stood out in their respective industries. We award the best Digital Banks, best Insurance firms, best Investment Management companies, best Wealth Management providers, best Energy companies, the most Innovative companies and the WF100

180 Sustainability Thought leaders talk to World Finance from several different industries about ESG, eliminating carbon emissions, achieving net zero and the drive to live in a more sustainable world

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The Ledger B U S INE S S NE W S & F I S C A L D I GE S T

The sun also rises high-ranking members of the former administration have been subpoenaed by the house select committee, but it's not clear how many have handed over documents. Steve bannon, former White house chief strategist and trump ally, is now facing a charge of criminal contempt for refusing to cooperate with the congressional investigation.

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c ol u m n i s t s

i n s ig h t s

Building business resilience

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Renewables investment must power up energy sector The International Energy Agency (IEA) has declared that investment in renewable energy must triple by the end of the decade in order to safeguard world energy markets amid the climate crisis. “The world is not investing enough to meet its future energy needs” the IEA said in its annual World Energy Outlook, published in October. While spending on renewables is “picking up,” the group said it remains “far short of what is required to meet rising demand for energy services in a sustainable way.”

It comes as energy prices spiked in the third quarter of 2021 on the back of oil and natural gas prices hitting multi-year highs. After the pandemic, renewable sources of energy, like solar power, wind power and bioenergy, need to make up a larger share of energy investments, the IEA said. Fossil fuels accounted for nearly 80 percent of the world energy supply in 2020, while renewables made up just 12 percent. What’s more, while renewables accounted

The market has long prioritised the status quo over making costly investments in transitionMARKET ing the economy to renewables, but the IEA has warned that this is a short-sighted strategy. Transitioning the energy system faster will protect consumers in the future, with a commodity price shock driving up costs for VOICE of the

Fig 1

Global energy c02 emissions Gigatonnes of C02

35 30 25 20 15 10 5 0

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

From finance to fashion, few industries have escaped the extraordinary digital transformation these past 18 months. Against a backdrop of rapidly evolving consumer Nathalie Nahai expectations, the pandemic has served to catalyse and amplify many existing trends already present prior to lockdowns. From demands for greater corporate accountability, responsibility and transparency, to an increasing appetite for sustainable, renewable and socially responsible products, younger generations have been driving a change towards more ethical and regenerative ways of working and consuming.

In the finance sector, 2019 saw the uK’s Financial Conduct Authority take proactive steps to prevent ‘greenwashing’, challenging firms making misleading claims over sustainable investments. And with the Bank of England receiving a government mandate to buy ‘green’ bonds earlier this year, it seems unlikely that we’ll be returning to business as usual. As we navigate the aftershocks of Brexit, we seem nevertheless to be taking a page out of the continental handbook, heeding the European Commission’s advice that advisers ‘take sustainability risks into account in the selection process of the financial product presented to investors before providing advice, regardless of the sustainability preferences of the investors.’

What’s fascinating from a consumer standpoint is the rapidity with which this approach has manifested practical changes in service, materialising both in corporate repositioning and a boom of green, digital-first banking products. And with fintech services such as Good Money and TreeCard already disrupting the sector, this is a trend we can expect to see a lot more of – especially since consumers born between 1981 and 2012 will make up 72 percent of the workforce by the year 2029.

So where does that leave us? One thing is clear – if the finance sector is serious about ensuring its long-term resilience and prosperity, it’s going to have to dance to a different tune. From offering ethical investment and banking services, to integrating ESG into business strategies, the future will belong to organisations brave enough to harness and lead the change towards a better, more sustainable world.

SOuRCE: Global Energy Review

for more than two-thirds of investment in new power capacity in 2021, growth in coal and oil use caused carbon dioxide emissions to spike to the second-highest annual increase (see Fig 1).

As the IEA concluded, “A low emissions revolution is long overdue.”

households by 30 percent less in its ambitious scenario where net zero emissions are reached by 2050, versus its more conservative Stated Policies Scenario (STEPS). In the STEPS scenario, global temperatures are set to rise by 2.6 degrees Celsius, well above the 1.5 degrees that the Paris agreement requires.

a p p oi n t m e n t s

c ol u m n i s t s

Cultivating people power

Jonathan Akeroyd ceo

Verena Ross chair

Sander van 't Noordende ceo

Burberry

ESMA

Randstad

Jonathan Akeroyd will take the reins of one of the UK’s best-known fashion houses, leaving Italy’s Gianni Versace, which he has led since June 2016. Akeroyd had ramped up the iconic brand’s growth by bringing its heritage to the fore. Now, the British national said he is honoured to join Burberry as CEO. “I am looking forward to returning to London where I first built my career in the luxury industry to join a talented team with ambitious plans for the future and a strong platform to accelerate growth,” he said. Akeroyd was previously CEO of Alexander McQueen for 12 years, where he led a turnaround and global expansion.

The EU’s top securities markets regulator has promoted a long-serving director. Verena Ross, a German national who started her career at the Bank of England, will succeed Steven Maijoor at the European Securities and Markets Authority (ESMA). “I am extremely delighted to welcome Verena’s appointment as the new chair of ESMA,” said Anneli Tuominen, interim chair.

“She brings with her an indepth knowledge of European and global markets as well as of ESMA itself, which will be invaluable.” Headquartered in Paris, the watchdog’s aim is to improve investor protection and promote stable and orderly markets.

Global staffing group Randstad has appointed Sander van 't Noordende to lead the group as chief executive following outgoing CEO Jacques van den Broek’s decision to step down. Van 't Noordende, a long-serving executive at Accenture, joined the Amsterdam-based company’s supervisory board in April and will take the reins in 2022. Van 't Noordende gained acclaim as Accenture’s group chief executive for products, where he grew the segment from $6bn to $12bn. He is also recognised for his work pushing equal rights for LGBTQ+ employees and has been celebrated several times as one of the top 100 global LGBTQ+ executives.

VOICE OF THE MARKET

Akeroyd’s experience in Britain’s luxury fashion industry, his knack for boosting growth and his strong commercial and marketing nous will be a boon to Burberry. Having driven Versace into profitable territory and steered Alexander McQueen through numerous highs and lows, he is well regarded as a safe pair of hands with the potential to revive the fashion group’s fortunes.

VOICE OF THE MARKET

Ross’s appointment comes at a key juncture for ESMA as it widens its scope. Following Brexit, the watchdog aims to lead the bloc’s drive to bolster capital markets. Having more than two decades of experience in regulatory and supervisory roles, as well as holding the position of executive director of ESMA for the last decade, Ross is set to hit the ground running.

VOICE OF THE MARKET

Van ‘t Noordende’s appointment comes at a pivotal time in global recruitment. After announcing he would step down, van den Broek noted that shortages in the labour market will be a major challenge for years to come. As scarcity across sectors like healthcare, education, technology and logistics becomes structural, global leaders in HR services like Randstad will be in the spotlight.

It’s over a decade since Steve Jobs declared “great things are never done by one person; they are done by a team of people”.

This observation was true before the Apple CEO gave his take on jürgen Galler the value of people. Across 30 years of working at major web companies from lycos to Google, I’ve seen that success almost always comes down to having the right talent.

While there’s no bullet-proof formula for leaders to perfect their people foundation, there are key steps they can follow to cultivate collective power.

While we’ve all heard that a leader shouldn’t be the smartest person in the room, there is often little focus on what’s required to avoid this: humble hiring.

Recruiting people with skills that surpass your own is crucial to achieve greater overall intelligence and productivity.

Seeking individuals who are skilled in their field ensures they can produce the best results: in our industry that would range from keeping product development in tune with demand to delivering effective advertising campaigns. Bringing specialists together also fosters a climate of innovation, where workers inspire each other to explore ideas, try different approaches, and raise their ambitions.

Bringing together exceptional people is a good start, but unleashing their potential takes work and guidance. leaders should embody the behaviour and cultural attitude they want to build.

Simple steps such as welcoming suggestions shows openness to unique thinking, encourages contribution, and establishes a horizontal structure that allows for equal participation.

Similarly, stimulating a spirit of ongoing evolution also has to start at the top, with leaders embracing and adapting to change. For example, the pandemic has taught me to recognise the benefits of home working, having previously leaned strongly towards the easy accessibility and information flow of physical offices.

Throughout my career, I’ve been lucky to work with many people; all of whom have proved that the individual skills everyone brings to the table are equally invaluable. My takeaway for any leader is to find and nurture the best talent you can – and leave your ego at the door.

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c ol u m n i s t s

who’s building back better?

Universal Music Group hits the right notes

It has become something of a rallying cry over the last two years, and a beacon of hope during the dark days of the global pandemic. The phrase 'Build Back Courtney Goldsmith Better' was originally coined by the Sendai Framework of disaster recovery that the uN World Conference adopted in 2015.

It was then used in a 2018 report by the World Bank.

Now, it’s a political campaign slogan and a shorthand for policies that promote resilience and recovery from COVID-19.

The phrase was used in uS president Joe Biden’s election campaign in 2020 as well as his cornerstone $3.5trn bill that aims to “create jobs, cut taxes, and lower costs for working families.” In the uK, prime minister Boris Johnson announced a similar plan for growth through investment in infrastructure, skills and innovation under the banner of Build Back Better. New Zealand’s PM Jacinda Ardern also borrowed the slogan during a recent election.

But what does building back better look like? In America, Biden’s Build Back Better bill is set to kickstart new social policies and programmes, including everything from universal preschool for children, which the White House estimates would save families $13,000 a year, to tax cuts for electric vehicles.

In the uK, Johnson’s plan promises to ‘level up’ the uK by funnelling £600bn to the public sector over the next five years and offering upskilling to adults. These nations are making hefty investments in their futures – and the World Bank says this is key to generating large economic benefits, with studies revealing that every $1 spent on new infrastructure assets saves more than $4 over their lifetime. Build Back Better approaches also rebalance finances and improve debt stability in the longer term.

What then for the poorest countries? According to the World Bank, raising the resources needed for developing countries to build a resilient recovery post-Covid will be a “monumental challenge”. External financing needs for these countries are expected to be much higher than in years past, and donor governments are facing their own budgetary constraints. Yet the poorest countries will not be able to Build Back Better without a helping hand; their recovery is the next great test that the international community faces.

French media group Vivendi has successfully spun off Universal Music Group. After the shares were distributed to its own shareholders, Universal was listed on the Euronext, and the business’ opening day of trading saw its shares leap to offer it a valuation of €45.5bn. Vivendi shareholders received one share of Universal each before the business was listed, so they now own 60 percent of the company. The deal comes at a pivotal time for the music industry, where the biggest companies, which hold most song copyrights, have had a significant boost from streaming services.

Universal expects this growth to continue as streaming service subscriptions provide a reliable source of revenue. It is also targeting emerging markets and new categories and the group already had a coup in October as South Korean music sensation BTS left Sony to sign a new distribution and marketing deal with Universal.

Universal is looking to boost the popularity of Korean pop, or K-pop, music around the world.

The Paris-headquartered media conglomerate Vivendi will now focus on its remaining businesses: pay-TV provider Canal Plus, advertising agency Havas and book publisher Editis. Canal Plus is now Vivendi’s biggest unit, and its

growth will help drive the business forward. In October, the group announced that Canal Plus’ sales had risen 6.5 percent in the third quarter thanks to a whopping 35 percent rise in revenue from its international activities.

Yet with the exit of Universal leaving a €16bn-shaped hole in the group’s revenues, it is expected Vivendi will begin an acquisitions spree to rebuild a newly focused business. In September, the group hinted at this new direction after revealing it would increase its stake in French publishing and retail business Lagardère, potentially opening the door to an eventual takeover.

M&A

M&A

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m e r g e r s & a c qu i s i t io n s

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Square acquires BNPL firm Crude terminal purchased Financial services and digital payments company Square has agreed to acquire buy now, pay later (BNPL) platform Afterpay for $29bn.

Square CEO and co-founder Jack Dorsey said that both Square and Afterpay are seeking to make the financial system one that is “more fair, accessible and inclusive.” Afterpay currently serves more than 16 million consumers and has nearly 100,000 merchants spread around the world. “Buy now, pay later has been a powerful growth tool for sellers globally,” said Alyssa Henry, lead of Square’s seller business. The group claims to “empower” customers to buy the things they want and need while maintaining “financial wellness and control” – however, some critics say the BNPL trend actually fuels impulse buying and tempts consumers to rack up debt.

Enbridge, the Canadian pipeline operator, has completed a deal to buy logistics firm Moda Midstream Operating for $3bn in cash. The deal saw it acquire North America’s largest crude export terminal, Moda Ingleside Energy Centre in Texas, which connects the low-cost and long-lived reserves in the Permian and Eagle Ford basins to international markets. The deal was announced as Enbridge seeks to increase its presence in the US Gulf Coast, a key import refining hub for Canadian heavy oil.

The transaction also fits neatly with Enbridge’s longer-term focus on sustainability and its goal of net zero emissions by 2050, as there are plans to develop up to 60 megawatts of solar power capacity at the terminal. Furthermore, the site may be used for carbon capture and storage in future.

n e w s i n p ic t u r e s

Farming grows up In Meishan, china, an employee takes care of soilless cultivated tomato plants at an intelligent greenhouse. as a leader in indoor and vertical urban farming, and with its population projected to reach 1.5 billion within the next decade, china is going allin on farming that is less resource-intensive and has a lower environmental impact.

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markets

v i de o s Dmitry Konov of Sibur Holding, and Albert Shigabutdinov of TAIF, sign an agreement to establish a merger company, the largest in Russia

M&A activity shatters all-time high A merger and acquisitions bonanza has sent global deal activity to record highs. During the third quarter of 2021, transaction volumes shot up, producing deals worth $1.52trn, which was up 37 percent from the same quarter in 2020 and higher than any other quarter on record, (see Fig 1). As third-quarter volumes soared, M&A activity in the first nine months of the year reached a total of $4.33trn, which overtakes the previous all-time high of $4.1trn, which was achieved in 2007, just before the financial crisis.

The increased deal activity should be seen as an extremely positive sign for the global economy, as industry players are displaying their increased confidence in the current market environment. Even an expected reform of taxes in the US, which is likely to increase the cost of doing deals, is not set to derail the spending boom. The nation notched a 32 percent rise in volumes to $581bn in the third quarter.

Meanwhile, deals doubled in Europe, reaching $473bn, and Asia Pacific recorded $365bn worth of M&A activity, up 21 percent.

Fig 1

Global M&A activity By transaction value ($bn)

n Q1 n Q2 n Q3 n Q4

3,500 3,000 2,500

705.4

731.0

664.3

571.7

858.8

891.2

2,000 1,500 1,000 500 0

792.6 2018

1,054.8 933.2 769.8 258.5

778.6

479.2

991.7

2019

2020

2021

SOURCE: S&P Global

When analysing closer, deal-making in the technology industry was particularly impressive, with software mergers and acquisitions more than tripling in the first nine months of the year.

MRNA technology provides boost to the health sector At time of writing, global COVID-19 levels appear to have settled down to a baseline of three million cases per week, after cresting a third wave in August. And although in some countries a fourth wave in January Dimitris Kantzelis seems inevitable, investors are hopeful that some facets of life will return to normal – and that the ways the pandemic has disrupted and transformed lives may prove profitable.

In a three-part video interview with World Finance, wealth technology innovator Dimitris Kantzelis outlined his bullish view of the global stock and bond markets.

“We’re seeing people buying houses, turning to real estate for safety after the global pandemic,” he said. But his company, XSpot Wealth, is also hopeful that businesses in the infrastructure sector will thrive, “as we’re trying to change the way we commute, and we live in cities.”

When the Biden administration signalled a crackdown on big tech firms in summer 2021, XSpot shifted some of its portfolios from technology stock to value sectors. The health sector was one prominent pick: “because the MRNA technology helped a lot, not only in the COVID-19 vaccines, but also in the entire research and development around vaccines for the future,” he said.

The banking sector is another area in which he predicts strong growth – “the banks were very well capitalised… and we believe with increasing interest rates they will be very profitable,” Kantzelis said. But he predicted that rates will increase more slowly than some would expect, as governments are wary of hyperinflation, and of counteracting the work that the trillions in stimulus packages did to keep economies afloat.

XSpot Wealth also launched its first ESG plans during 2021, to cater to the growing demand for more sustainable investment solutions. Research by PwC suggests that ESG funds could represent 41–57 percent of the European fund sector by 2025. “That was quite a successful launch as well,” Kantzelis said, “[our clients] were very happy, because with the passive way we’re investing, with the big transparency, they can always see what we’re doing… they feel comfortable. And this is the reason why they’re bringing us a lot of referrals, and we also see them bringing deposits from different institutions over to us.” to watch the full video, and for more content, visit: www.worldfinance.com/videos

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The Ledger Winter 2021-22

v i de o s

i n s ig h t s Protesters gather against President Bolsonaro in São Paulo, Brazil

Funding the 56 million homes missing in Africa African cities are in the middle of a housing crisis. Fifty-six million urban homes are required across the continent – and that number is getting higher and even harder to overcome every year, as urbanisation Andrew Chimphondah accelerates. The biggest challenge is affordability, according to Shelter Afrique, a pan-African development finance institution that funds low-cost, high-volume housing in 44 African countries: building homes isn’t enough, if they’re unattainable for the average worker.

Research from the Centre for Affordable Housing Finance says that in 11 of the worst-affected countries in Africa, more than 90 percent of the population can’t afford even the cheapest newly-built home in their country – even with a mortgage. “To get a low-cost house, you need to enter into a partnership with the governments,” Shelter Afrique Managing Director Andrew Chimphondah told World Finance in a down-the-line video interview. “They provide land, and possibly infrastructure support or subsidies; then we can provide funding for the top structure, so that the end result is a house that costs in the region of $20–30,000.”

Although development finance can go a long way – through 2021 Shelter Afrique was securing $1bn of funding through bond issuances, to ensure it could fulfil its pipeline of housing projects – the market and regulatory landscape needs to adapt in order to really confront the scale of the problem. “We are holding our 40th anniversary in Yaoundé in Cameroon, where we’ll be able to promulgate the Yaoundé declaration in terms of 40 years of housing,” Chimphondah said. “How have the policies in the member states been effective? And if not, what changes do we need to make in terms of the policies?”

In collaboration with UN Habitat and the UN Economic Commission for Africa, Shelter Afrique is developing a model “which is a benchmark for housing policy that should create an enabling environment to support the growth of low-cost, large-scale housing.” After all, in much the same way that building unaffordable homes is pointless, public-private partnerships that can’t attract private investment are unsustainable: “We're pleased to report… for 2020 a profit which we’ve delivered of $2m, and we’re looking forward to delivering more profit for our member states, so that the capital they’re investing in Shelter Afrique continues to grow,” Chimphondah said. to watch the full video, and for more content, visit: www.worldfinance.com/videos

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Inflation could cause financial crash A financial crisis could be on the horizon due to global inflation, Russia’s central bank has warned. In a report, the central bank said a crash on the scale of the 2008 collapse could occur in the next year if inflation is not managed. If the US Federal Reserve has to boost interest rates to keep inflation in check, the Bank of Russia said growing public and private debt levels could cause the world economy to “deteriorate drastically and rapidly”. Published in September, the bank’s annual monetary policy forecast said growth of global gross domestic product (GDP) could drop to 1.1 percent as higher interest rates cause investors to shed riskier assets.

Countries in emerging markets with high levels of debt would be susceptible to the crash.

“Risk premiums will increase significantly, the most indebted countries will struggle to service their debt, and a significant financial crisis will begin in the global economy in the first quarter

While inflation is becoming an issue in emerging markets, more established economies are market not immune to its effects. US businesses have warned that snarled supply chains are causing widespread inflationary pressure. Shortages are intensifying, with some factories forced to close due to COVID-19 illnesses, and others struggling with chronic staff shortfalls. This calls V oice of the

of 2023 — one comparable to the 2008—2009 crisis, with a long period of uncertainty and a protracted recovery,” the central bank said in its report.

Despite these stark warnings, the Bank of Russia’s central scenario predicts a broad economic recovery following the COVID-19 pandemic, with inflationary pressures fading by the end of 2021. While it says this scenario is “significantly more likely” the warning is a reminder of the concerns over inflationary pressures worldwide. Consumer and producer price inflation rose to multi-year highs in 2021, and larger emerging markets have raised interest rates in order to keep inflation in check. For instance, Ukraine has raised its rate by two percentage points, while Russia has raised its by 2.25 points and Brazil by 3.25 points. Inflation in Brazil currently stands at nine percent, well outpacing the central bank’s 3.75 percent target.

into question how badly inflation could impact consumer spending and corporate earnings. In October, the Federal Reserve’s summary of economic conditions said supply chain issues and worker shortages had slowed the pace of economic growth. “Most districts reported significantly elevated prices, fuelled by rising demand for goods and raw materials,” it said.

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The Ledger Winter 2021-22

n e w s i n p ic t u r e s

The first port of call the yangshan port in Shanghai, china, is the biggest automated container terminal in the world. More than 44 million shipping containers pass through here, annually, and when the next stages of development are complete the port will have seen a total of $12bn invested in it.

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s t a t i s t ic s

VIRtuAl

REALIT Y

E-commerce sales surged on the back of the pandemic, as physical stores across the world shut down and consumers turned to the internet to get their goods. The sector grew 29 percent in 2020, with global online sales hitting $4.28trn, and it’s showing no signs of slowing; here we look at the numbers behind the e-commerce industry and how different countries and companies across the globe compare.

world’s biggest e-commerce companies by revenue

Projected e-commerce sales by country in 2021

uSD, BIllIONS

uSD, BIllIONS

Amazon

China : $2,779.31bn

jD.Com

uS: $843.15bn

Alibaba

uK: $169.02bn

Suning.com

japan: $144.08bn

Meituan

Germany: $101.51bn

otto Group

France: $80.00bn

Rakuten

India: $67.53bn

eBay

0 25 50 75 100 125 150 175 200 225 250 275 300 325 350 375 400

Spain: $37.12bn

Growth in e-commerce sales from 2011 to 2020 PERCENTAGE OF TOTAl RETAIl SAlES

n Ecommerce sales n Offline sales

SOuRCES: markinblog.com, oberlo.co.uk, digitalcommerce360.com, statista.com, shopify.com, reuters.com, forbes.com

19.6%

84

%

AMAZON’S NET PROFIT GROWTH IN 2020

45

%

AMAZON’S SHARE OF THE uS E-COMMERCE MARKET

$386bn

AMAZON’S GlOBAl NET REVENuES IN 2020

7.1%

8.0%

8.8%

9.7%

10.7%

11.8%

13.2%

14.3%

19.5%

2 billion

WORlDWIDE GROWTH RATE OF E-COMMERCE IN 2020

NuMBER OF PEOPlE WORlDWIDE WHO BOuGHT ONlINE IN 2020

e-commerce revenue in the uS from 2017 to 2025 uS DOllARS MIllIONS

700,000 600,000 500,000 400,000 300,000 200,000

ITEMS SOlD IN THE uS EVERY MINuTE ON AMAZON

100,000 2011

aSoS’S Global REvENuE IN 2020

29%

15.8%

4,000

£3.26bn

$5.4trn

PERCENTAGE OF GlOBAl PuRCHASES FORECAST TO BE MADE ONlINE IN 2021

Canada $44.12bn

Zalando

GlOBAl E-COMMERCE SAlES IN 2020

PROJECTED E-COMMERCE REVENuES IN 2022

South Korea: $120.56bn

wayfair

$4.28trn

2012

75%

2013

2014

OF THE uS POPulATION BOuGHT AT lEAST ONE PRODuCT ONlINE IN 2020

2015

2016

2017

2018

2019

$538bn

VAluE OF THE uS E-COMMERCE MARKET IN 2020

2020

0

2017

70%

2018

2019

2020

PERCENTAGE OF BRITS WHO SAY THEY PREFER SHOPPING ONlINE TO IN-STORE

2021

2022

2023

2024

2025

$1.34trn VAluE OF CHINA’S E-COMMERCE MARKET IN 2020

Winter 2021-22 |

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The Ledger

Winter 2021-22

v i de o s

i n s ig h t s

BVI launches fintech regulatory sandbox The British Virgin Islands has played a pivotal role in enabling cross-border trade ever since the introduction of its International Business Companies Act in 1984.

Without international financial Simon Gray centres like the BVI, it’s unlikely we’d live in such a frictionless trade environment: according to a Capital Economics report, the BVI has contributed $1.5trn to the economy of our modern ‘global village.’

But just like the IBC Act has been updated multiple times as international finance has evolved, it’s important that the BVI keeps up with the times. “We continue to be responsive to business needs and changes globally,” BVI Finance’s Simon Gray told World Finance. “We tend to always try to benchmark with the best…seek out opportunities where they maybe haven’t been considered.”

This is one of the reasons why the BVI launched its fintech regulatory sandbox in summer 2020. The first of its kind was created by the UK, five years earlier, “But the approach we’ve always taken is: look, and learn, and listen from others – and hopefully improve,” Gray said. “We try never to be complacent, but we also recognise humility.

It’s very important to understand that there are amazing competitors out there, and rather than fear them, I respect them. Hopefully they respect us as well.”

For the BVI, its regulatory sandbox is targeted at young entrepreneurs seeking to build something new in the fintech space. BVI Finance worked closely with the Financial Services Commission to disentangle some key regulations for start-ups in the sandbox, without exposing consumers to any risk. “They’re in the laboratory at this point,” Gray explained: “At such time as they leave the sandbox, the condition absolutely is they have to have full compliance.”

Entrepreneurship is something the BVI has always been keen to attract – in 2017 the country introduced its Micro Business Companies Act, for businesses with annual turnover below $2m – and BVI Finance has been working hard through the pandemic to continue innovating. Recently it has introduced a private investment fund regime, adopted blockchain-enabled smart contracts and embraced crypto funds.

“We try and offer a suite of different products and services for the entire corporate and blood family,” Gray said. to watch the full video, and for more content, visit: www.worldfinance.com/videos

Jihad Azour, International Monetary Fund (IMF) Middle East and Central Asia director

Growth prospects rise for MENA region The International Monetary Fund (IMF) has signalled its optimism for economic growth in the Middle East and North Africa (MENA) in 2021 and 2022. The lender raised its growth expectations for the region to 4.1 percent in 2022, up from an earlier estimate of 3.7 percent. The change in projections is largely down to the quickening speed of the vaccine rollout in these areas, as well as the effect of postCovid financial measures.

Despite the positive outlook, Jihad Azour, IMF director for MENA and central Asia, warned that the road to recovery is “uncertain” in an interview with Bloomberg. He also said that any financial rebound will be “uneven” due to diverging levels of vaccinations. Earlier in October, the IMF noted that the global economic recovery had lost pace, and it downgraded growth to 5.9 percent, down 0.1 percentage points from an earlier prediction in July.

In the MENA region, the key hurdles still standing in the way of the recovery effort are

With the IMF predicting that the recovery gap between richer and poorer countries will market widen as the Covid bounceback progresses, it is positive news that the MENA region is recovering more quickly than expected, thanks to the success of its vaccine rollout. Vaccination rates remain a competitive V oice of the

debt stabilisation, rising unemployment levels and the continued effect of Covid-19. The IMF asked governments to increase vaccine distribution, tackle unemployment and prioritise fiscal and monetary support to keep the recovery on track.

Earlier in the year, the IMF warned that a “dangerous divergence” between richer and poorer countries had emerged since the pandemic hit. It added that the modest downgrade of the headline growth figure masks larger downgrades for some countries.

The outlook for the low-income developing country group has “darkened considerably due to worsening pandemic dynamics,” it said. While advanced economies will be back on their pre-pandemic trend path from 2022 and exceed it by 0.9 percent in 2024, economic growth in emerging and developing economies, excluding China, are set to remain 5.5 percent below pre-pandemic expectations in 2024.

advantage in advanced economies, with nearly 60 percent of the population being fully vaccinated and a booster programme taking protection rates even further in some areas. In stark contrast, around 96 percent of the population of low-income countries have not received a single dose of the Covid vaccine.

Winter 2021-22 |

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wor l d f i na nce

Global Review

1

Open for business

6

The Global Startup Ecosystem Index ranks countries and cities by how startup-friendly they are, taking into account quantity, meaning the number of startups, co-working spaces and accelerators available; quality, indicating overall success of the startups; and business, referring to infrastructure, policies and legislation 1–20 21–40 41–60

61–80 81–100 No data available

Note: Countries ranked (from 1 to 100)

1

US (Rank 1)

With a total score of 124.42 – more than four times that of its closest rival, the UK – the US is a clear winner, with 12 of the world’s 30 most innovative cities located in the country, according to the rankings. Free market capitalism, access to funding, private and public sector support, flexible bankruptcy laws and access to global markets have all contributed to the country’s startup-ready status, making San Francisco the world’s premier spot for entrepreneurship in all industries apart from foodtech, where New York takes the crown.

In all other areas, Silicon Valley remains the undisputed hero, scoring nearly three times more than the Big Apple.

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2

Israel (Rank 3)

Despite dropping nine places in the business category since last year, Israel retains third place and is fast catching up with the UK. Its success is propped up by high scores in quantity and quality, with sectors including autonomous driving, advertising, and cybersecurity all ripe for development.

Tel Aviv remains its most innovative city, ranking eighth globally, while Haifa has climbed the global rankings by 24 places to reach the 119th spot. Apps including Fiverr, Viber and Wix were all developed in Israel, with innovation programmes, incentives, minimal bureaucracy and a reputation as a global hub helping to fuel the country’s ongoing success.

3

Sweden (Rank 6)

Climbing four places since last year and ranking third in Europe is Sweden, birthplace of Spotify, Skype, Klarna and Minecraft. Access to early-stage venture capital funding, high quality of life, strong parental leave policies and a focus on gender equality have helped to lure entrepreneurs, giving the country exceptionally high scores in the business and quality indicators. The country comes second in the world for energy and environment technology and fifth for social and leisure technology, with Stockholm coming 24th in the global city rankings (up five places from 2020). It falls behind in cost of living, with prices excluding some early-stage entrepreneurs.

4

China (Rank 7)

Asia’s most startup-ready country is China, having moved up seven places since 2020 thanks to an exceptionally high score in the quality sector and strong investment in tech hubs. Alibaba, Huawei, Tencent and TikTok are among the billion-dollar companies – or unicorns – to have originated from the country, with Beijing ranking as the world’s third most innovative city, Shanghai coming seventh, Shenzhen 21st and Hong Kong 32nd. The country excels in areas such as transportation technology, IoT, AI, cryptocurrency, e-commerce and education tech, but geopolitical tensions and internet restrictions continue to hold it back from US-style dominance.

wor l d f i na nce

Global Review

3

4 2 7

8

5

SOURCE: GLOBAL STARTUP ECOSYSTEM INDEX 2021

5

Australia (Rank 9)

Despite falling two places since last year, Australia continues to hold its spot in the top 10. That’s fuelled by a proactive government approach to supporting startups and an entrepreneurial culture encouraged by universities and other stakeholders, according to the research – but time differences with Europe and the US hold the country back from establishing global partnerships and utilising remote teams.

In terms of city rankings, Sydney ranks number one in the country – and 36th in the world – followed

by Melbourne, Brisbane and Perth.

The standout industries are energy and environment and e-commerce and retail technology, where the country ranks third globally.

6

Brazil (Rank 24)

Taking the top spot in Latin America is Brazil, with a score almost 50 percent higher than Chile, its closest rival in the region. São Paulo remains the most startup-ready city in Latin America, ranking 20th in the world (followed by Mexico City at 50th), with global fintech and transportation technology dominating. The country has fallen four places since 2020, however, with Covid hindering the rapid growth seen in previous years, and high interest rates, taxes, low English proficiency and an unstable economy adding further drawbacks. Despite this, the country has produced its fair share of unicorns, helped by low living costs and incubators provided by bigger companies.

7

UAE (Rank 25)

First in the Arab world is the UAE, which has soared up the ranks from 43rd to 25th. Dubai has moved from the 99th most innovative city globally to the 67th, drawing entrepreneurs from across the Middle East looking to scale up, and ranking in the top 50 for software and data. Abu Dhabi’s score has also improved, putting the city 169th in the world thanks to a growing number of accelerators and incubators. Investment and funding opportunities are rife, helping give rise to the likes of ridehailing company Careem – sold to Uber for $3bn in 2020 – but longheld business regulations and bureaucracy can be tricky obstacles to navigate.

8

Kenya (Rank 61)

Ranked first in East Africa and second in the continent as a whole (rivalled only by South Africa), Kenya has established itself as an emerging tech hub in recent years.

This is thanks in part to the government’s focus on developing its startup scene – including the creation of Konzo Technopolis, a tech city just outside of Nairobi. Several giants including Samsung, Google, Intel and Microsoft have offices in the capital, which ranks 136th in the global city chart, with fintech leading the way and a developed, English-speaking economy helping to propel its success. Mombasa has also joined the rankings this year and now ranks 756th in the world.

Winter 2021-22 |

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wor l d f i na nce

Financial History

A history of crises The pandemic plunged the globe into one of the deepest recessions in history, but the world is no stranger to financial crises. From the bank panics of the 18th century to the Great Recession of the 20th, we’ve rounded up some of the most significant downturns of the last 250 years and examined the impact each had

1772

1907

1929

1973

The 18th century wasn’t without its downturns, but it was perhaps the credit crisis of 1772–73 that left its greatest mark. Following years of credit expansion by British banks, London bank Neale, James, Fordyce and Down collapsed, leading to a liquidity crisis in the city. It quickly spread, bankrupting the private banks in Scotland and plaguing Amsterdam, then Europe’s main financial centre. Markets recovered by 1774, helped by loans from the Bank of England, but its impact was felt for long afterwards.

In May 1907, the 20th century witnessed its first major financial crisis – the Bankers’ Panic (or Knickerbocker Crisis). The panic saw the New York Stock Exchange tumble by nearly 50 percent from the previous year’s high, following the collapse of speculative investments and an ensuing run on the New York banks. In the absence of a central bank, private financiers bailed out the surviving institutions, and the crisis became one of the key motivations for creating the Federal Reserve System in 1913.

It was the Wall Street crash of 1929, which saw the Dow Jones Industrial Average plunge by nearly 25 percent in six days, that led to the biggest financial crisis of the 20th century – the Great Depression. Businesses and life savings were lost on the back of the crash and interest rates raised by the Fed in 1928 caused further disruption. The crisis lasted almost 10 years and saw the US economy contract by a record 12.9 percent in 1932, with unemployment hitting nearly 25 percent at its peak in 1933.

In 1973, the OPEC oil embargo on the US – launched in response to the west’s support of Israel in the fourth Arab-Israeli war – saw oil prices quadruple. Inflation levels soared, the stock market crashed and unemployment in the US rose to nine percent at the peak, causing a background of stagflation. GDP dropped 3.4 percent and high spending on the Vietnam War worsened the burden, leading to a 16-month slump across the US and other developed countries that would last until March 1975.

1997

1998

2008

2020

This year saw the onset of the Asian Crisis, caused by an overextension of credit in Thailand, Indonesia, Singapore, Hong Kong and other East Asian countries, leading to high levels of debt.

The crisis began in Thailand, where the government had removed its long-held fixed exchange rate against the US dollar, causing panic among markets and leading overseas financiers to pull their investments. Concerns of a global crisis ensued, and the IMF ended up bailing out those hardest hit to prevent economies defaulting.

From 1998 to 2002, Argentina experienced its own Great Depression, sparked by political uncertainty and financial crises in Russia and Brazil, where demand for Argentine exports had fallen. A devaluation of the peso led to a major bank run, and the country defaulted on its foreign debt, leading to a loss in credibility among international markets and widespread unemployment. By 2002, more than half of Argentinians were living below the poverty line, and the economy had contracted by 28 percent.

The collapse of the US housing bubble gave rise to the biggest crisis since the Great Depression.

Financial institutions found themselves with trillions of dollars of worthless investments in subprime mortgages, while homeowners were left with mortgages higher than the value of their houses. It led to the infamous collapse of Lehman Brothers and 2009 was the first year on record to see global GDP contract in real terms, while lost growth from the crisis was estimated to have hit more than $10trn.

When COVID-19 shut down economies across the globe, the IMF predicted the worst recession since the Great Depression. World output shrunk by 4.3 percent over the year on the back of lockdowns while the US contracted a record 31.4 percent in the second quarter. Huge stimulus measures totalling more than $12.7trn across the globe helped stave off a worldwide collapse, with the recession lasting only two months in the US to April 2020 – but the true scale of its impact on a global scale remains to be seen.

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wor l d f i na nce

Profile

Albert Bourla CEO, Pfizer

The power of a vision The man behind the world’s fastest vaccine ever to have been made, Albert Bourla might just be the epitome of a transformative CEO. With sheer determination and a demanding leadership style he steered the pharma giant towards making history

“On March 19, 2020, as COVID-19 swept across the world, I challenged everyone at Pfizer to ‘make the impossible possible’: to develop a vaccine more quickly than anyone ever had before.” Those were the words of Albert Bourla, Chief Executive of Pfizer, as he recounted one of the greatest scientific feats in recent history in an article for Harvard Business Review earlier this year. And it worked; under Bourla’s – seemingly demanding, at times bullish – leadership, Pfizer and BioNTech produced one of the world’s most talked-about Covid vaccines in the space of just nine months, smashing the previous record of four years (the mumps vaccine in the 1960s), and slashing the average timeframe of 10 years.

Together with vaccines from the likes of Moderna, AstraZeneca, Johnson & Johnson and other pharma firms, the mRNA jab helped to dramatically reduce Covid-related hospitalisations, pull nations out of lockdown and bring economies across the world back from the brink – all while boosting the company’s profile like never before, and leading to projected sales of $34bn this year alone (on the back of an estimated three billion global doses).

At the same time, Pfizer has continued to home in on other areas of science, putting the focus on innovation and R&D by spinning off certain sectors of the business (namely Upjohn,

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the unit behind ‘the little blue pill,’ Viagra), and witnessing eight percent growth in operational revenue in products outside of the vaccine in 2020. So who is Bourla, how did the new CEO rally teams across the world to achieve ‘the impossible,’ and what else can we expect from his wider business strategy?

Bourla’s background Born in Thessaloniki, Greece – a place he still refers to as the “epicentre of his life,” according to Greek Reporter – Bourla apparently didn’t set out to become a businessman. Instead he trained as a veterinarian, graduating with a PhD in reproduction biotechnology from the Aristotle University of Thessaloniki before working briefly as a vet. But in 1993, he accepted a job as Technical Director of the Animal Health division at Pfizer – reportedly as a “stopgap” while waiting for a permanent academic position to come about, according to the Financial Times.

From there, however, he quickly climbed the ranks. In 2001, he moved to New York to serve as Group Marketing Director for the US, before becoming Area President of Animal Health Europe, Africa and the Middle East in 2006. He then led the company’s off-patent portfolio, and from 2014 headed up its Global Vaccines, Oncology and Consumer Healthcare division, gaining

Albert Bourla in numbers

28

9

3bn

$34bn

Years working his way up different areas at Pfizer

Global doses of the vaccine administered

Months it took to produce the Covid vaccine, a world record

The projected sales revenue for the company in 2021

wor l d f i na nce

Profile

We did not want our decision to be driven by the need for financial returns alone. Saving lives—as many and as soon as possible—would be our top priority

Albert Bourla

Curriculum Vitae Born: 1961 | education: The Aristotle University of Thessaloniki, Greece

1993

2001

2006

2010

2014

2018

After training as a veterinarian, Bourla joined Pfizer as Technical Director of the Animal Health division – reportedly as a “stopgap” while waiting for a permanent academic position to come about, according to the Financial Times.

After eight years in different roles across Europe within the Animal Health division, Bourla moved to New York, becoming Group Marketing Director for the US. In 2004, he became Vice President of Business Development and New Products Marketing.

Two years later, Bourla was named Area President of Animal Health Europe for Africa and the Middle East. In 2009, he took on additional responsibilities within the Animal Health division, covering the Asia and Pacific regions.

From 2010 to 2013, Bourla served as President and General Manager of Pfizer’s Established Products division, leading the company’s off-patent products, including legacy brands, with a focus on strategy and business development.

Bourla then became President of the company’s Global Vaccines, Oncology and Consumer Healthcare business, overseeing R&D across numerous sectors.

In 2016, he became Group President of Pfizer Innovative Health.

In January 2018, Bourla was named Chief Operating Officer, responsible for Pfizer’s commercial strategy, manufacturing and global product development. 12 months later, he became CEO – under a year before the first Covid case was reported.

experience that would become instrumental to his success several years later.

From 2016 to 2017 he served as Group President of Pfizer Innovative Health, overseeing R&D in consumer health care, vaccines, immunology and other sectors, and creating the Patient and Health Impact Group – focused on developing solutions for increasing patient access.

In January 2018, he was named Chief Operating Officer, and in January 2019 he became Chief Executive, winning the award for the ‘Preeminent Greek Leader’ in the global pharmaceutical industry by the US Ambassador to Greece a few months later.

Diverse experience During those 27 years, Bourla said he gained a “patient-first mentality.” Elaborating; “Throughout my career, my focus has always been on the end users of our products, whether they are animals and their caregivers or general consumers,” he wrote in the Harvard Business Review. “I have encouraged the entire organisation to adopt the same patient-first mentality, measuring outcomes by people (or animals) served rather than drugs sold.”

He believes international experience – including positions in New York, Athens, Warsaw, Brussels, Paris and beyond – also helped to shape his

outlook. “My exposure to so many cultures, my background as a scientist, and the diversity of roles I had taken on across Pfizer helped prepare me for my new responsibilities, as did my Jewish upbringing in Greece,” he wrote. “Coming from a country that’s a small player on the world stage and being a religious minority taught me to fight for what I believe is right and to never give up.”

Indeed, fighting seems to be in Bourla’s blood; he is a descendent of Thessaloniki’s few Holocaust survivors, and his mother escaped being shot by a firing squad after being captured. “I don’t want it to become folklore because, it may be inspirational or not, but she was the one who was arrested, »

Winter 2021-22 |

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wor l d f i na nce

Profile

» she was sexually abused, and physically abused at 17, 18 years old,” he told the Financial Times.

That instilled a sense of resilience, according to Bourla. “‘Life is miraculous,’ she told me. ‘I was in front of a firing squad seconds before they pulled the trigger, and I survived [she said]. And look at me now. Nothing is impossible. You can do anything you want.’”

Rob Kaiser, President of Kaiser Leadership Solutions, believes those experiences have indeed helped to define his attitude today. “A history of overcoming personal hardships and a long career of varied and challenging roles helped Bourla to cultivate versatility in his leadership,” he said. “He repeatedly stepped outside his comfort zone and learnt how to do what did not come naturally.”

A ‘new Pfizer’ It’s perhaps that background that also gave Bourla a penchant for challenging the status quo. When he stepped into the CEO role in early 2019, his ambition was to create a more innovation-focused, ‘new Pfizer’ that would put R&D first. As part of that strategy, in July 2019 the company announced plans to combine Upjohn – its off-patent drugs business, behind the likes of Viagra, Lipitor and Chantix – with pharma firm Mylan to form a new spin-off company, Viatris. “With the separation of Upjohn [completed in November 2020], we created a company that was 20 percent smaller but more focused than ever on delivering firstin-class science for the benefit of patients,” Bourla said in the company’s 2020 Annual Review. “We saw the culmination of a bold, decade-long transformation of Pfizer from a large, diversified enterprise to a smaller, science-driven, innovative biopharma company.”

That ‘new Pfizer’ would focus on “cutting-edge science” to prevent and cure serious diseases; a strategy regarded by some as risky (“clearly, it’s higher risk, higher reward,” Bourla told the Financial Times. “But if I felt that R&D was lacking, I wouldn’t have taken that bet. I’m not suicidal.”)

That higher-risk approach differed from his predecessor Ian Read, according to Kaiser. “Read was focused on a strategy of growth through acquisition,” he said. “Bourla refocused the strategy on organic growth with his expertise in drug discovery and R&D, coupled with a passion for technology.” Bourla set out plans to home in on areas such as targeted cancer and gene therapies, and to put a bigger emphasis on digital. The company took on new Chief Digital and Technology Officer, Lidia Fonseca, to lead its tech strategy, and shook up other parts of the leadership team. A new Chief Human Resources Officer was hired “to drive a culture of courage, excellence, equity and joy,” along with four new board members.

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The vaccine race And it was against this backdrop that, just a year later, the company found itself facing both one of the biggest challenges and one of the biggest opportunities in its entire history. “COVID-19 first came onto our radar screen in January 2020, when we began hearing reports of severe respiratory illness and deaths in Wuhan, China,” wrote Bourla in the Harvard Business Review. “By February it was clear that this virus would spread to many parts of the world, and we knew Pfizer would have to play a pivotal role in stopping it.”

The company had already been working with German firm BioNTech since 2018, with the aim of developing a different kind of flu jab using the smaller company’s innovative mRNA technology.

No mRNA vaccine had ever been approved before, but the process is quick; to develop a Covid vaccine, BioNTech could theoretically just plug the new virus’s genetic code into the software to synthetically trigger an immune response, instead of having to spend months growing weakened or dormant forms of the virus, as with the traditional method. Researchers did exactly that, and in the space of less than two months, BioNTech had come up with 20 versions of the vaccine. But the firm needed a bigger partner – so the founders called Pfizer on March 1, and on March 16, the collaboration began.

Speeding up the pace That month, the Pfizer team presented an 18-month plan – a timeline that would be faster than the development of any previous vaccine – but Bourla wanted it to be cut by more than half. “This will not work,” he said, as reported by the Wall Street Journal. “People are dying.” He asked for a vaccine to be ready by October the same year, with the goal of staving off a wave of winter infections. “Everyone knew it would be an enormous, perhaps unattainable, task, but we all knew it was one we were obligated to take on,” wrote Bourla. “We isolated our scientists from financial concerns and freed them from excessive bureaucracy. Our board accepted that this was a high-risk endeavour but understood the significance of success and gave us the leeway to spend as needed,” he continued. “We did not want our decision to be driven by the need for financial returns alone. Saving lives – as many and as soon as possible – would be our top priority.”

To speed things up, Pfizer decided not to use state funding (unlike rival Moderna, which was part-funded by the US and encountered a threeweek delay in its own mRNA trial because of federal requests). Self-funding involved significant risk; Bourla told the board they could lose up to $2bn if they failed in their mission, according to

Bourla refocused the strategy on organic growth with his expertise in drug discovery and R&D, coupled with a passion for technology

Business Insider. And indeed it was a costly endeavour; for a start, Pfizer didn’t have any mRNA kit. The company spent $500m in March to buy and design the equipment, then another $1.4bn on giant, garage-sized machines in April.

Other decisions were taken to help accelerate the process, including running tests on animals and humans simultaneously (as approved by the US Food and Drug Administration and the German regulatory authority) and combining phase two trials (involving hundreds of subjects, and normally lasting one to three years) with phase three trials (up to thousands of people, usually over one to four years). Those decisions paid off.

Roll on several months, and on November 8, 2020, during a WebEx call between Bourla and the team, the results came in; the independent committee had “highly” recommended seeking regulatory approval, with phase three trials indicating a vaccine efficacy rate of 95.6 percent.

The UK became the first country in the world to authorise use, shortly followed by the US, where the first doses were administered in December – only two months after the October target initially set by Bourla. By the end of the year, Pfizer and BioNTech had released more than 45 million doses.

Demanding leadership Throughout the process, Bourla was heavily – perhaps unusually, for his position – involved, participating in twice-weekly WebEx calls. Some have pointed to his apparent pushiness on those calls;

wor l d f i na nce

Profile

in June 2020, he told President of Global Supply Mike McDermott that he wanted manufacturing to increase at least 10-fold, with 100 million doses by the end of the year, according to the Wall Street Journal. “Why can’t we make more and why can’t we make it sooner?” Bourla asked – to which McDermott reportedly replied, “what we’re doing already is a miracle. You’re asking for too much.”

The following month, McDermott floated the idea of reining production in to 80 million doses by the end of the year. Bourla reportedly told him to “find a way” to hit the 100 million target. McDermott did, modifying the manufacturing process to produce an extra five million more doses per week. A shortage in raw materials led to a three-week hiccup, however, causing production to be scaled back to 50 million in the end. But 50 million doses by December 2020 – less than a year after the virus was first reported – was a remarkable feat; and one that some believe wouldn’t have been achieved if it wasn’t for Bourla’s pushy, certainly forthright, attitude.

Among them is Kaiser. “Pfizer’s remarkable, record-breaking development of a COVID-19 vaccine is the result of ingenuity, agility, and a relentless CEO who pushed a global team to do more than it thought was possible,” he wrote in an article for Talent Quarterly. “It brings hope to a world desperately in need of it while offering an instructive lesson on the need for demanding leadership – and the versatility it takes to walk that fine line between pushing for more, better

and faster for a noble cause, and just being pushy.”

Kaiser said what made that approach successful was Bourla’s ability to balance an ability to encourage his teams to go above and beyond with “credibility, strong personal connections and a compelling mission.”

“He had earnt trust and followership and had plenty in the relational bank account to draw from,” Kaiser told World Finance. “He also led with purpose and he kept his ego in check. Literally saving the world is an incredibly powerful way to galvanise an organisation. All of these are key ingredients in crisis leadership.”

Future challenges If those qualities drove Bourla’s success in helping to bring the world’s first Covid vaccine to market, they might just help him to overcome the next challenges facing Pfizer, too.

For his job is far from over; while booster shots and continued global demand for Covid jabs are likely to keep the company’s coronavirus business going for some time, Pfizer faces several sticking points moving forward; not least losing patents and market exclusivity on medicines that represent up to $20bn in sales in the latter half of the decade. Top-selling drugs including Lipitor, Chantix and Viagra have already lost their patent protections. In March, stock was trading at roughly the same level as pre-pandemic, as investors waited to see how Pfizer delivered in areas beyond the vaccine.

But Bourla seems well aware of the need to diversify, emphasising the work done in 2020 outside of the jab. “While we invested significant time, resources and brainpower to find medical solutions to the pandemic, tens of thousands of Pfizer colleagues continued to advance equally important work across all of our therapeutic areas,” he wrote in a 2020 letter to shareholders. “We believe that science will win the battle against not only COVID-19, but many other diseases as well.”

Outside of Covid efforts, the company has said it is forecasting new revenues of $15bn by 2025.

And alongside gene therapy for rare diseases, immunotherapies and targeted cancer treatments, Pfizer is expanding its vaccine business beyond the coronavirus jab. In June, the FDA approved the company’s next-generation anti-pneumonia vaccine (pneumococcal conjugate), which offers a promising new revenue stream – Pfizer’s previous pneumonia jab, Prevnar 13, brought in nearly $6bn in sales in 2020 – while marking another heroic, life-saving effort under the company’s ‘Breakthroughs that change patients’ lives’ tagline.

And Bourla has spoken about plans to develop the mRNA technology used in the Covid jab to fight other viruses too. “There is a technology that has proven dramatic impact and dramatic potential,” he told the Wall Street Journal. “We are the best positioned company right now to take it to the next step because of our size and our expertise.” He said Pfizer was ready to go it alone with the technology and was increasing its R&D in the sector, hiring at least 50 new employees to help in the mission to produce more mRNA vaccines.

Purposeful vision How that unfolds in reality, and where the company goes from here, remains to be seen. Kaiser believes the real challenge for Bourla and the wider company will be in remaining “focused and hungry – to neither get complacent with success, nor carried away with a sense of invincibility that can lead to overreach.” But if the past year and a half is anything to go by, Bourla doesn’t look like one for complacency. His approach might have garnered criticism, but it’s hard to refute the achievements made under his leadership – a feat that acts as a testimony to the power of a purposeful vision, and one that is likely to prove inspirational to many in the years to come.

“It took a moon-shot challenge, out-of-the-box thinking, intercompany cooperation, liberation from bureaucracy, and, most of all, hard work from everyone at Pfizer and BioNTech to accomplish what we did in 2020,” Bourla wrote in Harvard Business Review. It also took relentless ambition, sheer determination and undefeatable optimism. Bourla is living proof of the power of a transformative CEO – and if 2020 is anything to go by, something tells us he isn’t quite done in making the “impossible possible” just yet. n

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Barry Eichengreen PROFESSOR OF ECONOMICS AT THE UNIVERSITY OF CALIFORNIA, BERKELEY

Stuck at the back of the queue Special drawing rights issued by the IMF to help governments across the world tackle the pandemic disproportionately favour high-income countries. More needs to be done to ensure that those who need them most receive the funds In August, the International Monetary Fund announced, to much fanfare, that its members had reached a historic agreement to issue $650bn of special drawing rights (SDRs, the fund’s unit of account) to meet the COVID-19 emergency. SDRs are bookkeeping claims that governments, through the IMF’s good offices, can convert into dollars and other hard currencies to pay for essential imports, such as vaccines. And $650bn isn’t peanuts: it’s nearly one percent of global GDP. This could make a big difference for poor countries impacted by the virus. The problem is that SDRs are allocated according to countries’ quotas, or automatic borrowing rights, within the IMF, and the quota formula depends heavily on countries’ aggregate GDP. As a result, barely three percent of the $650bn total went to low-income countries, and only 30 percent went to middle-income emerging markets.

Nearly 60 percent was allocated to high-income countries with no shortage of foreign-currency reserves and no difficulty borrowing to finance budget deficits. More than 17 percent went to the US, which can print dollars at will.

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The hope was that governments and the IMF would find a way for high-income countries to transfer their SDRs to developing countries in need. So far, there’s little sign of progress in this direction. It’s time for the IMF institution – and its members – to step up.

Allocation mismanagement The precedents are not encouraging. In 1965, when serious discussions of creating the SDR first got underway, a group of experts working on behalf of the United Nations Conference on Trade and Development argued that SDRs should be allocated with a view to meeting the development needs of newly independent countries. But when SDRs were issued in 1970, they were allocated instead in proportion to IMF members’ quotas.

Then in 1972–73, spokesmen for developing countries proposed what came to be known as ‘the link.’ They envisaged a bargain whereby advanced economies obtained a reformed international monetary system, in which the SDR performed the function executed by the dollar in the now-defunct Bretton Woods system,

and developing countries, in exchange for their support, received the bulk of the next SDR allocation. In the end, developing countries were placated with a promise that the link might be considered in the future, and a second SDR allocation went ahead. As for the link, nothing was done. And, more recently, when $250bn of SDRs were issued in 2009 in response to the global financial crisis, the IMF again allocated them according to members’ quotas.

Why might this time be different? Earlier allocations were made to enhance the stability of the international monetary system and the liquidity of international financial markets.

These are, in the main, rich-country problems.

Today, by contrast, the raison d’être for the allocation is to relax financial constraints on fighting the pandemic. And it is in poor countries where those constraints bite. Rich-country governments know this – or they should.

So how might the resource transfer be accomplished? The IMF already has a poverty reduction and growth facility, which provides concessional loans, currently at zero interest rates, to low-income countries.

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High-income countries, which already lend to the PRGT, could use it to recycle their SDRs. But borrowing countries have to negotiate programmes with the IMF, which is contentious and time-consuming, and its loans are subject to elaborate conditions. Given that the PRGT lends less than $2bn in a typical year ($9bn in 2020), recycling $400bn of rich-country SDRs, or even a portion of them, appears to be beyond its capacity.

Alternative solutions There are two better alternatives. First, the IMF’s shareholders could agree to create a dedicated COVID-19 trust. Conditionality attached to its loans would be limited to verifying that governments are using their concessional borrowing to obtain vaccines and other healthservice inputs and are administering them fairly and efficiently.

Effective monitoring would not be difficult.

Money could be pushed out the door. Second, members could recycle their SDRs, with intermediation by the IMF, to the regional development banks, which are already authorised to

“Barely three percent of the $650bn total went to lowincome countries, and only 30 percent went to middleincome emerging markets”

hold SDRs and to convert them into dollars and other hard currencies. This would avoid centralising the lending process in Washington, DC. The regional development banks have boots on the ground and are attuned to local conditions, and they don’t share the IMF’s reputation as an outside interloper that imposes onerous conditions.

The coming decades IMF management evidently has its own ideas.

Managing director Kristalina Georgieva has proposed a resilience and sustainability trust, to be funded by recycled SDRs, that would help poor countries finance investments in climate change mitigation and abatement in the coming decades. That is all well and good.

But COVID-19 was the preeminent challenge of 2020 and also 2021. If the IMF and its members fail to meet it, none of their proposals for how to address the challenges of coming decades, climate change-related and otherwise, will be regarded as remotely credible. Time will now be the deciding factor on whether the IMF pick up the gauntlet, or not. n

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Andrew Deutz DIRECTOR OF GLOBAL POLICY, INSTITUTIONS AND CONSERVATION FINANCE AT THE NATURE CONSERVANCY

Closing the nature-finance gap The financial difference between activities that serve the environment and those that harm it is startling. It will take a global collective effort to mitigate the effects of climate change and embrace a low-carbon economy If you want to understand policy choices, it is said, ‘follow the money.’ Inspired by that advice, we at the Nature Conservancy (in partnership with the Paulson Institute and the Cornell Atkinson Center for Sustainability) crunched the numbers to see what it would cost to preserve biodiversity – the variety and abundance of life on Earth. We found that while the world spends $124bn–$143bn per year (as of 2019) on economic activity that benefits nature, it spends much more on activities that damage it. Moreover, to protect and then begin to restore nature, we urgently need to close a $598bn–$824bn annual financing gap.

This gap has had devastating consequences.

By the start of this decade, the world had failed to achieve a single one of the 2010 Aichi Targets, the world’s blueprint for biodiversity conservation. Now, another plan is in the works. Over the past two years, scientists and government officials have been drafting a new global framework of targets for managing nature through 2030, to be adopted at the next conference of the United Nations Convention on Biological Diversity (CBD COP15) in Kunming, China.

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The CBD framework, like that of the 2015 Paris climate agreement, will signal government ambition, set clear priorities for action, and indicate what the private sector needs to do to support global targets. Our research shows, however, that stopping the biodiversity crisis will require backing these ambitious new targets with equally ambitious financing plans.

Closing the financial gap To that end, our report recommends various ways to find the money needed to rebuild an economy that supports nature. The financing gap must be closed from both ends – by reducing financial need and increasing financial flows.

First, we must cease or redirect economic activity that actively harms nature. While governments around the world provide approximately $530bn per year in subsidies and price supports for farmers, only 15 percent of these incentives support sustainable outcomes.

Worse, most of them may lead to the overuse of fertilisers or land conversion (among many other perverse effects that degrade nature).

Second, we must be more creative about how we generate new funding to protect and restore nature. We also need better regulation to ensure that there is no net loss of nature. As we build the new infrastructure for a low-carbon economy, we must avoid damaging nature as much as possible, and compensate for truly unavoidable effects by restoring or protecting ecosystems elsewhere. Within the private sector, there is ample room for growth in green finance tools such as environmental-impact bonds and low-interest green loans that fund biodiversity-enhancing initiatives. But to realise this potential, governments must create the right conditions for greater private investment by developing and enforcing mechanisms that require industries to value nature in their operations and throughout their supply chains.

Finally, we must deploy our current spending more efficiently. Coral reefs, forests, wetlands, and other ecosystems provide healthy, sustainable habitats while also furnishing communities with natural water-management and coastal-protection services. This ‘natural infrastructure’ is sometimes even more cost-effective

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than engineered ‘grey’ solutions like dams and floodwalls. Protecting and restoring natural ecosystems not only preserves biodiversity but also helps to absorb greenhouse gases and build resilience against the effects of climate change.

The biodiversity crisis is intimately linked to the climate crisis. Natural climate solutions (conservation, restoration, and better ecosystem management) have the potential to cover one-third of the annual emissions reductions needed to keep global warming well below two degrees Celsius.

The first draft of the new global biodiversity action plan emphasises the importance of closing the $700bn annual financing gap by 2030. It calls for a $500bn reduction in harmful financial flows across sectors, and for a mobilisation of $200bn more per year in positive financial flows. These financial targets are a necessary counterpart to targets for sectoral sustainability, where the critical areas are agriculture, infrastructure, and financial services.

Target 15 of the action plan asks all businesses to “assess and report on their dependencies and impacts on biodiversity, and progressively re-

duce negative impacts by at least half and increase positive impacts.”

Moreover, G7 finance ministers have endorsed the new taskforce on nature-related financial disclosures, which has prompted many big financial firms to strengthen their reporting on their assets’ impacts on biodiversity (similar to already-mandated climate reporting).

These are all steps in the right direction, but mainstream financial flows need to become fully aligned with nature-positive outcomes, as is already happening with respect to decarbonisation.

To convert aspiration into implementation, the new biodiversity framework should require countries to develop national biodiversity fi-

“We must be more creative about how we generate new funding to protect and restore nature”

nance plans that will identify and then close national funding gaps, align all public and private financial flows, and assist with similar efforts beyond their borders when they can. These policy reforms and their associated budgets will need to include specific allocations for indigenous and local communities that contribute to the conservation of biodiversity.

Nature-based solutions Developing countries will need financial help.

This can be provided by doubling foreign aid flows by the middle of this decade (something that donor countries actually succeeded in doing in the 2010s), and by allocating up to 30 percent of climate aid for nature-based solutions, as countries like France and the United Kingdom have already done.

Finally, action on the home front is critical.

We need countries to spend more domestically to reduce their emissions, build resilience, protect biodiversity, and spend less overall on activities that harm nature and the climate. Following the money is no longer enough. We must take an active hand in redirecting it. n

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Robert Skidelsky MEMBER OF THE BRITISH HOUSE OF LORDS, PROFESSOR EMERITUS OF POLITICAL ECONOMY AT WARWICK UNIVERSITY

Where has all the money gone?

Amid all the talk of when and how to end or reverse quantitative easing (QE), one question is almost never discussed: Why have central banks’ massive doses of bond purchases in Europe and the United States since 2009 had so little effect on the general price level?

Between 2009 and 2019, the Bank of England injected £425bn – about 22.5 percent of the UK’s 2012 GDP – into the UK economy.

This was aimed at pushing up inflation to the BoE’s mandated medium-term target of two percent, from a low of just 1.1 percent in 2009.

But after 10 years of QE, inflation was below its 2009 level, despite the fact that house and stock-market prices were booming, and GDP growth had not recovered to its pre-crisis trend rate.

Since the start of the COVID-19 pandemic in March 2020, the BoE has bought an additional £450bn worth of UK government bonds, bringing the total to £875bn, or 40 percent of current GDP. The effects on inflation and output of this second round of QE are yet to be felt, but asset prices have again increased markedly.

A plausible generalisation is that increasing the quantity of money through QE gives a big temporary boost to the prices of housing and financial securities, thus greatly benefitting the holders of these assets. A small proportion of this increased wealth trickles through to 36

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the real economy, but most of it simply circulates within the financial system. The standard Keynesian argument, derived from John Maynard Keynes’s General Theory, is that any economic collapse, whatever its cause, leads to a large increase in cash hoarding.

Money flows into reserves, and saving goes up, while spending goes down. This is why Keynes argued that economic stimulus following a collapse should be carried out by fiscal rather than monetary policy. Government has to be the ‘spender of last resort’ to ensure that new money is used on production instead of being hoarded.

Industrial to financial But in his Treatise on Money, Keynes provided a more realistic account based on the “speculative demand for money.” During a sharp economic downturn, he argued, money is not necessarily hoarded, but flows from industrial to financial circulation. Money in industrial circulation supports the normal processes of producing output, but in financial circulation it is used for “the business

of holding and exchanging existing titles to wealth, including stock exchange and money market transactions.” A depression is marked by a transfer of money from industrial to financial circulation – from investment to speculation. So, the reason why QE has had hardly any effect on the general price level may be that a large part of the new money has fuelled asset speculation, thus creating financial bubbles, while prices and output, as a whole, remained stable.

One implication of this is that QE generates its own boom-and-bust cycles. Unlike orthodox Keynesians, who believed that crises were brought on by some external shock, the economist Hyman Minsky thought that the economic system could generate shocks through its own internal dynamics. Bank lending, Minsky argued, goes through three degenerative stages, which he dubbed hedge, speculation, and Ponzi.

At first, the borrower’s income needs to be sufficient to repay both the principal and interest on a loan. Then, it needs to be high enough to meet only the interest payments.

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And in the final stage, finance simply becomes a gamble that asset prices will rise enough to cover the lending. When the inevitable reversal of asset prices produces a crash, the increase in paper wealth vanishes, dragging down the real economy in its wake.

Minsky would thus view QE as an example of state-created financial instability. Today, there are already clear signs of mortgagemarket excesses. UK house prices increased by 10.2 percent in the year to March 2021, the highest rate of growth since August 2007, while indices of overvaluation in the US housing market are “flashing bright red.” And an econometric study (so far unpublished) by Sandhya Krishnan of the Desai Academy of Economics in Mumbai shows no relationship between asset prices and goods prices in the UK and the US between 2000 and 2016.

So, it is hardly surprising that, in its February 2021 forecast, the BoE’s Monetary Policy Committee estimated that there was a onethird chance of UK inf lation falling below zero percent or rising above four percent in the next few years.

This relatively wide range partly reflects uncertainty about the future course of the pandemic, but also a more basic uncertainty about the effects of QE itself. In Margaret Atwood’s futuristic 2003 novel Oryx and Crake, HelthWyzer, a drug development centre that manufactures premium-brand vitamin pills, inserts a virus randomly into its pills, hoping to profit from the sale of both the pills and the antidote it has developed for the virus.

“With QE, we have invented a wonder drug that cures the macroeconomic diseases it causes”

The best type of diseases “from a business point of view,” explains Crake, a mad scientist, “would be those that cause lingering illness... the patient would either get well or die just before all of his or her money runs out. It’s a fine calculation.”

A cure for QE addiction With QE, we have invented a wonder drug that cures the macroeconomic diseases it causes.

That is why questions about the timing of its withdrawal are such “fine calculations.” But the antidote is staring us in the face. First, governments must abandon the fiction that central banks create money independently from government.

Second, they must themselves spend the money created at their behest. For example, governments should not hoard the furlough funds that are set to be withdrawn as economic activity picks up, but instead use them to create public-sector jobs. Doing this will bring about a recovery without creating financial instability. It is the only way to wean ourselves off our decade-long addiction to QE. n

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Simon Zadek CHAIR OF FINANCE FOR THE BIODIVERSITY INITIATIVE

The finance to feed the world The global food system is unsustainable. While it is worth approximately $8trn annually, its negative impact is valued at roughly $12trn. And this is not the system’s only contradiction Around the world, food systems are both affected by climate change (owing to disruptive weather and rising temperatures) and make significant contributions to it (through greenhouse-gas emissions and biodiversity destruction). The millions of jobs they provide are often low-quality and poorly paid. And, most significantly, they fail in their ultimate purpose of delivering affordable, healthy food to all.

Because the global food system is fundamentally unviable, change is inevitable. But the radical reforms needed to create an inclusive, sustainable sector that produces nourishing food for the world’s population may have devastating short-term consequences. If we take the wrong approach, incorporating the true costs of production into food systems could trigger widespread bankruptcy, devastate rural unemployment, drive up prices, and increase poverty.

Healthy food for all The best way to achieve a rapid, fair, and safe transition to a sustainable global food system that can deliver affordable, healthy food for all is, however, a matter of heated debate.

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This is reflected in the strident and largely unproductive discussions that took place in the run-up to the United Nations Food Systems Summit, held during the UN General Assembly. From a production standpoint, advocates of regenerative farming vehemently oppose a new generation of soilless food production, such as lab-grown ‘alternate protein’ and vertical farming. But it is tough to scale regenerative farming rapidly. Soilless systems must be a major part of the solution, given their dramatically reduced carbon footprint and water use, minimal impact on biodiversity, and potential for rapidly delivering cheap, healthy food at scale.

The role of finance in this transition is no less controversial. There is some merit to complaints about the undue influence of a limited number of private players on decisions that impact the entire global food system. Financialisation – the drive to maximise risk-adjusted financial returns – is increasing across the global food system, and market concentration is growing.

For example, just 10 companies control half of the world’s seed market, and four agribusiness firms account for 90 percent of the global

grain trade. Just one percent of agricultural firms own 65 percent of the available farmland.

Financialisation reinforces the unequal distribution of economic returns, squeezing the incomes of small farmers and communities, while supporting business models that undersupply healthy, affordable food, and over-supply foods containing high levels of salt, sugar, fat, and carbohydrates.

Moreover, financialisation amplifies corporate lobbying that externalises public-health costs, maintains perverse agricultural subsidies, and ensures that the costs to the climate and nature do not adversely affect financial bottom lines.

Financial resources But private capital is absolutely necessary for financing the global food system’s transition.

We need to harness the massive financial resources managed on our collective behalf by pension funds, banks, and private equity while mitigating the dangers of financialisation.

In a recent report, Making Finance Work for Food: Financing the Transition to a Sustain-

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able Food System, the Finance for Biodiversity Initiative maps out the role global finance can play in the needed transition. The report, prepared in association with the Food System Economics Commission, describes four ways financial tools can be used to shape future food systems.

Four-pronged attack For starters, financial policies and regulation, reinforced by shareholder and public activism, must drive investors’ internalisation of the costs to nature and climate in their financing decisions. This change would strand dirty assets, accelerate green-friendly investments, and trigger a shift toward more nutritious food production.

Second, financial innovations, including blended public and private solutions, are needed to accelerate investment in healthy food produced by climate- and nature-friendly forms of farming, thereby driving down costs. Such innovations could involve scalable instruments equivalent to the feed-in tariffs that have been used to great effect in catalysing investment in renewable energy.

“There is some merit to complaints about the undue influence of a limited number of private players on decisions that impact the entire global food system”

Third, policies and public finance are needed to protect and retrain those whose livelihoods are eroded during the transition. The goal should be to provide technology, skill development, and capital to enable them to own and operate commercially viable regenerative and soilless forms of food production.

Finally, we need to create opportunities to empower citizens, especially by harnessing the power of digitalisation. As consumers, they can make an impact by adopting improved, sustainable diets. As investors, pension policy holders, and taxpayers, they can advocate for better uses of their money.

Delaying the transition to a more inclusive and sustainable global food system would jeopardise food security, destroy livelihoods, and prevent us from achieving environmental goals. We need to overcome the resistance not only of those who profit from today’s systems but also of those who seek to protect the vulnerable.

Resetting global finance and harnessing its benefits is necessary to fund a rapid, sustainable, and equitable transition. n

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From crisis to

opportunity

Over the course of his 30-year career, former Bank of England governor Mark Carney has been on the financial frontlines for crisis after crisis. Now, he has turned his attention to the next great emergency facing our planet: climate change »

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The time is now

n a grey, Glaswegian Sunday in midNovember, COP26 negotiations drew to a dramatic close. Hailed as a potential “turning point for humanity” by British Prime Minister Boris Johnson, the UN’s climate change summit brought together world leaders from almost every country on Earth for a series of urgent, timely and closely followed discussions. For two weeks, the world looked on as deals were struck, pledges were signed and new climate change commitments were drawn up. Amid powerful pleas from young climate activists, countries from around the world took decisive action in Glasgow, promising to protect forests, cut methane emissions and shift away from fossil fuels.

But the trailblazing tone of the summit was tempered on its closing day. An eleventh-hour intervention by India and China saw the wording of the final deal – the Glasgow Climate Pact – amended to reflect a commitment to “phase down” coal usage, rather than the original pledge to “phase out” the harmful fossil fuel.

COP26 President Alok Sharma was almost overcome with emotion as he explained what had happened to assembled delegates, saying that he was “deeply sorry” for how events had unfolded. According to a tearful Sharma, the last-minute alteration was necessary to keep the pledge on the table, but he admitted that the resulting outcome was a “fragile win” in the fight against the climate crisis.

Despite this late revision to the COP26 deal, the Glasgow Climate Pact still very much represents a historic moment in the global effort to combat climate change. The agreement marks the very first time that an international climate deal has aimed at reducing coal consumption – for the past 30 years, the word ‘coal’ has been notably absent from any global climate pacts.

Elsewhere across the summit, more than 100 world leaders promised to end deforestation by 2030 (see Fig 1), while China and the US announced a surprise pledge to work together to cut greenhouse gas emissions.

On ‘finance day,’ a coalition of 450 banks, pension funds and other financial institutions – who together have over $130trn at their disposal – committed themselves to the Paris Agreement 1.5 degrees Celsius warning limit, in what was a historic unlocking of private capital to fund the transition to green energy.

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Liberia President, George Weah

The climate crisis is certainly looming large on the global horizon – but the world’s most powerful players are now taking tangible action.

Who can you call?

While politicians such as Liberia’s President, George Weah, may have taken centre stage at COP26, the summit showed that global finance has a critical role to play in the fight against climate change. After all, financial institutions control vast amounts of capital, and if they stop lending to environmentally damaging sectors – fossil fuels, coal mining, fracking and forestry, to name a few – then these industries may find that their funding soon dries up. Despite this

Fig 1. Where most primary forest is lost hectares

Brazil

1,704,000 491,000

Congo Bolivia Indonesia Peru Colombia

277,000 270,000 190,000 166,000

Cameroon

100,000

Laos

82,000

Malaysia

73,000

Mexico

68,000

SOURCE: World Resources Institute Global Forest Review

mounting pressure, however, it appears that our f inancial giants aren’t quite ready to turn their backs on fossil fuels just yet. In fact, the world’s largest investment banks have poured $3.8trn into fossil fuel companies since the signing of the Paris Agreement in 2015, according to a recent report led by a coalition of NGOs. But COP26 may well see the financial world go green. The financial sector’s $130trn net zero pledge is undoubtedly a watershed moment for the sector, representing a decisive pivot towards a more sustainable future. If successful, it could very well be the first step along the road to a net zero financial system.

As eagle-eyed readers may have noticed, there was a familiar name behind this headline-grabbing COP26 deal. Mark Carney, the former Bank of England governor, was responsible for bringing together the $130trn coalition, in what was perhaps a personal career highlight for the climate-focused banker.

Consistently vocal on climate change risks during his time with the Bank of England, Carney’s eco-credentials have only grown since his departure in 2020. Now serving as the United Nations’ Special Envoy for Climate

The summit showed that global finance has a critical role to play in the fight against climate change

The time is now

COP26 President, Alok Sharma

Action and Finance, the Canadian native is on a mission: to drag the financial world away from the dirty investments of the past and push it towards the green opportunities of the future. It’s a big ask, but Carney may just be the right man for the job.

Calm in a crisis Through every stage of his high-profile career, Carney has shown himself to be a dependable problem-solver. At the age of 42 – practically still a teenager in central banking years – he was promoted to the top job at the Bank of Canada, becoming the youngest ever central bank governor among the G8 and G20 nations.

But banking wasn’t always Carney’s dream. In an interview with The Guardian, he admitted that banking had initially been a way to pay off his student loans after graduating from Harvard and earning a PhD at the University of Oxford. It turned out to be a good fit, however, and after proving his merit with a 13-year stint at investment banking juggernaut Goldman Sachs, he was appointed deputy governor of the Bank of Canada.

It was while he was on secondment with Canada’s Department of Finance that he was called up for the role of governor at the Bank of Canada, assuming the post against the turbulent backdrop of the rapidly unfolding global financial crisis in February 2008. Taking on the top job at such an unprecedented, volatile and financially calamitous time was not for the

faint-hearted. Yet it was in these testing times that Carney proved himself on the global stage.

Just one month into his tenure, he slashed Canada’s interest rates, providing something of a fiscal injection and boosting market confidence at what proved to be a pivotal moment in time.

Months later, other central banks followed suit, but by then it was simply too late. Carney had acted quickly and decisively, and his actions at this time are said to have spared Canada the very worst impacts of the financial crash. After a few short months in his post, it was already clear: Carney was a good leader in a crisis. It is perhaps unsurprising then, that four years later the Bank of England came knocking on his door.

Never smooth sailing In 2012, the British economy was in a very sorry state. The UK had fallen into a deeper postcrisis recession than experts had anticipated.

With GDP in decline, the country entered into its first double-dip recession since the 1970s. The Bank of England, meanwhile, was increasingly seen as an antiquated institution in urgent need of a refresh.

And with the serving central bank governor nearing the end

The financial sector’s $130trn net zero pledge is undoubtedly a watershed moment

of his tenure, then chancellor George Osborne had just one man in mind to take over the role.

However, Carney wasn’t easily sold on the Bank of England job, repeatedly turning the position down until the chancellor was forced to sweeten the deal with a more attractive offer. Securing a salary over double that of his predecessor, Carney officially took the helm in July 2013, becoming the first foreign governor of the Bank of England since the institution was founded in 1694.

“Mark Carney is the outstanding central banker of his generation,” chancellor George Osborne told MPs as he unveiled his appointment in the House of Commons. From the outset, expectations were almost unreasonably high – with representatives from across the political spectrum hailing the Canadian as something of an economic miracle worker.

Yet despite these pressures, he once again rose to the occasion, quickly earning the nickname ‘Capable Carney’ in the British press.

One of the first items the incoming governor had to tackle was making the Bank of England a more open and communicative institution. It goes without saying that changing the company culture and working practices of a 319-year-old establishment was no easy task, but it was certainly a necessary one. When Carney joined the Old Lady of Threadneedle Street in 2013, public distrust of the banking system remained high, with central banks expected to lead by example when it came to rebuilding »

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The time is now » trust and establishing a more honest and open working environment. In August 2013 – just one month after assuming his role as governor, Carney launched the bank’s ‘forward guidance’ policy, signalling his intention to make monetary policy more accessible and transparent.

More specifically, he wanted to give financial markets, businesses and the wider public a clear picture of the bank’s future interest rate policy – something that the institution had been famously tight-lipped about before his arrival. This early activity was a sign of more work to come on improving communications and transparency – which is now seen as one of Carney’s most noteworthy achievements from his seven-year tenure at the bank.

By 2016, Carney had made good progress.

Under his stewardship, the Bank of England had implemented some necessary post-crisis changes and the British economy was in recovery, with GDP now growing again after taking a nosedive in the years following the financial crash. If Carney had been drafted in to solve a crisis, he was certainly well on his way to fulfilling that demand. Then, just as one crisis appeared to be over, another one landed on his desk.

The Brexit blues Markets were jittery in the weeks leading up to the UK’s landmark EU membership referendum. As Britons headed towards the polling booth, Carney warned that a vote to leave the EU could trigger a new recession just as the country emerged from the last. This comment prompted Eurosceptic backbench MP Jacob Rees-Mogg to label Carney as an “enemy of Brexit,” but the Bank of England governor defended his position, insisting that the bank’s role was to “identify risks, not to cross your fingers and hope risks would go away.”

And indeed, the Brexit risks didn’t disappear. In the early hours of June 24, 2016, the results were in: Britain had voted to leave the European Union. By the morning, the pound was plummeting and the Prime Minister had resigned. In the midst of the unfolding chaos, Carney once again took charge, offering reassurance to the nation in a televised address, broadcast shortly after David Cameron’s resignation. “We are well prepared for this,” Carney told the cameras in his presidential-style address. Overnight, a political vacuum had opened up in the UK, and it fell to the Bank of England governor to restore a sense of stability and calm to markets, business owners and British households. Determined to avoid an economic downturn, Carney soon set out his post-Brexit plan, with the press praising him as the only “adult in the room” at a time when the nation needed stable and decisive leadership.

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Entering into all too familiar crisis-management mode, Carney slashed interest rates to historic lows in an effort to safeguard financial stability. “There is a clear case for stimulus, and stimulus now, in order to be there when the economy really needs it – to have an effect when the economy really needs it,” he said at a news conference upon announcing the base rate cut. In the months that followed, Carney stuck to his plan, acting calmly and quickly to keep the economy from plunging into the recession that he had so feared.

Just a few months on from the pivotal Brexit vote, the Theresa May-led Conservative government implored Carney to stay on as Bank of England governor for an additional year, taking his tenure at the institution through to June 2019. The Canadian dutifully agreed to serve an additional year, confirming that he would remain in post in order to help the UK to navigate its tricky exit negotiations with the European Union. However, as UK-EU talks rumbled on and Carney’s departure date loomed large in the diary, he was once again asked to extend his tenure – this time out to January 2020 to ensure a smooth Brexit transition.

So, having steadied the ship through the choppy Brexit waters, Carney was relieved of his duties after serving almost seven years in the Bank of England top job. After steering the institution through two ‘once-in-a-lifetime’ crises, he was now ready to take on the next global challenge: the threat of climate change.

Onto the next crisis Nobody would have blamed Carney if he had decided to enjoy some well-deserved down time after departing from the Bank of England. But it seems that is just not his style. A long-time vocal advocate for action on climate change, he was appointed as UN Special Envoy for Climate Action and Finance in March 2020, with the aim of whipping up private finance to fund global climate goals. Net zero can still be a hard sell in the financial world – but if anyone is up for the challenge, it’s Carney.

Drawing on the same practical, problem-solving approach that served him so well during his banking career, Carney has spent the last 18 months persuading the world’s biggest banks to lend their support to international climate goals. Specifically, he has been influencing banks, insurers,

If we are to build a new, more sustainable world, it is only right that we also create a new, more sustainable financial system

pension funds and asset managers to invest in schemes that are aligned with the Paris climate agreement goal of limiting global warming to 1.5 degrees Celsius. COP26 saw months of tough negotiations come to fruition, with a Carney-led coalition of 450 powerful players from the world of finance – known as the Glasgow Financial Alliance for Net Zero (GFANZ) – all pledging to manage their assets in line with that 1.5 degrees Celsius pledge (see Fig 2). “Right here, right now is where private finance draws the line,” Carney told delegates on ‘finance day’ at the COP26 summit in Glasgow.

“Up until today there was not enough money in the world to fund the transition. And this is a watershed.”

Between them, GFANZ members control more than $130trn, and will be using their deep pockets to fund sustainable green projects across the globe. As Carney observed in his COP26 speech, the creation of the GFANZ coalition is something of a watershed moment for the financial world. For many years, getting Wall Street to go green seemed like an impossibility. After all, investors tend to follow the money – and for decades, that money was in oil and gas. Sustainable investments have historically been seen as more risky, producing lower returns than their fossil fuel competitors.

But the tide now looks to be turning for green investments, with data showing that sustainable investments are now outperform-

The time is now Carney’s vision of “a financial system entirely focused on net zero” may seem idealistic to some.

After all, can a financial system ever be entirely focused on anything other than, well, finance? And yet Carney’s $130trn C OP 26 c o a l it ion shows that financial net zero might be closer than we think. If now is indeed the moment for change, then why not dream big?

This is the concept that underpins Carney’s bestselling book, Value(s): Building a Better World for All. The title reflects the optimistic tone of the banker’s bold manifesto, which advocates for creating an economy – and indeed, a wider society – based on human values, instead of market values. Sticking to a topic that he happens to know all too well, Carney argues that a crisis in shared common values has brought about the three major crises of our time: the financial crisis, the COVID-19 crisis and the climate crisis. All too often, he argues, our fundamental human values are cast aside in favour of what is materially valuable, leaving us living within systems where price takes ultimate precedence.

The world is emerging from the great lockdown, shedding its past and transformed into something new

Mark Carney (second from right) is the UN Special Envoy for Climate Action and Finance and played a pivotal role in bringing together a $130trn coalition to tackle climate change

Fig 2. countries meeting their Paris Agreement goals Emission goals and projected achievements by 2030

Target

Projected achievement

Saudi Arabia

+>4°C

+>4°C

Indonesia

+>4°C

+3°C

India

+>4°C

+2°C

Kenya

+>4°C

+1.5°C

Russia

+4°C

+4°C

Brazil

+4°C

+3°C

Argentina

+3°C

+4°C

Mexico

+3°C

+4°C

Australia

+3°C

+3°C

China

+3°C

+3°C

Canada

+2°C

+4°C

Japan

+2°C

+3°C

US

+2°C

+3°C

European Union

+2°C

+3°C

Nigeria

+2°C

+1.5°C

UK

+1.5°C

+2°C

SOURCE: Climate Action Tracker

ing their more conventional peers. Fossil fuel investments, meanwhile, are becoming increasingly risky. As world leaders pursue an accelerated net zero transition, new research shows that half of all fossil fuel assets could become worthless by 2036. Investments in oil, gas and coal now risk becoming stranded as the world looks to decarbonise, making renewables and green solutions an ever-more attractive alternative.

“Private finance is judging which companies are part of the solution, but private finance, too is increasingly being judged,” Carney said in an interview for the United Nations website. “Banks, pension funds and asset managers have to show where they are in the transition to net zero. And people are voting with their money.” Indeed, with the call for global action on climate change now reaching fever pitch, the financial world can no longer ignore this plea – in order to stay both reputable and profitable, it will need to become part of the climate solution.

Finding values If we are to build a new, more sustainable world, it is only right that we also create a new, more sustainable financial system. The financial world has always had a fundamental role in helping to shape global development, and the pledges struck at COP26 put finance at the heart of the global fight against climate change.

We live in radical times After a 30-year career on the frontline of finance, Carney appears to have reached a firm conclusion: that the system requires profound change. To some, this might seem like a radical stance. Yet we are living in radical times. Our ‘new normal’ is one largely defined by uncertainty and instability in almost every aspect of our daily lives. The pandemic has brought to light just how fragile our societies and the systems that uphold them truly are – and has prompted a revision of values at a scale we have perhaps never seen before.

Like a butterfly from its chrysalis, the world is emerging from the great lockdown, shedding its past and transformed into something new.

There is a shared desire to create a new, better world than the one that came before – one in which we treat each other, and indeed our planet, with more kindness and respect. If there was ever a time for change, for hitting the reset button, then it’s right now. And with its deep pockets and mighty global influence, the financial world is well equipped to lead that transformation. As rose-tinted as it may seem, Carney’s vision might just be the blueprint the financial world needs as it cautiously enters its next chapter. n

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Digital Banking

Growing together towards sustainability Amid the spread of COVID-19 and digital disruption, Krungthai Bank is wholly committed to developing the quality of life of Thai people as well as transforming and driving Thailand towards the digital economy, on the path to sustainable growth 1. Government technology words by

Payong Srivanich pRESIDENt & cEo, KRuNGthaI baNK

As a state-owned commercial bank, Krungthai Bank always stands beside the people and society of Thailand as one of the country’s economic pillars and the government’s strategic partner in implementing government policies, reflecting our vision of ‘growing together for sustainability.’

In order to respond to drastic changes in customer behaviour due to digital disruption, we have decided to drive a dual strategy in which we improve the efficiency of our traditional banking business and safeguarding it against disruption while venturing into new businesses that focus on leveraging data on digital platforms so that we can interact with our customers more effectively and meaningfully. As we believe that digital technology is the key to empowering better lives for Thai people, we have been focusing on developing our digital infrastructure and using digital technologies to serve both our customers and the people of Thailand.

Our Thailand open digital platform, Pao Tang mobile application, now has over 33 million users, making it the largest digital banking platform in Thailand. We are also serving 13 million users of Krungthai NEXT mobile banking application, 16 million users of Krungthai Connext LINE service, and 1.5 million users of Tung Ngen mobile application for merchants.

We have defined five key ecosystems that are highly relevant to people’s lives and we believe that making improvements in these areas will eventually lead to better quality of life and sustainable growth.

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As the government is trying to realise its Thailand 4.0 ambition, we have been working closely with it to lay foundations for the country’s digital transformation and digitise government services. Our open digital platform, Pao Tang mobile application, is the main platform used to connect the people to government services, and as the platform provider, we expand our customer base and help Thai people familiarise themselves with digital and financial technologies. The COVID-19 pandemic has accelerated digital adoption rate and Pao Tang has become the main tool used to implement relief schemes and deliver financial aid to people, helping the people benefit from government schemes and helping the government gain valuable data that can be used to deliver more targeted economic policies and packages in the future.

Millions of people have benefited from different COVID-19 relief and economic stimulus schemes made available via Pao Tang. Among others, Half-Half co-payment scheme, where the government helps pay half of the bill when a registrant makes a payment at a participating merchant using Pao Tang’s G-Wallet, has helped people lower their cost of living, boosted domestic consumption and helped small merchants survive the economic slump.

Moreover, we have digitised and upgraded several government services with blockchain technology. For example, the blockchainbased Thailand VRT mobile application and web application allows tourists and merchants to process VAT refunds for tourists more conveniently, accurately and paperlessly.

The e-Court and e-Filing platforms have digitised court procedure, making dealing with the court faster and more convenient, which directly benefits the people and has helped Thailand’s ranking in the Ease of Doing Business Index.

33 million

users of the thailand open digital platform developed and managed

by Krungthai bank, pao tang

2. Health and wellness Krungthai Digital Health Platform was introduced to enhance the efficiency of the public health system and enable ‘Smart Hospital’ to improve the people’s medical and healthcare experiences. We have worked with the National Health Security Office (NHSO) to provide easier access to universal healthcare via Health Wallet on Pao Tang and improved the management systems for hospitals under the universal healthcare programme.

Within the Health Wallet, people can make appointments for medical services at hospitals or medical units nearby, view medical service history, use Health ID QR codes to verify their identities and make payments for the excess fee that is not covered by universal healthcare. Pao Tang is also used in COVID-19 management projects; for example, people can request free antigen test kits and people in Bangkok can register for vaccination in Pao Tang.

We have also partnered with various hospitals to pioneer the smart hospital model where health technologies, such as self check-in kiosks, AI chatbot for patient screening, telemedicine and a blockchain-based health information exchange system are employed to help them serve their customers better and improve their efficiency. Furthermore, as we realise that having a strong research and development capability will

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Digital Banking

we believe that digital technology is the key to empowering better lives for thai people 5. Payment We have upgraded the Krungthai NEXT mobile banking application with cloud native technologies to make the application scalable, stable and secure, so that we can make lives simpler for everyone. The application can handle massive concurrent transactions while providing a stable and seamless user experience as well as maintaining the highest level of security. One of the key features in Krungthai NEXT is its bill payment service, which covers the largest number of payees in both public and private sectors, thus covering the payment needs of our customers in a single mobile application.

Krungthai e-Donation platform was developed to make donation simpler for both donors and organisations receiving donations. When a donation is made via QR code payment, the donation record is directly submitted to the revenue department, thus removing the paperwork and making it more convenient to claim tax deduction for the donation.

Go Local, Grow Local benefit the country in the long run, we provided financial support for King Mongkut’s Institute of Technology Ladkrabang to contribute towards the building of King Mongkut’s Chaokhun Thahan Hospital and establishing it as an innovative hospital and a medical research and development centre that will uplift the country’s healthcare industry and reduce reliance on imported technologies. All our efforts in the health and wellness ecosystem help to ensure healthy lives and promote well-being for Thai people.

3. Educational institutions and students The bank has partnered with universities in the ‘Smart University’ project to develop a cashless society within the university by providing cash management solutions on the Krungthai digital platform and installing cashless payment facilities in universities. University-specific mobile applications are developed to help students and staff manage their university-related tasks and activities.

For example, students can view class schedules and check-in classes, receive class-related notifications, view an unofficial transcript, use the app as a virtual student ID card, and make payments. This helps students and staff familiarise themselves with the digital lifestyle and prepare them for the digital economy and Thailand 4.0.

4. Transportation Transportation is one of the most important activities in people’s daily lives so we aim to make fare and toll payment simpler, faster and more convenient by making them cashless and creating a common ticketing system that includes different public transportation services.

We installed QR code payment and EDC machines on buses so that commuters can pay with a credit or debit card, a government welfare card in which people with low income receive financial aid, a BMTA contactless prepaid card, or by scanning a QR code.

We have installed contactless payment terminals on smart ferries so that fare payment can be made using a debit or credit card as well as a HOP prepaid card. As for expressway tolls, motorists can easily pay tolls with cards and we are currently developing a free flow toll collection system that will greatly reduce congestion at toll booths.

In an effort to create a common ticketing system that connects trains, buses and ferries, we have developed ‘Mangmoom Card’, a debit card that can be used to make fare payment within the ‘Mangmoom’ common ticketing network, which currently includes the blue and purple lines of MRT trains. The network is expanding and will cover more mass transit options in the future.

Leveraging the bank’s strengths in financial literacy and a strong line-up of products and services, we, together with partners who are experts in different areas, engage with local communities to help them develop their local businesses and capabilities, promoting the sustainability of the communities.

Koh Tao, Better Together Krungthai Bank joined hands with UNDP Thailand and Raks Thai Foundation in the ‘Koh Tao, Better Together’ campaign to help boat drivers in Koh Tao who were affected financially by the travel ban due to the pandemic. We used our e-Donation platform, which has made the donation process more convenient and improved the transparency of crowdfunding. The money raised was used to hire boat drivers to clean beaches and collect debris, which helped the nature of Koh Tao recover and promoted harmonious and sustainable living with nature.

We have prepared and readied ourselves, as well as the country, for the upcoming full-scale digital economy by continuously developing financial service platforms in the five ecosystems that respond to customer needs as well as employing technology to reduce inequalities and promote social and environmental sustainability. All of these efforts reflect our continued determination to realise and stay true to our vision #GrowingTogetherForSustainability. n

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Digital Banking

thE RISK oF DoING thE baRE MINIMuM May pERhapS bE bIGGER thaN thE RISK oF ExpERIMENtING, FaIlING aND tRyING aGaIN

Opportunities abound in open banking The era of open banking is here, but in a nascent stage. By continuing their efforts to develop strategies and work with specialist fintechs, institutions can be part of the revolution

words by

Jan van Vonno DIREctoR oF RESEaRch & thouGht lEaDERShIp, tINK

The pandemic unleashed unprecedented disruption, a level of global disorder not seen since the Second World War. To put it simply, without the internet, the global economy wouldn’t have survived the pandemic. During all of this, financial services have been at the forefront of a transformation of everything from payments to banking and commerce, as businesses have moved or deepened their online presence.

In our latest research report, The open banking revolution, we found the attitude of European financial executives mirroring this shift, as positive sentiment towards open banking increased from just over half (55 percent) in 2019, to 71 percent in 2021.

Its impact at this point should not be understated – 82.8 percent of financial executives also believe that open banking is causing ‘a revolution in the industry.’

But there should be equal parts uncertainty and confidence at this time, as it still remains to be seen how the future will shake out. Many institutions are struggling to implement open banking initiatives at pace.

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While nearly a quarter (23 percent) believes their business will have completed its open banking objectives within the next five years, the most common view is that it could take up to a decade (39.9 percent) or even beyond (36.9 percent). Institutions that can translate open banking into concrete strategy will be in an optimum position to start realising its benefits sooner. So how can financial institutions best embrace the open banking revolution?

Improving the customer experience There has never been a better time than the present for businesses to move their open banking strategy beyond compliance efforts.

With a revolutionary opportunity at hand, the risk of doing the bare minimum may perhaps be bigger than the risk of experimenting, failing and trying again. Enhanced banking through external APIs can optimise existing product offerings and is the safest and most strategic direction a financial institution can take beyond compliance.

Third-party providers (TPPs) continue to play a crucial role in this area – many have developed specialist solutions for micro-segments along the customer journey, from customer acquisition to loyalty. They can the percentage of financial therefore prov ide executives who believe open ample inspiration banking is revolutionary

82.8%

for banks looking to embrace open banking and strengthen customer experience, whether solo or through working with technological partners.

Stop looking for the killer app I’ve said multiple times on industry panels and I’ll say it again: the killer app that will disrupt the industry as we know it doesn’t exist – don’t waste time looking for it. The killer app that will drive the adoption of open banking use cases won’t be an app, it will be a collection of services that will enable intuitive and strong customer authentication journeys. Using open banking for a wholesale reinvention of a process or the launch of a new product can be risky, and shouldn’t be the first port of call for financial executives looking to take the plunge.

Tried and tested use cases like automated onboarding, income verification and personal finance management have already been proven to help accelerate and streamline decision-making processes, risk analysis, and the verification of identity, assets and liabilities. Taking advantage of these use cases will ensure that businesses can unlock more value, before pursuing riskier and lengthier use cases that have a longer lead-time for companies to reap the rewards.

Embrace smart partners The open banking journey is one that financial institutions and fintechs have embarked on hand in hand, and there has already been so much progress. However, it’s not guaranteed that the industry will continue along the same vein. That’s why institutions must continue to partner with specialist fintechs rather than seek solely to develop new competencies inhouse. These partnerships can serve a strategically important role for both partners, so it’s important that they are done right. A potential technology partner needs to be carefully scrutinised to ensure they can be onboarded smoothly and securely.

Open banking’s core values of empowering choice, competition and innovation by democratising access to data across financial services are now something the financial services industry has begun to embrace with both hands – whether out of necessity or otherwise. Over the coming decades, it’s safe to assume that these conversations will continue and open finance and open data will become more topical – producing a tailwind for open banking and innovation. We are still at the beginning of the open journey. The institutions set to prosper are those able to translate the open banking opportunity into concrete strategy. Only then will this have been a successful revolution. n

Private Banking

There are banks and then there are banks People are different. Banks are similar, very similar. With similar savings products, interest rates and asset management strategies.

Carnegie Private Banking is probably Sweden’s most different bank.

So different that we reboot our banking business with every new client meeting – for the simple reason that standardised solutions do not fit individual needs.

Carnegie Private Banking takes up where your ordinary bank leaves off.

For almost 100 years, we have been Sweden’s meeting place for knowledge and capital, accruing unique experience and relationships.

We bring together investors and investment opportunities so that new business concepts, companies, workplaces, prosperity and wealth are born.

This ultimately builds our future society and our Sweden.

As a Carnegie client, with access to our expertise and unique investment opportunities, you will also become a builder of society.

We were named Sweden’s premier knowledge bank for high net worth individuals* by providing the special expertise, analysis and tools required to build and secure capital across generations.

Welcome to Carnegie Private Banking. We help individuals, entrepreneurs, families and companies to build prosperity. * Sweden’s best private bank for five years in a row, according to Kantar Sifo Prospera.

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Digital Banking

Much more than new technology MoraBanc is a long-established institution and perhaps this is why it understands that when stepping into the digital future, you must consider people’s ability to adapt and change to the world around them

words by

Ignasi Martín Morales chIEF clIENt oFFIcER, MoRabaNc

It was Philip Kotler, the father of modern marketing, who observed that the adoption of new technologies alone cannot transform an organisation. Add a lot of new tech to an old organisation and all you get is an old organisation that costs a lot more to run. If it’s real transformation you want, then new technologies are just one piece of the puzzle.

MoraBanc is an old organisation. Today one of the largest banking groups in the European principality of Andorra, it dates back to 1938, when its founder, Bonaventura Mora, opened the exchange bureau Comptoir Andorran de Change.

In 1952, it became a bank proper, part of a nascent banking sector that grew up in response to Andorra’s changing fortunes in the wake of the Second World War. There have been plenty of changes at MoraBanc in the nearly 70 years since it became a bank but those of the last six – heralding the organisation’s transition to digital – have been arguably the most significant.

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Digital transformation – a process that began six years ago when MoraBanc successfully implemented a technological platform to revolutionise client relations in Andorra, and continues today – has never been about adopting new technologies alone. It is about leveraging these new technologies to transform business models, the client experience, operational processes, organisational culture and the way teams are led. Digital transformation is about much more than technology.

People are the key You can incorporate new technologies, from big data to artificial intelligence to cloud computing – but unless they are used effectively by people with the talent to develop them, people ready to prioritise client experience, true transformation will remain elusive.

In the turbulent world of modern finance, banks cannot afford to ignore digital transformation in its broad sense, incorporating not just technology and processes but business models, new markets and client experience.

People, of course, are central to every one of these. There is no room for complacency in the competitive world of Andorran banking – those who cannot adapt will be left behind.

Banks must adapt to clients’ needs, demands

and expectations in an environment that is volatile, uncertain, complex and ambiguous.

It is a difficult journey, but one full of opportunities for those organisations able to use the full potential of digital environments, creating differentiated value propositions and seeking alliances with new players, from fintech to proptech.

Banks must shift from being mere providers of traditional financial services to taking on a much more relevant role in their clients’ daily lives. They must lead a strategy focused on client engagement and loyalty through digital ecosystems far beyond financial products, in a context of ongoing personalised interaction.

There are many challenges that financial institutions have to face in order to digitally transform themselves. Agility is key and this can be achieved by implementing a digital culture internally, one led by a management team that drives this change through the acquisition of new digital skills and agile ways of working.

New technologies must be incorporated as a key strategic element – this technology must go far beyond simple business support and enable new digital business models to be defined. It can’t be done without acquiring

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Digital Banking

83%

Of Andorran companies at a basic stage of digital transformation

112%

Increase in platform access growth of MoraBanc Digital between 2017 and 2020

Real differential value will be found in the people who understand what digital is and are able to anticipate clients’ new needs new digital talent, bringing entrepreneurs and those passionate about the digital world into the organisational fold. This is because the real differential value will be found in the people who understand what digital is and are able to anticipate clients’ new needs and consumption habits.

The challenge of change Banks will have to explore the frontiers of their business and redefine themselves, seeking new digital business models that generate new sources of income and increase their profitability. This is everything from the monetisation of client knowledge to offering digital non-banking services to creating open technology platforms.

At the same time, banks must increase the productivity of their existing digital channels: this isn’t just about keeping costs down but rather taking advantage of the large number of digital interactions with their clients to sell more and gain better leverage on digital marketing and client intelligence tools. Alongside all this, banks can’t just leave their physical distribution network to stagnate while developing their digital infrastructure – efficiencies can and must be achieved throughout the business.

For a small country such as Andorra (population 77,543), digital transformation comes with both opportunities and challenges. According to a study on the digital maturity of the Andorran companies that MoraBanc works with, 83 percent are at a basic stage of digital transformation and their employees have a long way to go in improving their digital skills.

To boost the digital capacities of the country’s businesses and public administration agencies, in July 2021 the government of Andorra presented a wide-ranging digital transformation project that will run until 2024. Examples of adaptations to the current regulatory framework include the implementation of a law on digital assets, a law regulating e-sports and a new digital economy law intended to encourage innovation and the diversification of the country’s economy in order to attract talent and investment.

A profound transformation of the bank in the wake of regulatory and market changes has set the pace for the bank’s strategy. MoraBanc’s strategic plans have focused on digitalisation, efficiency and quality of customer service and have led to the growth of client benefits and assets under management, profitability, solvency and efficiency in the Andor-

ran banking sector over the last four years.

MoraBanc opted to place key people with digital talent at the forefront of its digital transformation project. Transformational leadership at management level, driven by a clear vision of the digital path the organisation must follow, was key. As was the ability of leaders to inspire their teams to put clients’ needs at the heart of the MoraBanc experience, whatever channel they engage with.

The reputation of banking is badly damaged. We need to win back clients’ trust, improving the client experience in every interaction. Each client’s experience with the brand is unique and this has always been the case, but the advent of digital banking ups the ante in terms of the options institutions are able to offer their customers. The effective use of technology has the potential to make banking significantly more convenient, as clients are able to access the products and services they need whenever and however they need them.

The potential for personalised approaches is huge, providing banks are able to turn client data – their personal behaviour, preferences and circumstances – into value.

A long-term vision Achieving this transformation wasn’t just a matter of a few new hires. The success of digital transformation lies primarily with people; it required a sea change in organisational culture, building a community where people are at the centre of the business and establish quality relationships based on a willingness to share a common, long-term vision.

The result was MoraBanc Digital. This digital ecosystem, approved by the board of directors at the end of 2014, included the launch of a new website, iOS and Android apps and a state-of-the-art online broker. Clients were able to reach us via new routes, such as a chat function, appointment system and MoraBanc Direct, a fully virtual client branch office.

It was worth the hard work. Between 2017 and 2020, MoraBanc Digital’s usage figures increased by 112 percent in platform access growth, 80 percent in the number of monthly unique users and 154 percent in transaction volume. And it wasn’t just clients that were impressed – MoraBanc recently won World Finance magazine’s award for Best Digital Bank and Best Banking App in Andorra for the fifth consecutive year.

At MoraBanc we are committed to digital transformation, innovation and ongoing improvement in order to be the best bank for our clients, the best company for our employees and the go-to bank in the markets where we offer our services. n

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Digital Banking

Digitalisation setting even more ambitious goals for the future The road to digitalisation began much earlier than the start of the pandemic for Postbank, so they were able to continue supporting their customers throughout and use the crisis as a catalyst for change

interview with

Petia Dimitrova cEo & chaIRpERSoN oF thE MaNaGEMENt boaRD, poStbaNK

The Bulgarian institution, Postbank, this year celebrated three decades since it was founded.

Despite the challenging year with the effects of the pandemic still being felt, Postbank has managed to navigate itself through 2021 thanks to its flexibility, commitment to personalised service and willingness to learn. Drawing on its 30 years in the international banking space, the institution is now looking to the next 30. World Finance spoke to Petia Dimitrova, CEO and chairperson of the bank’s management board, about embracing digitalisation and supporting Bulgarian entrepreneurship going forwards.

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How has Postbank responded to the COVID-19 pandemic and the need for digitalisation?

Everything that happened over the past year and a half posed many challenges for all of us.

It was a test of our capability to adequately respond to a change the scale of which could not easily be foreseen or controlled. These recent times have allowed us to get to know the situation we are living in and to efficiently organise internal processes. Bulgarian banks responded to this situation very well and once again showed that they are resilient and stable institutions. Results show that the banking system has been through minimal stress during this critical period. And although the pandemic has had an effect on the way we work with multiple restrictions, the Bulgarian banking sector remains stable and profitable, with high levels of capital adequacy and liquidity.

The future of banking is undoubtedly digital,

with more advantages and benefits for our customers, providing what is most important – a speedy, time-saving service.

We started digitalisation processes at Postbank a few years ago, when we created a special unit dedicated entirely to that mission. This team developed the overall strategy and its implementation, set priority fields for investment in creating new products with one main aim – digitalisation. This is why in 2020 we were ready, reacted quickly and responded to our customers’ expectations. That we are on the right track was proven by the data, which show that for yet another year in a row Postbank scored a significant increase in customers who now choose to use the digital channels of the bank. Now more than 70 percent of transactions are being carried out online.

What are the benefits of digitalisation?

The pandemic was not only a catalyst for digitalising banks but was also a stimulus for financial literacy among customers after successfully transforming attitudes that we would have otherwise waited for years to change under normal circumstances. The months spent

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Digital Banking

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Branches of Postbank that now have a digital zone for customers

The National Library in Sofia, Bulgaria

“Our mission is motivated by the deep and genuine concern for the most valuable asset of our bank, people”

in isolation helped many Bulgarians discover the benefits of digital banking channels and the speed and security with which they can manage their funds online. Naturally, this is a process, so we expect it to continue, and we will be by our customers’ side, responding to all their specific expectations for faster and more convenient banking. As a modern bank working towards protecting the environment, we were among the first to introduce an innovative way to confirm payment documents with a digital signature. Thanks to this, we decreased the use of paper by 43 percent.

What are the leading trends you expect to see in the banking sector in Bulgaria for the next year?

We are currently focused on instant payments, which allow for funds to be transferred to a counterparty in seconds. Postbank, together with BORICA, a company providing technology infrastructure to the Bulgarian payment industry, has been working hard to implement this product and we expect it to be available to our customers by the end of the year. Banks are starting to pay much more attention to online customer experience and are introducing entirely digital processes. I believe these are processes that eventually will benefit customers, since with healthy competition in our industry we manage to further contribute by adding new products and services to e-channels.

Along with this, our mission is to adequately participate in the development of Bulgarian society and as a leading financial institution, to assist with projects in the major spheres of social life, such as education, culture, sports and environmental protection.

Our mission is motivated by the deep and genuine concern for the most valuable asset of our bank, people.

This year, Postbank celebrated its 30th anniversary as one of the leading banks in Bulgaria. Can you tell us about the products you have launched to mark the occasion?

We offered our customers our unique new generation mobile wallet, ONE Wallet, with which customers can perform even more banking services through their phones. They can have practically instant contactless access to main banking services as they transfer their physical wallet onto their mobile phone. They can add all their cards into this new wallet and freely and efficiently manage them thanks to the rich range of functionalities set in the app. There is support for contactless POS payments through the phone, managing cards in the mobile wallet by setting limits for different channels (POS, ATM, online payments), opportunities for adding loyalty cards from various merchants, discount vouchers for partners and much more. Our customers have active and flexible control over their funds 24/7, which is certainly a convenience nowadays. This is why I am sure that ONE Wallet will become an irreplaceable application in everyday payments for each of us.

Another major innovation we carried out at Postbank was the introduction of our express banking digital zones that were immediately recognised as a preferred alternative to banking at a counter. Thanks to the intuitive devices in these zones, customers can easily and quickly carry out a major part of main banking transactions after identifying themselves with their debit or credit card, with no need to be registered for the bank’s online banking. Digital zones are already functioning in 75 branches in 32 towns across the country and we will be unveiling more locations and upgrading the service.

Our customers’ needs are of greatest importance to us, and we will therefore continue offering new solutions for managing their finances. One of our main goals in this process is to create high-quality products providing them with the necessary security of the investment.

A few months ago, we became the first bank in Bulgaria to start offering a new-generation metal credit card.

Once again, we demonstrated our position as an innovator in the sector and succeeded in offering our customers something different, modern and valuable in order to meet their highest demands and expectations. We are happy that our customers appreciated this modern product that gave them even more flexibility and confidence, completely in line with their style.

We are pleased to be the first bank in Bulgaria to offer an easy and convenient solution for contactless payments for any merchant. The innovative service, which contributes to mobility, holds the key to the effective development of many industries, and is attractive to both small and niche businesses, as well as large corporate clients. Smart POS by Postbank aims to upgrade the established POS business model and make contactless payments much more accessible and convenient for merchants.

This, in turn, will expand access to contactless payments for end customers, which is not only convenient but also especially important during a pandemic.

What further goals are you working towards with Postbank?

Other than our innovative digital products and services, here at Postbank, we continue focusing our efforts and funds in support of projects with real added value for society and we believe that one of the great effects will be building self-awareness that will change our lives for the better. For the third year in a row, we are participating in the ‘dare to scale’ project – a four-month growth programme, aimed at entrepreneurs and businesses that are already past the initial phase of development and want to scale up their activity. The programme is organised by the Bulgarian office of the global entrepreneurship network, Endeavor, with Postbank as the main partner.

It is extremely important to us to be part of this process, to support the ambitions of companies seeking to upscale their businesses and thus change the entire ecosystem. I am positive that this is the right path and the right attitude to lead us forward. The times we live in provide numerous challenges, but they will be overcome with resilience and our capacity to learn and grow. We at Postbank will share with entrepreneurs our experience and expertise in order to support them in the most important stages of their businesses’ development and become part of their growth. We will seek the potential of successful partnership allowing us to innovate and create opportunities in the ecosystem. To us, this is an investment in the future and a chance to be part of the change moving us ahead. n

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Nordea Sustainable Finance Nordea seeks to inform and engage our clients in environmental, social and governance issues.

The world is challenged by impacts of climate change and increasing resource scarcity. These challenges are putting pressure on natural habitats, communities and people as well as on businesses, presenting a threat to global prosperity.

By acting on our clients behalf we can make important contributions to economic growth and prosperity, through capital allocation and interaction with companies.

This is not only a business opportunity, but a part of our responsibility.

Sustainable Finance is about the mobilization of capital for businesses with economic, social and environmental benefits.

Sustainablefinance.nordea.com

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Digital Banking

The rise of intangible capitalism A new model of capitalism is emerging. Where once we focused on physical infrastructure, now we are living in the era of digitalisation and intangibles, where only the highly skilled and digitally savvy will thrive

words by

Eric Hazan MaNaGING paRtNER, McKINSEy & coMpaNy

In a 2014 book, the Nobel laureate economist Joseph Stiglitz and published author Bruce Greenwald argued that the most important societal endowment is the ability to learn. Today, it is increasingly evident that the ‘learning society’ has not only been created, but is starting to drive our economies. From the 19th century until about 25 years ago, businesses largely invested in physical infrastructure and machinery, from railroads to vehicles. But in the past quarter-century, investment in socalled intangible assets – such as intellectual property, research, software, and managerial and organisational skills – has soared. Recent McKinsey Global Institute (MGI) research found that, in 2020, intangibles accounted for 40 percent of all investment in the US and 10 European economies, up 29 percent from 1995.

And intangibles investment appears to have surged again in 2021 as digitalisation accelerated in response to the COVID-19 pandemic.

We believe that this trend strongly hints at the emergence of a new model of capitalism, in which companies’ success will be measured more by their people and their capabilities than by their machines, products, or services. Moreover, we think there is no going back. Firms such as Amazon, Apple, Facebook, and Microsoft are clearly scaling up dramatically and achieving hypergrowth. Intangibles may well be driving this phenomenon. After all, there is certainly a correlation between investment in intangibles and higher productivity and growth. MGI’s research found that companies in the top quartile for growth invest 2.6 times more in intangible assets than the bottom 50 percent of firms.

Similarly, economic sectors that have invested more than 12 percent of their gross value added (GVA) in intangible assets grew 28 percent faster than other sectors. Economies in which intangible investment is increasing are also posting growth in total-factor productivity.

Notably, the only companies that were able to maintain 2019 rates of growth after the pandemic hit in early 2020 were those that had invested significantly in the full range of intangibles: innovation, data and analytics, and human and brand capital.

In a dematerialised, digitised, knowledgedriven world, corporate returns, productivity, and economic growth will increasingly be tied to such assets. But unlocking their true value requires not only investing in them, but also developing the skills and managerial know-how, or human capital, needed to make effective use of them. An MGI survey of more than 860 executives indicates that the major difference between fast-growing and slow-growing firms is that the former not only invest more in intangibles and appreciate their importance for boosting competitive advantage, but also focus on deploying them effectively.

A recipe for inequality The growing salience of intangibles thus makes the imperative of raising skills and capabilities even more acute. This emerging new form of capitalism is potentially marvellous for qualified people with highly portable skills, but somewhat scarier for the less skilled and less digitally savvy. Companies that lack the resources to make necessary investments in intangibles also could fall further behind. The dematerialised economy, if not managed well, thus risks being a recipe for inequality. Previous MGI research found that a key distinguishing feature of ‘superstar’ companies is their investment in intangibles, including large-scale spending to raise the skills and capabilities of their people.

Back in 2019, for example, Amazon announced plans to spend $700m over six years to retrain 100,000 employees. Other tech giants, including Google and IBM, have developed similar schemes. But the growing concentration of revenue and profit in a small group of successful firms risks increasing disparities of income and wealth. Intangibles-heavy superstar firms tend to employ fewer, more highly skilled, and better paid people who are generally more productive than employees in less digitised businesses. If these superstars pull even further ahead, then labour’s share of national income – the percentage that goes to worker compensation – could decline of all investment in the uS and even more. This is not 10 European countries in 2019 to argue that successwas for intangibles ful intangibles-based firms should be constrained from expanding further or from training their own people. Such firms are important sources of innovation and high-productivity growth, and have formidable incentives to continue investing in intangibles.

Rather, companies and governments should do everything they can to spread the skills that will open up opportunities for more individuals and firms in the digital economy.

Huge value is at stake. Given the mounting evidence of the correlation between intangibles investment and GVA growth, executives and policymakers should ask themselves what it will take to realise the opportunities intangibles represent. If an additional 10 percent of companies were to attain the same share of intangibles investment and GVA growth as top growers, this could produce an additional $1trn in GVA, or a 2.7 percent increase across sectors in OECD economies. Governments can play a key role in reskilling and in ensuring that the right knowledge infrastructure is in place.

That means focusing on education, internet and other communications technologies, urban planning, and public science spending. The digitised, dematerialised economy is already here, and its spread is unstoppable. The challenge is to manage the transition in a way that benefits the many and not just the few. n

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Digital Banking

thE bESt baaS pRovIDERS havE thE capacIty aND MoDulaR aRchItEctuRE to oFFER totally bESpoKE pRoDuctS to DIFFERENt clIENtS

The rise of Banking-as-a-Service There is virtually no industry or sector that has been unchanged by the pandemic.

People are engaging with brands and services in new ways across the globe, and – like everyone else – the banking sector has to adapt

words by

Paddy Vishani

come knocking, there are important points to consider as banks, brands and BaaS providers form new partnerships.

StRatEGIc paRtNERShIpS MaNaGER, yobota

Don’t sleep on BaaS

For years, we have witnessed the steady rise of fi ntech companies and neo-banks as financial services are increasingly becoming digitalised. Demand for open banking is growing as more people discover how free access to their banking data can generate innovative embedded finance solutions.

Tier one banks that hold pride of place on the high street remain at the heart of financial services. Yet with the commoditisation of banking services, other players can now operate within the space once reserved for these giants.

There is no shortage of fi rms that want to offer ‘greener banking,’ entrepreneurs that want to build more innovative banking apps, or retailers that want to explore novel ways to lend money to buyers and simplify the customer journey. The appetite for digital transformation is strong across financial and non-financial businesses alike, and the realisation of these bold plans no longer needs to be constrained by regulatory hurdles. This is where Banking-as-a-Service (BaaS) providers come in. They can build bridges between banks and businesses while negating the need for the two to compete with one another. But while opportunity has

The technology behind digital banking is complex, and developing it from scratch is prohibitively expensive for many businesses.

This, along with the difficulty of obtaining a banking licence, is a key obstacle for those trying to embed financial services into their digital channels. BaaS allows businesses to develop sleek, customisable financial products that suit their users, and leave the balance sheets and regulatory considerations to the licensed banks. This way the customers get what they need, the innovators are free to pursue their ideas, and the banks benefit from the value chains created. Everybody wins.

One benefit of this shift is that banking services become more engaging to the end user. Businesses with strong customer loyalty can offer credit during the purchase journey, improving both the experience and the customer’s relationship with the brand through embedded banking services. Demand for these services is being driven in part by the rise of ‘buy now, pay later’ (BNPL) services that are growing at a staggering rate – 39 percent a year – with almost 10 million shoppers in the UK stating they avoid retailers that don’t offer split payment options at checkout.

The demand for these services is clear, and it’s up to BaaS providers to keep up momentum.

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Solutions like no others A misguided concern with BaaS is that it will eliminate differentiation from the market – that constant intermingling of partnerships and white-label solutions will homogenise all banking products into one. This couldn’t be further from the truth: while third-party solutions enable anyone to offer banking products, the innovation of competing brands and the varying demands of users will lead to a boom of novel products tailor-made for every corner of the market. The best BaaS providers have the capacity and modular architecture to offer totally bespoke products to different clients, cherry-picking the functions they need to meet the demands of their own unique customer base.

This is why now is the time for BaaS providers to shine – those with the best functionality and most agile solutions can fuel major change across multiple sectors. They must be designed to offer easy access to the bank’s critical functions while remaining scalable and extensible.

Onboarding clients, creating financial products, and thereafter orchestrating and servicing these products must all be easily achieved through the core banking system. Giving businesses the functionality they need while carefully protecting the bank’s data and adhering to strict compliance requirements is a tight line to walk, but the best BaaS providers are equipped to do it. The industry is crying out for smart, scalable solutions, and BaaS is the tool that will power innovation well into the future. n

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Investment Banking

Kazakhstan: Building new financial frameworks for a better future Tengri Partners continues to pursue and successfully execute complex market development transactions, as evidenced by the trust of large international and local institutional clients Introducing ESG financing words by

Ilias Tsakalidis cEo aND hEaD oF capItal MaRKEtS, tENGRI paRtNERS INvEStMENt baNKING (KazaKhStaN)

Formerly known as Visor Capital, Tengri Partners Investment Banking (Kazakhstan) JSC (Tengri Partners) was founded in 2004 with the aim of creating the best regional investment bank in Central Asia. Tengri Partners provides a full range of investment services and products in Kazakhstan, including – but not limited to – investment banking, securities trading and brokerage, industrial analysis, and investments. The company’s activities were recognised by World Finance, which awarded Tengri Partners the honour of the ‘Best Investment Bank in Kazakhstan’ in 2019 and 2020.

Paving the way for development In 2018, Tengri Partners made its debut in bringing AAA-rated development financial institutions (DFIs) to the capital market of Kazakhstan. Thus, the company was first to place bonds of the International Finance Corporation (IFC) denominated in tenge on the Kazakhstan Stock Exchange (KASE) with a total volume of KZT8.6bn ($25m). For the first time, DFI bonds were included in the basket of government securities, which increases the attractiveness of the instruments for investors and, subsequently, bolsters the market activity.

The transaction became a landmark event in the history of the development of capital markets in Kazakhstan. Following the IFC, Tengri Partners has successfully placed international bonds in tenge with such DFIs as the European Bank for Reconstruction and Development (EBRD) and the Asian Development Bank (ADB). The total issued volume of the AAArated DFI bonds in tenge in Kazakhstan currently amounts to KZT722.5bn ($1.83bn) – all of which were placed by Tengri Partners.

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Although the topic of green financing is gaining widespread popularity in developed markets, it is too early to compare the performance of a given asset class to the conventional instruments as it is at an early stage of development in Kazakhstan. The first green bonds in Kazakhstan were placed by the ‘DAMU’ Entrepreneurship Development Fund JSC on the Astana International Exchange (AIX) in August 2020.

In turn, the debut issue of green bonds on the KASE platform is attributed to the ADB placement in November 2020 with Tengri Partners acting as a sole arranger. ADB tapped the market with two medium-term notes in the total amount of almost KZT14bn ($32m). The proceeds went to projects aimed at lowering or eliminating greenhouse gas emissions, as well as lowering the vulnerability of anthropogenic or natural systems to the consequences of climate change and enhancing resilience and adaptability.

Newly introduced green bonds demonstrated high appreciation by market participants reflecting oversubscription of 283 percent and 179.5 percent and negative spread of 10–12 bps to the government bonds despite a highly competitive environment with the ministry of finance and competition of high-grade SOEs for the spare liquidity at the time of placement.

A long w ith green bonds, ADB also launched the debut placement of gender bonds in Kazakhstan aimed at the achievement of gender equality and the promotion of women’s empowerment. Tengri Partners participated in this deal as a sole arranger placing about KZT8.4bn ($20m) worth of ADB bonds on KASE. Proceeds were directed to the ‘Promoting Gender Equality in Housing Finance Project,’ which focuses on increasing the lending operations of the Otbasy Bank House Construction Savings Bank JSC and promoting affordable residential mortgage loans for female borrowers in predominantly

Nur Sultan (astana), Kazakhstan

rural regions. Overall, the ESG bond market in Kazakhstan today amounts to KZT43.4bn ($102.4m), which already exhibits good opportunities for the development and stimulation of sustainable financing in the region.

Making securitisation work Until recently, there were no precedents in Kazakhstan’s history of a multi-tranche securitisation of a mortgage portfolio based on the principle of ‘true sale’ adhering to the local law. That was due to several legislative and regulatory provisions that not only implied additional risk of loss of value for investors – especially in the event of SPV default – but also impeded fair reflection of the economic viability of the transaction and the quality of bond credit risk in the international credit rating.

Considering the amount of work and energy costs associated with initiatives to change legislation, a specific deal is often needed to clearly determine the ineffectiveness of certain provisions. Such a deal is the debut securitisation of the mortgage portfolio for the largest mortgage organisation in Kazakhstan – the Kazakhstan Housing Company JSC (KHC). It was initiated in 2019 in the amount of up to KZT26bn ($65m), and structured by Tengri Partners.

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Investment Banking

Tengri Partners in numbers:

$18.9bn

Total executed transactions

$12.1bn

Debt capital market placements

$3.6bn

Equity capital market placements

$3.2bn M&A deals

The preparation of the deal made it If the necessary possible to identify amendments the main barriers to the development of are adopted, the the market, gave im- securitisation petus to a broad dis- market in cussion of the issue at Kazakhstan has a the legislative level, great future and served as a pretext for introducing key amendments to the legal infrastructure to bring it in line with global best practices.

The main limitation in Kazakhstan today, in comparison to more developed jurisdictions, is the lack of a full-fledged concept of subordination when registering several SPV bond issues within one bond programme. Although it is possible to prioritise the allocation of funds to investors from the proceeds on the underlying assets during the life of the SPV, the observance of such priority in the event of a default of the SPV contradicts the following provision of the law.

The second limitation is the lack of disclosure of how other parties in a securitisation transaction should be treated in case of default: service agent, custody, asset manager, management company, stock exchange, trustee, etc.

Initiated amendments by Tengri Partners and KHC account for all of these, allowing the trustee the use of cashflows from the remaining performing portfolio and recoveries for payment of third-party fees.

If the necessary amendments are adopted, the securitisation market in Kazakhstan has a great future. The reason for this is the growing loan market – the mortgage and car loan market, for example – amid a limited range of long-term funding instruments for local commercial banks and quasi-state-owned companies. In addition, given the high share of non-performing loans and, consequently, the high pressure on regulatory capital, securitisation may serve as an effective way to increase the level of banks’ liquidity and to provide capital relief without the need for government as previously observed with additional banks’ capitalisation programmes.

Global infrastructure practice In 2021, Tengri Partners became a member of the International Swaps and Derivatives Association (ISDA). Membership in the international professional association will allow Tengri Partners to exploit the developed infrastructure of ISDA in the OTC-derivatives transactions, cooperate with industry experts on the issues of current interest, participate

in the discussions of best practices and in the preparation of relevant regulatory documents.

Thereby, Tengri Partners has proved that it is striving for active development of the company as a professional participant in the international capital markets and derivative instruments.

Today, Tengri Partners is one of the few ISDA members in Kazakhstan.

Tracking the performance of TONIA Overnight repo market is the most liquid segment of the capital market in Kazakhstan due to the large transaction volumes – about KZT400bn ($940m) per day – and many market participants: banks, insurance companies, funds, corporate treasuries. Tenge Overnight Index Average (TONIA) reflects a key short-term risk-free benchmark for the value of money in Kazakhstan’s financial market. In developed markets, government securities, corporate bonds, swaps and loans are linked to the analogous indicators (SOFR, SONIA, etc) to fairly reveal the change in the value of money.

In September 2021, Tengri Partners, in cooperation with EBRD and commercial banks, proposed an introduction of the TONIA compounded rate and TONIA compounded index indicators to the market on KASE. TONIA Index is a big stepping-stone to the development of the financial market in Kazakhstan assisting with liquidity enhancement and a wider range of instruments. TONIA-linked instruments will thus enable a more efficient way of investing in the risk-free money market, in comparison with the traditional rolling of position in the overnight repo market.

Launching the market analysis toolkit In 2020 Tengri Partners commenced a PMI survey in Kazakhstan in partnership with IHS Markit that provides some of the most closely monitored reports of business activity worldwide. Thorough work has been carried out with IHS Markit in the development of the methodology and approach to calculating the PMI. The launch manifests Tengri Partner’s focus, which is to provide an essential entry point into Kazakhstan’s market for international investors and share vital analysis for investment decision, as well as to gauge market sentiment. Kazakhstan became the 44th country covered by the global PMI series from IHS Markit.

Despite turbulent conditions in capital markets over the course of 2020, and extreme volatility in the exchange rate, Tengri Partners has maintained all of its core business lines and remained focused on serving the needs of major institutional clients to a world-class standard. n

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Ripe for investment As Greece emerges from the pandemic and benefits from a raft of new projects – including €33bn in funding under the NextGenerationEU programme – the country is ripe for international investment. Among those leading the way is Eurobank, which has launched the country’s first segment dedicated to overseas customers

interview with

Iakovos Giannaklis GENERal MaNaGER oF REtaIl baNKING, EuRobaNK

The Greek economy is expected to grow 6.5 percent this year, according to the IMF – up from a decline of nine percent in 2020 – marking the start of a promising post-pandemic recovery that brings with it ample opportunity for investment; and not just for residents. As tourism and real estate rebound, new, innovative projects come to fruition (aided by a €33bn funding package under the NextGenerationEU programme). With port infrastructure upgraded and the country making significant strides in renewable energy production, Greece offers an attractive package for international investors. It also offers one of the EU’s most coveted investment visa programmes – the Greece Golden Visa, issued to non-EU citizens who make a significant contribution to the country’s economy and offering five-year residency for investors and their families.

With all of that in mind, appetite for international investment is set to grow in the coming years – and catering to the demand is Eurobank, which recently introduced the first segment in Greece to be dedicated to international customers, as well as the country’s first bank branch to service Golden Visa holders and non-resident investors. To find out more about the bank’s new ‘one-stop-shop’ for overseas customers, World Finance spoke to Iakovos Giannaklis, General Manager of Retail Banking at Eurobank, who talked us through the country’s key investment opportunities, the remote services Eurobank offers and how the Greek economy is faring as it emerges in a postCovid landscape.

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What impact has the pandemic had on the Greek economy and on international investment?

As a consequence of the pandemic, Greece lost nine percent of its GDP in 2020, and foreign direct investment flows dropped by 37 percent.

As expected, movement restriction-vulnerable sectors such as tourism and retail trade suffered the largest blows, with manufacturing following due to weaker demand and disruption in international supply chains. Economic recovery in 2021, however, is expected to be significantly stronger. Tourism posted a robust recovery, with revenue reaching 78 percent of its pre-pandemic levels in August, and real estate prices maintained their upward trend even amid lockdown. The number of construction projects in the pipeline also hit a 15-year high in September, opening up new opportunities for investment in real estate as well as a raft of other sectors.

What key opportunities are there for international investors as the country recovers?

Greece is in the process of transforming its economic model through a solid growth plan comprising structural reforms and largescale projects. Proportionally to its GDP, the country is one of the largest beneficiaries of the NextGenerationEU programme, created to help economies emerge stronger from the pandemic. Under the programme, Greece will receive nearly €33bn in grants and loans in the next five years to finance investments in green transition, digital transformation, R&D, innovation and infrastructure. An additional €21bn will flow through EU structural and investment funds, while the European Investment Bank and the European Bank of Reconstruction and Development have already committed to back projects in excess of €7bn.

the temple of poseidon at cape Sounion in attica, Greece

All of this points to huge potential for growth and investment opportunities. Moreover, the government’s recent labour and social security reforms, corporate tax rate cuts, the digitalisation of the public sector and fast-track processes introduced to ensure quick absorption of the EU funds make Greece an attractive country to invest in.

Which areas in particular are ripe for investment and why?

With the potential for year-long solar and wind power and the country’s decarbonisation commitment to the EU, Greece presents a large potential for investments in renewable energy production. Owing to its position as the south-eastern gateway to Europe and its recently upgraded port infrastructure, the country also has the capacity to attract investment in logistics, turning it into a major regional and European trade hub. As always, tourism also remains a key area of focus. In addition, Greece offers a competitive advantage in other lesser-known sectors, such as pharmaceuticals, metals, software development and agri-food products.

How is Greece’s real estate market faring currently?

The Greek real estate market was severely impacted by the financial and debt crises. Between 2010 and 2016, commercial real estate prices declined by 30 percent, and residential apartment prices by about 40 percent, according to the Bank of Greece. Thanks to the gradual recovery of the Greek economy, this down-

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Retail Banking

the pandemic, with non-resident clients asking to enjoy our services from the comfort of their homes. Our focus has been on addressing these requests by developing a number of products and procedures in order to attract new non-resident customers as investor interest in Greece grows.

ward spiral has now reversed, with property prices rising by around 15 percent from 2017 to 2020. The upward trend slowed down but was not interrupted during the pandemic. Based on preliminary data, we expect it to continue into 2021, and even accelerate further over the next few years. The revival of holiday rentals, a predicted rise in disposable income and development prospects on the Athens Riviera will be among the key drivers of this growth.

Eurobank introduced a dedicated Retail International Customers segment in 2020. What does this entail?

The International Retail Customers segment is dedicated to servicing non-resident customers, Greeks and foreigners who reside abroad, for all their banking and investment needs in Greece. The segment also provides exclusive services and custom-made products for Golden Visa and tax-resident investors, such as foreign pensioners.

Why did Eurobank decide to launch a service exclusively for non-Greek residents?

In recent years, the Greek government has gradually legislated a series of investment and tax benefit regimes to entice foreign investors, and we have witnessed increasing demand for banking services from abroad as a result.

Eurobank has a significant legacy portfolio of non-resident customers who have repeatedly expressed interest for specialised banking services and tailor-made products. This has become even more apparent as a result of

What perks do customers get?

Our customers benefit from remote banking services – whether that’s signing up to the bank or applying for a mortgage loan – meaning they don’t need to be physically present in Greece.

Through the innovative v-Banking service, we also offer remote services for day-to-day banking transactions. Clients can meet their dedicated International Relationship Manager over video, a dedicated EuroPhone international helpline is also available seven days a week and of course via our award-winning Eurobank mobile app. According to their needs and risk profile, our clients also have access to a wide range of investment solutions, managed

by Eurobank Asset Management, a leader in Greece in the areas of fund and institutional asset management, investment advisory and fund selection. Buying property in Greece is easier now than it was in the past, although one can still meet with obstacles along the way. We have developed infrastructure and products to facilitate our clients’ journey to buying their dream holiday home. Non-resident investors can now commence a banking relationship and apply for a mortgage loan with Eurobank remotely. Mortgages are offered in Euro currency to residents of most countries on particularly attractive terms.

You were the first bank in Greece to introduce a segment like this. How successful has it been so far?

We are proud to say that since the beginning of the year, we have received more mortgage applications from non-residents than we did in the previous five years, indicating the segment has been successful. The formation of the financial landscape, as explained previously, will attract a significant number of foreign investors, which, in combination with the tax incentives and the uniqueness of Greece as a destination, will considerably increase the demand for retail products customised for nonresidents.

“In recent years, the Greek government has gradually legislated a series of investment and tax benefit regimes to entice foreign investors”

Eurobank was also the first bank in Greece to introduce a branch dedicated to servicing Golden Visa and non-resident investors. What response have you seen?

The international retail branch opened in February 2020. We are currently the only bank in Greece operating a branch dedicated to serving Golden Visa and non-dom investors, operating by appointment. As it opened just before the Covid outbreak, we saw a relatively low number of visitors in the first year. However, in 2021 we witnessed strong pickup in new clients, and although there has been a significant slowdown in new Golden Visa issues at a country level, the branch is experiencing rising interest in the products and services it offers.

You also offer services in tax consulting and real estate management; what does this entail?

Finding the ideal property requires significant time investment and the right partners.

Navigating through a foreign tax regime and legal framework may also be a challenge for someone who is a non-resident. Eurobank has created an ecosystem that facilitates all of our customers’ needs and in cooperation with reputable partners, we offer a hassle-free, one-stop investment experience. We collaborate with leading tax consultants to provide our clients with tax and public admin-related services, whether that’s applying for Golden Visas, transferring their tax residence to Greece, obtaining tax numbers or paying income and property taxes. We have partnered with reputable agencies to provide remote, end-to-end management services. These include property and tenancy searches, sales contacts and lease agreements, property maintenance and valuations and technical and legal due diligence. We aim to cover all stages of the property investment process.

What other plans does Eurobank have in the pipeline, and what is your vision for the future?

Eurobank is currently going through a transformation that not only aims to create value for our customers, employees and shareholders, but also to help us become part of the wider national move towards sustainability.

We aim to support the development of major infrastructure projects over the next ten years, while working with both small businesses and individuals to offer consulting and lending services. We are also investing in new technology and using it to empower our employees and customers. By embracing the digital world while simultaneously maintaining that element of human interaction, we believe we will thrive in the world’s future economic and social environment. n

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Retail Banking

High flying Starling swoops into mortgage lending Starling Bank has enjoyed a meteoric rise since its start in 2014.

Now, there are plans for the digital challenger bank to branch out into mortgages perhaps in anticipation of an IPO in the next year or two, as Ruth Kibble discovers Starling Bank completed its first acquisition earlier in the summer, giving a strong indication that the fintech soon plans to offer domestic mortgages. Surprisingly though, the purchase was of buy-to-let specialist Fleet Mortgages. If Starling is planning to be the first entirely digital bank to offer mortgages and loans in the UK, why go for a more niche acquisition first – were they just dipping a toe in the water or is there more to it than that?

Starling’s recent 600 percent increased revenue report and doubling of customer numbers demonstrate how firmly it has established itself in the UK’s mainstream money consciousness.

Now, it has acquired a mortgage lender and suggested moving into the mortgage lending space. If the bank’s mortgage offerings are as progressive and user-friendly as its app, they will surely see unprecedented uptake. It would also make Starling the first wholly digital mortgage lender, placing them ahead of other digital rivals Monzo and Revolut, and more in line with the traditional high street banks it seeks to better.

Fleet Mortgages’ customer base is professional or semi-professional buy-to-let landlords. Perhaps knowing that the BTL market has become increasingly onerous for landlords in recent years, Starling wishes to offer a simple digital product that makes life easier. Perhaps it knows that its own core customers – adults who lead digital lives – are likely to have multiple streams of income, some of which may come from property. Whatever the reason, Starling itself has confirmed that the move is part of a wider plan at the bank to expand lending through a mix of strategic forward-flow arrangements, organic lending and targeted M&A activity.

A strategic manoeuvre Anne Boden, CEO of Starling, said: “The acquisition of Fleet Mortgages is the start of our move into mortgages as an asset class and builds on a number of forward-flow arrangements that we’re doing with leading non-bank lenders.” Moreover, the acquisition of lending facilities and the development of its own capacity to lend on mortgages and take a share of 62

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the UK domestic mortgage market will build Starling’s balance sheet and stand it in even better stead for its much-anticipated possible IPO in the next year or two. This had once been rumoured for late 2021, but with the pandemic stalling everyone’s plans, the bank has remained steadfast in its commitment to do banking better, and Boden will not be rushed.

No public date for flotation has yet been announced by the bank, but its acquisition activities and expansion of offering such as BaaS for Europe and joint accounts all suggest that the organisation is taking its time to optimise its position before it goes for any flotation.

This goes for both the disruptor tech that made it famous as well as the need for ‘traditional’ banking provisions; ‘Banking. But bet-

a traditionally reliable business that If the bank’s will make money for mortgage offerings investors. Third, it has enormous appeal are as progressive to customers due and user-friendly not only to its ease as its app, they of use and impres- will surely see sive technology, but unprecedented also due to its ethical uptake credentials. Banking as an industry has somewhat fallen out of favour with young investors at least, and several banks have fallen under fire in recent times due to their investing in industries that in turn fund arms production, climate breakdown, and human trafficking. Traditional funds and individual investors alike are more and more concerned with companies’ business practices and ESG credentials when investing, and Starling has aligned itself with this public mood in its ethics statement.

ter,’ as the firm’s strapline goes. Starling’s IPO success will come from three things: first and foremost its tech. It has clearly positioned itself as a technology company and has built its own world-class technology from scratch. This is an incredibly complex and difficult thing to do and having developed this technology and become the market leader, it is rightly proud of its achievements as a disruptor and challenger.

Secondly, in positioning itself as a real bank, not just an app (Starling gained its banking licence in 2014), it gains legitimacy and Increase in revenue captures the idea of for Starling Bank

This should serve to increase confidence further still that any IPO when it does happen will lead to success for the bank. From its beginnings as a disruptor bank, to its slew of ‘best British bank’ awards, TV ads encouraging customers to ‘break free’ from traditional banking, and a brand new sponsorship deal with the UEFA Women’s Euros 2022, Starling is clearly resolute in its goal of ‘Banking. But better.’ A continued focus on M&A activity and optimising its position while growing its ranks of happy customers could be a winning combination. No wonder industry insiders are keen to know when they can muscle in and get a piece of the action. n

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Islamic Finance

What’s next for Kuwait’s banking sector?

In a post-COVID reality, Kuwait International Bank (KIB) is the model of a bank adapting to change by striving for innovative evolution and with a proactive growth plan in place, a promising future awaits

words by

Raed Jawad Bukhamseen vIcE-chaIRMaN aND cEo, KuWaIt INtERNatIoNal baNK

If there is one thing that business leaders around the world can agree upon, it is that the economic impact of the COVID-19 pandemic has been view-changing and paradigm-shifting. And that impact has been by no means limited to 2020. Well into 2021, the volatility of the situation continued to impede economic recovery and growth in Kuwait. Rather than the swift return to pre-pandemic levels of economic growth that many had hoped for, we saw a cautious edging towards economic stabilisation. As a result, Kuwait’s economy and economic development – which had been on such a strong upwards trajectory prior to the pandemic – inevitably levelled out.

That being said, with the pandemic seemingly under control in the country, the national economic outlook has taken a more optimistic turn. Despite a challenging fiscal year allround with an extremely bumpy start, we are seeing signs of recovery and revitalisation. Nowhere is that truer than in the banking sector.

Today Kuwait’s banking sector seems poised and on the brink of a new era; characterised by a fast-paced and dynamic model of constant evolution. One bank that I believe embodies that philosophy is Kuwait International Bank (KIB).

Forward-focused approach Overall, Kuwait’s banks fared relatively well throughout the crisis. Although the banking sector was impacted – mainly with regards to financial liquidity and profitability – the banks ushered in this turbulent time from a position of strength and stability, supported by decades of foresight, planning and ongoing risk assessment. The expansive, unpredictable and overwhelming scope of impact left its marks on the sector, but Kuwait’s banks proved to be agile, risk-savvy and cautiously action-oriented; and were quick to take decisive steps to alleviate 64

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the negative impact and the economic toll, both for themselves and for the economy at large.

In fact, banks played a crucial role from the early days of the crisis when it came to supporting the government, national recovery efforts, SMEs and even individual consumers. From contributing to the national COVID-19 fund, to halting financing repayments, the banking sector has been an active source of support on the national scale.

This support, in addition to the economic toll of the pandemic, has added a lot of shortand medium-term stress on operational costs and financial liquidity for many in the sector, but it has not permanently stunted growth or irreversibly damaged the industry. More to the point, banks with a solid strategic vision and a drive for creative problem solving, such as KIB, have been able to find the opportunity for re-evaluation, reassessment and complete revitalisation of business models and brand offerings – to not only mitigate and recover, but actively architect a new industry.

With its core focus on innovation, staying ahead of the pack and cementing its position as a key market player, rather than settling for a return to the pre-pandemic models, the goal for KIB became reimagining the banking experience in the post-pandemic world. The bank’s core strategic vision seeks to strengthen KIB’s financial indicators, diversify its investments portfolio by attracting new opportunities, prudently manage risks and mitigate crises, and pursue focused local expansion, as well as bolster its digital infrastructure and service offering across the board. The ultimate aim is to rethink the bank’s entire business and operational model; to push the boundaries of what the traditional banking experience is and what it can be.

Adoption of the fintech evolution If there is one thing that the pandemic did, it was to serve as a catalyst for change. As a result, one of the few positive takeaways has been the aggressive push towards a more accelerated digital evolution of consumer offering.

Suddenly, as a matter of survival and business continuity, companies across all sectors had

the liberation tower in Kuwait city, Kuwait

to look for upturns and fast-paced solutions in order to improve operational resilience.

The banking sector has not been the only one caught up in this digital wave of progress, but we can definitely say it has been one of the most successful transformations.

However, the fintech revolution is not something new. It has been taking the world by storm for the past few years. Yet, the sweeping impact of the pandemic graduated this storm into a full-blown hurricane. Today, the banking sector is fully set on a path towards incredible momentum by redesigning core processes and accelerating forward-looking trends, such as digitisation of operations, prioritising customer experience, leveraging data and analytics alongside other advanced technologies and practices. For KIB, the march towards a whole new digital existence had actually already begun much earlier. When the pandemic first hit, the bank had just completed a monthslong exercise to develop a comprehensive and ambitious plan for a radical digital-focused restructuring. The pandemic simply accelerated the pace of roll-out and increased the sense of urgency. Timetables were brought up and even more expansive targets were set, as the bank’s digital evolution quickly went from being a good strategy to a necessary development.

At its core, KIB’s digital programme seeks to leverage innovative strategies and technological know-how to completely overhaul the bank’s technological base and digital applications and platforms – in order to meet the needs of a more sophisticated customer base.

One of the core components of this strategy

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Islamic Finance

centres on developing and optimising Kuwait’s banking the bank’s offering, sector seems with a relentless push poised and on the towards innovating more products and brink of a new era; services that are becharacterised by spoke, unique and a fast-paced and user-optimised. The dynamic model of bank also continconstant evolution ues to be focused on capitalising on the latest financial technologies in the market. From revamping and optimising its alternative channels and digital platforms, to rethinking the concept of the inbranch customer experience and introducing a whole new spatial design concept of branches, KIB has sought to reconceive the entirety of its customer journey.

Moreover, KIB is making great strides when it comes to improving its business model; strengthening its digital infrastructure, and adopting advanced digital solutions and services, whilst in parallel maintaining high efficiency and outstanding performance levels in terms of cyber security, data privacy and risk management. This strategy also goes hand in hand with heavy investment in the bank’s human capital; to put in place teams that are capable of keeping up with the pace of digital development and of fully utilising all the latest technologies being adopted. The bank’s human development philosophy is one built around the concept of dynamic development, with an ongoing drive to restructure teams and provide

extensive professional development opportunities across the organisation periodically; to ensure the right person is in the right position at the right time and that teams are empowered with the tools and skills needed to provide a comprehensive and next-level customer journey. The end product of this strategy has been an elevated, modernised and encompassing banking experience that continues to develop and grow with the needs of consumers.

Exploring new opportunities Beyond the realm of fintech and the customer experience, the economic impact of the pandemic has made it necessary for banks to carefully and strategically reconsider expansion and diversification plans, to ensure business continuity and long-term fiscal viability. For KIB, the pandemic actually resulted in market conditions aligning to produce one key area of potential growth: financing and investment opportunities.

Accordingly, the bank sought to develop and expand its financing activities across key sectors – both in Kuwait and abroad. The bank sought to pursue and develop key long-term strategic partnerships with economic stalwarts such as Zain and Equate, taking part in various successful investment opportunities that not only drove the bank’s own vertical growth and its efforts to diversify its investment portfolio, but also actively contributed to economic national development on the broader scale – establishing the bank as an industry dynamo able to lead and organise large financing operations on a bilateral basis.

Another area that has proven to be ripe with opportunities is the sukuk market. There is no doubt that sukuk have become a vital component of capital markets, critical for investment and liquidity, both domestically and internationally. After all, they help in overcoming various economic and financial challenges at the best capital cost, and they play an important role as one of the main tools for Islamic investment operations. Moreover, in recent years, sukuk issuances have helped foster Kuwait’s attractiveness for regional and global investors.

From this standpoint, KIB has made a real name for itself in this area, taking part in highquality sukuk issuances of all tiers involving some of the largest banking and financial institutions in the market. The high demand for KIB sukuk is also a vital indicator of the high level of trust that both local and regional investors have placed in the bank’s pronounced growth strategy – in addition to serving to reaffirm its sustainably strong financial performance. These sukuk issuances continue to support the bank’s business growth and development plans for the coming years, as KIB actively strives to position itself as a serious contender in this rapidly growing domain. Among the bank’s most notable contributions within this area was KIB serving as a Joint Lead Manager in both the $600m sukuk issuance for Ahli United Bank and the $500m issuance for Boubyan Bank. Regionally, the bank also participated as a Joint Lead Manager and a Joint Bookrunner in the issuance of QIB sukuk, the first of its kind from Qatar, and took part as Co-Manager in Masraf Al Rayyan’s $500m Senior Unsecured sukuk issuance and in Dubai Islamic Bank’s (DIB) $750m Senior Unsecured sukuk issuance. KIB also acted as Co-Manager for the Islamic Development Bank’s (IsDB) $1.5bn Sustainability sukuk issuance, another first of its kind sukuk that sought to mitigate the effects of the COVID-19 pandemic on IsDB member states.

KIB has also continued to diversify its portfolio, by completing a series of financial transactions in 2020 with great success, including its $300m sukuk issuance, as per Basel III standards; these were the highest rated tier two capital instruments in Kuwait and the GCC, as well as being the first USD Tier 2 sukuk from Kuwait to be listed on the London Stock Exchange.

Looking ahead, the bank is exploring various opportunities and prospects, as it aims towards active involvement in the sustainable growth and development of the overall investment infrastructure in the region. With its carefully mapped out – and admittedly ambitious – strategic plans firmly in place, KIB has carved a place for itself in a much-changed banking sector, where constant, proactive and innovative evolution is the new normal. n

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Private Banking

Increased friction The stock market upturn has been impressive, but there is no lack of threats to corporate profits. In the meantime, stimulus programmes are being withdrawn. Which is more important – the pace or the direction?

words by

Jonas Predikaka Global hEaD oF pRIvatE baNKING, caRNEGIE pRIvatE baNK

Inflation is here, and higher than expected.

Inflation-proof the portfolio with real assets, banks, robotification and companies with pricing power: they are the likely winners in an environment of higher cost pressure.

Growth in the world economy has peaked, we are approaching the apex of central bank liquidity injections and COVID-19 is still an uncertainty factor. Investors are moving into rougher terrain. Growth should remain above trend and is more likely to be subdued by supply issues than demand factors. The semiconductor famine is still ongoing, freight costs are sky-high, companies are having a hard time finding workers, and wages are accelerating.

Demand is likely to hold up, supported by budget stimulus packages, corporate investments and recovery in the service sector. On the other hand, the tax take on capital gains and labour has begun to rise in the UK and (soon) in the US. Growth is subsiding in China; the country is wrestling with over-indebtedness in the property sector and we have recently been hearing surprisingly harsh rebukes of business. Large central banks are easing up on the liquidity pedal, while smaller ones are already raising their reference rates. The stock market has taken this with equanimity thus far – a tapering without a tantrum. The economic impact of the pandemic will be determined by the race between vaccines and virus variants.

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Hot stock and bond markets are probably approaching a correction phase. The risk of rising long rates in the US is intensifying since Congress has agreed to raise the debt ceiling and the Fed is putting the brakes on its asset purchases. The central banks’ toolbox is orientated towards the demand side, and eliminating labour supply bottlenecks is getting trickier.

Returns can still be found through stockpicking companies that can set their own prices and are not exposed to risks in unpredictable supply chains. Profits recovered dramatically in 2021 and persistent (single-digit) profit growth in 2022 is entirely possible in the light of issued economic growth projections.

The virus is still generating uncertainty with Americans and Europeans heading indoors as winter approaches. High stock valuations and investor optimism imply significant risk of disappointments.

Carnegie Private Banking pocketed profits and reduced its overweight towards equities – at which point Nasdaq Stockholm had risen by about 30 percent this year. Other attractive investment opportunities are scarce in an environment characterised by minimal bond rates, low credit spreads and higher inflation. In ‘the return of inflation’ section, later in this article, we analyse these challenges and present a few investments in real assets.

The return of inflation increases incentives to protect assets against higher inflation. This favours real assets, including real estate and infrastructure, along with companies that can pass on rising costs to the end customer. Exposure to energy commodities and base metals is also of interest.

the Federal Reserve building, Washington, uS

Is the positive scenario intact?

Basically, several of the positive drivers are still in play. The economy is chugging along nicely and a lot of curves are pointing upwards. The year 2021 is looking like it will be very good from a growth perspective and the signs are also positive for the outlooks in 2022. Listed company profits are thus expected to grow next year as well. Still, we cannot get away from the fact that profit and macroeconomic momentum have probably peaked, meaning the acceleration rate is likely to slow. The reasons are that expectations have risen during the year and there should not be the same pent-up need for many goods and services next year.

The stock market thrives when data outcomes are better than expected and forecasts can be revised upwards.

We are seeing a similar pattern when it comes to stimulus packages. The central banks, with the US Fed leading the pack, are continuing to make the financial markets happy with liquidity, but that notwithstanding, the plan is to gradually slow the pace. The pundits are writing at great length about how this tapering is supposed to be a threat to the stock market, but we can count on the banks to move

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Private Banking

“2021 is looking like it will be very good from a growth perspective and the signs are also positive for the outlooks in 2022” launch various stimulus packages as soon as the economy shows signs of weakening, but China is now aiming to curtail the economic significance of the real estate sector.

Downshifting before a bump

very cautiously to avoid unwanted market turbulence. However, we cannot ignore that the next step is likely to be incremental reductions of the liquidity injections, and thus a little less of the good stuff. The fact that we have reached a peak in our base scenario regarding growth, the profit growth rate and liquidity makes us a bit more careful heading into the autumn and winter. If we also consider that the stock market is relatively highly valued and there have been no major corrections since October 2020, a vague sense of unease creeps in. Some investors have no doubt had enough time to get used to the pace over the last year and have begun to underestimate the risks of equity investments.

China: A new cause for concern There are other factors clouding the picture right now. The trend in China is often difficult to read. At present, we are witnessing some kind of economic slowdown combined with stricter regulations on certain industries and companies. China has been a key growth engine for the global economy, and if the country’s economy were to slow down more permanently, that would, by extension, mean problems for many other regions. Governments usually

30%

Increase during 2021 for Nasdaq Stockholm

10%

Level of price upturns recorded by the OECD

2.5%

Current inflation rate in Sweden

Our positive view on the stock market during the year was based on a strong economic trend, rising profits and massive liquidity injections trumping high valuations, certain bubble tendencies, inflation risks and the commonly moderate returns in the summer months of the year. We are now becoming a little more cautious, simply because we believe we have passed the peak and that risk/reward will be slightly poorer from here on out, meaning that the potential for further upturns is not much greater than for corrections. It should be noted, however, that we are not averse to equities.

Carnegie Private Banking is maintaining a small overweight against foreign equities.

The reason is that the low interest rate level is still providing strong support for share prices.

There is no doubt that TINA (there is no alternative) still applies. Although we can trace some upwards pressure on interest rates in the autumn, it would take fairly large upturns for this to be a problem. As we see it, the biggest risk over the next year is that the central banks will misstep in the tapering process, resulting in turbulence in the fixed income market.

We have placed the cash we freed up by lowering the equity weight in alternative investments. We still prefer this asset class over fixed income investments. Our forecast for rising rates combined with low credit spreads in corporate bonds indicates limited return potential going forward and this curbs our enthusiasm.

Nevertheless, fixed income instruments serve a certain function as diversification in a welldiversified portfolio. We see somewhat better potential for return in alternative investments, where our uncorrelated strategies have worked well in the past year.

The return of inflation Inflation is here – higher than expected and perhaps not as transitory as the central banks believe it will be. The US inflation rate has settled at an annual rate above five percent since May and inflation in the eurozone stepped up to three percent in August. At present, the inflation rate in Sweden is almost 2.5 percent. »

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Private Banking

“In our alternative portfolio, we are increasing the exposure to real assets including real estate and infrastructure” » The central banks have been trying to counter low inflation and growth since the financial crisis of 2008 by setting low and sometimes negative rates. In the past, holdings of cash and short nominal government bonds have been key instruments for managing risk and have produced positive real return. Today, such exposures cause a loss in purchasing power.

Regardless of whether or not inflation is here to stay, the central banks’ ‘kidnapping’ of nominal bonds makes asset allocation even more challenging. How should equity risk be balanced without digging into capital? Inflation-adjusted bonds have not been much help either because real interest rates have been low, often negative. There are, however, several indirect ways to protect capital against higher inflation. In our alternative portfolio, we are increasing the exposure to real assets including real estate and infrastructure. On the stock exchange, inflation can benefit certain sectors with pricing power, rising wages can work in the favour of companies in robotification, and bank stocks are likely winners if inflation results in rising interest rates.

Navigating in the rear-view mirror Central banks in the western world believe the current rise in inflation is temporary, without saying how long ‘temporary’ is. The Fed has been trying to nudge inflation upwards for decades. Along the way, it has also changed the inflation measure from the consumer price index (CPI) to the personal consumption expenditure (PCE) deflator. The calculation of housing costs has also been changed. Since 2020, the Fed has changed its policy from the inflation target of two percent to average inflation targeting of two percent.

The ECB also changed its policy as of this year and now follows a symmetrical inflation target of two percent, where the bank accepts up and down deviations. The aim of the new Fed and ECB inflation targets is for inflation to exceed the target for a period to compensate for earlier shortfalls. In addition, both central banks have purchased even more securities in response to the liquidity shortfall that followed the pandemic. This time, they did not buy only government bonds, but also bought housing bonds. The ECB and the Riksbank have also purchased corporate bonds.

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US President, Joe Biden

government bonds, which has made investors look increasingly further out on the risk and reward curve. This has resulted in a lowering of the entire yield curve, which has lowered the discount factor for standardised valuation models and thereby contributed to the inflation we have seen in risk assets (especially in growth companies) over the past 10 years. The Fed has explicitly stated that the bank is now acting based on outcomes and not projections – reactively instead of proactively, in other words. Navigating by what can be seen in the rear-view mirror implies a risk that the Fed will react too late, when higher inflation has already become entrenched.

Deglobalisation and demographics Inflation has fallen over the past 30 years in pace with rising globalisation as well as technological progress and digitalisation. It is hard to say whether these factors will become less counter-inflationary going forward, but globalisation is now taking a few steps back, not least due to chilly relations between the US and China. Global supply chains are being renationalised – including for subsidy reasons, like when US President Joe Biden’s electric vehicle initiatives focus on ‘all-American electric cars.’

Some also believe that the demographic effects of ageing populations have moderated inflation, as in the case of Japan’s ‘lost decade’ of deflation. Here as well, we are seeing a change. An increasingly older population can cause labour shortages and drive up inflation if automation and productivity do not increase to a corresponding extent.

China, which has added millions of workers to the total global workforce over the past 30 years, is one example. The country’s one-child policy was formally repealed in 2016 and three children are now accepted. But the labour supply is shrinking dramatically and the threat of moving production to China is not going to relieve wage pressure in the western world like it used to.

Major virus effects – but more than that An analysis of the CPI in the US shows that the latest price increases have been driven mainly

by Covid-sensitive goods. If the vaccination programmes also help global supply chains recover, there may be justification for the belief that the current increase in the inflation rate is only a temporary supply shock.

But a lot of things are getting more expensive and, even excluding pandemic-driven

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Private Banking

“The biggest risk over the next year is that the central banks will misstep in the tapering process, resulting in turbulence in the fixed income market”

Three winners in the face of higher inflation 1) Pricing power: Companies with a monopolistic position, less pricesensitive goods or a market-leading position are winners. When materials and purchasing costs rise in industry and consumer durables, the winners are the companies that can pass on these costs to the end customer.

2) The financial sector: Banks usually benefit in an environment of rising inflation and rising interest rates, especially when the interest curve gets steeper. Net interest income increases when the banks raise their lending rates. The banks are also interesting right now because they are raising dividends, which can compensate for higher inflation.

3) Robotification: Companies in automation and robotification are the winners when there are cost increases related to labour shortages (as we are now seeing in the US and China). This applies particularly when compared to labour-intensive manufacturing companies.

price hikes, US inflation is already above two percent. Energy prices and wage growth are both accelerating. The latter is problematic because wages are significantly more resilient on the downside than commodity prices. There is risk that trade barriers and reduced globalisation combined with expansionary monetary policy will raise the structural inflation rate.

The pandemic: a reflationary crisis Crises have often been deflationary over the past 40 years. They have been of a financial nature, where bubbles have arisen in asset prices that later burst – such as the financial crisis in Japan, the Swedish banking crisis, the dotcom crash and the financial crisis of 2008.

Inflation has often been pushed down due to weak demand when household and business indebtedness have been reduced.

Developments during the pandemic were not caused by economic imbalances. The pandemic has affected the supply side by impacting supply chains and freight prices, causing a component shortage and forcing production shutdowns. Demand has been stimulated by major financial and monetary policy support, which is why the pandemic has instead had a reflationary effect.

Finance Minister of Sweden, Magdalena Andersson

Four causes of inflation Different asset classes are helped or hindered by inflation to varying degrees. The drivers underlying the inflation are the critical factors. We primarily see four separate (but closely interlinked) inflationary factors: 1. Supply of goods and services: Controlled by the costs of taking goods to market. A supply-driven inflation shock may be due to wage growth or price increases in constituent goods, such as base metals or oil – there was runaway inflation in the 1970s in the wake of the oil crisis. Technological advances that make goods and production cheaper and more efficient help lower inflation – the chip manufacturing and robotification of the past 30 years, for example.

2. Demand for goods and services: Controlled by individuals’ needs, budgets and willingness to pay. Inflation is often driven by demand outstripping supply, which sometimes takes time to increase – by building housing, for one such example. An expansionary monetary and fiscal policy has increased demand for housing, primarily in the US, where house prices are up 20 percent on an annual basis

(Sweden: 13 percent). Price upturns of nearly 10 percent have been recorded for the OECD as a whole.

3. Money supply: American economist Milton Friedman famously said, “Inflation is always and everywhere a monetary phenomenon.” In a nutshell, this means that prices, and economic activity by extension, are directly proportional to the supply of money in circulation. This was the basis for how former Fed chair Paul Volcker chose to deal with the runaway inflation of the 1980s: by suddenly hiking the benchmark interest rate to reduce the money supply.

4. Expectations: Americans were persuaded that the Fed was willing to take all necessary measures to get the price trend under control, which was critical to Volcker’s success. If households and businesses expect prices to be higher in a year’s time, they plan their finances accordingly by either bringing forward or postponing certain consumption and investment decisions. Wage earners who believe prices are going to go up demand higher wages to keep as much of their purchasing power as possible. »

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“There is risk that trade barriers and reduced globalisation combined with expansionary monetary policy will raise the structural inflation rate”

Demonstration against the Nord Stream 2 gas pipeline, Berlin, Germany

A better climate comes at a price Greenflation refers to higher costs due to climate action. Some believe the oil price may remain high for a long time due to strong political resistance to new extraction of oil. Demand and prices for aluminium and copper, the two most important metals for electrification and green transition, have risen sharply. New extraction of these metals has impact on the environment, which can trigger protests from environmental groups and government intervention. Mines in Alaska and smelting plants in China (which produces 60 percent of all the aluminium in the world) have been forced to shut down or limit production. The prices of natural gas and electricity are currently exploding in Europe – before the arrival of winter. One reason is that Europe has scrapped coal power and shut down nuclear power plants and renewable energy is not meeting demand. Emission allowances have surged. Russia has cut its gas exports to Europe – the Russians might need the gas for themselves, or they might be aiming to hasten the opening of the Nord Stream gas pipeline that runs between Russia and Germany. » Inflationary environment investments We have actually not seen a lot of inflation in central bank measurements since the financial crisis, but we have seen enormous asset price inflation, including in real estate, equities and, above all, bonds. Although there is little to suggest that consumer inflation is going to skyrocket to 1970s levels, more investors and managers are presumably abandoning the view that inflation is ‘extinct’ or ‘dead.’ For the first time in a very long time, we can expect somewhat higher inflation in the next few years.

The central banks are presently indicating that they will begin dismantling the current support purchase plans this year and might begin raising interest rates somewhat in 2023.

This will have varying impact on asset prices.

Cash and long nominal bonds are called ‘junk investments’ by some because they reduce the holder’s purchasing power, but should, as in the past, be more resilient in the face of a possible major stock market downturn.

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Natural resources and commodities: Inflation often goes hand-in-hand with rising commodity prices. The best protection is found in commodities such as energy commodities (oil and natural gas) and base metals (steel, copper, aluminium). Broad exposure to commodities also protects against inflation. The exposure can be obtained through both broad-based and niched ETFs, but also through certain specialised hedge funds.

Commodity producers: Producers of commodities and materials, such as mining and energy companies, benefit from higher commodity prices – they profit immediately when the goods they sell get more expensive. Exposure is obtained via individual equities or sector ETFs. Real estate: Directly owned real estate has historically provided good protection against rising inflation. Higher prices for building materials increase the building replacement cost and makes it more difficult for new supply to reach the market. Higher inflation thus

makes existing properties more attractive. Real estate assets with long leases, such as commercial office and industrial properties, are often automatically adjusted for inflation. There is some sluggishness in residential properties, but a certain level of protection against inflation is achieved as long as rents are regularly renegotiated. Higher interest rates are a risk for properties with a high loan-to-value ratio, but property owners with long-term loans at fixed rates run less interest rate risk. Nominal loans can also be repaid using ‘inflated’ money (SEK). As long as interest rates do not rise too quickly, real estate should provide good protection against inflation in general. Exposure to real estate is obtained by purchasing shares in property companies. Directly owned real estate provides more direct protection against inflation, but it is more difficult for private individuals to obtain exposure here.

Infrastructure: Infrastructure assets share many inflation-proofing characteristics with real estate assets, such as value growth through higher replacement costs, but also higher income from their utilisation. For example, through government regulation, electricity networks have built-in inflation and interest rate components in their pricing structures.

Infrastructure assets are even more difficult for investors to obtain exposure to – it is easier to buy a rental property than it is to buy an electricity network.

Alternative strategies for managers who do not exclusively invest in the traditional asset classes (equities and fixed income securities) should have equally good chances to generate returns regardless of whether inflation is high or low. Global macro strategies, for example, can take both short and long exposure in fixed income investments, currencies and commodities.

Relative value strategies, which exploit mispricing among the same or similar assets and are not dependent on price changes, are another alternative. n

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Financial Recovery

Inf lation: friend or foe?

In response to the economy-crippling stagflationary era of the 1970s, the two percent inflation target was adopted by many central banks as a means of preserving purchasing power.

But what are the implications of raising this target?

A delicate balance words by

David Worsfold FEatuRES WRItER

Inflation is starting to cast a shadow across developed economies as they emerge from the COVID-19 pandemic. It has jolted central bankers and policymakers out of their comfort zone with the totemic two percent target suddenly slipping away from them. Since the global financial crisis, gentle inflation has been seen as the friend of stable, growing economies.

Now, it is looking to break the shackles central banks thought they had firmly affixed to it.

Some economists and analysts see higher inflation as a benign influence in economies with high levels of debt but that ignores its corrosive effect on savings and those on fixed incomes, such as pensions. Others are warning of the threat of stagflation, and a return of the economic blight of the 1970s, when a grim combination of low growth and inflation rates of 20 percent crippled the UK and other western economies. The two percent inflation target adopted by the Federal Reserve, Bank of England, European Central Bank and others emerged out of that era of high inflation and was then cemented into policy in the wake of the 2009 global financial crisis.

“It was a bit of an accident,” says David Morrison, senior market analyst at UK-regulated online trading platform Trade Nation. “It came in when we were coming off the back of very high inflation in the late 1980s when inflation was still in double figures. It started with the New Zealand central bank and by the mid-90s most central banks were moving towards it, although the Federal Reserve didn’t officially embrace it until 2012.”

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According to the OECD, normally cautious in its inflation forecasts, the US and the UK are unlikely to see inflation fall back to that two percent target until well into 2023, although it predicts other economies might withstand inflationary pressures better (see Fig 1).

This will mean a constant stream of headlines about inflation exceeding the two percent target, but most economists believe central banks will live with those rather than change the target. It is a delicate balancing act. Raising the target would not be without its benefits, but the risks outweigh those, says Martin Beck, senior economic adviser to the EY Item Club.

“A higher inflation target, if achieved, would imply nominal interest rates being higher than otherwise. This would give central banks more room to cut rates when a shock hits. So there’s certainly some theoretical benefits from raising the inflation target. The problem is how it could be achieved. Most major central banks have undershot their targets over the last decade and the risk is that loosening policy sufficiently to achieve the higher target would cause inflation to overshoot and spiral upwards.”

Inflation is not just about numbers, debate over a few percentage points and the likely impact on interest rates. It is also about expectations, and that is a danger gnawing away at policymakers, says Beck. “A higher inflation target would also increase the chances that the public would start to pay more attention to inflation, and so it would bear more on pay demands.

One of the triggers for rising inflation in the 1960s and 1970s was the fading of ‘money illusion.’ As inflation began to creep up, workers became more aware that growth in pay was being eroded by rising prices and sought to offset that with larger pay demands.”

“Expectations are everything. Going out to deliberately push inflation up by raising the two percent target is an extremely dangerous thing to do. It can easily get out of control,” says Morrison.

Tempering trust Keeping a lid on people’s expectations – and fears – about rising prices is one of the reasons why central bankers and politicians keep stressing their belief that the current inflationary pressures are only transitory. This was the theme adopted by the Governor of the Bank of England, Andrew Bailey, in his pre-budget letter to the Chancellor of the Exchequer, Rishi Sunak, in which he blamed the exceptional volatility of post-Covid economic activity on the hikes in energy and fuel prices and supply chain strains pushing up transport costs.

Bailey is also cautious about being manoeuvred into a situation where the bank raises interest rates but inflation does not respond. This is a seminal moment for central banks and one of the central tenets of monetary policy in the 21st century. If they raise interest rates and the impact they have on demand is minimal, accoRDING to thE people will start to oEcD thE uS aND thE lose faith in their ability to control inf lauK aRE uNlIKEly to tion. This concern is SEE INFlatIoN Fall very real, says Kieran bacK to that tWo Cleere, head of sales pERcENt taRGEt uNtIl trading for the market WEll INto 2023 risk solutions team at Silicon Valley Bank.

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Fig 1

OECD Inflation forecasts for 2022 n June n Sept

published October 2021

US Japan Germany France UK Italy Canada 0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

SOURCE: OECD

“At its core the monetary policy lever is a demand tool. Central banks will be asking themselves the very same questions as the markets at large: what has been the catalyst for the broadbased price increases? Where supply bottlenecks are driving prices not only is increasing rates unlikely to have a material impact but, on the contrary, it risks throttling a nascent, if faltering, recovery. If supply constraints are driving prices the question has to be whether the monetary Aladdins are the right people to put the fiscal genie back in the bottle?”

The alternatives for the central banks are to talk tough, hoping that they are not called into action before they can be effective. “History tells us that inflationary expectations and central bank credibility are the key to inflation dynamics”, says Vladimir Potapov, CEO of VTB Capital Investments.

He believes that talk alone might not be enough and that central banks might have to take the plunge and raise interest rates. “The famous economist John Cochrane says that fighting inflation is like deterring an enemy. If you just say you have the tools that’s not very scary. If you tell the enemy what the tools are, show that they all are in shiny working order, and demonstrate that you have the will to use them no matter the pain inflicted on yourself, deterrence is much more likely.

So, central banks should demonstrate that they are ready to act and we believe that is what most central banks are doing right now.”

Emerging market central banks are already starting to move in this direction with Singapore announcing its first serious tightening of

monetary policy for over three years in midOctober. The major central banks are now expected to follow with incremental increases over the next few months.

Most believe significant moves by the major central banks are unlikely, partially because the pressure on prices is being driven by supply factors and partially because the impact on households and businesses of any precipitous rise in interest rates could be detrimental. This is very much the view of the EY Item Club, says Beck. “Higher interest rates would do nothing to resolve supply problems or bring energy prices down but would add to the pressure on household finances from higher prices and welfare cuts.”

He doubts the Bank’s Monetary Policy Committee (MPC) would want to risk damaging the recovery by raising rates too far, too soon. Inflation may be looking as if it has few friends but those holding large amounts of debt – governments, businesses and households – have often benefited from the diminution of their debt burden in real terms in the past, especially if they can cope with the burden of the higher interest payments that usually accompany higher inflation.

Inflation acceptance Cleere thinks governments will be quietly relaxed about modestly higher levels of inflation, calling their response nuanced. “Going forward the servicing and paying down of debt burdens will be front and centre of treasury minds around the globe as economies re-establish a normality. Given the scale of stimulus provided,

tax increases alone cannot rein in debt without fear of crushing economic activity. For this reason, a tacit approval of inflation is going to inform part of any future approach to deleveraging nations.”

Indebted businesses might not be so sanguine if their interest payments start to rise, warns Morrison: “Even in the junk bond market, spreads have come right down and poor business have been able to borrow the money.

Once those spreads start widening then we are heading for trouble.” Failing businesses would do nothing to ease the supply side pressures, many of which are global, but would be a serious drag on economic growth. This is a gloomy prospect but one canvassed as a very real threat by several leading economists, including Professor Nouriel Roubini from the Stern School of Business at New York University. In a recent article (in The Guardian) he dismissed the role of inflation in reducing debt as holding more dangers than potential benefits.

“As a variety of persistent negative supply shocks hit the global economy, we may end up with far worse than mild stagflation or overheating: a full stagflation with much lower growth and higher inflation. The temptation to reduce the real value of large nominal fixed-rate debt ratios would lead central banks to accommodate inflation, rather than fight it and risk an economic and market crash.

“But today’s debt ratios (both private and public) are substantially higher than they were in the stagflationary 1970s. Public and private agents with too much debt and much lower income will face insolvency once inflation risk premia push real interest rates higher, setting the stage for stagflationary debt crises.” For most of this century inflation sat benignly on the economic sidelines clutching its two percent target. It looked to be everyone’s friend. It is rapidly losing those friends as it casts aside its former constraints. n

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Financial Recovery

Pioneering the new era in banking The past 18 months have radically transformed our way of living and working due to the pandemic, and the changes in the banking industry have also been profound.

The commitment that Banorte has with the Mexican people led to the acceleration of its digital transformation to their benefit and assumed a key role in the sustainable recovery of the economy

words by

Carlos Hank-González chaIRMaN, GRupo FINaNcIERo baNoRtE

It has been more than 18 months since the COVID-19 lockdown and the pandemic has dramatically reshaped our lives both personally and professionally. While these have been challenging times to live through, we are also seeing first-hand how the pandemic is fuelling innovation at an extraordinary scale, from the scientific breakthroughs behind the lifesaving COVID-19 vaccinations, to the technological advances that have facilitated a worldwide pivot to working remotely.

Progress has been rapid, effective, and driven by need. Now, as the world looks to move towards recovery, these innovations will continue to revolutionise our post-pandemic lives. For the banking industry, the pandemic has served to accelerate many of the digital changes that were already well underway. For Banorte in particular, the challenge has been to expedite our digital programmes to meet the evolving needs of our customers.

The digital transformation at Banorte For years, a digital revolution in the banking industry had long been overdue. At Grupo Financiero Banorte, we have been working steadily to expand our digital offerings for many years and have been paving the way into the Mexican banking sector when it comes to both digitisation and personalised services.

As part of that journey, we have launched many innovations, including features for our mobile banking app ‘Banorte Movil’; as well as passed several milestones by becoming the first bank in Mexico to offer a wide variety of digital features to our clients, such as: a mobile token 74

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in 2011; a digital debit and credit card that can be generated instantly in 2013; identity verification via selfie in 2016; and credit cards and mutual funds available from the app in a matter of minutes in 2019. For over a decade we have focused on our exploratory and research analysis on how to seize technological opportunities, and how best to meet the consumers’ changing needs.

Undoubtedly, this preparatory work served us well when the crisis struck, and we were forced to accelerate what we had planned for the next five years to occur in less than one.

Having laid the groundwork for that digital transformation, we found ourselves wellplaced to serve our customers when the pandemic arrived. As social distancing guidelines impeded in-person branch visits, our customers pivoted to digital with remarkable ease. In just one year, we observed an increase of 1.2 million customers using our digital services, with only four percent of transactions taking place in branches. While this growth is certainly something to celebrate, Banorte is not stopping yet; we still have much more to do to achieve our digital vision.

Recently, we signed a strategic agreement with Google Cloud to continue the IT modernisation across all our platforms and services, truly propelling Banorte towards a more technological and innovative future. The agreement will also get Banorte closer to artificial intelligence (AI) when it comes to data analysis, which will allow us to provide hyperpersonalised experiences for our customers as we deepen our understanding of their needs.

In a similar vein, in 2020 we also signed a joint venture with Rappi, a Latin American tech ‘unicorn,’ to develop a new generation of digital financial services within the superapp, another exciting initiative to add to our growing portfolio.

1.2 million Extra customers using banorte’s digital services since the pandemic

A strategy with customers at the centre When it comes to Banorte’s approach to service, the pillar is quite simple: the customer is at the core of everything we do. That is why we are always working to better understand our customers, their needs, and their unique circumstances. We know that each individual – and indeed, each small business – is different, thus we strive to offer a highly personalised banking experience to each of our customers.

At Banorte, we believe that hyper-personalisation is the key to retain a competitive edge in this challenging industry. Increasingly, in all aspects of their lives, customers are demanding more personalised experiences and tailor-made offers, and banking is no different. Fortunately, every customer interaction provides us with valuable real-time data on their individual banking habits and lifestyles.

We are then able to use AI to analyse this data, which helps us create a profile of each of our customers and offer them products and services in return, while simultaneously improving our branch efficiency in terms of sales and cost savings. This way, prioritising personalised experiences has proved beneficial to Banorte as well as to our valued customers.

Today, customers require access to a wide range of services while also feeling reassured that they are not compromising their security when banking digitally. If their needs are not

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Financial Recovery

Grupo Financiero Banorte’s CEO, Marcos Ramírez-Miguel (left) and Chairman, Carlos Hank-González

It is our goal to seamlessly combine our branch-based services with our digital efforts Banorte headquarters, Santa Fe, Mexico

met by their current bank, we can fully expect them to switch – after all, digital acceleration has made it easier than ever before for customers to change banks. With all this in mind, it is safe to say that the world of digital banking is becoming incredibly fast-paced and competitive.

While Banorte’s portfolio of digital products has been incredibly popular with its customers, we also understand that some customers continue to value the traditional banking experience. It is our goal to seamlessly combine our branch-based services with our digital efforts, ensuring a flexible experience that works for all whether a customer prefers to bank inperson or on their smartphone.

Solidarity with Mexicans However, it is not just our digital products that have aided customers during the COVID-19 crisis. Guided by solidarity and our commitment to Mexicans, we were determined to stand by our customers from the very beginning of the pandemic. We are proud to have become the first bank in Mexico to offer its customers a loan deferral programme in response to the pandemic. Since we introduced this scheme, which allows for deferrals on payments from four to six months, more than 630,000 loans were deferred, providing customers with buffer time.

During these unprecedented times, we are also committed to keeping our staff and our customers safe. Our remote work policy is still in place, with 60 percent of employees continuing to work from home, which has proven a more efficient way to work – on top of the reduced COVID-19 exposure risks, of course.

These actions are not only a result of our commitment to customers and employees, but they have made us aware of the profound reassessment of values all people and organisations are going through.

The financial industry is key Understanding this new set of needs individuals have takes us one step further in the banking industry. As a part of the financial sector, we must find opportunities in the crisis and embrace our key role on the path of economic recovery, which will also depend on our capability to transform ourselves and upgrade our business as necessary.

To attain long-lasting relationships through value-added proposals, we should consider working with all our stakeholders and understand that the context has changed. For a true recovery to take place, it must be comprehensive and sustainable. We already see clear signs of recovery. The main economic indicators are showing us that people and investors’ trust is back.

In Mexico, there has been an important growth in the economy as well as in consumption, investments, and credit. Although we should not claim victory yet, we must celebrate what we have already advanced together. Perhaps the challenges of the last year and a half did not allow us to go as far or as fast as we expected, but the pandemic has unleashed new opportunities. For Banorte, the mission is very clear: to be the engine of the recovery in Mexico by honouring our commitment to Mexicans to help them get ahead and fulfill their dreams.

Decarbonising our business During the pandemic, we have kept our environmental, social, and governance (ESG) strategy at the core of our operating model and will continue to build on it in the years to come. This means that the environmental aspects of our commitment are as important as the social and governance ones. As a founding member of the UN’s Net Zero Banking Alliance, we are fully committed to decarbonising our operations, as well as our loan and investment portfolios by 2050. Moreover, we are also a founding member of the UN’s Principles for Responsible Banking, and for over 10 years, we have pioneered best practices on social and environmental risk management in credit portfolios within the Mexican banking industry.

As we look towards the future, our ESG principles will continue to define our business model. In our digitisation strategy, we are also committed to exceeding and generating best practices by placing our customers first. Marrying the very latest technologies with our deep customer knowledge and understanding, we hope to go above and beyond our customers’ expectations, always striving for excellence as we shape the banking industry of tomorrow. n

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Healing the economic scars of the pandemic The great recovery begins after 18 months during which global economies have been tested to breaking point, but for those countries burdened with state-owned enterprises, the task will involve much-needed reform as a first step, writes Selwyn Parker The global finance industry may have survived the pandemic more or less intact, but now it finds itself in the forefront of a long recovery as gaping economic scars heal. And the wounds are deepest in those regions that were struggling even before the pandemic for what the International Monetary Fund describes as “strong, sustainable, job-rich and inclusive growth.” By general consent, the hardest-hit were the Middle East, North Africa and central Asia, most of which are burdened by large, relatively inefficient state-owned enterprises (SOEs) that were idled throughout the pandemic, draining state coffers and raising compelling issues for governments. Some countries in these regions have hundreds of SOEs while at least one, Azerbaijan, with a population of 10.25 million, has several thousand.

As global output collapsed by roughly three times more than during the financial crisis of 2008 (as well as in a much shorter period), the banks also found themselves supporting millions of privately owned companies, notably those in smaller tourism-dependent economies. As these regions fight back from the economic ravages of the pandemic, the finance industry has a huge window of opportunity. These institutions will be expected to back sovereign loans as governments raise money to restore their nations to a more secure footing while also providing finance for privately owned firms that, it is hoped, will emerge from the wreckage to take over the SOEs’ role 76

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and do it better. As an IMF study released in September points out, the recovery provides a golden opportunity to reform SOE-dominated economies. “These organisations are used for a wide range of purposes, including supplying basic goods and services, advancing strategic interests, addressing market inefficiencies, and meeting social objectives,” the IMF explains.

“They are also involved in a wide range of activities that are often carried out by private firms in other regions – and they often act as the employer of first and last resort.”

An absence of information In short, many of these sprawling organisations suffer from bloated staff numbers, endemic inefficiencies, poor corporate governance and confused functions, causing considerable damage to public finances. Overall, argues the IMF, the absence of proper information about nonfinancial SOEs, which is most of these organisations, means it is difficult to know whether “they contribute to economic development or impose a drag on the economy.”

But reform can start now. Starting with a forensic examination by each country of the role, functioning and cost of its SOEs, a consensus of economic organisations such as the IMF, European Bank for Reconstruction and Development, World Bank and OECD recommend a wholesale spring clean of these unwieldy organisations. ‘Know what you own,’ is their collective advice.

As individual functions of SOEs are hopefully hived off to private enterprise, banks will be in a better position than government to provide start-up credit. And, given the vast sums of public money unconditionally sunk into support for SOEs, the banking industry will also be better placed to manage them out of debt.

Thus the industry faces nothing less than a societal mission in these regions. By rescuing SOEs and funding privately owned alternatives, the scars are forecast to heal more quickly. “Without resolute measures to address a growing divide between advanced and emerging economies, COVID-19 will continue to claim lives and destroy jobs, inflicting lasting damage to investment, productivity and growth in the most vulnerable countries,” fears IMF economic counsellor Gita Gopinath.

The most vulnerable countries are those with the least resilient economies. The numbers tell the story. The average fiscal deficit in the most advanced economies – generally, those that can tap cheap credit – rocketed to 9.9 percent, to 7.1 percent for emerging ones and to 5.2 percent for low-income nations. Yet, the most indebted countries will bounce back the soonest. Indeed they already are.

As a governor of the US Fed, Lael Brainard, rejoiced recently; “The economy is reopening, consumer spending is strong, and hundreds of thousands of workers are finding jobs in the hard-hit leisure and hospitality sector each month.” But the US can tap the cheapEmergency funding given est credit and boasts by the IMF to 85 countries the highly resilient, private sector-dominated economy that SOEburdened countries lack. That’s why India, Malaysia, Taiwan and Thailand all announced an extra fiscal stimulus towards the end of 2021 that must be paid back eventually.

More vulnerable countries have been given lifelines. The IMF handed emergency funding of $117bn to 85 countries and another $50bn is speeding up lagging vaccination programmes, the essential first step to economic recovery. The Next Generation European Fund is boosting struggling EU member states with a further €750bn. And in August, $275bn out of the IMF’s general allocation of $650bn in Special Drawing Rights, the largest in history, was earmarked for emerging and developing countries. In the long run though, there is only so much that these lifelines can do without root-and-branch reform of many thousands of SOEs. n

$117bn

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crypto age A new era for the

El Salvador’s big, bold decision to adopt bitcoin as legal tender has been met with both praise and derision. But does the move take cryptocurrency out of the financial shadows and into the mainstream? Rachel Richards investigates »

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I

n January 2009, as the world was reeling from a financial meltdown of near unfathomable proportions, a new currency was born. A decentralised digital currency for the postcrisis age, bitcoin promised an alternative to the mainstream financial system for those who found themselves suddenly suspicious of the traditional banking institutions of decades past. From its earliest days of trading, bitcoin had its fervent supporters. While some dismissed it as an underground fad, others believed that bitcoin was truly the future of money, and imagined a utopia where crypto replaced cash. These voices have only grown stronger over the course of the last decade, as bitcoin has enjoyed a meteoric rise, moving rapidly from the financial margins into the mainstream.

Now a $2trn industry (see Fig 1), cryptocurrency is no longer an underground phenomenon. In September of this year, El Salvador made history by becoming the first country in the world to adopt bitcoin as legal tender. On the other side of the Atlantic, Ukraine is said to be hot on its heels, with plans to adopt bitcoin as legal tender, according to reports. For early proponents of bitcoin, this feels like a landmark moment, confirming what they always believed to be true: that the future of currency is crypto.

However, while bitcoin has its supporters, it is not without its sceptics. Many economists view cryptocurrencies with suspicion, with regulators in both Europe and the US issuing warnings on the dangers of trading with crypto. Its highly volatile nature means that El Salvador’s bitcoin experiment is something of a gamble – and we are yet to see whether it will pay off. But with one country paving the way with crypto, others may soon follow suit. For better or for worse, El Salvador could be the start of a digital currency domino effect.

$2trn

Within El Salvador itself, meanwhile, two-thirds of citizens Current value of the work within the incryptocurrency industry formal economy, and 70 percent do not have bank accounts.

A desire to tackle Value of the industry this unique set of just 12 months ago economic circumstances seems to have driven El Salvador’s decision to embrace cryptocurrency. President Nayib Bukele – who at the age of 40 is often described as Latin America’s first millennial President – has championed crypto as a path to both financial inclusion and independence for Salvadoran citizens. It is his hope that the move could save Salvadorans up to $400m a year in transaction costs on remittances, while

$800bn

giving access to financial services to those who are currently unbanked.

“In El Salvador, we are trying to start the design of a country for the future,” Bukele said in a video message broadcast to the Bitcoin 2021 conference in June of this year, where he first announced his plans to formally adopt the cryptocurrency as legal tender. “In the short term, this will generate jobs and help to provide financial inclusion to thousands outside the formal economy. In the medium and long term, we hope that this decision can help us push humanity at least a tiny bit into the right direction.”

Legal tender Following the announcement of Bukele’s crypto-vision for El Salvador in June, a bitcoin bill was passed, requiring all Salvadorian busi-

Fig 1. Two trillion dollars’ worth of crypto

In developing economies across the globe, crypto appears to be gaining mainstream appeal

market caps of cryptocurrencies (usd Billions)

2,220

Brave new world Big problems often require radical solutions.

El Salvador has long been plagued with a number of very particular economic woes: a small, central American country of just 6.5 million citizens, the nation’s economy is heavily reliant on remittances – money sent home from the two million Salvadorans who are currently living and working abroad. With expatriated Salvadorans sending more than $4bn back to their home country every year, remittances make up one fifth of El Salvador’s total GDP. 80

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1,172

602 283

All SOURCE: CoinMarketCap

Bitcoin

Others

Ethereum

85

78

Binance Coin

XRP

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Fig 2. global cryptocurrency adoption index

nesses to accept payment in bitcoin as well as the US dollar – the nation’s existing legal tender – effective from September 7. To mark the launch of the nation’s new bitcoin era, all Salvadoran citizens were gifted a digital wallet called Chivo (Spanish slang for ‘cool’), with $30 of credit pre-loaded for each user to spend.

While this may all sound very promising, the reality proved to be rather more challenging than perhaps anticipated. The country’s landmark bitcoin adoption day was beset by technical difficulties – the Chivo digital wallet was forced offline for hours after government servers were overwhelmed by an influx of signups, and President Bukele took to social media to complain that app stores on Apple and Huawei devices were not yet hosting the government-backed app. Elsewhere, it was reported that ATMs were running out of money, as citizens rushed to convert their $30 bitcoin holdings into cash. In the capital city, more than 1,000 people took to the streets in protest of the bitcoin adoption, setting off fireworks and burning a tyre in front of the Supreme Court building in an impassioned display of opposition to the law change.

“Like all innovations, El Salvador’s bitcoin process has a learning curve,” Bukele said in a tweet, reflecting on the rollout. “Not everything will be achieved in a day, or in a month.”

While there may have indeed been noble intentions behind El Salvador’s bitcoin experiment, it’s clear that creating a crypto-utopia is going to be a very hard task for tech-savvy Bukele to pull off. Opinion polls show that the overwhelming majority of Salvadorans remain unsure as to how bitcoin actually works, while the currency’s extreme volatility is yet another

Nayib Bukele, President of El Salvador, the first country in the world to adopt bitcoin as legal tender

Country Vietnam India Pakistan Ukraine Kenya Nigeria Venezuela United States Togo Argentina Colombia Thailand China Brazil Philippines South Africa Ghana Russia Tanzania Afghanistan

Index score 1.00 0.37 0.36 0.29 0.28 0.26 0.25 0.22 0.19 0.19 0.19 0.17 0.16 0.16 0.16 0.14 0.14 0.14 0.13 0.13

source of anxiety for many. At a time when pandemic-related economic uncertainty remains rife, it is understandable that bitcoin feels like too large of a gamble for some sceptics. And yet, despite the many teething troubles that El Salvador has encountered, it looks like a number of other countries are now looking to follow in its digital footsteps.

The path to financial freedom?

El Salvador is one of a growing number of developing economies that have been gravitating towards cryptocurrencies. In Mexico, Cuba and Venezuela crypto transactions are fast becoming a part of daily life, allowing for fast, cheap and reliable cross-border transactions in countries that also rely heavily on remittances.

Just one day after El Salvador officially adopted bitcoin as legal tender, Panama introduced a draft bill that aims to recognise bitcoin as an alternative payment method – suggesting that the cryptocurrency domino effect may already be underway.

The phenomenon isn’t unique to Latin America, either. In developing economies across the globe, crypto appears to be gaining mainstream appeal. Each year, leading blockchain data company Chainanalysis publishes its Global Cryptocurrency Adoption Index, listing the world’s top 20 countries for crypto

Overall index rating 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Ranking for individual weighted metrics feeding into Global Crypto Adoption Index On-chain value On-chain retail P2P exchange received value received trade volume 4 2 3 2 3 72 11 12 8 6 5 40 41 28 1 15 10 18 29 22 6 3 4 109 47 42 2 114 17 33 27 23 12 7 11 76 1 1 155 5 7 113 10 9 80 18 16 62 32 37 10 8 6 122 60 45 4 53 38 7

adoption (see Fig 2). In the 2021 ranking, 19 of the 20 countries listed are emerging and frontier markets, reflecting a surge in usage in developing markets. From South-East Asia to Sub-Saharan Africa, cryptocurrencies are gaining a significant foothold – and are quietly filling gaps in the market that traditional financial services were never able to penetrate.

It should perhaps be unsurprising that crypto has enjoyed such success in the developing world. After all, many developing countries were also early adopters of mobile payments, with citizens both urban and rural leapfrogging traditional financial products and moving straight into the world of remote, cashless payments. The best-known success story is Kenya’s M-Pesa, a mobile-money platform that has recently hit 50 million users across Africa, and that has been credited with expanding financial inclusion across the continent by enabling payments and transfers among the traditionally unbanked. While it goes without saying that cryptocurrency is an entirely different world to that of mobile payments, the early success of such technologies may have paved the way for the digital currencies of today.

Developing nations As is the case with El Salvador, crypto’s potential to enable cheap cross-border transactions »

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» is central to its appeal in developing nations around the world. Migrant remittances are a significant source of income for low- and middle-income countries, totalling approximately $554bn worldwide at the end of 2019, according to the International Organisation for Migration. That said, sending money back home can be a slow, complex and above all, costly exercise for many migrants living abroad. The UN estimates that currency conversions and fees on international transfers eat up approximately seven percent of the total amount sent through remittances every year – a considerable percentage of what is a crucial source of income for some of the world’s most economically vulnerable people.

In areas of instability, conflict or hyperinflation, meanwhile, crypto is proving to be something of a safety net to many. In Afghanistan, cash all but dried up following the Taliban takeover in September, forcing banks to close and seeing citizens struggle to purchase food and other basic necessities. A freezing of foreign aid has aggravated the unfolding humanitarian crisis in the country, while money transfer services MoneyGram and Western Union temporarily halted services in Afghanistan in the weeks following the US military’s withdrawal – cutting off many Afghans from a critical source of income in a desperate time of need. For those seeking an urgent solution to the nation’s cash crisis, crypto has offered a much-needed lifeline, with the conflict-ridden country seeing a surge in cryptocurrency usage among its citizens in 2021. Indeed, in Chainanalysis’ Global Cryptocurrency Adoption Index, Afghanistan now ranks seventh in the world for peer-to-peer crypto transactions. Last year, however, it didn’t even appear on the list.

In a similar vein, Libya, Palestine and Syria are all near the top in global online searches for bitcoin and other forms of cryptocurrency, while downloads of bitcoin wallet BlueWallet grew by 1,781 percent in Lebanon in 2020, as the country continues to grapple with an ongoing financial meltdown. In times of conflict and crisis, it would seem crypto offers a way to circumvent broken systems and to provide some financial protection to those in real need.

No safe bet Cryptocurrency is far from being the perfect cure to the world’s many financial ills. It has, undoubtedly, been a useful – and at times, necessary – tool for some of the world’s most vulnerable citizens. But it is not without its flaws.

In more developed economies, there remains a more sceptical outlook on crypto, both among economists and the wider population alike. Indeed, in the US and Europe, crypto82

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The Salvadoran government is currently exploring options to mine bitcoin using geothermal power

680,000

currency payments are far from being an ever yday oc- Visa transactions have the currence for most same carbon footprint as a citizens. The world single bitcoin transaction of crypto remains s ome t h i ng of a niche subculture, largely dominated by semiprofessional traders and blockchain aficionados. There is also a significant gender imbalance among traders, too – in the US, 76 percent of current crypto holders are men.

The main criticism of crypto, however, is that it is notoriously volatile in price. Thought to be 10 times more volatile than most major currencies, the market value of cryptocurrencies such as bitcoin can fluctuate by hundreds of dollars in a single day, making crypto a highrisk investment for many. Regulators have repeatedly warned about the dangers of investing and trading in cryptocurrency, citing this unpredictable and extreme volatility as one of their most pressing concerns. Price fluctuation not only puts people’s personal finances at risk, experts warn, but could potentially threaten financial stability across multiple different markets. In October, Bank of England Deputy Governor Sir John Cunliffe called for urgent cryptocurrency regulation, citing financial stability concerns. In a speech given at Sibos, an annual banking conference, he compared the current crypto boom to the rocketing value of US subprime mortgages before the catastrophic 2008 global financial crash. Without rapid intervention, he argued, a potential crypto crash could plunge the global economy back into another 2008-level crisis.

“When something in the financial system is growing very fast, and growing in largely unregulated space, financial stability authorities have to sit up and take notice,” he said. “They have to think very carefully about what could happen and whether they, or other regulatory authorities, need to act.”

In 2021 alone, cryptocurrencies have surged by around 200 percent to an estimated value of $2.3trn – up from $800bn in 2020.

As Cunliffe noted in his speech, subprime mortgages were valued at around $1.2trn in 2008, and triggered a global financial meltdown of unprecedented proportions when borrowers began defaulting on loans. With the fallout from the 2008 crash still fresh in economists’ minds, it is hardly surprising that regulators are setting alarm bells ringing when it comes to crypto’s seemingly unstoppable growth (see Fig 3).

Environmental issues And crypto’s inherently volatile nature isn’t the only cause for concern. There is also growing unease among sceptics and aficionados alike over bitcoin’s environmental impact. Bitcoin mining – the process through which ‘new’ bitcoins are created – is incredibly energy intensive. In order to be awarded a new bitcoin, ‘miners’ must use their computers to solve a series of incredibly complex puzzles. Whoever solves the puzzle first is awarded a new coin to their computer.

However, solving the problems requires the use of incredibly powerful specialised computers, which then need to run at full capacity, burning through an extraordinary amount

Fig 3. year of the Cryptocurrency % change in price 2021

Dogecoin

+7,555%

Maker Ethereum Dash

+760% +324% +198%

Litecoin

+115%

Bitcoin

+113%

SOURCE: Statista

B an k ing on Bi t c oin

$4bn

Despite the initial glitches and setbacks, El Salvador’s bitcoin Amount expat Salvadorans gamble has already send home each year achieved some undeniably impressive results. As of October, Approx cost in transaction 30 bitcoin ATM machines have been infees for these remittances stalled in major cities in the US, including Los Angeles, Houston and Chicago, in Of Salvadorans do not the hopes that Salpossess a bank account vadoran expats will use Chivo to send money back home. The plan appears to be working – in a tweet posted on October 16, President Bukele told his followers: “today, we received 24,076 remittances, adding up to $3,069,761.05 (in one day).”

When it comes to the environmental aspect of bitcoin, too, the country also appears to be making some progress. Aware of the growing concerns surrounding the cryptocurrency’s carbon footprint, the Salvadoran government is currently exploring options to mine bitcoin using geothermal power. A pilot project has been set up at a geothermal power station near El Salvador’s Tecapa volcano, where 300 stateof-the-art mining computers are currently being powered by electricity generated from the volcano’s high-pressure steam. In El Salvador, where geothermal electricity already accounts for a quarter of domestic energy production, volcano-powered mining could be the solution to bitcoin’s dirty problem.

$400m

70 percent

of energy during each mining operation. As a result of this energy intensive process, the Cambridge Centre for Alternative Finance estimates that a single bitcoin transaction has the same carbon footprint as 680,000 Visa transactions. Already, this considerable carbon consumption is beginning to damage bitcoin’s reputation on the global stage. In May, Tesla CEO and long-standing crypto advocate Elon Musk announced that his electric car company would no longer be accepting bitcoin for car purchases, due to pressing concerns over the currency’s environmental impact.

“When there’s confirmation of reasonable (~50 percent) clean energy usage by miners with positive future trend, Tesla will resume allowing bitcoin transactions,” Musk said in a tweet, clarifying his position. Environmental concerns also played a role in the World Bank’s decision to decline a request from El Salvador to assist with implementing bitcoin as legal tender. The central American nation approached the World Bank earlier this year, seeking technical assistance with its plans to formally adopt bitcoin as an alternative national currency. “While the government did approach us for assistance on bitcoin, this is not something the World Bank can support given the environmental and transparency shortcomings,” a World Bank spokesperson told Reuters in July.

If crypto continues on its current upwards trajectory, the inconvenient truths surrounding its environmental impact and its inherent volatility will surely become increasingly difficult to ignore.

An undefined future Like all modern innovations and technological advances, the world of cryptocurrency is a fast-moving one. In little over a decade, crypto has gone from a niche, abstract idea to a $2trn industry. Bitcoin’s introduction as legal tender in El Salvador marks a pivotal moment in the

history of cryptocurrency, but the journey certainly isn’t over yet. In many ways, it feels like this could just be the beginning, as countries around the world look to potentially follow El Salvador’s lead. No matter the outcome of the Salvadoran bitcoin experiment, one thing is for certain – governments across the globe will be watching closely, and taking notes.

Less than one month on from the Bitcoin Law coming into effect in El Salvador, more people are said to have a Chivo bitcoin wallet than a traditional bank account. According to President Bukele, three million Salvadorans are now using Chivo – almost half of the country’s total population. By contrast, only a third of Salvadoran citizens are believed to have a bank account. It’s amongst these unbanked citizens that bitcoin is likely to be having the greatest impact. For those with access to a smartphone but not to a bank, payments, deposits and money transfers are now available to them at the touch of a button. While financial inclusion may have previously been a real economic hurdle for El Salvador, now digital literacy is perhaps the most pressing challenge, as the Bitcoin Law means little if citizens don’t fully understand the financial options available to them.

The world watches on It is still far too early in El Salvador’s bitcoin journey to draw any firm conclusions on its success or lack thereof. But it certainly seems likely that the country’s bold experiment will fuel a new flurry of activity in the world of digital currencies. Most of the world’s central banks are already looking to create their own versions of digital currencies, with the Bank of England announcing in April that it is exploring the possibility of launching a new form of digital money to exist alongside cash and bank deposits. According to a report by PwC, 60 governments around the world are currently working on some form of Central Bank Digital Currency (CBDC), with 88 percent of those under construction said to be based on blockchain – the same technology that powers bitcoin. With so many CBDCs being tested, the question is not if they will be introduced, but when.

As for whether any countries will be as bold as El Salvador in adopting any form of cryptocurrency as legal tender, that remains to be seen. For now, the future of crypto remains as unpredictable as its market value. n

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company, which is sometimes worth much more than their financial assets. Since it is pure risk capital, it must be taken into account when it comes to investments. Above all, the needs of the company must also be considered. For this reason, we will continue to enhance the synergies with BNL’s corporate banking – a necessary choice if we want to look at customers’ assets as a whole. This liaison with corporate business is important and has become increasingly central to our overall approach, paving the way for our local clients to operate at an international level, on a global stage with BNP Paribas Group.

The four pillars of wealth management The guiding principles by which BNL BNP Paribas meets the needs of its clients are applicable across many different industries and guarantee to those willing to abide by them a secure foothold on the upward path to success Our wealth model words by

Stefano Schrievers hEaD oF WEalth MaNaGEMENt, bNl bNp paRIbaS

There are many different ways of interpreting wealth management. On the one hand, there are those who focus on pure and ‘simple’ portfolio management, which is often far from simple. On the other hand, we have the consulting models that consider that service as a commodity, with limited added value. Between the two poles, there are infinite shades. We are inclined to view financial asset management as a solution. And not because that activity has lost its dignity. It remains essential.

However, in a market context like the current one, we are convinced that we need to broaden the analysis. And after all, the customers we turn to have much more complex needs. The synergy at BNP Paribas group level in wealth management is constant and strong, in order to bring the value of a large international group to its Italian clients. There are few pure wealth management players in the Italian market with a dedicated structure and strategy. HNWIs need dedicated offer and service models, but individual requirements must be articulated, because each customer is different from the others.

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A systematic method is needed. At BNL BNP Paribas, the wealth management model has four pillars when it comes to consulting needs: certified quality, integrated vision, effectiveness, and a 360-degree approach. To ensure quality, we have built and launched an ‘excellence academy’ that started in October 2021: an ambitious and concrete initiative, it was developed with SDA Bocconi to certify the quality level of BNL BNP Paribas wealth managers.

This is a 24-month training course, developed internally, at the end of which bankers obtain a certification in wealth management, issued

by SDA Bocconi. We built it together, but the teachers and the evaluation criteria are from the university’s school of management, one of the most prestigious in Italy. The training course is completed in a series of classes dedicated to analysing a wide array of potential issues identified by the individual operational managers of BNL BNP Paribas. This certification is for every one of our wealth managers; they attend it before receiving their final certification.

An integrated vision Many of our wealth management clients are entrepreneurs. It does not make much sense to limit yourself to looking only at liquid financial assets, which omits the fact that typically the most important asset of these families is their

An integrated approach Our third pillar is a means of organising work in a systematic way, preparing and planning each meeting with clients along with all other associated activities, with a minimum horizon of 15 days. Finally, the correct approach is needed. We are building a network of advisors, wealth planners and credit specialists who work in total support with the banker, developing a relationship founded on shared knowledge. The method we are applying is conceptually based on a very deep analysis of the client’s assets and the role of the wealth manager is now becoming more and more like that of a senior banker, one with an overarching view of a client’s needs. The essential focus must always be on this archipelago of needs in order to develop a healthy working relationship with the client.

Banker remains the relationship owner In the world of business, being a door opener isn’t just about a sense of responsibility, it’s about being highly attuned and conscious of others, and we manage this at BNPP by bringing quality via a huge span of solutions and services to our clients. We are about to launch a consultancy service that provides the possibility for the client to access all advisory services whenever and however they want, and that is offered on the basis of a pricing that provides for an all-inclusive commission, measured according to the size of their assets. Furthermore, this offer also allows for a dedicated wealth advisor, who supports the banker with the aim of bringing a specialist view directly to the client.

It is just one of the many innovative ways in which we are transforming wealth management to offer transparent and timely advice.

Here, value for money is the key.

Certified quality, integrated vision, an effective system and approaching customer needs from every conceivable angle. These are the ways that BNL BNP Paribas are leading the way in its industry. n

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Wealth Management

Emerging stronger from the pandemic We are now looking towards the end of this challenging tunnel after long periods of lockdowns, restrictions, countless hours of remote working and volatile markets. However, the risks ahead have not been eradicated, and we should prepare to overcome them

words by

Dimitris Kantzelis cEo, xSpot WEalth

While all recent research shows that the COVID-19 pandemic might be a thing of the past by the summer of 2022, it is not over yet. The last 18 months have proven to be crippling for most people on many different levels. Nevertheless, it has acted as a catalyst for necessary changes as we prepare to exit the COVID-19 era wiser, stronger and better in all aspects.

Many believe we now need to structure our choices around a more sustainable way of living to navigate these difficult times. The reliance on technology has been critical in keeping the world’s interconnectedness afloat while broadening the use of platforms. We believe it will fuel a decade of technological evolution; unlike anything we have experienced in the last 50 years in all sectors. Global financial markets went through unremitting periods but proved very resilient for those who were well prepared. Subsequently, our investors remained confident through these difficult times and are now reaping the benefits of the economic recovery.

The impact on global financial markets The markets went through some very turbulent times during March 2020, where implied volatilities of stocks and oil spiked to crisis levels. The stock markets dropped as much as 30 percent while oil traded at below $0 per barrel. This was caused by a surplus in sup86

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ply and a significant drop in demand due to the coronavirus pandemic. Simultaneously, credit spreads on non-investment grade debt dramatically increased as investors braced for a once-in-a-lifetime catastrophe.

However, the governments and central banks were prepared to take all necessary steps and supported the economy significantly. The US alone has brought an extensive fiscal stimulus of more than $5.8trn in three tranches. Two of them under the Trump administration, the $3trn stimulus in spring 2020, the $900bn stimulus in December 2020 and another $1.9trn stimulus this March from President Biden. Of course, we are also expecting the $2trn infrastructure bill to follow soon. The combined total exceeds $7.8trn in contributions to households and businesses.

Comparatively, the sum is a far more extensive response to the COVID-19 crisis when compared to the 2008 global financial crisis.

Arguably, the above stimulus has sparked fears that hyperinflation will stay for years to come. The counterargument proposes that most of the financial support went directly to households to protect them from rising debts and helped them to increase their savings.

These savings will prove vital if the Federal Reserve and central banks decide to delay their monetary tightening. Central banks not fulfilling their mandates to maintain inflation below two percent is a base case scenario for our investment committee. Otherwise, increasing yields could take indebted companies to bankruptcy, and a recession will follow. Consequently, the trillions spent to deter a decadelong recession will be immaterial.

Investors are keen to get back to normal We see some risks associated with rising consumerism in sectors like real estate. Consumers refrained from making purchases during the pandemic. This helped build up a backlog of demand that became apparent after Q2 2021 when the first signs of recovery emerged.

As a result of rising inflation, investors are keen on placing their bets once again in the real estate market, but things are a bit different this time. The real estate market has rapidly corrected since the drop from its all-time highs.

We firmly believe it can promptly bring new highs with the recorded demand from domestic and international investors, especially in developed capitals.

These developments are not isolated to the real estate market. Despite fears of a slowdown, the global economy shows signs of stability, with the stock markets preparing for another positive year. Nasdaq predominantly led the rally as tech stocks were resilient during the pandemic and made the case for digital evolution in a short period. While we believe tech stocks will continue their incredible performance for years to come, our focus has turned to value sectors and banking since the beginning of this year.

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Wealth Management

$1.26bn Value of treasury shares purchased by banks in a four-day period in August

We believe that global stock and bond markets will move to the next phase of mature growth, which will be reflected in investment flows As we revert to everyday life and habits, specific sectors will begin to outperform during the following years. For instance, health companies will be of great importance in any portfolio. This is because people getting out of this pandemic now understand how R&D can prevent this from reoccurring. Additionally, mRNA technology will rise as a new approach to medicine.

Infrastructure companies are another area we are focusing on. Emerging from the pandemic our habits changed quite a lot and we believe that the ‘working from home’ concept will become mainstream for many companies, so fewer people will be required to commute to and from their physical offices. Additionally, the huge spike in digital retail sales during the pandemic will force retailers to re-think their physical presence with local branches.

We expect infrastructure companies to play a significant role in transforming our cities. The $2bn infrastructure investments will – apart from demand – help to increase the supply side, which is vital to the economy and public finances. Another sector we have already invested in is banking. With all the turbulence in 2020, banks have shown that they are well capitalised and prepared to play a significant

role in helping reshape our economies. That is why we believe banks are going through one of their best periods in history. All big banks announced better than expected profits. They were much higher than the estimates in several cases, causing a sharp rise in their stock price.

Many banks have increased or are expected to increase the dividend they distribute to stimulate investment interest. However, the most important clue comes from the repurchases of own equity. Since the end of 2020, this practice has been allowed and utilised by banks. Subsequently, repurchases of own shares are intensifying month by month. Between August 9 and August 13 alone, banks bought $1.26bn worth of treasury shares. No other sector carries out more intense share buyback programmes. According to a report by BofA, a study of similar data from 2020 shows that banks have a strong chance of outperforming all other sectors in the coming months.

Our post-pandemic expectations We believe that global stock and bond markets will move to the next phase of mature growth, which will be reflected in investment flows.

Thus, we will experience a decade of growth in stock markets.

At XSpot Wealth, we analyse all possible scenarios and prepare our different plans with complex stress testing tools to respond to sharp market movements. All our plans are expected to produce great results by the end of 2021, a year that many believed would be negative for the stock markets. We have strategically shifted away from treasuries in riskier plans. As the economic trajectory continued to improve, we added an ESG-only thematic plan to our offerings. Not only do we believe flows in ESG investments will keep increasing but that returns of such investments will prove far more attractive.

With the markets entering the mature growth phase, capital movements to the banking, tourism, hotel, energy, and value sectors are already visible. There may even be an attempt for more sustainable growth in China.

As time goes on, the situation in China is quite likely to start its normalisation course.

As always, global markets will show signs of normalisation earlier, and that is why we are closely following the developments regarding a possible change in trend. Trading volumes in Chinese ETFs continue to be large. This is a very positive indicator as a potential trend change will have a solid basis. There is a particular focus in the Chinese technological sector, which is now trying to break the uptrend of the last six months following its recent drop.

Digital disruption is the way forward At XSpot Wealth, our teams are working to augment artificial intelligence in most business actions. Our Robo-advisor program is designed to address clients’ needs better, faster and in a more efficient way. These developments are essential as private investors are moving away from the traditional models.

We are expanding quickly and our clientele is growing at a rate that is 30 percent faster than last year as we prepare to expand in the Middle East with our office in Dubai.

Furthermore, we have started offering our technology to regional banks, asset managers and family offices, to expand our reach and strengthen institutions. This is achieved through a robust solution that can easily connect to existing infrastructures. This can contribute to the development of their offering through the automation of operations and the provision of advanced and personalised services to their customers. We are helping to provide a cost-effective solution with reduced risk and access to the world’s top-rated custodians and prime brokers. n

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Indebted no more Debt forgiveness, something of a taboo in the previous decade, is now being discussed more frequently, courtesy of the pandemic and climate change

words by

Alex Katsomitros FEatuRES WRItER

Just a few years ago, the idea would send shivers through the market. Raising the debt ceiling prescribed by the Stability and Growth Pact, a set of rules governing the eurozone, from 60 percent to 100 percent of GDP would spark a new round of questions over the solvency of highly indebted countries such as Greece and Italy. And yet, it came from the most unlikely source: the European Stability Mechanism, an institution tasked with supporting eurozone members under financial distress.

Faced with a pandemic that sent debt levels to unprecedented heights, the eurozone has launched a consultation process to revise rules hitherto seen as sacrosanct, particularly among fiscally frugal northern members. However, the idea of overhauling the debt ceiling still faces an uphill task to be adopted. “It’s a politically ‘feel-good’ measure, but it would change neither the existing level of debt nor the fact that interest rates have to remain low for it to be sustainable,” said Rui Soares, an investment analyst at FAM Frankfurt Asset Management.

Europe’s debt conundrum Eurozone budget rules were suspended during the pandemic to offer governments some leeway to deal with the impact of lockdowns, but will come back into force in 2023. However, the crisis has brought even more radical ideas to the table. In November 2020, Riccardo Fraccaro, an aide to the then Italian Prime Minister Giuseppe Conte, suggested that the European Central Bank (ECB) should cancel government bonds it bought during the pandemic, effectively writing off a large chunk of sovereign debt.

The idea was picked up by a group of prominent economists and politicians who argued in an article published by Euractiv that debt forgiveness of ECB-held sovereign debt would provide fiscal space for a quick and green-orientated recovery. “The post-Covid era must not be a return to what was ‘normal’ before the crisis, but a profound transformation that the current stimulus programmes do not guarantee,” 88

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Jézabel Couppey-Soubeyran, an economist at Panthéon-Sorbonne University and one of the article’s signatories, told World Finance.

Proponents of debt cancellation invoke the massive bailouts of private banks during the global financial crisis in the early 2010s as a precedent that justifies a sovereign debt writeoff of similar magnitude. However, it is another crisis that still haunts European policymakers. Those who still remember the long saga of Greece’s near default in 2015 fear that opening up such a politically fraught debate would be a distraction from Europe’s more acute problems. When ECB President Christine Lagarde was asked about the prospect of debt forgiveness, she starkly dismissed it as a violation of EU treaties: “I don’t even ask myself the question – it’s as simple as that,” she said. Many analysts also note that investors are more worried about historically high levels of private debt, with highly indebted ‘zombie companies’ becoming increasingly vulnerable after the end of pandemic relief programmes. “The problem is not public debt, but high levels of private debt,” Soares said. “Even if you restructure public debt, you can’t normalise monetary policy. If interest rates were to increase significantly, many private borrowers would collapse.”

One reason why debt forgiveness remains controversial is the risk of moral hazard. Europe’s fiscal hawks fear that it would incentivise debt-addicted countries such as Italy, whose public debt surpassed 154 percent of its GDP in 2021, to keep borrowing without implementing necessary reforms. “You have some pressure for the system to reform, which is better to do without debt restructuring. You see it in Greece, Spain and Portugal, whose economies are structurally on a better footing compared to 2010,” Soares said.

At the centre of the debate is the key tool of central banks in tackling growing debt levels: quantitative easing (QE). During the pandemic, the ECB launched a €1.85trn bond-buying programme that is due to expire in March. Its critics argue that QE is a form of indirect financial assistance to states that creates social tensions, as it benefits rich asset holders and causes asset price bubbles. Debt cancellation would help governments increase public investment and allow central banks to taper off QE harmlessly, according to Couppey-Soubey-

Riccardo Fraccaro, who suggested the Ecb should cancel government bonds it bought during the pandemic

ran. Sceptics retort that extreme times require extreme measures. “The solution is quantitative easing at infinity – keep low interest rates forever,” Soares said, adding: “What is ‘back to normal’? Why wouldn’t the ECB be able to keep quantitative easing forever? Japan’s had quantitative easing for over 25 years and is not going back to the so-called normal.”

Another line of criticism of debt cancellation focuses on its practicality. In an article published last March, several prominent French economists argued that cancelling sovereign debt would be a form of accounting gimmickry that would change little, since it would cancel sovereign bonds already held by national central banks. Governments, they argued, should instead gain fiscal room by taxing high-net-worth citizens and multinationals. “If you were one of the wealthiest people in Europe, you would be happy to see that policymakers want to cancel debt, rather than tax you,” said Anne-Laure Delatte, an economist and researcher at Paris Dauphine University.

America’s student debt crisis In the US, the pandemic has added a new twist to a debate that has been raging for several decades: what to do with the over $1.7trn of student loans owed by 43 million Americans.

The Biden Administration has approved over $9.5bn of student loan relief, allowing borrowers to skip payments, accrued interest and

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Wealth Management

$9.5bn

Amount of student loan relief approved by the Biden Administration

“The burden is disproportionately borne by borrowers of colour, especially women who are paid less for the same work and frequently have to drop out of the workforce to provide care.

The Biden Administration has also given up on offering free community college in its ‘Build Back Better’ agenda, which could potentially halve the cost of a college degree,” said Elizabeth Shermer, an academic at Loyola University Chicago and author of Indentured Students: How Government-Guaranteed Loans Left Generations Drowning in College Debt.

A tool to tackle climate change

Even if you restructure public debt, you can’t normalise monetary policy.

If interest rates were to increase significantly, many private borrowers would collapse default for approximately two years, with payments expected to restart in February.

However, critics claim that this does not go far enough. During his campaign, Biden supported the idea of student loan forgiveness, but so far he has resisted calls from leftwing Democrats to cancel student debt up to $50,000, stating that he will only support cancellation of loans up to $10,000. Other government officials, including the Secretary of Education Miguel Cardona, have signalled that broader debt forgiveness is still under consideration.

Blanket debt forgiveness would be counterproductive, according to Sandy Baum, a sen-

Fig 1

ior fellow at the Washington DC-based Centre on Education Data and Policy and author of a book on student debt: “Borrowers with high levels of education generally worked remotely through the pandemic. They are not the people who are struggling economically now. Most borrowers can and should repay the money the federal government gave them to help finance their educational expenditures.”

What makes student debt a political hot potato is its correlation with another issue dominating US politics over the last two years: race.

African American graduates owe on average $25,000 more than their white counterparts.

Government debt to GDP ratio Percentage

225 200 175 150 125 100 75 50 25 Greece Italy Portugal Cyprus Spain Belgium France Euro area EU Croatia Austria Slovenia Hungary Germany Finland Ireland Slovakia Poland Malta Netherlands Romania Latvia Lithuania Czechia Denmark Sweden Luxembourg Bulgaria Estonia

0

SOURCE: Eurostat

Notes: 2021 Q1

Strangely enough, the pandemic is putting to rest the idea that rising public debt is a problem that has to be addressed at all costs. Many hope that higher inflation will slowly kill it off, as happened with massive levels of debt following WWII. The healthcare crisis has also rekindled the debate on whether there is a specific debt/ GDP ratio over which public debt is not sustainable. Although this was assumed to linger around 120 percent during the European sovereign debt crisis, many economists point to massive increases of public debt during the pandemic as proof that chasing specific debt targets is a chimera. At the height of the pandemic last year, eurozone government debt ballooned from an average of 86 percent to close to 100 percent of GDP (see Fig 1); France’s debt is approaching the 120 percent threshold, while even traditionally fiscally prudent countries such as the UK have come close to surpassing 100 percent. “Financial markets are shortsighted and have very short-term memories,” said Delatte. “In the past, many countries have quickly recovered from credit events. There is no empirical evidence about the level of debt/ GDP ratio above which public debt is not sustainable.”

What makes the idea of debt restructuring more appealing to those who were until recently opposed to it is the battle against an enemy deemed more dangerous than COVID-19: climate change. The Brussels-based Bruegel think tank found in a recent study that EU countries will need to sacrifice up to one percent of their annual GDP to meet EU goals to cut carbon emissions, justifying changes in EU rules that would exempt green projects from debt calculations. The bloc is also considering a plan to grant developing countries relief from bilateral debts in reward for green investment, including an initiative to forgive $8.5bn of South African debt on the condition that the country will close most of its coal plants. “The world is not getting back to normal,” said Delatte. “We will need more public spending and investment in green innovation to protect citizens against climate change. So the main risk is not taking up more debt, but not spending enough.” n

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Tax & Legal

The papers phenomenon: of information, law and (dis)order Various leaks of data over the past years have brought to light a trove of private or concealed financial information, but are invasion of privacy and demonisation of offshore companies absolutely indispensable?

words by

Thierry Afschrift MaNaGING paRtNER, aFSchRIFt tax & lEGal

Swiss Leaks, LuxLeaks, Paradise Papers, Panama Papers and now the Pandora Papers: 12 million confidential documents from the archives of firms specialising in the creation of offshore companies in so-called tax havens.

The phenomenon of the papers and leaks is in full swing and causing strong reactions among the public and major upheavals among the political class; however, some aspects of this ‘practice’ raise substantial ethical and legal questions.

Tax evasion is illegal and therefore legally and socially unacceptable; it can neither be 90

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condoned nor advised. It is obvious that exposing patterns of fraud can be useful for the authorities, in order to know the scale of the problem and the methods used by fraudsters and their advisers, whose names are also exposed. This allows authorities to undertake all necessary steps to counteract these illegal schemes, whether national, European or international, mainly at the OECD level, where the committee on fiscal affairs is ensuring the urgent implementation of the main base erosion and tax shifting (BEPS) actions in this area.

These actions aim to neutralise the effects of hybrid mismatch arrangements, design effective controlled foreign company rules, limit base erosion through interest deductions and establish financial payments and mandatory disclosure rules. While the explanation of fraud schemes may be of educational interest, the

publication of the names of the beneficiaries of offshore companies can only be of theoretical interest to the ordinary citizen.

Total (while uncontrolled) disclosure As previously said, this way to proceed poses many problems on legal, ethical and social levels. It should be emphasised from the outset that the facts are presented to a largely nonspecialised public, which has difficulty distinguishing between tax fraud (an illegal practice) and tax avoidance (a perfectly legal practice).

Political statements exacerbate this confusion, such as the recent statement by the Belgian minister of finance: “Avoiding tax through off-shore constructions is fraud.” This statement must of course be tempered.

Firstly, it is obvious that an offshore company (like any other structure or company, wherever it is established) is nothing more than an instrument. And like any instrument, the offshore company is not legal or illegal in itself: it is its use that may or may not be. An offshore company is therefore not necessarily an instrument of tax fraud.

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Tax & Legal

12 million

confidential documents leaked from companies in so-called tax havens

tax JuStIcE DEMaNDED by thE publIc IS INtERpREtED IN a pEculIaR Way: pEoplE Do Not aSK to pay lESS tax, but RathER that othERS pay MoRE Subjected to a multitude of media and political statements, and lacking the technical skills to understand the situation properly, the average citizen thus loses sight of another important issue: the fact that they are being very heavily taxed. Thus, curiously, public opprobrium is directed against those who have tried to escape, even legally, from heavy taxation, rather than against governments that constantly increase the tax burden to cover their excessive public spending. In this way, the ‘tax justice’ demanded by the public is interpreted in a peculiar way: people do not ask to pay less tax, but rather that others pay more.

This is a curious attitude, since the state’s argument that increasing the tax base (notably by combating tax avoidance) would allow the average citizen to pay less in taxes has never been verified in reality: tax revenues increase over time but taxes never decrease.

An attempt on human rights On an ethical level, it is unacceptable to put fraudsters and people who use an offshore company in a perfectly legal manner on the same footing. The latter are subjected to an unprecedented attack on their privacy for absolutely no reason, especially since, at the time these documents are revealed to the general public, no one knows whether the beneficiaries of such structures have acted improperly

or not. Moreover, while the revelation of such information is always widely publicised, the results of the ensuing investigations are rarely known, so much so that the proportion of fraudsters among those whose private lives have been exposed to the public is unknown.

Some of the practices denounced are common in everyday life. For example, a former political leader was accused of having acquired a company that owned a building, rather than the building itself. This very common transaction is stigmatised on the grounds that the company in question was established in a tax haven, but it has not been argued that if it had been a local company, he would not have made the same saving. After the right to privacy, it is therefore the principle of proportionality that falls victim to the lack of nuance in this way of communicating: starting from the incorrect assumption that the offshore company is an instrument of fraud, it is deduced that anyone who uses an offshore company is necessarily a fraudster and that, in general, the use of offshore companies is to be banned. However, it is also true that a large number of people defraud by means of structures established in their own country, but no one has ever suggested banning their use. To ban (the use of) a tool on the grounds that some people may misuse it makes no sense.

Finally, this phenomenon raises important legal issues. The problem of violation of privacy has already been mentioned above. Article 8 of the European Convention on Human Rights proclaims the right of everyone to respect for “their private and family life, their home and their correspondence.” Admittedly, restrictions exist when they are “prescribed by law” and are “necessary in a democratic society.” It is difficult to see, though, how dumping millions of non-anonymised documents on the internet, in bulk and without any prior filtering, could be considered as an attitude prescribed by any law, in a democratic society. Moreover, once published, these documents are subsequently examined by national authorities and serve as a starting point for tax audits, criminal investigations, and sometimes as a basis for tax adjustments and criminal prosecutions.

These documents and the information they contain are, legally, the result of a theft, often in violation of the professional secrecy obligations of their holder, and their disclosure constitutes a violation of the right to privacy and the secrecy of correspondence. It is difficult not to notice the singularity of this approach, which has been frequently validated by the courts, and which consists of fighting, in the name of legality, fraud by means of data illegally obtained by a third party.

The principle thus overrides an exception that is not as exceptional as it should be, and

therefore the property and privacy rights of the beneficiary of an offshore company give way to the ‘necessities of a democratic society’ (be it freedom of expression or the duty of the state to prosecute violations of the law), making the publication and use of illegally obtained data legitimate, whether directly or indirectly.

A quest for proportionality and balance Is this acceptable? Opinions differ on the subject, but it cannot be denied that the use of stolen information by the authorities to achieve their ends is shocking in principle and in most cases, making unfiltered and non-anonymised data public constitutes a disproportionate step with regard to the right to privacy and the presumption of innocence.

In the future, even if this practice should be deemed legally or morally acceptable, the release of such data should at least be regulated to protect the rights of the citizens concerned (many of whom are beyond reproach). In the middle ages, only the names of the convicts were called out and shamed by town criers.

These days, the European Court of Human Rights, to the detriment of human rights, considers that states have an obligation to regulate the exercise of freedom of expression to ensure adequate protection of the privacy and reputation of citizens. As for the press, it must assess the repercussions of its publications, which are supposed to generate a ‘debate of general interest.’ While the issue of the use of offshore companies may well be the subject of a general interest debate, it is doubtful that the disclosure of the names of the beneficiaries (especially those whose actions are not of general or even public interest) can be of any interest in the context of such a debate.

This is in fact the whole problem with these leaks: it leads to confusion and very often results in a disproportionate infringement of the rights of beneficiaries. Tax avoidance is equated with tax fraud and the beneficiary of an offshore company with the fraudster, while at the same time, the use of stolen documents appears to be acceptable in order to achieve a ‘higher’ goal, even if nobody knows whether the proportion of fraudsters among the beneficiaries justifies such a breach of the legal rules.

Furthermore, the personal data and assets of thousands of people are subject to uncontrolled publicity, often with disastrous consequences on both personal and economic levels, even though they often have nothing to blame themselves for.

In this highly media-driven context, public and governments often disregard the fact that proportionality is also essential in a democratic society, especially when it comes to reconciling values of equal strength that are on a collision course. n

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Investment Management

Finding your way on the digital road Across many sectors the pandemic has acted as a catalyst for the adoption of digital channels, and in the Philippines, BDO Trust was able to do this while also advocating for financial wellness, inclusion and literacy to encourage a nation of savers to become investors

words by

Rafael G. Ayuste, Jr. SENIoR vIcE pRESIDENt, hEaD oF tRuSt aND INvEStMENtS GRoup, bDo uNIbaNK

2020 was quite a challenging year for all of us.

Lives and businesses were severely disrupted due to the pandemic. As we crossed over to 2021, there was cautious optimism that this would be a year of recovery and rebuilding. We were right to be cautious as the second wave of the pandemic hit. The Delta variant of the COVID-19 virus caused havoc to local and global economies alike, enforcing another round of lockdowns and slowing economic activity in the process. Fortunately, the vaccine rollout in the Philippines has also progressed throughout the year and we saw more Filipinos get fully vaccinated, which consequently led to the gradual reopening of the economy.

The ‘We Find Ways’ mentality Similar to 2020, BDO Trust and Investments Group (BDO Trust) has constantly been on hand to assure clients that it is in full control of their investments, transitioning from being defensive to counter market volatility to becoming opportunistic to gear investment portfolios in preparation for recovery and growth.

BDO Trust continues to service clients by embodying the ‘We Find Ways’ mentality, ensuring that clients get access to investment opportunities despite the challenges of community lockdowns. Digital technology, through email and mobile messaging systems, is highly utilised to share investment ideas that can help to manage investment funds, encourage investment opportunities or simply to reassure.

Video conferencing and collaboration tools are used to execute initiatives such as our investment teleconsultation service, Market Sense and the Practical Investor webinar series. The BDO Invest Hotline and BDO Invest Online provide safe alternatives for clients to carry on with their investment transactions even if 92

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most bank branches are already open. These measures not only allowed us to increase wallet share from our existing client base, but the same communication tools were also used to acquire new markets that successfully brought in fresh funds.

For our institutional clients, we now offer a holistic approach to retirement fund management services, which is truly unique in the industry. We believe that it is important not only to provide adequate returns for the company’s retirement funds but also address the needs of the ultimate beneficiaries – the employees.

Through the BDO Pension 360, companies can empower their employees in augmenting their funds for retirement through the BDO Easy Investment Plan and the Personal Equity and Retirement Account, and provide them with a facility to responsibly manage their regular retirement payout through BDO easy pension pay. As a testament to BDO Trust’s ability to remain nimble and adapt despite the disruptions of the pandemic, clients invested more in 2020 and continue to do so in 2021, increasing BDO Trust’s leadership in the trust and investments space in the country with a 24 percent market share with trust assets under management of PHP1.183trn ($23.66bn) as of August 31, 2021.

Preparing for the future The ongoing pandemic has helped accelerate the use of technology among Filipinos. For the past year and a half, digital transactions have massively increased. Groceries, supplies, discretionary purchases, and banking have seen a surge in digital traffic. Investing is no different.

BDO Trust’s invest online facility allowed clients to invest in the BDO UITFs from the safety of their own home.

Increased transparency through BDO Invest Online reassured clients that their money was still safe during the pandemic. Moreover, having the means to continue transacting has allowed clients to take advantage of opportunities during this period of economic recovery.

BDO Invest Online’s end-to-end investment

process, from account opening to transaction fulfillment, places it at a competitive advantage to its competitors, most of whom require a visit to the branch. This same straight-through digital process is also available for its programmed investments, the BDO Easy Investment Plan.

Currently, only BDO Trust has the capability to show both the client’s segregated portfolio via an investment management or trust account and a UITF account in the same online portal, providing the client with a full 360-degree view of their investment portfolio.

BDO Trust is the only Personal Equity and Retirement Account (PERA) administrator and PERA product provider that allows investors to open an account and invest in PERA products fully online, digitising an otherwise 30-minute face-to-face process, revolutionising the onboarding experience and making it more accessible to the intended market who are the overseas Filipino workers. PERA is a voluntary retirement account that is meant to supplement a Filipino’s social (GSIS or SSS) and/or corporate pension benefits. It provides tax exemption benefits to contributions of a yearly maximum of PHP100,000 ($2,000) to encourage longterm retirement savings.

BDO Trust continues to invest for the future to better serve digitally savvy investors and to provide more value to customers. Enhancements to its digital channels are already ongoing for a seamless and consistent customer experience through multiple channels.

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Investment Management

24%

Market share for BDO Trust in the trust and investments space

$23.66bn

Assets under management, as of August 2021

Downtown Metro Manila, Makati City, Philippines

The pandemic has proven that financial inclusion can be accelerated through a robust digital infrastructure. The digital roadmap for BDO Trust takes this into account to further contribute to the achievement of financial stability and economic development. What this translates to, for our customers, is convenient asset accumulation. To our country, it increases economic participation. To our institution, it is a cost-effective means of achieving market growth and business sustainability.

Focus on sustainability Another aspect of business sustainability is being able to provide relevant products to customers. BDO Trust has always been an advocate of socially responsible investing. Since 2015, it has made available the BDO ESG Equity Fund, which invests in companies that exhibit exemplary environmental, social and governance attributes. The BDO ESG Equity Fund subscribes to the specific guidelines set by the International Finance Corporation (IFC) for ESG investing.

The fund does not invest in companies with the primary business of selling alcohol, tobacco or those purely engaged in gaming or mining.

While the fund is still relatively small, it has the potential to grow exponentially in size and importance as more investors start to see value in socially responsible investing. Clients are beginning to favour companies that manage their environmental and social risks and practise good governance, creating a positive

The pandemic has proven that financial inclusion can be accelerated through a robust digital infrastructure

contribution to society. Schools, foundations, religious organisations, associations, and other non-profit organisations, in particular, generally seek a long-term investment portfolio that is consistent with their values and purposes. For these clients, BDO Trust offers a values-driven investment strategy that upholds their own environmental, social and governance principles.

Advocating financial wellness BDO Trust continues to support sustainable strategies through the advocacy of financially inclusive growth. The pandemic clearly demonstrated the importance of financial wellness as Filipinos were blindsided by the sudden economic downturn. This presented a golden opportunity for BDO Trust to direct the market’s attention to greater financial literacy by continuing its investor education programmes digitally, providing fresh content and modules that take into account where the target audience is in terms of their customer journey.

Supporting this strategy is a dedicated team that provides free financial education programmes to clients. The courses, which cover proper budgeting, wise investing habits and retirement planning, are open to different audiences – clients, bank branch personnel, employees, teachers, and blue-collar workers to name a few. Throughout 2020 and 2021, BDO Trust has conducted numerous webinars to sustain its training and educational activities despite limited mobility.

At the heart of these financial wellness sessions is the BDO Easy Investment Plan or EIP, which is the clients’ tool to successfully and automatically execute their wealth creation plans. EIP allows clients to invest in the BDO UITFs for a minimum investment amount of PHP 1,000 ($20) for peso-denominated funds and $200 for US dollar-denominated funds.

Through the EIP, more Filipinos are able to invest for their emergency fund, children’s education fund, retirement and other financial goals easily, affordably and regularly without the need to go to a branch for every transaction. EIP effectively democratises investing for the mass market – allowing easier conversion of savers to investors.

BDO Trust also offers the Personal Equity and Retirement Account (PERA) to help Filipinos augment their retirement pay and plan for a comfortable retirement. PERA lets clients invest a maximum of PHP 100,000 ($2,000) yearly – or PHP 200,000 ($4,000) yearly for overseas Filipino workers (OFWs) – and take advantage of tax-free investment income to encourage long-term savings.

Making Filipinos global investors In support of its push for improving financial literacy of Filipinos, BDO Trust not only aims to make Filipinos transition from being savers to investors, but also to turn Filipinos into global investors as well. Understanding both the benefits as well as the risks inherent to investing is fundamental to becoming a savvy investor. In addition, learning how local and global economies develop and grow can also help Filipinos appreciate investing more, knowing that diversifying into other markets can help grow their investment portfolio.

Through the BDO global feeder funds, retail and institutional investors alike can conveniently access global assets for as low as $500.

Available through BDO Invest Online and BDO branches, these funds allow clients to invest in stocks that are traded in the US, Europe, China, and other developed and emerging markets.

BDO Trust partners with the biggest names in the global asset management industry, such as BlackRock, Nomura Asset Management, Wells Fargo Asset Management and Citigroup to leverage on their expertise and experience in global markets. This strategy allows our clients to grow and diversify their investment portfolio as well as take advantage of investment opportunities both locally and globally.

With our advocacy for both financial wellness and sustainable investing and our adherence to the ‘We Find Ways’ mentality, we believe that our clients can easily take advantage of opportunities in the domestic investment environment as well as confidently venture into possibilities outside the Philippines. n

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Investment Management

Strategic investment clears a path through the crisis By applying best practices in investor relations and corporate communication, Kuwait’s National Investments Company sparked investors’ appetite amid an economic crisis

interview with

Fahad Al Mukhaizim cEo, NatIoNal INvEStMENtS coMpaNy (NIc)

It is a well-known fact that the pandemic has had far-reaching consequences on the global market beyond the outbreak of the disease itself. Nevertheless, amid a year of economic distress, one cannot overlook the resilience that major financial institutions in the Gulf market, such as National Investments Company (NIC), have shown during times of turmoil.

Established in 1987, National Investments Company is a leading Kuwaiti asset management and investment bank. The company takes pride in its dynamic and agile approach in a fast-changing environment. As a result, the company has been able to report a total comprehensive income of $73m in the first half of 2021, after registering a total comprehensive loss of $19.2m in the comparative period of 2020 (see Fig 1). In addition to these achievements, the company received three prominent awards in 2021. Firstly, the ‘Best Wealth Management Award, Kuwait 2021’ by Global Business Outlook for its successful record in serving high-net-worth individuals. Secondly, the ‘Best Investment Management Company in Kuwait for 2021,’ by International Business Magazine, a leading publication in the world of business and financial investment, headquartered in Dubai. And finally the ‘Best Asset Management Company of the Year, GCC 2021’ from financial platform Global Banking & Finance.

the changes, the company’s investment banking team took decisions that resulted in exceptional returns for its clients.

One of the examples was the acquisition of a significant stake of Boursa Kuwait, a strategically important asset with strong, recurring and sustainable cash flows due to its market leadership position and improving prospects.

Since acquisition, Boursa Kuwait has undergone an IPO and listing process resulting in a gain of several multiples of NIC’s acquisition cost. The second case study was the acquisition of Kuwait Foundry, a mispriced asset with intrinsic value significantly greater than the prevailing market value. The investment offered an identifiable path to realisation of true value.

Towards this, NIC acquired a 21 percent stake in January 2019 and have been taking measures to realise value. So far, the company has recaptured most of its equity in the transaction already and the total return multiple based on market value is 1.41 times.

Market leadership Al Mukhaizim elaborated that the company has built specialist teams in key potential areas such as equity capital markets, mergers and acquisitions, and venture capital as part of its long-term strategy that provides NIC with an excellent platform to execute flagship transactions.

Fig 1

Financial results for National Investments company, h1 US DOLLARS

h1 2021 (uSD)

Manoeuvring through crises The positive return in NIC’s H1 2021 occurred as the company was quick to capitalise on opportunities by shifting the tactical allocation of its funds and client portfolios towards sectors poised for recovery. The CEO of NIC, Fahad Al Mukhaizim, explained that Boursa Kuwait witnessed unprecedented circumstances due to the pandemic. By thoroughly analysing the market and understanding the reasons behind 94

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h1 2020 (uSD)

Total income

$73.0m

($19.2m)

Profit (loss) for the period

$56.5m

($42.3m)

$0.6

($0.5)

Other comprehensive income (loss) for the period

$26.9m

($10.0m)

Total comprehensive income

$82.8m

($51.5m)

Earnings (loss) per share – EPS

SOuRCE: National Investments Company (NIC)

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Investment Management

In 2021, NIC completed the financing mandate for a leading fitness and lifestyle business and has The income for NIC listed Al Safat Investin the first half of 2021 ment Company, a fully-fledged investment-licensed company with a capital of $85.2m. In addition, the team started a strong pipeline of other mandates, including a buy-side transaction for a leading logistics company, one of Kuwait’s largest multi-sector businesses. And, it is currently working on two flagship pre-IPO mandates, expected to complete in 2022 and 2023, as well as contracts to provide general advisory services.

$73m

Diversification and innovation Technological innovation and the adoption of digital services have expedited since the emergence of COVID-19 and there are no signs of stopping. The technology sector has been one of the most attractive and high-performing sectors due to its record growth in the past few years. Consumer and business spending in this sector has boosted tech stock price targets and increased share prices, reaching new highs.

Harkening to the developments in this sector, NIC followed a technology investment strategy and invested in several global and regional venture capital funds as well as direct investment opportunities. The investment banking advisory team focused on supporting companies and founders, as well as venture capitalists that are likely to disrupt several industries, including financial services, data security, software, mobility, healthcare, and food. The strategy is to invest in projects and companies that have clear potential to make a huge impact on their respective industries and eventually the regional landscape.

Exemplary transactions include NIC’s recent investment in Pipe Technologies as part of its expanding investment strategy targeting the technology sector. Pipe Technologies is a fast-growing US-based financial technology company recognised as the world’s first trading platform for recurring revenues, with a recent valuation of $2bn. Its valuation increased in just under a year since its launch in 2020, making it one of the fastest financial technology companies to reach this rating in history.

In addition to the Pipe investment, NIC has recently invested in several global and regional venture capital funds as well as direct investment opportunities. The direct opportunities include NotCo and Darktrace. NotCo is one of the most exciting food technology firms focusing on plant-based alternatives, utilising patented AI technology.

Darktrace is one of the global cyber-security champions, also using AI technology, in this case to help clients thwart cyber-attacks.

Meanwhile, the investment banking team is in the advanced phase of due diligence to invest in a leading regional VC platform specialising in delivery.

Unrivalled partnerships “At NIC, not only did we assess the market behaviour and investment projects during the heart of the pandemic, we also acknowledged the impact of the pandemic on our clients – as human beings. We care about our clients and this had to be translated into action during times of crises,” stated Al Mukhaizim. Accordingly, NIC’s objective was to provide a seamless customer experience that would recognise their psychological status and physical restraints during the uncertain times of the pandemic. Acknowledging what the clients are going through on the other side of the coin has prompted NIC’s evolvement plans to launch an electronic portal, the ‘Market Maker’ service, and support their clients in times of stress by understanding their “The company’s individual needs and addressing these by investment offering highly perbanking team sonalised services.

The N IC elec took decisions tronic por tal was that resulted launched to grant in exceptional customers direct access to their account returns for its so they can view all clients” their investments and the performance of their portfolios through one window integrated with their personal devices. Adhering to social distancing measures, and recognising the series of lockdowns that have occurred in Kuwait and the region, the electronic portal connects clients with their account managers at any time through one application. The service also enables customers to manage their accounts, follow up on investments, carry out withdrawals and deposits, obtain reports on portfolio performance and allows them to update their profiles.

Though the market was significantly impacted by the pandemic, NIC has demonstrated a successful example of strategically capitalising on challenging situations and turning them into opportunities for growth and evolvement. Applying best practices in investor relations and corporate communication has definitely played an important role in cultivating NIC’s relationship with its clients amid an economic crisis. n

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Investment Management

Similarly, financial professionals NoWaDayS, need an effortless, INvEStoRS REquIRE smo ot h-r u n n i ng , a SoFt-SKIllED aND a n d t i me - s av i ng EDucatIvE appRoach, sales process. We strongly believe that INStEaD oF SIMply raising capital from bEING SolIcItED investors requires a more sophisticated marketing approach, which utilises all the benefits that our varied digital tools bring into the picture. This is something the market currently lacks, and it is something we excel at. The sell-side of the investment industry has been left behind by asset managers who would often use approaches that are very similar to each other, yet lack efficiency.

A true leader in fintech When it comes to investing, the industry has come to a gradual understanding that education is key. Investae understand that amid a crowded marketplace and an increasingly digital landscape, the prospective investor seeks clarity above all else

interview with

Gerald Autier MaNaGING paRtNER, INvEStaE

Investae is a fintech with offices in London and Moscow, which prides itself on serving clients in over 30 countries. The company provides a licensed solution for investment firms, bond issuers, wealth managers, private bankers, and alternative investment fund managers, and is designed to make the capital-raising process easier.

Why is your solution new and competitive?

Our aim is to simplify the distribution of financial instruments, whether bonds, equity, real estate, funds, or any other type of investment product. We have gained a complete understanding of the main hurdles faced by investment distributors. We innovate by striving to simplify each step of the capital raising process as much as possible, so that investment managers can focus on what they do best: managing money. We offer a unique solution in the market, providing our clients with guidance, sales and marketing tools, ongoing support, 96

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and a continual improvement of results. What’s more, Investae utilises artificial intelligence in the continual process of improving the solutions that we are providing.

For example, there is no longer a need to prepare materials describing each investment proposal in order to persuade your prospects.

There is no need to even compose marketing emails. All you need to do is click ‘send’ while using our system. Our team members not only train our clients how to deliver their sales pitches, but they also prepare these investor presentations in advance. Our clients can benefit from the experience of each member of their sales team by gathering all objections and tricky questions into a single dedicated forum, what we call the ‘objection centre.’ It is designed to inform sales team members about the objections they could face, so that they are better prepared to overcome them.

How is the market evolving?

The financial world is changing fast and undergoing a digital revolution. Undoubtedly, it is becoming increasingly hard for anyone looking to raise capital to stand out in an overcrowded marketplace. Nowadays, investors require a soft-skilled and educative approach, instead of simply being solicited.

What challenges are usually faced when raising capital among investors?

Potential clients are constantly bombarded with investment proposals. That is why it is hard to grab investors’ attention. However, the most common mistake many advisors make is they do not take their prospects’ wants and fears into account. They contact anyone that they think might be interested, following a blanket approach, which means that they do not know how to appeal to potential investors. That is the very problem we solve. Investae runs comprehensive training sessions for our clients, presenting the best techniques on how to secure meetings with prospects, grow their network, deal with indecisive and less financially educated prospects, and get them to respond.

How can your capital-raising tool be used?

Investae offers a platform that uses white-label licensing. As a result, the capital raising process is considerably simplified, which enables our clients to raise money faster: all marketing efforts are already in place, leading to a huge time saving. Companies are then able to hire new agents and distributors, add them to their existing teams, train them, and instantly manage their work. Thus, this tailor-made licensed platform will assist our clients’ own sales teams in selling their own products.

What are your objectives for the next five years?

Our team’s day-to-day efforts are directed to continually increase the value we provide.

The primary goal of Investae is to widen the range of services we currently offer to various industries and sectors and gradually become the leading fintech company in the field of capital raising. We aim to change the entire appreciation of this process and bring it to the next level. n

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Silicon Valley

No time to lie There is a culture of secrets and lies built into Silicon Valley that has led to investors with capital buying into fraudulent start-ups. Can this change?

words by

Natalie Keffler FEatuRES WRItER

Silicon Valley has always been heralded as being a secretive place, and the mystery surrounding SV has arguably added to the excitement around the place over the last few decades.

However, this culture of secrets has become increasingly dangerous, to the point that it is enabling founders of start-ups in Silicon Valley to commit high-level fraud. The Theranos scandal is what might immediately spring to mind regarding this fraudulent activity, but other founders of startups, including HeadSpin’s CEO and founder, Manish Lachwani, have also defrauded their investors, enabled by this covert culture.

More recently though, a shift in the coveted secrecy of Silicon Valley has been seen to be taking place. This shift is arguably a result of Trump’s victory in 2016, a rise in tech scandals and tech employees becoming more vocal about issues in the sector. In addition, the COVID-19 pandemic has led to a rise in med-tech startups, where investors are more likely to be reputable, and this rise gives these new start-ups the chance to operate on a more open and trustworthy level going forward.

The rise and fall of Theranos Elizabeth Holmes launched Theranos at age 19, after coming up with a seemingly revolutionary way of testing blood from a simple finger prick.

People were enthralled, with business tycoons George Schultz and Rupert Murdoch among the first big financial backers, with Murdoch putting $125m toward the company, despite having not seen an audited financial account of the business at this point. Holmes also sought out other big investors, including the DeVos and the Walton family, because she believed 98

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these families would support her in ensuring Theranos could remain a private company. In total, over $900m was invested into Theranos between 2004 and 2015.

In 2015, Dr. Flier, then dean of Harvard Medical School, expressed concerns, after Holmes failed to answer basic questions about the technology of this device that would test the blood. However, at this stage, it was not suggested she was a fraud and she still received an invitation to join the medical school’s Board of Fellows at Harvard University. However, towards the end of that year, the business started to unravel, when a whistleblower raised concerns about Theranos’s flagship testing device, the Edison. The following year, in 2016, Holmes was banned from operating blood-testing services for two years by US regulators, and two years later, Theranos was dissolved. In June 2018, Holmes was arrested, along with Tamesh Balwani, her associate, on criminal charges of wire fraud and conspiracy to commit wire fraud.

How she was able to get away with convincing investors of Theranos’s legitimacy for so long is all testament to the conspiratorial nature with which the company was operated. Holmes took her investors’ money on the condition that she would not have to reveal how Theranos’s technology worked, and also that she would have a final say over everything to do with the company, according to Business Insider.

In addition to these demands, Holmes was obsessed with the security at Theranos, asking anyone who visited the company’s headquarters to sign non-disclosure agreements before being allowed into the building. Interestingly enough, the secrecy that surrounded Theranos was an aspect Holmes had borrowed from her Silicon Valley hero, Steve Jobs, taking this idolisation as far as to dress in black turtlenecks and refuse to take any holiday, both traits of Jobs.

Another recent defrauder in the SV area is Manish Lachwani, the former CEO and co-founder of the tech start-up HeadSpin.

Lachwani was arrested at the end of August 2021, for allegedly defrauding investors in order to Invested into theranos raise money for his between 2004 and 2015 company. Lachwani had overstated privately held financial metrics from the company, including revenue, in an attempt to inflate the company’s value. He overstated the annual recurring revenue of HeadSpin by $4m, as well as grossly exaggerating the overall revenue between 2018 and 2020 from $26.3m to $95.3m. The HeadSpin CEO’s actions are yet another example of the corruption in Silicon Valley that has further flourished as a result of the cloak-and-dagger nature that continues to surround start-ups. Lachwani’s possible prison sentence of 20 years hopefully has some chance of being an effective deterrent against this kind of fraudulent behaviour.

$900m

The masters of secrecy The root of this ongoing culture of secrecy in Silicon Valley dates back to the 1990s, when Silicon Valley first became a hotbed for the technology industry. This inevitably led to the area becoming a highly desirable place for tech journalists to access, but these reporters quickly discovered that if their coverage was anything less than positive and full of praise, their level of access to the start-ups would soon disappear.

There is little doubt from anyone you speak to in the industry that the influence Apple, a Silicon Valley giant, has had on this culture of

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Silicon Valley

Elizabeth Holmes was obsessed with the security at Theranos, asking anyone who visited the company’s headquarters to sign non-disclosure agreements

Theranos founder Elizabeth Holmes

Apple Park in Cupertino, California, US

secrecy has been widespread and in a bid to emulate that success, it is something that all other start-ups have subsequently adopted.

Apple’s love of keeping things under wraps started with its co-founder, Steve Jobs, as part of his magisterial desire for showmanship, in order to conjure up excitement for a big reveal of new products. Secrecy has historically been of more importance to Apple in comparison to companies selling similar products, such as Samsung, because of the high price tag and the associated reputation Apple has for selling a product that embodies a premium experience.

This ultimately means that Apple products have been designed to feel aspirational, and therefore being shrouded in mystery to build up the grand reveal has helped serve this purpose.

However, in recent years, Apple employees have become increasingly open about internal

Fig 1

Highest funded fintech start-ups usd billion

Mobile wallets 9.7

Grab Stripe Robinhood Oscar NU bank

Payment processing | 2.0 Investing | 1.7 Insurance | 1.5 Banking | 1.4

Affirm

POS/Lending | 1.3

Figure

Real Estate | 1.2

Klarna

POS/Lending | 1.2

SOURCE: CB Insights

Notes: September 2020

problems, after concerns that the company culture of secrecy has harmed diversity and inclusion efforts. One example of this was demonstrated in September 2020, when a Slack channel was created by Apple employees in an attempt to promote a more flexible working environment. By the summer of 2021, this channel had reached roughly 2,800 members, and when Tim Cook announced that in September this year, Apple would be reopening its offices, Apple’s remote work advocacy group, off the back of this channel, sent an anonymous email back to him requesting further flexibility.

Ultimately though, it is the company’s product launches that Apple is most concerned with keeping secret, and it is these products that they will do all in their power to keep under wraps and away from the watchful eye of the press, and social media.

Change on the horizon?

There has also been a more general turning point to secrecy in the tech world. Following Trump’s Presidential victory in November 2016, and a rise in tech scandals, technology journalists felt more compelled to push back the following year against the ossified norm of being unable to criticise technology giants for fear of being ostracised and losing access.

More recently, new stories about these technology giants are coming from employees breaking NDAs and risking their jobs by doing so. But if the tech giants continue to self-govern and refuse to grant access to outsiders, this can often feel like the only way to expose perceived wrongdoing.

As a result of the COVID-19 pandemic, there is an increased emergence of med-tech startups. Silicon Valley expressed eagerness at the start of the pandemic to invest in future win-

ners of the current crisis, and in March 2020, 12 investment firms pledged to invest over $30m in start-ups with COVID-19 programmes, with Y-Combinator, a start-up accelerator, connecting founders to investors.

One successful example of this is the startup Shared Harvest Fund, which was founded

by Dr. Nana Afoh-Manin, a doctor from Los Angeles, who began the myCovidMD initiative to help provide equal access to coronavirus testing. Mobile health start-up iXensor is another example of a successful med-tech start-up fostered in Silicon Valley, and then incorporated in Taiwan. It has developed a fully digitalised rapid antigen test and accompanying digital platform to aid with COVID-19 outbreaks. However, these med-tech companies and all those that follow, do now face more intense scrutiny in the wake of Elizabeth Holmes and the Theranos scandal. If any good has come from this, it is the raised awareness of due diligence when it comes to start-up investment instead of the vogue for leaping without looking in a desire to catch the next wave of the future (see Fig 1). The old adage of ‘if it looks too good to be true, then it probably is,’ should be heeded.

This new and healthy scepticism of start-ups has arguably done some damage to prospective start-ups with investors now exercising a greater degree of caution rather than relying solely on an appearance of integrity and what looks like a golden market opportunity.

It is therefore important that this new wave of start-ups emerging do not covet the same secrecy that Silicon Valley start-ups have always strived for, and instead try their hand at transparency in the beginning, so that investors know what they are getting into, giving these nascent companies a chance at real success in the long run. n

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Insurance

Walking the walk A climate emergency is making every insurer re-evaluate their attitude to risk and disaster. Ping An Property & Casualty says real change is possible and is incentivising its clients to help change their behaviour. It could just work

interview with

Michael Guo SpEcIal aSSIStaNt to thE chaIRMaN, pING aN pRopERty & caSualty INSuRaNcE coMpaNy oF chINa

As the climate change emergency accelerates, the global insurance industry faces unheard of challenges: from heavy rain in China’s Henan province to dramatic flooding in Germany and wild fires in northern California, much of our shared environment is at risk. Catastrophe insurance though is still seen as ‘optional’ for too many. Yet insuring for climate change risk – be it from extreme heat, rain or hurricanes – is a key part of the environmental, social and governance contract, or ESG commitment, for increasing numbers of businesses.

Rising to the challenge, Ping An Property & Casualty has overhauled and upgraded its green financial services portfolio, developing car insurance products for electric vehicle (EV) owners plus a brand new range of products that support the green energy industry with an emphasis on photo-voltaic, hydro and wind power.

“In the future we will introduce preferential policies and discount rates for green enterprises and projects to promote better economic and environmental development,” Michael Guo tells World Finance. This commitment to the environment – including discounted policies and incentives to eco-friendly companies and projects – is a radical departure for an industry still, for the most part, struggling to make sense of the long-term risk factors of an over-heating planet.

ESG principles at the heart of business In other words, this Shenzhen-based property insurance company is putting green finance at the heart of its business – from operations to procurement, right down the supply chain – while financially incentivising other companies to change their behaviour for the benefit of all. “Through our digital transformation,” Guo says, “we continue to create a paperless work environment, settling claims online while many of our insurance policies are designed to 100

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encourage our clients to put their energy and carbon emission commitments first.”

To bolster its ESG expertise and reach, Ping An Property & Casualty has built up a large team of experts with close, hard-won knowledge of natural disasters. In the background, so many businesses remain completely unprepared for the long-term effects of climate change. “In August this year,” Guo explains, “we built our first natural disaster laboratory in Sichuan, able to simulate 10 natural disasters, from storms to typhoons and earthquakes, all based on existing records of disaster and other socio-economic statistics.”

“Our experience,” Guo continues, “in assessing catastrophe risk not only helps risk industry quantification and actuarial pricing but, we feel, society more broadly.” Green and sustainable ways must always be advocated “to support green economic development,” he says, adding that “to achieve carbon neutrality has become a must-do for any insurer with focus on ESG.”

Online emergency response 24/7 Insurance companies have a responsibility not just to serve the real economy and stimulate overall economic growth, but to protect the environment. So how is environmental risk handled on the ground? If the carefully developed Ping An Property & Casualty system predicts heavy rain or flood risk, text messages to clients – from car and home owners to corporate and business customers – are sent, advising them of prevention measures to cut their risk exposure.

Ping An Property & Casualty also deploys these messages via Ping An Auto Owner app, the largest automotive service app in China, encouraging policy holders to move vehicles to a safer place. Backed by robust human emergency resources and a carefully honed disaster risk management platform, Ping An Property & Casualty schedules and organises rescue teams and vehicles to follow up all extreme incidents when catastrophe strikes.

In addition, the company has constructed a full-cycle risk management system for catastrophes with defined emergency processes to minimise and prevent further client losses.

“When a disaster happens, our survey and

Futian district of Shenzhen, china

claim team will respond, start rescue work, and stop losses,” says Guo. “After a disaster, our insurers will quickly take up their compensation responsibilities. We always ensure timely availability of claim funds through our rapid settlement and pre-claims systems so businesses can restart and get on with their post-disaster reconstruction, if needed.” Ping An Property & Casualty also works closely with government agencies to clarify liability exposure, alleviating dispute and civil conflict potential in post-disaster loss situations. This is especially important for businesses so that they can get back on their feet as quickly as possible.

Electric vehicle cover risk Ping An Property & Casualty is optimistic about the development of electric vehicle (EV) insurance for EV owners as the global economy transitions to cleaner transport technology. However, the EV cover risk area remains technically immature. This sector hasn’t – yet – had time to develop reliable oversight of all risk and claim scenarios, despite there being around 350 million private cars in China.

“To better serve new energy car owners,” says Guo, “it is necessary to develop new terms and provisions and we’ve accumulated the historical underwriting and claims data of EVs compared with internal combustion engine vehicles so we can do this thoroughly.”

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Insurance

2060

The target year for China to reach carbon neutrality

Insurance companies have a responsibility not just to serve the real economy and stimulate overall economic growth, but to protect the environment “We’re also,” he adds, “actively working with car makers and auto industry partners to carry out research on the specific risks of batteries, motors, and electronic control of new energy vehicles.”

While electric vehicle technology provides cleaner transport it adds technically ambitious autonomous driving tech possibilities, enhancing driver, passenger and pedestrian safety. While much of the legislation around it is in development, Ping An Property & Casualty says the long-term benefits will support customers – both in value and with the added on-the-road protection.

Accurate risk assessment and ‘big data’ at a granular level is also increasingly relevant, which can fundamentally change any insurer’s sense of vehicle risk. Collision avoidance systems, for example, are highly sophisticated.

But data around these safety advances must be equally available across the risk industry for the sustainability of safety systems longterm. Guo believes cross-industry discussion and collaboration is vital and is committed to working with other industry players to support automated driving technology for the benefit of all. This may include, inevitably, some rationalisation of different automated technologies, which can be potentially confusing to customers, both in and outside the risk industry.

From green engineering to superfoods While the car industry is one industry undergoing seismic change, new ways of insuring risk abound – from agriculture to healthcare and heavy industry. The bottom line is innovation and carbon neutrality.

COVID-19 support for the most vulnerable In July 2021, Ping An Property & Casualty, Shenzhen, collaborated with Bank of China to issue the first batch of digital RMB policies. Specifically it developed a pilot insurance programme for hospital workers in Shenzhen’s Nanshan District.

This included RMB 300,000 ($46,850) compensation for death caused by COVID-19, a RMB 50,000 ($7,800) allowance for nurses diagnosed with COVID-19 and RMB 50,000 ($7,800) compensation for accidental death. Policyholders could also have preferential insurance rates if they used digital RMB wallets for payments.

The introduction of these policies mark an extension of Ping An Property & Casualty’s digital RMB pilot programme for online settlement scenarios, boosting settlement convenience, speed and security for their clients.

Innovation is nothing new for Ping An Property & Casualty, underwriting the extraordinary Three Gorges Dam ship lock mega project – an elevator capable of lifting cargo ships or cruise liners more than 100 metres – allowing vessels to cross the Three Gorges Dam. Ping An Property & Casualty has since provided protection for increasing numbers of offshore and onshore wind farms as well as photovoltaic projects to help their clients diversify their long-term energy dependency.

Extending its environmental governance, Ping An Property & Casualty has launched its first environmental liability policy and introduced ecological impairment liability cover. Gradual pollution and grassland cover is another area in which Ping An Property and Casualty is providing innovation.

Traceability for the food industry is also a major breakthrough: Ping An Property & Casualty has designed supply chain production insurance deploying blockchain technology.

This tech monitors, for example, the production growth stages of goji berries – widely seen as a ‘superfood’ across Asia as well as the West – with real-time digital journals recording the harvesting process, end-to-end. “Every farm product has a unique traceability tag which shows its origin, processing, transportation, and cash value for farmers. The aim is to help improve agricultural production standards and create more eco-friendly and high-quality brands of farm products,” says Guo.

Planet protection underpinned Behind all these efforts and innovations is a single-minded determination to make investment standards greener. “Environmental protection and green industry standards are the two core factors to consider when the company makes its investment plans,” says Guo. Ping An Property & Casualty has drafted evaluation standards for all green projects, underpinned by national guidelines. Based on strict environmental criteria for green companies, it also invests in publicly listed clean energy stocks, bonds and debt vehicles.

This is backed by a bespoke green finance office responsible for sustainability-related projects across insurance, services and investment. “Green Finance is more than just a concept but a viable approach to eco-friendly business growth,” Guo continues. The Shenzhen-based property insurance company’s advanced early warning laboratory system points to more wildfires, tornadoes and droughts, which will continue breaching the living conditions and livelihoods of many, despite the Chinese government’s commitment to achieve carbon neutrality by 2060. The point, says Guo, is to be prepared – and to innovate regardless. n

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Insurance

New thinking shows digital agility of award-winning AI Throughout its 100+ year history, Japanese insurer Mitsui Sumitomo has kept the needs of its customers front and centre.

Now, its pandemic response has allowed it to prove that exploiting AI doesn’t mean losing the human touch

words by

Masashi Ippongi DIREctoR, MaNaGING ExEcutIvE oFFIcER, MItSuI SuMItoMo INSuRaNcE

For a decade or more, digitalisation has been at the forefront of business development the world over. Managing transactions, processes and lifestyle needs of all kinds has transferred from the physical to the mobile sphere. The worldwide ‘Covid effect’ served to accelerate this phenomenon and, coupled with a need for reduced human interaction during 2020, insurance company Mitsui Sumitomo’s MS1 Brain system has expanded and improved even further, digitising the entire insurance process from beginning to end.

The MS1 Brain AI system had already won industry recognition for its innovation and led Mitsui Sumitomo to win World Finance’s award for ‘Best General Insurance Company in Japan’ at the Global Insurance Awards 2020. The system evolved in response to the new lifestyle and rapid digitalisation caused

by COVID-19, by implementing new remote functions and digitising the entire insurance process from preparation to after-sales. MS1 Brain has two key features: impressive data analysis capabilities and intelligent policy design, and now, as a pandemic response, a new remote function has been implemented, providing Mitsui Sumitomo’s customers a totally seamless experience.

Anticipating needs MS1 Brain works by analysing a vast amount of data, including 22 million pieces of data on customers, accidents, claims, contact centre history for the past seven years, and external data, like corporate information.

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Based on the latent needs of customers visualised by the power of AI and the formal knowledge of some of Japan’s top sales representatives, MS1 Brain enables personalised customer service and helps to uncover new needs that would not have been noticed by a human alone.

During the insurance renewal process, the system can deliver personalised videos of coverage that AI predicts will be in high demand by customers. For corporate insurance, the system can dynamically calculate accident examples and the amount of compensation required in the video. In this way, the system supports customer experience independent of the insurance agent’s skills with the latest digital technology.

MS1 Brain’s purpose was to help agents offer the best possible choice of products by predicting customer needs and improving convenience. During the pandemic, seamless omnichannel communication between customers and agents was also achieved, enabling remote interviews and online contract processing to take place. In addition, a simple set-up process using SMS has simplified the communication channels between customer and agent, dramatically improving convenience.

The human touch Non-face-to-face communication has made significant progress with the spread of COVID-19 and, due to concerns about infection, many customers preferred remote procedures instead of real contact. On the other hand, there are still a certain number of customers who prefer ‘real’ contact with their insurers.

Mitsui Sumitomo was among the first to successfully digitise the entire insurance process, but at the same time, the company recognises the need to interact with customers where it suits them. It has therefore standardised two

22 million pieces of data MS1 brain analyses

lines of contact between customers and agents: real contact and digital contact, and it will continue this policy.

In Japan, many contracts are signed on paper, so the company’s development philosophy was to create a customer orientated omnichannel experience. Customers can send and receive messages and conduct web interviews with agents in a secure communication environment, but they also continue to have the option of interacting with Mitsui Sumitomo via other channels, particularly in situations where digital networks or smartphones may not be available. When this happens, customers can still use the contact centre by phone, and agents can also help them in person. Customers have the option of face-to-face or nonface-to-face contracting procedures, and they can also choose to view maturity information and insurance policies on paper or online.

Disaster response Digital marketing is a key function of improving the customer experience in any industry.

According to customer attributes, MS1 Brain helps to support policyholders by sending out an insurance-related e-mail newsletter designed to prevent accidents. It also provides alert information to customers in the relevant area before disasters such as typhoons and heavy snowfall occur.

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Insurance

mitted by the customer without waiting for the customer to provide a quotation. It then calculates and presents the amount of damage on the system’s initiative. The system also helps to prevent the intervention of specific companies.

Carbon neutrality

After the occurrence of a disaster, information on insurance claim recommendations is rapidly sent to eligible customers, and agents are ready to follow up based on the results of email ‘opens,’ enabling seamless customer response. Another notable feature is the frictionless experience in the event of a motor accident.

If an accident happens, customers can check their policy details and make an accident claim from their smartphone via a dedicated policyholder page.

Key features of MS1 Brain Remote ›› No need to download an app, providing a

high level of convenience for customers ›› Secure messaging function to communicate

with agents and exchange electronic files ›› Web interview function allows customers to

receive proposals and explanations as if they were meeting the agent face-to-face ›› Ability to share documents and procedure screens ›› Complete smartphone-based automobile insurance that enables you to seamlessly select a plan, confirm important information, register on the policyholder’s dedicated page, complete the procedure, and post the policy on your smartphone

The customer can then send images of the damage and the location of the accident digitally, and the entire claim process can be completed on the customer’s phone, including the receipt of the accident report, the status of the response, and confirmation of payment details and payment history.

While AI becomes more and more adept at handling customer needs, the system also features the ability to handle suspect claims.

Mitsui Sumitomo is building a fraudulent claims detection system that extracts suspected cases of fraudulent billing by using predictive analysis scoring based on scenarios set for each method and type of fraudulent billing.

It also uses network analysis, a method that automatically visualises the hidden relationships of the parties involved in an accident in a network diagram. It achieves this using two main functions.

The first is to score suspected fraudulent claims based on fraud detection scenarios that combine AI-based machine learning with knowledge and empirical rules, and the second is to automatically visualise the relationship between the parties involved in an accident and create a network diagram using names, accounts, VIN numbers, and other key information. The system is also able to mitigate false claims by using AI to judge and determine the amount of damage based on the photos sub-

Looking to the future, MS1 Brain should also help to reduce operating costs and contribute to carbon neutrality. The system covers approximately 34,000 insurance sales agents and up to one million sales agent representatives, while the remote function covers tens of millions of existing corporate and individual customers throughout Japan. The implementation of the remote function has effectively combined real and digital points of contact, while at the same time realising more efficient sales activity, resulting in a significant reduction in business costs. Mitsui Sumitomo has also achieved significant Innovative AI will cost savings by going surely affect all paperless, thanks to aspects of our the full digitisation of digital lives in the the accident response very near future process, starting with a dedicated customer portal. In the past, the accident response process was a complex, multi-step process that was difficult to digitise. However, with the new remote system, the entire process can be completed on a smartphone. This is expected to significantly reduce operating costs and contribute to carbon neutrality.

The amount of paper used in automobile insurance alone is already expected to be reduced by about 35 million sheets of A4 paper, or about 140 tons per year. MS1 Brain Remote is scheduled to be extended to fire insurance, and the paperless function is also scheduled to be extended to personal accident, new type and cargo insurance, which is expected to further contribute to the company’s aims for carbon neutrality.

Innovative AI will surely affect all aspects of our digital lives in the very near future, and Mitsui Sumitomo Insurance has significantly enhanced its offering to digitise the entire insurance process and create a multi-channel and seamless customer experience. But looking to the future, not only does its AI propose the best insurance plan, it also achieves a significant reduction in operating costs and a contribution to carbon neutrality. The need for effective, convenient insurance in a post-pandemic world will not go away, and Mitsui Sumitomo is leading the non-life insurance industry in the drive for digitisation. n

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Insurance

Bringing Filipinos a global insurance experience As BPI-Philam becomes ‘BPI AIA’, it signals change on the horizon with upcoming innovations that aim to transform the insurance industry in the Philippines and ensure that insurance is accessible and easy for every Filipino Strength and commitment interview with

Surendra Menon cEo, bpI aIa

BPI-Philam, the strategic alliance that allowed AIA Philippines (formerly AIA Philam Life) to offer life insurance through the Bank of the Philippine Islands (BPI), now has a new identity as BPI AIA. The redesigned brand will use its global heritage to fulfil its commitment to provide accessible, affordable, and personalised insurance for Filipinos.

The rebrand is another step in the company’s commitment to forward thinking and continual innovation and evolution. It wants to be a world-leading insurtech that stands out for its advanced technology that allows customers to ‘experience the future.’ The firm was founded in 2009 and is among the top insurance companies in the country recognised by the Insurance Commission. Its bank partner, BPI, is the leading bank in the Philippines and Southeast Asia, with a heritage of financial strength and innovation over the past 170 years.

Meanwhile, AIA Philippines has been a market-leading insurance company for over 70 years under the AIA Group – the largest independent publicly listed pan-Asian life insurance group, with a presence in 18 markets across Asia Pacific.

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“As BPI AIA, this rebrand further communicates our company’s stability and commitment to our customers,” Surendra Menon, BPI AIA’s CEO, told World Finance. “The challenges we all experienced in the past years brought extraordinary changes to our customers’ lives, and as their life protection partner, we also evolve to deliver the support they need and deserve.”

Menon says the rebranding will entail an overall boost in BPI AIA’s standards of doing business. There will be significant improvements in processes and the technology it uses to service its customers. Specifically, it will be utilising data and digital tools even more efficiently to craft not simply products but solutions that will help improve the lives of Filipinos.

“Meanwhile, our people will also be more involved in every step along the customer journey. We are constantly evolving and innovating to give our customers, partners, and people the best experience whenever they engage with our brand,” he adds.

As expected, there will be an ever-increasing range and standard of services geared to how customers’ lifestyles are changing at the speed that is comfortable for them. “What we bring to our customers are the same high standards in terms of product and service quality that AIA is known for,” he continued to explain.

Alignment Menon believes there are a number of advantages to aligning with the bigger umbrella that is the AIA Group. He says: “AIA has always been the North Star for us, we’ve always known we’ll adopt the AIA name one way or another.”

AIA is a global brand that has had a positive association with the insurance industry for over a century now, so carrying the AIA name solidifies the company’s identity as a stable insurance company capable of delivering on its promises.

In addition, the global reinforcement of the AIA Group allows the company to tap into the industry’s best practices gained in the 17 other markets that AIA services in the Asia-Pacific region.

This will bring about continuous improvement in systems and processes, all aimed at the end goal of improving customers’ experience with insurance. BPI AIA already shares values, expertise, and levels of commitment with BPI and AIA Philippines. Customer centricity is at the heart of what they do collectively. “We are all working towards providing our countrymen with the appropriate financial solutions they need as they go through different life stages,” says Menon.

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Insurance

$54bn

The estimated insurance protection gap in the Philippines at present

All these efforts together provide the fastest, most seamless customer experience. “We want our customers to feel the insurance experience of the future today – by having everything they need from BPI and BPI AIA just a few clicks away, on their mobile banking app or on our own platforms. They can get insured virtually, manage their policy digitally, and even file their claims online – everything is there at their fingertips,” added Menon.

Protection gap

Fireworks on the Manila skyline, Philippines

The mission at BPI AIA is to make sure that insurance is easy to get and easy to have for every Filipino, no matter what class they belong to

Post-pandemic

Service innovations

During the pandemic, BPI AIA prioritised ensuring the welfare of its own people so that they would be in a good position to help customers as soon as they needed it. Suddenly working full-time from home, teams rallied and continued business as quickly and as efficiently as they could.

The Philippine Insurance Commission approved digital selling and the company continues this practice today. Menon believes it is up to its customers to know whether they are comfortable with meeting with salespeople face to face; and if they aren’t, it’s absolutely understandable: “There are secure digital tools in place to provide them the services they require, without sacrificing their safety and peace of mind.”

Menon continued; “As the situation improves in the Philippines, we are looking forward to seeing more and more people come back into BPI’s branches and engage with our people again. But nonetheless, we have onboarded some of the latest technology that will allow for a more seamless, faster experience for our customers – and they work for both faceto-face and virtual.”

Aligning with the AIA brand in the time of a pandemic pushed for service and product innovations already scheduled to be developed and launched much earlier than planned. Systems and processes were streamlined and brought to life to improve the client service experience.

Many more innovations are expected from the entire AIA Philippines Group. These will include improving their self-management of policies via My AIA, a comprehensive health and wellness app with BPI AIA’s Total Health Solution and AIA Vitality, more payment options, and more customer touchpoints/communication channels. On top of all the digital developments on BPI AIA’s side, integration with their bank partner’s digital developments are at an all-time high – customers can expect a faster, more seamless interaction with BPI AIA through BPI’s mobile banking app.

Through one click of a button, a customer can use their own data to determine the best life insurance product the company has for them. Payments facilities through BPI are constantly evolving to include the latest and most secure payment channels customers prefer for their own convenience.

At present, insurance penetration in the Philippines is still very low. It is this huge protection gap that the combined companies are committing to address together. The geography of the Philippines makes it vulnerable to natural calamities such as earthquakes, volcanic eruptions, and typhoons. When there’s low insurance penetration in an economy, losses resulting from unforeseen events like these significantly limit economic and social development. There is an estimated PHP2.7trn ($54bn) protection gap in the country.

BPI AIA plans to help close it using its life, health, and income protection plans. It is making it its mission to come up with products that cater to various needs and different market segments to make a difference in the lives of its customers, and in the long run, help bridge that huge gap.

Community support BPI AIA is committed to its ongoing initiatives.

Financial literacy has always been central to the entire AIA Group. The mission at BPI AIA is to make sure that insurance is easy to get and easy to have for every Filipino, no matter what class they belong to. “We continuously work towards educating our countrymen on the importance of becoming financially literate and providing them with the skills and tools to do so,” says Menon. “Solutions such as microinsurance, for instance, have consistently been part of our offered products and services, and we continue to work with more partners nationwide to expand the reach of our microinsurance products and related solutions,” he continued.

Peace of mind This all feeds into the company’s long-held desire to encourage its customers to live healthier (both physically and financially), longer, and better lives. “We share our philosophy that when you live healthily, you live well. And when you have peace of mind because you know your insurance will take care of everything when the unthinkable happens, you have more courage to live your life to the fullest,” said Menon. n

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Insurance

Embracing the spirit of mutuality Bereket Sigorta has been visionary in the insurance sector, having implemented a first-of-its-kind participation model, but this is just one of many accomplishments for this dynamic and innovative business What is participation insurance? words by

Mahmut Güngör GENERal MaNaGER, bEREKEt SIGoRta

Bereket Sigorta was established in 1995 and provides services within the framework of a multi-sales channel business model with the motto ‘just in case.’ By 2017, it was serving in more than 500 locations, in places where other insurance companies do not have any distribution channels, and continues to meet the demands of customers all around Turkey with a wide range of products for all. It has a widespread and efficient supply network of over 3,300; consisting of 10 regional directorates, agencies of Agricultural Credit Cooperatives of Turkey, participation banks, saving financing companies, agencies and brokers.

Agricultural Credit Cooperatives of Turkey, the main shareholder of the company, was founded in 1863 and is the largest farmer organisation in Turkey, with total assets of €4bn and more than 850,000 members. With the all-encompassing support of Agricultural Credit Cooperatives of Turkey, Bereket Sigorta has set out to create a model for participation insurance based on taking the lead in the market to restructure insurance products so that they are in compliance with Takaful principles. Bereket Sigorta has developed an exemplary model for the sector called ‘the performance supported incentive proxy model.’ The model was created with the vision of being the benchmark for participation insurance. The idea is to offer positive balance sharing incentives over the profitability of the entire pool without separating income from investments.

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Participation Insurance is a type of insurance based on the idea of solidarity. It is built on a system that is far from the traditional economic and financial practices, with interest and activities that are considered forbidden, or ‘haram’ in Islam. It can also be defined as a type of insurance created to meet the insurance needs of individuals who stay away from traditional insurance for religious reasons. In this type of insurance, insurance activities based on risk sharing and cooperation among the participants is carried out.

Participation insurance refers to the insurance practice in which fi nancial assets are managed within a special framework and under the supervision of an advisory committee consisting of experts in the field of Islamic sciences and insurance. In accordance with the principles of participation, companies can’t guarantee religiously illegitimate issues and risks, or manage financial assets within the framework. They must establish an advisory committee and a compliance unit and prepare a participation internal audit report.

The basic principles of participation insurance are to evaluate premium/donation collected from capital owners and participants within the framework, check which are in line with Islamic principles and submit for the approval of the advisory board, which is specialised in Islamic law, for insurance business and transactions. Participation insurance began in Turkey in 2009 and it has shown serious development due to the growth of the interest-free finance sector as well as the regulations introduced in the last decade or so.

As part of the medium term programme (2022–24) published by the T.R. Presidency, Presidency of Strategy and Budget, actions to ensure compliance with international

tractors harvest beetroot in the Mus province, turkey

standards in the field of participation finance and to expand participation insurance are included. In this context, participation insurance, as long as it is presented correctly to the segment it addresses, will continue to be an important potential source of funding.

Navigating a crisis The company operates across all branches including motor, traffic, fi re, housing, engineering, agriculture, health, personal accident, transportation, legal protection, TCIP and liability insurance, and continues to progress rapidly in the sector with its technological infrastructure and digital solutions. With its dynamic and innovative brand vision, Bereket Sigorta continues to swiftly progress at the point of customer experience with more than 100 robotic applications in operational business processes and 24/7 service through digital platforms of individual internet and mobile branches.

With the effect of quarantine and restrictions during the pandemic that affected the whole world, the company highlighted its online sales channel, took quick action and

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Insurance

increased the efficiency of its digital channels. As a part of the digital transformation process Coverage provided by Bereket started in 2019, BeSigorta to more than 55,000 reket Sigorta became women entrepreneurs the first company to offer online insurance products through the instant messaging service BIP, which is like the Turkish version of WhatsApp. Through our application, customers can buy insurance products and access information from agencies and authorised services. Bereket Sigorta, which implements the first and unique participation model in Turkey, continues to stand out in the sector with all kinds of corporate social responsibility projects and collaborations that will contribute to the sustainable growth of the participation finance ecosystem as well as the faster and healthier development of participation insurance.

It contributes heavily to the spread of participation insurance through public institutions, non-governmental organisations, universities, associations and sports clubs,

$101m

with a special focus on corporate social responsibility projects. Within this scope, Bereket Sigorta worked with the Turkish foundation for waste reduction (TİSVA) and provided $101m coverage to more than 55,000 women entrepreneurs as they take important steps into economic life.

In order to encourage low-income women entrepreneurs within the agricultural sector, the ‘women farmer loan’ project, which includes basic agriculture and basic financial literacy training, was implemented in cooperation with Tekfen Foundation and TİSVA. This programme, implemented as a social management project, allowed the provision of support for low-income women farmers in the Aegean region of Turkey.

To deepen the participation finance ecosystem and spread the participation insurance to the base, a protocol was signed between the independent industrialists and businessmen association (MUSIAD) and Bereket Sigorta, with the idea of becoming a ‘unifying force in the economy.’ With this cooperation, discounted insurance products for MUSIAD women, young members and employees are offered, as well as membership of Bereket loyalty club, which provides advantages in many areas of daily life from shopping to personal development.

Continued excellence and growth Participation insurance constitutes approximately five percent of the insurance sector premium production in terms of volume and this will likely increase to 10 percent in the coming periods. According to data compiled from the union insurance and reinsurance companies of

“Participation insurance, as long as it is presented correctly to the segment it addresses, will continue to be an important potential source of funding” Turkey (TSB), the total premium production in participation insurance in 2020 increased by 24.2 percent compared to the same period in the previous year and reached 4.3 billion TL ($460m). There are 10 companies operating in the field of participation insurance and they represent a significant proportion of production, having the largest share in premium production.

Bereket Sigorta received two awards at once in the categories of the ‘Most Reliable Participating (Takaful) Insurance Company in Turkey’ and ‘CSR Excellence and Dedication to Community in Turkey’ within the scope of the 2021 Islamic Finance awards presented by World Finance.

This accolade is in recognition of Bereket’s leadership and for demonstrating remarkable vision in identifying tremendous opportunity in the greatly underserved Turkish market, while simultaneously answering community needs for participation insurance. Bereket Sigorta’s successful nomination is not only due to its long-standing records of expertise in risk management, but also for its compelling business plan, mobilising highly qualified professionals with procedural know-how, allocating resources and being able to make outstanding progress in a short period of time. n

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Insurance

At the end of a storm there’s a golden sky In a year beset by so much hardship and tragedy, it has, for many, been difficult to see a silver lining, but Standard Insurance has continued to promote care for its customers and to go above and beyond to make a difference as a company

words by

Leticia C. Tendero DIREctoR oF INvEStoR RElatIoNS, StaNDaRD INSuRaNcE

The year 2020 blindsided the world with the Black Swan occurrence of the deadly Coronavirus disease that spread so swiftly across the globe and that had devastating consequences.

Global activity ground to a halt, hampering economic growth as we paused to deal with this crisis. The healthcare industry was temporarily crippled, and the virus caused people to lose their jobs across all industries.

On the local front, the Philippines was faced not only with this devastating pandemic, but started and ended the year with natural disasters – from the unexpected eruption of the Taal volcano to the influx of typhoons during the latter part of the year. Reeling from all these, but most especially from the pandemic, the Philippine’s GDP suffered its biggest annual contraction on record at negative 9.6 percent, year-on-year, according to the Philippine Statistics Authority. Nonetheless, we must salute our selfless overseas Filipino workers who, in spite of global lockdowns and mass layoffs, found ways to send more money back home to help support their struggling families, with total remittances decreasing by 0.8 percent in 2020, dismissing a rather more grim forecast of a sharper fall due to the pandemic.

Highest growth in 33 years Despite the challenges during these past two years, the Philippines has seen a gradual improvement quarterly, year-on-year, 2020 to 2021. From its worst dip in the second quarter last year, GDP posted a record high of 11.8 percent growth in the second quarter of 2021, year-on-year, the highest since the fourth quarter of 1988. This robust performance may be a result of the ‘base effect’ as some analysts claim. Some optimists nonetheless reason that this is a result of the gradual improvements in business confidence as the economy learns to live with the virus and the hope of a safer fu108

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ture with the vaccine roll-out in March. Following the performance of the economy, the Philippine non-life insurance industry faced its toughest and most challenging year as COVID-19 redefined the ‘face-to-face’ norm of insurance business transactions, with most insurance companies pivoting their business operating models and systems. Considered a nonessential sector, and thus not operational for several months during restrictive quarantine status, this propelled insurance companies to embark on more aggressive initiatives towards the digitalisation of operations. The non-life insurance sector’s business portfolio contracted by 9.3 percent at PhP83.8bn ($1.7bn) with total net premiums written posting a 16.2 percent negative growth at PhP49.3bn ($984m).

In terms of profitability, however, net income leaped by 65.8 percent to PhP5.7bn ($113.8m) as losses spiralled down 20.9 percent to PhP21.5bn ($429.2m). With lower claims incidences during the lockdown period and operational efficiencies partly brought about by work-from-home arrangements for the whole year, these somehow balanced off the decreasing premiums, hence maintaining the non-life insurance sector’s profitability. The loss ratio in 2020 was therefore at 41.7 percent versus 49.1 percent in 2019. On the whole, despite the challenges of the pandemic, the non-life insurance industry remains strong and stable with aggregate assets and net worth ending a challenging year with increasing growth rates at 7.96 percent and 7.66 percent at PhP280.2bn ($5.6bn) and PhP105.6bn ($2.1bn), respectively.

The route ahead Moving forward, the non-life insurance industry is optimistic that it can recover lost ground and exceed expectations as the administration is fast-tracking its vaccine programme, imposing more localised and granular lockdowns, thereby reducing the drag on the economy.

In addition to this, it is expected that the sale of new motorcars will lead to an annualised growth of 18.2 percent based on motorcar sales as of July 2021, so insurance premiums on these will naturally move up substantially relative to last year.

business district of Metro Manila, philippines

Nonetheless, to remain relevant, insurance companies need to advance technology as innovation will be an important component of the future. Equally important, artificial intelligence (AI) will be integral to better underwriting capabilities. There is no path back to pre-COVID, only a path forward to the postCOVID market, accelerating digital infrastructure and product offerings to meet the evolving demands of the market with minimal human intervention.

As we leave the most challenging year so far, we send our overwhelming gratitude to our colleagues and associates, our clients, our business partners and to everyone who went the extra mile during the global health crisis. The year leaves with us a reverberating memory of a sense of awe at how people can naturally adapt to a Black Swan situation and be resilient, tolerant, and empathetic in dealing with a diversity of challenges during this global COVID-19 pandemic; but at the same time, move on with a sense of caution, hopeful and optimistic that this too shall pass. We shall continue to face all difficulties with gratitude, strength, perseverance and we, together, shall work hard for a sustainable, dignified and fulfilling future. We should look beyond the short-term ‘new normal’ and towards the long-term ‘new normal,’ towards sustainability.

Continuously upgraded Through all these difficult times, we turned challenges into a wealth of opportunities as Standard Insurance has been well prepared for catastrophic events. Our systems are all digital, integrated and upgraded continuously. Everything is online, whether for internal

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Insurance

To remain relevant, insurance companies need to advance technology as innovation will be an important component of the future

or external customers. All of our systems are also in the cloud, having migrated all of our systems onto the public cloud years ago, making us possibly the first domestic insurer to be an Amazon Web Services partner. The company’s ISSIoffice plus is an ‘insurance office in an app’ and is accessible via smartphone or any telecomputing device and is another platform that allows one to do the whole insurance cycle.

These allowed us to fluidly adjust to the workfrom-home arrangement.

Yes, we took a quick pause immediately after the declaration of the community lockdown in March, to check on our people nationwide, ensuring that all our associates were cared for and kept safe so that they too would care for our customers. When it comes to caring for each other, everything is personal to us at our company. After all, that is the very essence of our massively transformative purpose (MTP), ‘peace of mind for all mankind,’ starting with our associates. It is an MTP that we try to ingrain into our DNA so that we are guided by this in all aspects of our operations.

With everyone settled and secure of their future, we immediately plunged into the business of the day, maximising our digital capabilities while easing into the new ways of doing business and conducting meetings using the different platforms of digital communications.

We looked at the ‘new normal’ just as a way of looking at and doing things from a different perspective. As long as we persevered and continued to focus on proper underwriting, intelligent pricing across all lines, fast and accurate claims turn-around, and sustainability in the long run, we knew we would be okay. As our Swiss independent director always likes to

say, “If it doesn’t make cents, it doesn’t make sense.” Correct business decisions and sales, profits, cash flows, and balance sheets that we understand and can count on, are critical to the welfare of all of the enterprise’s stakeholders, especially during these times.

Furthermore, we strongly believe in both the power of an individual to make a difference, and in the greater power of individuals moving together as one enterprise. More importantly, we are in a unique position of working with a diversity of generations in our workforce, made up of millennials, generation Xers, late baby boomers, and even early baby boomers, with the latter two categories still very much able to work and learn. Getting the best out of the mix of all four generations is a highly challenging but necessary and worthwhile endeavour. We believe that combining the different but existing concepts and people in novel ways creates the products, companies and industries of the future that will surpass and overcome any adversity.

Utilising technological advances Another unique position is having the capability to be data scientists, having the fundamental product of an insurance algorithm. As such, we have the capability to optimise a large database and engage in mutually beneficial customer-to-company interactions, and drill down on revenues, recurring losses, expenses and investments. We utilise technology to do this and consider it an imperative, recognising that these tasks require the often severely and chronically under-tapped computing power of today. This predictive and advanced analysis goes a long way in enhancing and updating

our underwriting and pricing strategies, among others. These last two years brought out both simple and complex innovations of doing business, of delivering despite the challenges of lockdowns and quarantines, of consistently providing quality service to our customers and business partners. We successfully rose to the evolving demands of the market, in terms of innovative products and services.

We further enhanced our market footprint across digital platforms as well as in physical sales offices in untapped and business areas with high potential. Moving forward, we continue to strive to be better and make an impact, making meaningful connections through wellestablished distribution channels, harnessing technology to improve our accessibility. We continue to bridge the gap with our strong presence in key cities, with the aim of bringing our products to where you are. We are building a collaborative network as we diversify boldly and expand globally. We are forging strong connections with leading institutions and broadening the spectrum of our local and international clients. Standard Insurance continuously strives for excellence in both national and international arenas, serving the needs of the insuring public according to global standards.

World Finance awarded us the ‘Best NonLife Insurance Company, Philippines for 2021,’ for the eighth time, even at the height of the pandemic. Equally important, Global Credit Rating upgraded our financial strength ratings to A+(PH) (single A plus) and an international scale rating of BB (double B). We also maintained our ISO 9001:2015 certification by SGS International.

A sustainable future Finally, the world is insisting that we do things sustainably. Let us all do things that create sustainable lives for everyone: work towards cleaner water for others; more nutritious food for others; cleaner energy for others; let us work towards a future in which we are able to live, work and study in clean and safe neighbourhoods without having to commute expensively for hours; let us be part of a society that provides more equality in terms of opportunities (even if there will always be some who will strive more than others).

We will always respond rapidly no matter what crisis falls in our way. With our massive team of claims experts, highly advanced digital platforms and total insurance infrastructure, we are attuning ourselves to all important challenges and needs, and with our strengths, we are making a difference, the way only we can. n

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Mergers & Acquisitions

Meanwhile in the UK, the Competition and Markets Authority (CMA), has taken a rather interventionist approach to merger control.

This is evident from its approval of Roche’s takeover of Spark, in which the CMA found that the share of supply test was met, despite the fact that Spark did not have any sales in the UK.

The US focus

Merger control – the current global landscape Like almost everything else over the past 18 months, the review procedures for merger control have been subject to change in order to adapt to the ongoing health crisis. Rebecca Farrington and Axel Schulz, Partners at White & Case, discuss ‘killer acquisitions’ and the issues surrounding planned mergers falling foul of competition law Early in the Coronavirus pandemic, the European Commission (EC)’s Directorate-General for Competition sent the daunting message to businesses that parties should delay their merger notifications where possible. Despite initial obstacles, legislators responded quickly, adapting to the challenges of the pandemic by making merger notification submissions electronic and simplifying procedures to fast-track the review process. In March 2021, the EC launched an impact assessment on policy options for further simplification of merger procedures.

In a September 2020 speech, the European Commissioner for Competition, Margrethe Vestager, covered the pressing issue of EU notification thresholds, a hot topic in competition circles, as national competition authorities had begun advocating for and adopting value-based notification thresholds. The goal of these new mechanisms is mainly to catch so-called ‘killer acquisitions’ — incumbent firms acquiring innovative targets to preempt future competition before the targets are big enough to reach turnover-based thresholds.

Vestager confirmed that value-based thresholds would not be among future measures to prevent this type of deal. Instead, the EC’s Article 22 EUMR new referral policy, effective from March 2021, might be used to address this perceived enforcement gap, as it allows member states to refer to the EC transactions that raise potential competition concerns when the EU notification thresholds are not met. In September 2021, the EC published the policy brief ‘Competition Policy in Support of Europe’s 110

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Green Ambition,’ which flagged a particular concern about ‘killer acquisitions’ of companies active in green innovation and suggested the use of the new Article 22 referral policy to tackle the issue.

The EC also appears to be increasingly stringent when it comes to the enforcement of procedural rules. Decisions such as Facebook/ WhatsApp, Canon/Toshiba Medical Systems Corporation, GE/LM Wind and Altice/PT Portugal have been characterised by the imposition of hefty fines for procedural violations such as gun jumping or the provision of incorrect or misleading information.

European national level At the national level, the activity of the French Competition Authority (FCA) and of the German Federal Cartel Office (FCO) provides a good example of the developments in competition policy and enforcement. The FCA has recently shifted the focus of its merger control activity toward digital issues. One particularly innovative example is the novel approach of modernising its market definitions to consider the development of online sales in the retail sector. This trend was unequivocally confirmed in the new FCA merger guidelines introduced in July 2020, which now contain a specific section dedicated to online sales.

As for the German FCO, recent practice has shown a trend to extend Phase II proceedings, leading to a significantly longer total review period than the four months German law currently stipulates.

On the other side of the Atlantic, antitrust agencies have largely adapted to the challenges created by COVID-19. The US Federal Trade Commission (FTC) and DOJ have continued to be active in merger investigations and successfully introduced a Hart-Scott-Rodino (HSR) Act e-filing system. In the first quarter of 2021, senators from the Republican and Democratic Parties introduced legislation to alter existing antitrust laws. While from different ends of the political spectrum, the new bills share many similarities. Both create rebuttable presumptions of illegality or harm based solely on the size of the acquirer and increase the focus on enforcement of vertical mergers. While it remains to be seen whether these bills will become law, there has been increased debate on Capitol Hill about overturning existing antitrust laws, exacerbated by the current discourse on underenforcement in dynamic industries like big tech and pharma.

Nevertheless, both the FTC and the DOJ began 2021 with heightened merger enforcement activity. In January, Visa and Plaid abandoned their planned merger following a DOJ lawsuit alleging Visa had nefarious incentives for the acquisition. The new administration’s first vertical merger enforcement move occurred in February when the DOJ issued Second Requests to Slack and Salesforce. The US agencies have demonstrated a continued focus on transactions involving nascent competitors, as evidenced by the FTC’s challenges to Edgewell Personal Care’s acquisition of razor manufacturer Harry’s, as well as the life sciences merger between Illumina and Pacific Biosciences.

These cases reflect that the agencies are still focused on killer acquisition theories, with the DOJ alleging that Sabre’s acquisition of Farelogix was an attempt to neutralise or eliminate an innovative competitor. Despite the pandemic, the US agencies also released new vertical merger guidelines, which reflect the agencies’ approach to investigating the competitive impact of vertical mergers. Although COVID-19 has been at the forefront of people’s minds, the development of merger control policy and rules worldwide shows that companies looking to take advantage of the disrupted economic environment need to make sure they are abreast of the changes to navigate their way through the uncertainty that still lies ahead. n

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Finding the

sweet spot It’s hard to ignore the current zeitgeist for app-based money management and digital investing. But when it comes to saving for retirement, the greatest challenge for fintechs is still educating and engaging young adults facing an uncertain future. Romi Savova, founder and CEO of PensionBee, spoke to World Finance about demystifying retirement in a postpandemic world. Ruth Kibble investigates »

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he wave of digitalisation that has swept the financial market over the past 10 years has led people of all ages to get more actively involved in their personal finances. But there persists a well-established impression that pensions are by comparison stuffy, boring, complicated, and not relevant for younger people. Romi Savova founded PensionBee in 2014 with a desire to make pensions simple and help customers to locate, consolidate, and manage their investments. PensionBee has certainly tapped into the current trend for managing money and investments digitally and via apps, and the company is passionate about engaging with and educating their customers. Having set out to solve a problem, Savova herself remains actively involved in responding to users’ needs, and with a potential savings crisis on the horizon when today’s young adults retire, a savvy young business owner on the side of millennials will surely help to bring attention to the issue.

Primarily, that issue seems to be that pensions still scare people off with an intimidatingly complex reputation, and Savova agrees. “Pensions are often thought of as complicated and difficult to manage, and many people associate their pensions with filling out paperwork piled in a scary drawer. PensionBee’s mission is to make pensions simple. We do that by enabling consumers to interact with their savings through a unique combination of smart technology and dedicated customer service.”

So far, so user-friendly. But rather than training and working in one specialism for one’s entire working life, it is the norm these days to have a portfolio career, moving to new jobs and even completely different industries several times over. It is rare for people to retire at 60 when they may live beyond 85 (see Fig 1). The department for work and pensions predicts that the average worker will have 11 different jobs during their career, with each workplace – since 2012 – now automatically enrolling eligible staff into a pension scheme (see Fig 2). “Pension consolidation is one of the most popular reasons savers choose PensionBee,” Savova tells World Finance. “People are busy, and their time is valuable so they want to sort out their finances quickly and simply so they can confidently get on with their lives. The days of taking time off work to fill out lengthy paper forms and spending hours on the phone to legacy providers are long gone. Now these tasks can be done in a few clicks from an app on your mobile while you’re travelling to work or sitting on the sofa.

“For younger savers in particular, there’s something very motivating about having a holistic view of your finances and seeing your savings grow over time – thanks to a combination of compound interest, personal and employer contributions and perhaps even investment growth. Having full visibility from an early age can help savers achieve their goals faster and ultimately get the retirement they want.”

Embracing the hive mind early Here, Savova touches on a vital point. It is only in the past few years that financial education around savings, loans, pensions, and mortgages has made it onto the UK school curriculum. That means that, unless it was specifically 114

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chosen by or for them, young adults in their 20s and 30s today had no guaranteed financial education. The impact of a financial education cannot be overestimated, and a quick look at some statistics about the amount of money sitting in ‘lost’ pensions in the UK alone is jaw-dropping.

Thinking about its customers and the pension market at large, we ask Savova if our collective ignorance is obvious to her expert eye, and can anything more be done?

She explains that her company exists to solve a real problem facing millions of people in the UK. “The pensions landscape is too complex, it’s still too difficult to get basic information on how much you’re paying in fees, where your money is invested or even what your current balance is. Despite this poor experience, consumers are often reluctant to make changes for fear of doing the wrong thing. As a result, many savers risk missing out on better pension plans that could help them look forward to a happy retirement.

“We’ve created a product that seeks to give people pension confidence and a sense of optimism about their future, as they know they are saving regularly for the retirement they expect and deserve. Confidence and optimism aren’t emotions that most people feel about their pensions right now, and that’s because the market is not

There’s something very motivating about having a holistic view of your finances and seeing your savings grow over time

Fig 1. Europe’s old age dependency ratio n 2015 n 2050

Number of people aged 65+ per 100 people of working age Sweden UK Ireland France Netherlands Germany Italy Spain 0

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SOURCE: OECD

currently set up to serve savers in the ways that they need and expect. We see evidence of that across the UK in the lack of engagement, low contribution rates and the estimated 20 million pension pots left behind when people have changed jobs.

“One of the most common questions we’re asked is how much to save for retirement. And of course, the answer is the earlier you start the better.” The global average is estimated at 78 percent of current income for a comfortable lifestyle (see Fig 3).

Savova continues; “Over time, the compound interest savers can earn on their savings could have a significant impact on their pension pot by the time they decide to retire. If only those working today had been taught this

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*2050 value is OECD’s forecast

Pensions re-worked

Romi Savova, founder & CEO, PensionBee

ever to be materially worse off than their parents), it is also the case that theirs is an active and engaged generation who have no problem challenging authority and have multiple ways to do that from their smartphones. Just as young activists can tweet directly to world leaders, could there be untold collective power in our pockets in the literally trillions of pounds in our pension pots?

Campaigns like Pension Awareness Week encourage us to take a moment to educate ourselves about what pensions are, what they can do, and why it’s important to invest as much as you can as early as you can. Even a one percent increase in contributions can, with the power of compounding, add up to significantly more in a final pension pot at the end of one’s career. According to the Make My Money Matter campaign, spearheaded by film maker and co-founder of Comic Relief, Richard Curtis, “greening your pension is 21 times more powerful at cutting your carbon than giving up flying, going veggie and switching energy provider, combined!”

Being a millennial herself, Savova is no stranger to environmental and social crises, and this also taps into the drive she feels to educate and engage her customers.

We talk a little about the gathering momentum for using investments for good, and ESG as an indicator of IPO

Fig 2. UK employees with workplace pensions

Fig 3. Income required to remain comfortable in retirement

Percentage share of employees from 1998 to 2020

Percentage

80 75 70 65 60 55 50

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SOURCE: Office for National Statistics UK, Statista

when they were at school, we might not be in the midst of a savings crisis where many retirees face the very real risk of a shortfall in later life.”

Environmental concerns Another common worry, particularly among those new to investing, is around having their money fund industries they may not agree with, such as fossil fuels. Even if pension issues are considered to affect the older population disproportionately, environmental issues face the younger among us far more. While it could be argued that younger generations have more pressing financial problems than their parents or grandparents before them (it is widely believed that millennials are the first generation

India UAE Egypt Hong Kong France Canada Malaysia Mexico Average Taiwan USA China UK Brazil Singapore Australia 0

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Many savers risk missing out on better pension plans that could help them look forward to a happy retirement

success. Could it be that having a choice about where our money goes is the hook for young people to engage more with their pensions? She thinks so.

“We’ve seen from our own customer base that younger savers are more likely to be invested in one of our responsible plans. Increasingly the younger generations are voting with their feet and choosing the companies and products that align with their values.

“Our fossil fuel free plan was created in 2020 in direct response to customer feedback, which highlighted a growing divide, with some customers wanting to engage with oil companies and others no longer believing in the effectiveness of engagement, instead desiring a product that excluded oil from the outset. The plan excludes firms »

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» with proven or probable reserves of oil, gas or coal; tobacco companies; manufacturers of controversial weapons and persistent violators of the UN Global Compact.

“At PensionBee, we believe that sustainable business practices have a positive impact on long-term pension returns. Therefore we consider it important to regularly seek our customers’ views on how their pension, and the companies it invests in, should evolve in a changing world. In our most recent survey, the majority of savers invested in the fossil fuel free plan told us that they are happy with the current exclusion policy, but a significant proportion told us they wanted to also exclude companies that provide associated services to the major oil producers and also banks who finance fossil fuel exploration. As a direct result the plan has now broadened its exclusion criteria to remove companies that provide associated services to the fossil fuel industry.”

It is refreshing to find that the firm’s customer response policy is more meaningful than a token fund, and PensionBee is also listening to a minority within this customer group that want to move more quickly still: “We’re committed to finding a new plan that goes even further in its exclusionary policy, with a focus on positive impact. Even though this new plan is likely to come at a higher cost and reduced diversification, given the emerging nature of this segment in the economy, there’s a growing appetite for a plan of this type. A change is definitely underway and it’s young people who appear to be leading the charge!”

Above A rally in defence of fair pensions in Madrid, Spain

Pension activism Here, we seem to find the paradox. Young people care about everything. There has never been such passion and drive around veganism, social issues such as Black Lives Matter, averting the climate emergency and corporate social responsibility. With an increased awareness of where our money goes and putting investment back into local economies and towards good causes, comes a surge in the proliferation of ethical funds and pension investments.

Combine tech-savviness with the moral imperative for this generation to do better, and rather than a bleak situation, we could be at a perfect tipping point, a new age of pension investing that not only benefits the individuals who are taking control of their own futures, but that also contributes to a less gloomy future for the planet as people quite literally take matters into their own hands.

Any shrewd entrepreneur knows that there is opportunity in solving problems of inconvenience or effort, and PensionBee takes this premise and creates an easy to use and understand platform that could end up changing customers’ behaviour, such that they end up with a pension that is much more fruitful than it would have been otherwise. In terms of strategy, I wonder whether PensionBee consciously positions itself as a ‘challenger’ in the world of pensions as Starling, Monzo et al have with retail banking. Savova is direct in acknowledging that since it was founded in 2014, PensionBee has been a challenger in an industry ripe for disruption.

“We’re constantly innovating and setting new standards of transparency in a sector that hasn’t changed or adapted with advances in technology and consumer be116

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We’ve found a way to connect with a generation that has long been forgotten by the legacy providers

haviour in decades. We’ve found a way to connect with a generation that has long been forgotten by the legacy providers, and are passionate about campaigning on behalf of savers to improve standards across the industry, whether that be around exit fees or consumer switch guarantees.

“Being on the right side of change, particularly in financial services, is very motivating. Over the years we’ve learned that as long as you have the consumer on your side and are doing the right thing, you can take on huge battles and win. “We aim to be the best universal online pension provider, and in the past 12 months have released several innovative new product features that set us apart, including deeper open banking integrations, so our customers can manage their pension in some of the UK’s most popular money management apps, and creating a pension product for the self-employed, a group who have historically been underserved by the pensions industry.”

I wonder if there is a typical PensionBee customer, and if the company’s metrics show any gender or generational bias. I assume young adults make up the majority of the customer base and I am right, with those in their 30s and 40s making up the majority. Interestingly, around 20 percent of its customer base is self-employed; a significant proportion of whom will be classic portfolio careerists. The gender split is around 3:1 in favour of men, but Savova assures me they are putting plans in place to significantly increase the number of women signing up to PensionBee next year.

“The needs of our customers vary and we’re here to help them look after their pensions throughout their savings journey, from sign up to drawdown. PensionBee’s vision is to live in a world where everyone can look forward to a happy retirement in the form of financial freedom,

Pensions re-worked

Gone are the days of working for the same employer for 50 years in the hope of having a vaguely comfortable retirement

to be moved anywhere other than its own scheme, probably because it is in everyone’s interest to not risk billions of pounds being moved out of government control and potentially into high-risk portfolios or poorly managed funds, or simply being forgotten about. The government invests and manages these pension funds itself, and returns are then used to raise capital for government aims.

The second reason (and perhaps a tonic to the above) is that civil service pensions are roundly considered to have excellent terms and no adviser would suggest you’d get a better deal elsewhere anyway. The upside to that is that people with such pensions can continue to benefit from them; the downside is that it means that no app or pension system will be a ‘one stop shop’ for you. PensionBee and its ilk plainly offer the most benefit and convenience to those who have had several previous jobs in the commercial sector. It will appeal most strongly to those who have a standard portfolio career rather than those in state positions.

Empowerment through taking control

good health and social inclusion. Educating people about the benefits of saving for later life is vital to achieving this.

“Saving for retirement is a marathon, not a sprint. It can be overwhelming to think about how much a saver will need to put aside to be able to afford the lifestyle they’d like in retirement; however, it’s important to set realistic goals, whatever their age, and use a pension calculator to ensure they stay on track. Apps like PensionBee’s increase consumer engagement with pensions and help savers feel a sense of control and ownership over what’s happening to their money. By feeling in control, we hope that savers will consider what retirement could look like for them so that they make appropriate contributions and better plan for later life.”

Gathering the nectar I attempt to follow the process and try it for myself. PensionBee shouts loudly about helping you trace your old pensions, but in the early stages of signing up with them it becomes apparent that they can only trace what you can provide. This is reasonable, but unless you have a list of previous employers and their associated pension providers next to you when opening your PensionBee account, you will still likely find yourself trawling through emails and paperwork attempting to dig out the name of your previous providers. The UK government has a pension tracing website that may be able to assist with this.

It is also worth bearing in mind that pensions held from civil service, the NHS, teaching positions or other public sector jobs like local government are not possible to transfer into a PensionBee scheme, or any other for that matter. The reason for this is twofold. The first is simply that the government does not allow such pensions

Apps like PensionBee take the hard work out of tracing your own pensions from days gone by and enable you to start saving easily if you haven’t already, split into one of eight funds. No endless options to scroll through, no paperwork. Yes, for the more experienced investor there isn’t much to challenge you or lots to compare and contrast, but the financial imperative is for people today to take care of themselves (and the planet) in a way that has not taken this shape before. Gone are the days of a once-a-year letter from a pension provider you didn’t know you had, telling you how a set of investments you don’t understand have performed. Gone are the days of working for the same employer for 50 years in the hope of having a vaguely comfortable retirement.

So many elements are at play here: portfolio careers where people switch jobs every five years or so. The willingness of young adults to look corporations in the eye and ask where their money is going. The proliferation of fintech startups that bring ease, speed, and dare I say it, fun, into making investments and watching your savings grow. The fact is that more and more people are aware that the future does not look good, either in terms of relying on the state pension alone or when considering the direction the world is headed.

Savova certainly seems to understand this duality.

On the one hand is the need for digital money management and making finances easy and relevant to everyone, but especially younger adults. On the other is a global imperative to put a stop to climate change and impending doom. The paradox is that something historically thought of as boring, irrelevant, and moreover a long way off, could be crucial in tackling the ecological disaster that may once have been far away, but has now very much come knocking. We may not be especially motivated to riffle through financial paperwork for a retirement that is decades away, but Romi Savova says it doesn’t have to be that way, and for a small amount of effort, we could all take practical steps towards a significantly improved retirement pot and, with a bit of luck, a sustainable world in which to enjoy it. n

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Forex

Market trends of the new reality The economic turmoil inflicted in the wake of the COVID-19 crisis has left many a trader and investor disorientated. While its effects continue to play havoc in the markets, Olymp Trade provides clear analysis and market strategy to help make sense of it all When the virus came, the lockdowns, travel bans, and restrictions in response to it, decimated the global economy. To reduce the damage, state authorities put anti-virus and economic recovery measures in motion. Now, the global economy is slowly trying to recover, but the damage is reflected in the markets where the effects of supportive economic activities continue to alter the landscape.

For many traders, it can be hard to orient oneself in such a changing environment. This article was created to help them. It observes and structures the main economic trends.

Also, it provides some specific trading strategy recommendations and helps traders better understand the changing global economic environment. As a result, their trades may be better planned and aligned with the current market trends, and their overall ‘survival’ ratio may possibly increase.

Response to the pandemic The pandemic and resulting lockdowns severely impacted the global economy. Activity in the manufacturing sector, a core element of economic growth, sharply declined at the peak of the pandemic response. According to IHS Markit, in May 2020, the US PMI fell to a record low of 36.1. In the EU, the same indicator was at 33.4. Against this backdrop, stock markets began to slide. The Dow Jones fell more than 35 percent, and the Euro Stoxx 118

| Winter 2021-22

50 dropped more than 40 percent. To fix the situation, developed states put in place extensive supportive campaigns to restart their economies. Primarily, their central banks significantly reduced interest rates. Also, they launched emergency stimulus programmes, effectively printing more money.

As a result, the money supply in the EU and the US jumped to record highs. In the US, the M1 money supply almost tripled. The American economy has never seen such a growth rate in all its history. The supportive campaigns worked. Together with the loose monetary policy, the stimulus made the dollar fall. The central banks jump-started the stock market and their economies.

Inflation as a side effect Central banks across the world printed nearly $9trn in 2020 to support economies. They managed to revive the economies, but their measures have led to inf lation growth. In the US, it is now 200 basis points above the target value. Other developed states are suffering a similar side effect. In the meantime, the demand for international trade and domestic consumption is at historic lows. US retail sales haven’t grown by one percent yet.

August saw a weak growth rate of 0.7 percent, and the second quarter of 2021 had –1.8 percent. China has a similar problem. Moreover, the world may fall into another recession from

weakening demand for Chinese products.

This problem plagued Europe in 2019 before the pandemic. If it happens again, Europe and Japan will suffer because their economies are export-oriented and have tight trade bonds with China. Also, unlike other G7 countries, their central banks are unlikely to stop the economic stimulus as their GDP growth has only recently surpassed zero. Therefore, while central banks’ actions aided the economies, they are now struggling to find a solution for the side effects for these measures, and inflation is just one of them.

The energy sector crisis Energy prices are rising, and this issue moves parallel to the inflation problem. In Europe, gas reserves have been significantly depleted partly due to the unusual summer heat and low winter temperatures of 2020. On the other hand, the ECB’s push towards green energy doesn’t help the EU reduce its total energy demand. As a consequence, the EU’s current energy shortage has not been seen since the previous decade. Therefore, it is under pressure to get back to traditional energy such as coal, with Russia as its first supplier to consider.

Russia is now directing most of its coal to Asia under contractual agreements. It simply doesn’t have enough spare to provide to Europe. Furthermore, even if Russia was able to do it, the railway system’s physical limitations

markets

Forex

$9trn

Printed by central banks during 2020 to support economies

To benefit from the changing market environment, traders and investors need to be aware of its trends and the opportunities it offers wouldn’t allow it to effectively distribute the supplies. As a result, Europe is stuck between the green movement and the effects of 2020, and its energy demand is left unfulfilled. In China, new resistant virus strains have disrupted the normal functioning of the country’s energy systems. The government has imposed restrictions on energy consumption, and businesses lack access to energy inside the country to meet production needs. This is pushing the Chinese state authorities to look for more energy on the global market.

These facts suggest that the global energy demand is increasing. In the oil sector, however, OPEC+ isn’t planning to meet it immediately. On the contrary, its member countries have recently agreed to incrementally increase oil output in the near future. The cartel wants to support energy prices to extract the most profit from them. Recently, natural gas prices exceeded $1,500 per 1,000 cubic meters. Brent crude has crossed $80 against the $60–70 range it had in the summer and is likely to keep going up. October 2018 was the last time Brent was as high. Even after the drone strike on Saudi Arabia’s ARAMCO refineries in 2019, oil prices didn’t leap that much. In the near future, observers expect the oil price to exceed $100.

Partly due to the strong energy demand and progressing economic recovery, the mining and exploration companies are now doing fairly well. The Dow Jones Oil & Gas index

reached 470 points, and EuroStoxx Oil & Gas is testing 290 points. Based on these dynamics, we believe most energy stocks may grow through the end of the year. In the meantime, while developed states are trying to move towards green energy, the high carbon energy sector is attracting less global investment and losing appeal to retail traders. That’s why many brokerage companies now educate traders about the cost of missed opportunities while expanding their financial literacy.

How to trade when the stimulus ends Positive dynamics may not be as likely for the other market sectors. The US Federal Reserve, European Central Bank, Bank of England, and other state financial authorities are about to move from supportive to restrictive monetary policies. Recently, the US Fed Chairman, Jerome Powell, hinted that quantitative easing (QE) will soon be phased out as the US economy is recovering well. When the cutting back of QE is announced, the US dollar will likely go up. In fact, it is already growing on the expectation of the end of stimulus. In the meantime, stocks have an inverse correlation with the US dollar.

Historically, every time the Fed cuts back the QE programme, stock prices mostly drop.

In August 2021, the Fed indicated that a shift to the ‘normalisation’ of monetary policy was coming. In response to that, the stock market

began to reverse. The impending end of the US Fed’s support is the main reason for the firming US dollar and the decline of blue-chip stocks.

Yet, stocks may receive the full hit when the US Fed stops supporting the economy. The asset volume on the balance sheet of the Fed is around $8.36trn. They are currently buying $120bn in treasury bonds and mortgagebacked securities a month. This process fuels interest and prices in various asset groups. But when it stops, a huge void may form. To avoid its impact on asset prices, traders need to select their trade instruments well.

A possible way to do that is to wait until the market correction ends. While waiting, cash may be a safe place to keep funds, but eventually, traders may be able to form new portfolios by buying financial instruments at lower prices. Another way is to buy the so-called ‘defense’ stocks. This refers to those with low or negative beta. It may be American Tower from the financial sector or Bristol Myers from the medical technology sector. Colgate-Palmolive, Procter & Gamble, or PepsiCo from the nondurable consumer goods sector may also do.

These stocks have a fairly low beta. Comparative analysis shows that their capitalisation is undervalued against the industry average. At the same time, these companies have high average profitability and promising revenue and net profit growth dynamics. Alternatively, traders can open short positions on stocks that are in the risk zone upon moving to restrictive monetary policy.

A tactical solution from Olymp Trade To benefit from the changing market environment, traders and investors need to be aware of its trends and the opportunities it offers. Focusing on the right asset at the right time is key.

That, in turn, may be easier with a broker that offers a solid educational base and keeps traders well informed on what’s happening in the market. This is Olymp Trade’s commitment.

Olymp Trade is a trading platform that provides a practical knowledge base through its help centre, made available right from inside the app. It contains various kinds of educational materials from video guides to textual explanations of how Forex trading works.

Traders may apply their knowledge to various types of assets, from Brent to crypto. Moreover, they can do that in various trading modes such as Forex or stock price trades. Equipped with various trading tools ranging from price alerts to market news, they get a trading environment that is as flexible as it is comfortable.

Both qualities help traders to effectively orient themselves in the rapidly changing Forex world and reach their financial goals. n

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Technology

The future role of AI in finance The financial industry is changing rapidly and external catalysts are overwhelming its business model. Blockchain, AI and mobile payments have led financial services companies to refine their views of the future, but can AI ever replace the personal experience?

AI use cases in finance words by

Nicholas Otieno FEatuRES WRItER

The general consensus appears to be leaning towards the idea that artificial intelligence can replace the role of human financial advisors and therefore, those in the industry must adapt or risk getting left behind. But before jumping to that conclusion, it’s worth exploring some important questions: what’s next, what is needed and who needs it? And, perhaps crucially, whether AI will ever remove the need for human advisors in the financial industry.

AI transforming financial sector Business leaders have revealed that the use of technology including AI plays a significant role in filling gaps within financial services offerings. Jim Pendergast, Senior Vice President and General Manager at AltLINE by The Southern Bank, has said that AI can improve the consistency of financial advice. “AI is inherently consistent, so it can provide a much narrower picture of what will work and what won’t based on previous information. When it comes to investing, having this level of consistent understanding of the market can help investors make the right choices.”

Cliff Auerswald, the President of All Reverse Mortgage, said in a recent interview that AI could solve questions about potential financial problems and solutions. “While human financial advisors do have some of the best options for financial solutions based on past experiences, AI can provide more researchbased information on how people can succeed financially,” Auerswald said. It’s clear that with advancements in technology, even the financial sector has become less human dependent.

Personal mobile applications powered by AI and machine learning algorithms have started flourishing in the market, providing additional value over traditional approaches.

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As highlighted by Pendergast and Auerswald, the rapid expansion of AI application areas is having a huge impact in the environment that firms are operating in, both externally and internally (see Fig 1). Externally, AI is making it possible to carry out tasks faster and at a lower cost. Internally, AI is shaping companies’ relationships with their customers, other firms and society at large. Pendergast said that some of their clients rely on AI to improve their finances. “We work with small and mid-sized businesses, so we often recommend software that will help them keep track of their finances successfully,” he elaborated.

Auerswald mentioned that his own company occasionally uses AI for their financial advisory. “We don’t know any major organisations that rely solely on AI. Other organisations should give it a shot since they can likely improve their metrics and customers’ experiences over time.” Of course, the pandemic has further accelerated digital transformation in the banking sector, with several financial firms racing to adopt cloud-based technology to deliver a much better service for their clients. An increasing number of financial companies use various different technologies to offer digital online services that have traditionally been provided by mainstays of the financial industry. According to Pendergast, many financial services firms are using AI to detect fraud, predict cash-flow events, create invoices, fine-tune credit scores, conduct cost and benefit analysis, as well as for account creation and goal setup.

Other uses include recommendations for investing, rebalancing of portfolios and retirement planning, communication between users for mutual investments, and trading and investing in stocks, bonds and ETFs. Robo-advisory helps to simplify customers’ user experience and make advisory services accessible to both wealthy customers and investors with lower investable amounts. Roboadvisors are increasing investment activity, especially with the low-budget investor, who

generally doesn’t have access to investment advisors. Continuous 24/7 accessibility, automated rebalancing, and monitoring differentiate robo-advisors from traditional investment advisory services. Customers can access their accounts via user-friendly websites or smartphone applications and make adjustments to their portfolios any time of the day and recalibrate their investments.

Robots can’t replace human interaction There has been lots of hype about AI and its potential application in the investment advisory process, but implementing such a service model must be evaluated in strict terms that take ethical questions about transparency and responsibility into account. Both Pendergast and Auerswald admitted that the use of AI for personal finance and planning is gaining in popularity and is seen as more accurate as a forecasting tool. However, when it comes to things close to people, they disclosed that financial firms still prefer human financial advisors – this includes buying a house, buying a car and planning for retirement.

Pendergast asserted that AI will likely never truly replace financial advisors. He stated that financial advisors have tools to help increase finances and often explore routes that most people don’t consider, and AI often won’t have the ability to make those distinctions.

markets

Technology

to customers, such services seem to struggle with customer adoption. Customers appear to prefer hybrid models where they can search for information and compare products online, but are still able to contact human advisors before completing the final investment. AI advisory services do have some value, and the proof of this is measured by those willing to test out a robo-advisory service when they discover that one exists. They just aren’t willing to use it to make actual investments via online platforms.

Pendergast and Auerswald admit that this is an area in which more work is needed in order to design AI so that the end result is more accessible for customers.

AI can support human advisors’ success

Auerswald appears to be in agreement on this point, explaining that human advisors are better able to adapt than AI, though machine learning is narrowing that gap. “Even with all the research that goes into AI, human intelligence can make decisions that are not based on previous activity in the market, making them invaluable,” he stated. In other words, the industry experts don’t believe that AI can replace the role of human financial advisors.

They agree that human financial advisors continue to play an important role in counselling individuals about managing expenses

Fig 1

in accordance with their income and ways to increase their savings for better investments.

For instance, Pendergast stated that technologies such as AI are better suited to handling day-to-day functions such as opening an account or executing trades than giving advice to clients. AI advisory systems are currently based on products that require little or no active portfolio management. An example of this is ETFs, which do not require active decisionmaking by portfolio managers, thus making their cost structure more manageable. Despite the cost savings that AI services provide

AI use cases in financial services industry worldwide percentage

70% 60% 50%

58%

40%

41%

30%

33%

33%

31% 25%

20% 10% 0%

Fraud detection

Finance processes, analysis

SOURCES: MIT Technology Review Insights; Genysys; Phillpis; Amazon - Statista 2021

Cybersecurity

Personalisation of products, services

Customer care

Asset management

Notes: Worldwide, January to December 2020

For now though, the industry experts believe that human financial advisors will still be needed alongside AI, both now and in the future. Pendergast said that AI is vastly more efficient than most other techniques, and therefore it can help financial advisors save a lot of time. Auerswald agrees that time delays when it comes to market analysis can be solved with AI. “One of the problems with the traditional way of working is the time it takes to analyse information. AI can make information more reliable, but the resources will be easier to see overall,” he stated.

Typically, a financial advisory role is a pretty hectic job. Accounting for clients’ income, expenditure, loans, taxes, and investment is not a straightforward task for a financial advisor. The calculations, and therefore the results, can be imperfect at times. All the above shortcomings can be easily overcome by using a mobile application backed by AI. In other words, financial advisors should be supported by technology – AI could be used to make sense of the research and other data that advisors don’t have time for. The very best technology is that which acts as a natural complement to our lives. That is what AI can do, because breaking down a variety of product options is a mammoth task that we are not necessarily best equipped to carry out.

Auerswald signalled that AI is likely to take over many organisations, as many people may choose this option over a paid financial advisor, since it’s much easier. He did mention, however, that people who don’t know how to make the correct financial decisions are destined to fail, even if they do use AI metrics. “Remember that AI is not exact, so it’ll become more popular, but coupling it with human financial advisors will continue to be the future of artificial intelligence,” he stated. n

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Technology

holDING up a MIRRoR to thE FacE oF huMaN ExIStENcE IS FINE, So loNG aS It’S Not thE SIDE oF It that ENGaGES IN WaR oR EthNIc clEaNSING

Robot wars Robotics and AI, now more than ever, is a thriving industry – though care must be taken to ensure our increasing technological prowess does not take us down a dark path

words by

Scott Rouse FEatuRES WRItER

It was in 1921 that Czech writer Karel Capek coined the term ‘robot’ when writing his play Rossum’s Universal Robots. It is perhaps from these early beginnings that we have developed a general wariness towards technology and a fear of things created in our own image, for in the play, and now a common trope in science fiction, the machines rise up against their masters and bring humankind to the brink of extinction.

We marvel at robots and AI that can mimic lifelike behaviour, but also find them just a little bit disconcerting. Capek’s play, set around the year 2000, was a vision of the future that did not come to pass, though industrial robots were in widespread use by then, having first appeared in the early 60s. It is only in recent years that we have been edging closer to more nuanced applications of robotics and its associated field, AI, that lean towards the kind of mimicry that Capek envisioned.

In June 2020, Boston Dynamics, under ownership of SoftBank, offered up its first commercial product, Spot, a four-legged inspection robot, capable of navigating terrain with ‘unprecedented mobility, allowing you to automate routine inspection tasks and data capture,’ according to the promotional material. A majority stake in the company was then purchased by car manufacturer Hyundai in December that year, so there is a lot of jostling for position in an industry that has the potential to influence a great many markets.

Over a year later, in August 2021, when introducing the Tesla Bot as part of the company’s AI day, Elon Musk said: “Tesla is arguably the world’s biggest robotic company because our cars are like semi-sentient robots on 122

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Boston Dynamics’ Spot The Robot Dog

wheels.” He goes on to make the case that the work his company has done to provide his cars with the ability to understand and navigate the world is transferable to a humanoid form, joking to a reception of nervous laughter that the Tesla bot will be designed so that “you can run away from it” and “most likely overpower it.” It introduced just the slightest hint of apprehension when stepping into a future that could be right out of those well-trodden sci-fi storylines.

If life does imitate art, then I would hope that artificial life does not imitate us.

A trip to the uncanny valley For just as we are aware of our capacity for benevolence, we are aware of our shortcomings.

Perhaps we are fearful that we will unwittingly teach these to an AI. In building robots we are holding a mirror up to ourselves and to the world. Therefore, when we see four-legged robots moving around as an imitation dog, or Boston Dynamic’s Atlas, a humanoid bipedal robot, perform parkour in a pre-proamount uS Department of grammed sequence, Defense plans to invest in aI or even observe the for 2022 ‘muscles’ of a robot arm flexing, we get a sense of the ‘uncanny valley’ – that feeling of something eerily similar to us, but not necessarily frighteningly so. Because holding up a mirror to the face of human existence is fine, so long as it’s not the side of it that engages in war or ethnic cleansing.

When Spot is mounted with a tactical assault rifle, or when the parkour performing Atlas robots are suited up with Kevlar, then perhaps we might start worrying. Because then, it is less uncanny, and more the stuff of science fiction nightmare.

Prof Stuart Russell, the founder of the Center for Human-Compatible Artificial Intelligence at the University of California, Berkeley, speaking to The Guardian newspaper said;

$874m

“The use of AI in military applications – such as small anti-personnel weapons – is of particular concern” because “those are the ones that are very easily scalable, meaning you could put a million of them in a single truck and you could open the back and off they go and wipe out a whole city.”

Perhaps any anxiety about the machines taking over is premature, but a lean towards adapting robots for military use does set alarm bells ringing. Boston Dynamics has stated in its ethical principles that it is firmly against weaponising robots, but it is not the only robotics company to have built a robot dog. In October, Ghost Robotics unveiled its version with a special purpose unmanned rifle (SPUR) affixed to the top of it, making the unnerving case that dogs are not necessarily a man’s best friend. The module, designed specifically for these robots, comes courtesy of a company called Sword International and has an effective range of 1,200 metres. Of course this does not prove that we are moving towards a future of autonomous killing machines, but it is a worrying development.

The Biden administration has proposed an increase in R&D spending for the Department of Defense to the tune of $112bn, according to figures in the Pentagon’s fiscal year 2022 budget request, the largest such increase on record.

A total of $874m would go towards development of artificial intelligence to keep up with its adversaries.

And this is where I believe the crux of the problem lies. Government defence agencies are engaged in a never-ending game of oneupmanship in order to maintain the edge in any future engagement. Many envision robot labour transforming the economy and rendering physical labour a choice for us.

I’m certain that those enthusiastically enlisting for this future hope that it ultimately wins out against our innate predisposition for self-destruction. n

markets

Space Tourism

Wish you were here There has always been significant interest in the final frontier and as commercial space companies work to make space tourism a viable market, we may not have to wait too long for the price of admission to come back down to Earth

words by

Lana Crowe FEatuRES WRItER

Once dominated by national space agencies, private companies are revolutionising the technology-constricted space travel industry.

Exciting scientific developments are funded by impressive levels of investment: in 2017, 120 venture capital funds put $3.9bn into commercial space companies. While most private aerospace companies are research-focused, a market for sending non-astronauts to space is emerging, as flights become autonomous and no longer require a trained astronaut to operate the craft. This year, the success of the first tourist spaceflights has been a breakthrough.

Whether space tourism can generate enough turnover to make a profit, considering the high costs, is a major barrier to this yet unproven market becoming sustainable. The successful development of reusable launch systems is a big step towards lowering costs enough to make it a viable market: Elon Musk, whose aerospace company SpaceX was founded with this goal in mind, has claimed that “the cost of access to space will be reduced by as much as a factor of 100.” In the next decade, the value of the space industry as a whole is expected to double, from $400bn to $800bn.

According to UBS, the space tourism market alone could be worth $3bn by 2030.

New horizons An important distinction in space tourism is between suborbital spaceflight – which usually peaks approximately 60 miles above sea level at the Kármán line (the boundary between the Earth’s atmosphere and outer space), where passengers experience a view of the Earth and a feeling of weightlessness – and orbital spaceflight, in which a spacecraft ventures beyond the Kármán line and into orbit. Jeff Bezos’ Blue Origin and the Richard Bransonfounded Virgin Galactic are both developing suborbital flights.

Blue Origin sent its first crewed mission of private travellers into space in July 2021.

The New Shepard rocket – named in honour 124

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of Alan Shepard, the first American astronaut to fly into space – is just over 18 metres tall (around the height of a four-storey building), consisting of a booster rocket and a 15 cubic metre pressurised crew capsule. The rocket flies up to the Kármán line and the capsule separates from the booster near the peak of ascent; the former deploys several parachutes to return safely to the Earth’s surface, while the latter undertakes a powered landing.

The f light lasts just 11 minutes and is thought to require one day of training. Blue Origin’s first paying customer was 18-year-old Oliver Daemen, replacing an anonymous buyer who purchased the seat at auction for $28m.

As well as Jeff Bezos and his brother Mark, the crew was completed by trained astronaut Wally Funk, who, at 82, became the oldest person to fly to space. Her record was quickly surpassed when, in October, 90-year-old Star Trek actor William Shatner was on board Blue Origin’s second successful crewed flight. It has been reported that Blue Origin has sold almost $100m worth of tickets to tourists for future trips.

While Bezos was expected to be the first of the private space entrepreneurs to board a suborbital flight, he was beaten by Richard Branson. Virgin Galactic is primarily focused on tourism, and the Virgin brand experience is a selling point of Virgin Galactic’s offering, which prioritises photo opportunities and is advertised on luxury experience websites.

For $250,000, a Virgin Galactic space tourist can expect a 90-minute tour after three days of training. Unlike Blue Origin’s New Shepard, SpaceShipTwo – which has been specifically designed for space tourism – is a spaceplane, a class of vehicle intended to function like a fixed-wing aircraft in the Earth’s atmosphere, and like a spacecraft beyond. The spaceplane is carried by WhiteKnightTwo to an altitude of 8.5 miles, where upon release its hybrid rocket motor propels it to the Kármán line before it glides back to Earth.

Virgin Galactic also has plans to revolutionise tourism in another way: by replacing longhaul flights, which usually cruise at an altitude of around seven miles, with high-speed travel via space. UBS predicts that this form of highspeed travel could be a $20bn annual market

in 10 years’ time. Virgin Galactic went public in 2019, and has a market cap of $6m. Since it was founded in 2004, Virgin Galactic has raised more than $1bn in funding.

Above and beyond While both Blue Origin and Virgin Galactic are offering suborbital experiences, Elon Musk has his sights set higher. SpaceX became the first private company to send a spacecraft to the ISS when its unmanned Dragon One docked in 2012, and last year became the first private company to send astronauts to the ISS in Dragon Two. This spacecraft has two variations: Cargo Dragon, an update on Dragon One, and Crew Dragon, which can carry up to seven passengers. While Crew Dragon’s primary function is to transport astronauts to and from the ISS as part of Nasa’s commercial crew programme, it will also be used for space tourism.

In September 2021, SpaceX facilitated the first orbital space flight of only private citizens, in association with payment processing company Shift4. The mission was in aid of raising money for a children’s research hospital in Memphis, Tennessee. Crew members – including Shift4 CEO Jared Isaacman – had extensive training over a six-month period, including a 30-hour simulation in a full-size replica.

markets

Space Tourism

splashdown landing in the Atlantic Ocean.

SpaceX has raised more than $6bn in equity to date. It has recently been valued at $100bn.

$100m

Value of tickets sold for future trips on Blue Origin

$3bn

Potential value of the space tourism industry by 2030

When you’re a high-net-worth individual, it’s all about being the first, trying something new Crew Dragon begins its journey atop a Falcon Nine launch vehicle; the two stages of separation occur within minutes of lift off, leaving the capsule on its own in space. The capsule is 9.3 cubic metres, with reconfigurable black racing-style seats in a clean, white interior.

Sleek design has been considered alongside comfort and experience as well as function: a touchscreen interface replaces the switchboard; for the September flight, the docking station was replaced with a glass dome to allow its passengers a panoramic view.

The September flight did not dock with the ISS but orbited the Earth for three days, reaching an altitude of 364 miles. During this time, the crew conducted medical tests, including monitoring blood oxygen levels, heart rate and ECG activity, for research into the effect of spaceflight on people who haven’t been carefully screened and benefitted from the extensive training required of professional astronauts.

If docking with the ISS – which resides around 250 miles from the Earth’s surface and is reached within 24 hours – Crew Dragon can perform this manoeuvre autonomously. Nasa announced that the ISS was open for private space missions in 2019: it is thought to receive $35,000 for each night a tourist spends on the ISS. In partnership with Space Adventures, SpaceX will shuttle tourists to and from the

ISS in a joint venture with infrastructure developer Axiom, with each seat coming with an estimated $55m price tag. The long-term plan is for tourists to visit Axiom’s proposed private space station, planned to be completed by 2030. Earlier this year, Axiom announced it received $130m in funding, and suggested that its valuation had surpassed $1bn.

The descent from the ISS takes around two days. Once the capsule re-enters the Earth’s atmosphere, travelling at a speed of around 17,000mph, parachutes deploy to assist a safe

Fig 1

Investment in Space billion usd

20 18

16.84

16 14 12 10 8 6 4 2

1.06

1.50

2000-2004

2005-2009

3.35

0 SOURCE: Tauri Group – Strat up Space

2010-2014

2015-2019

A changing landscape Blue Origin, Virgin Galactic and SpaceX were all founded in the years following the first space tourist flight in 2001, when entrepreneur Dennis Tito became the first private space traveller. At the time, Nasa was strongly opposed to touristic space travel, objecting to the heightened burden of care placed on crews accompanied by a non-professional. As a result, Tito flew as part of a Russian mission. Daniel Goldin, then Nasa’s administrator, criticised Tito at a government hearing in 2001, claiming that he “does not realise the effort of thousands of people, in the US and Russia, who are working to protect his safety and the safety of everyone else.” On April 28, 2001, the Soyuz TM32 mission launched with Tito on board; two days later, they docked with the international space station. Tito spent seven days, 20 hours and four minutes in space, orbiting the Earth a total of 128 times. He reportedly paid $20m.

Though much has changed in the 20 years since Tito’s flight, the barrier to entry remains high. For now, space tourism will remain the privilege of the super-rich. A 2020 Cowen survey found that 39 percent of individuals with a net worth of about $5m were interested in Virgin Galactic’s $250,000 space trip, estimating the addressable market to be almost 2.5 million people. “When you’re a high-networth individual, it’s all about being the first, trying something new,” Barry Shanks, director of space travel agency RocketBreaks told World Finance.

Infrastructure, from specialised travel agencies such as RocketBreaks to space ports, hotels and space stations like that planned by Axiom, will also be a key part of the landscape of commercial space tourism. Businesses such as RocketBreaks could form an important part of that infrastructure: “With the large amount of different experiences on offer, the need for a specialist travel agent will be a must,” Shanks said. Though COVID-19 saw the slowest quarter for space infrastructure since 2009, last year was the largest on record for investment in infrastructure, reaching over $5bn. In the first quarter of this year, space infrastructure companies raised a combined $3.6bn (see Fig 1).

Despite numerous obstacles, from cost to safety to technological restrictions, space tourism is a sector that is set to develop rapidly over the next decade. “We are finding it’s experiences that matter,” Shanks said. “A voyage into space is a trip of a lifetime that you will never forget.” n

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markets

Focus: Malta

Making a move to magnificent Malta Investment migration and economic mobility are equally appealing and both can be discovered with residencyby-investment entrance to Malta, offering solutions for families of the future

words by

Charles Mizzi cEo, RESIDENcy Malta aGENcy

The world is currently struggling with its identity. Overnight, from a place of globalisation where cross-border movement was at its height, humankind found itself in a state of travel limitations, border restrictions and introspection, and all because of a microscopic but highly contagious virus. Media coverage of curfews, quarantines and doctors decked from head to toe in full protective body gowns at hospital beds looked like cuts from post-apocalyptic movies. Citizens of the world put their physical and mental brakes on, to take stock of their personal, professional and social situations, while political contexts baulked under pressure.

Never before had we felt our freedoms so restrained, checked and limited. Never before has liberty of movement been so valuable.

And never before has second residency been a more attractive proposition. Traditionally, families look at residency-by-investment as a means to have an alternative home in a safe and secure place, in case things go wrong in their country of domicile – a plan ‘B’ that puts their mind at rest. From geopolitical unrest to lack of educational opportunities for their children or a dearth of investment possibilities, a second residency gives individuals and 126

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families a kind of insurance, a guarantee of a sound fall-back position, and a plan for a better future and lifestyle for their families.

Our industry has not been spared the impact of COVID-19. However, ironically, there has also been increased interest in residency-by-investment propositions. It is easy to see why. People want to live in jurisdictions where their health and safety are guaranteed.

Families want fast and easy access to good healthcare that can be life-saving. Entrepreneurs want to operate in markets that are sound and that have growth potential even in the face of adverse economic conditions.

An attractive proposition There is an excess of motives as to why Malta is an alluring destination for investment migration. Malta combines island life with European standards and a multi-cultural ambience. An archipelago in the middle of the Mediterranean just south of Sicily, the country boasts a mild climate and over 300 days of sunshine, pristine beaches, a rich history and heritage and an outdoors lifestyle.

This, however, is contrasted with a strong economy, highly regulated industries, and membership of the European Union, the Commonwealth, the Schengen Area and the Eurozone.

Malta’s strategic location and its geographical proximity to Europe, North Africa and the Middle East means it is well connected to the main regions and markets of

Marsans harbour at sunset, valletta, Malta

interest with numerous air and sea links.

Malta has world-class healthcare services, easily accessible via reasonably priced health insurance. The country registered impressive Covid vaccination stats that dominated the EU tables – the result of a strategy that coupled opting for full allocation when purchasing vaccines, with a general awareness of the importance and benefits of getting vaccinated. At the height of contagion, health authorities gave daily public briefings to keep citizens well informed while introducing general restrictions that helped mitigate the spread.

The country offers excellent educational opportunities with a range of state, church and independent schools, as well as a 400-year-old university and a college of arts and sciences. With English being an official language and the language for doing business, expats will have no issues communicating with locals and settling in will be easy.

Indeed, Malta is one of the safest countries in the world, with a negligible crime rate.

This should attract families who would like

markets

Focus: Malta

time of four to six months from the submission of a complete and correct application. With such a brand promise, applicants can put their mind at rest that it will not be a long-drawn-out procedure.

Embracing the nomadic lifestyle

to spend their time in an environment where children are safe and women go out for earlymorning jogs, secure in the knowledge that no harm will come to them.

Doing business Investors and entrepreneurs look for jurisdictions with robust and growing economies, high regulation, government support and industry demand. Malta has all these elements while constantly garnering positive ratings from credit agencies and topping the EU charts for economic growth, even in Covid’s aftermath. The government has in place a number of interesting business support agencies that are geared to help entrepreneurs startup or expand their operations.

And with Malta’s size and composition, it doubles up as a fully-fledged test market for new products and services. Booming industries include hospitality, aviation, pharma, maritime, financial services, gaming, film and the knowledge industry. These industries are supported by a strong broadband infrastructure and e-government services.

Stay, settle and reside The Malta Permanent Residence Programme (MPRP) is a property-based residency-by-investment programme that gives beneficiaries the right to stay, settle and reside permanently in Malta with visa-free access to the Schengen area for 90 out of 180 days. Investors have the option to purchase or lease property, while making a direct contribution to the Maltese government. They should also make a donation to a local registered non-governmental organisation in the areas of philanthropy, culture, sport, science and animal welfare. The aim of this initiative is to build links between residents and the local community.

Up to four generations may apply, enabling family relocation. Applicants and their dependants must go through a four-tier due diligence exercise that ensures that only fit-and-proper individuals and families are given Maltese residence status. To ensure rigour in the application process, applications are submitted via regulated and licensed agents, who will act on behalf of applicants. The programme is straightforward and competitive and we promise a processing

The pandemic also gave the final blow to the concept of the traditional workplace. When remote working kicked in for the masses in order to control the spread of the virus, it was a first test of a more flexible working arrangement for many. The future augurs well for sustainable hybrid arrangements that give flexibility and improve work-life balance, but also reap benefits for employers.

So, with teleworking no longer the prerogative of the few, many will be seeing how to best exploit this newfound way of working remotely.

For those in the knowledge-based industries, working from one country while giving services to employers and clients based in other parts of the world is now even more doable. Malta was quick to react to this trend with the launch of a new Nomad Residence Permit intended to give non-EU nationals the opportunity to work remotely from Malta for a temporary period.

Malta already hosts Malta combines a significant digital island life with European standards nomad community made up mostly of EU and a multinationals who do not cultural ambience require any permits due to freedom of movement. The new permit is intended to reach new niches beyond Europe, as travel restrictions ease once again enabling global mobility.

Applicants who wish to work remotely from Malta, for a temporary period of up to one year, must prove they can work remotely, independent of location. They should either work for an employer registered outside of Malta, conduct business activity for a company registered outside of Malta, and of which they are partners or shareholders; or offer freelance or consulting services to clients whose permanent establishments are in a foreign country. The process is straight-forward and Residency Malta promises an efficient service that discerning nomads expect. To conclude with a famous quote – “the only constant in life is change”. We must all react with agility to what happens around us and find solutions to personal, social and professional challenges that offer us better futures.

We believe these solutions can be found on the Island of Malta.

More information about the MPRP and about Malta’s Nomad Residence Permit may be found online at residencymalta.gov.mt n

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markets

Focus: Africa

Can hybrid finance unburden Africa’s shaky SME sector?

For SMEs in Africa the effects of the pandemic have exacerbated a woefully under-financed area of the economy, but by cultivating the right environment and encouraging SMEs to formalise their operations, hybrid financing might provide the key to recovery

words by

John Muchira FEatuRES WRItER

It is tough being a small and medium enterprise (SME) in Africa, a continent where the SMEs sector is quite fragile. Nothing has exposed the apparent quicksand foundations of the sector more than the COVID-19 pandemic. With the crisis dragging the continent into its first economic recession in 25 years, SMEs bore the brunt with a majority sinking into oblivion.

For those that have survived the pangs of the pandemic, rebuilding is bound to be torturous.

“COVID-19 had a knock-on effect for SMEs, forcing many to close or curtail operations,” says Manuel Reyes-Retana, International Finance Corporation (IFC) director for Africa. He adds that although the sector has demonstrated a zeal for resilience with many SMEs finding ways to stay in business, the damage has been substantial with a majority struggling to regain momentum.

For SMEs in Africa, the one challenge that has remained constant, and one that COVID-19 has yet again blatantly exposed, is how lack of access to finance makes the sector vulnerable.

In fact, it’s been obvious that SMEs with relatively weak financial muscles have faced the most risk. Experts believe that for the sector to recover and build shock absorbers for long-term survival, adequate access to stress-free financing is paramount.

Hybrid finance is emerging as the ultimate solution in offering to achieve this. In Africa, the concept of combining debt and equity features into a single financial instrument is yet to set down roots. However, on a continent where SMEs are in desperate need of recovery and growth capital, hybrid finance has the potential to accelerate recovery of the sector and offer it a strong foundation going into the future.

“Hybrid financing is a more flexible tool for SMEs,” states Conor Savoy, senior fellow, project on prosperity and development at the Centre for Strategic and International Studies.

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He adds that development financial institutions (DFIs) have the ability to lead the way in creating financial instruments through which SMEs can access hybrid financing, thus giving the sector a more solid backing to pursue growth. DFIs have proved they can be an important source of equity in developing countries. Some are already investing as much as half of their portfolios in equity. “In exchange for a certain degree of ownership, equity investments provide an essential source of capital for firms without burdening them with loan repayments,” he notes.

Across emerging markets, Africa included, SMEs are the engine for economic growth, job creation and poverty alleviation. Ironically, they face significant financing gaps that stifle innovation and growth. The World Bank estimates that across emerging markets and developing economies, over 21 million SMEs constitute 45 percent of employment and 33 percent of gross domestic product (GDP). Despite their importance, they are grappling with a $4.5trn credit gap.

In Africa alone, according to the African Development Bank (AfDB), SMEs account for more than 90 percent of businesses and almost 80 percent of employment. Yet, the sector is facing a $421bn financing gap. In retrospect, this means that roughly half of small businesses on the continent cannot access the financing they need. The situation is even worse for micro enterprises, which are mostly informal.

Addressing the SME finance gap Over the years, bank financing has been the traditional source of external financing for SMEs. Though to the extent banks have tried supporting SMEs, their rigidity in providing credit means that only a few qualify. Banks still cling to the mantra of SMEs being riskier than large firms. In Rwanda, for instance, a country where SMEs face a finance gap of $1.2bn, the share of total bank lending to SMEs stands at 17 percent compared to 60 percent for corporates. What makes this statistic more startling is the fact that SMEs comprise 98 percent of businesses in the country. In other countries like South Africa, Nigeria and Kenya, banks are more com-

90%

of businesses in africa are SMEs

$421bn

the financing gap of the SME sector in africa

70%

of SMEs in South africa fold within the first five to seven years of inception Workers at an apple factory in South africa

fortable lending to the government, a strategy to stay away from risks associated with SMEs. “Financial institutions will be more reluctant to provide additional credit to SMEs under the current conditions of COVID-19 given how cumbersome it will be for them to determine the extent and adequacy of collaterals, identify which borrowers are facing longer-term financial difficulties and be able to adequately cover monitoring costs,” states an AfDB report.

In effect, this means that COVID-19 has made it even more difficult for SMEs to access bank financing. Hybrid finance, however, can fill the vacuum. In the developed world, the concept has been instrumental in offering SMEs the lifeblood that has made the sector vibrant and given it the ability to withstand shocks.

Instruments like subordinated loans/bonds, silent participations, participating loans, profit participation rights, convertible bonds, bonds with warrants and mezzanine finance provides SMEs with financing packaged in the form of debt and equity.

For SMEs, the packaging of products that are essentially debt with equity-like features comes with many benefits. First, the products are ideal because they allow SMEs to borrow long term and with limited or no collateral. This is because they align the profile of the debt repayments to the profit of the borrower.

markets

Focus: Africa

to a point where they have the right structure to attract a blend of debt and equity. This is important considering the high rate of SMEs mortality. In South Africa, Africa’s second largest economy, research has shown that over 70 percent of SMEs fold within the first five to seven years of inception. In Uganda, about a third of new business startups do not go beyond one year of operation.

Another important factor is providing exit channels. Injecting capital in a business for an equity stake is undoubtedly a complex process.

Exit opportunities are among the complex factors that investors must consider when assessing the viability of deals. In Africa, however, the tragedy is that the continent does not offer many suitable exit opportunities. Lack of welldeveloped and vibrant financial markets means that equity investors cannot take the option of an initial public offer (IPO) to exit from a business that has hit the maturity stage.

Work to be done

Second, the products include clear Across emerging mentoring that is crumarkets, Africa cial in helping SMEs included, SMEs successfully run their businesses. For SMEs are the engine for in Africa, lack of techeconomic growth, nical capacity is a key job creation and poverty alleviation factor in the high rate of mortality. Third, and equally important, is the fact that they provide SMEs with stability. This is because the products are better suited for SMEs that have reached a high growth phase.

“We want to make this model replicable and expand it across Africa because of the products’ many benefits, which include diversified sources of funding, lower financing costs, greater flexibility compared to traditional bank loans and improved loan terms and conditions,” notes Reyes-Retana. The need to drive growth of hybrid finance aligns well to IFC’s commitment to being at the forefront of helping SMEs access financing. As of June 30, the financial institution’s committed SME finance portfolio was over $12.3bn worldwide, which represented a growth of 42 percent from financial year 2010. Of this amount, Africa’s portfolio stood at $2.6bn.

The right environment to thrive Unlike other parts of the world, Africa is facing a herculean task in creating an enabling environment in order to attract hybrid finance.

Top on the list is the need for SMEs to formalise their operations. It is near impossible for hybrid finance to flourish in an environment where businesses lack sophisticated financial records and proper governance structures. The fact that a majority of SMEs on the continent are familyowned means that the majority continue to pay lip service to accountability, transparency and governance.

“Making SMEs in Africa more formal is key in helping the sector become more sustainable,” avers Savoy. He adds that formalising the sector is critical in building a wider pool of businesses with the right capabilities to attract hybrid financing. Under the current setup, the available financing is competing for a limited number of companies. The companies become even more unattractive because other credit providers like banks, private equity and microfinance institutions among others are also courting them.

The continent must also resolve the challenge of lack of early stage financing. Hybrid finance is not really designed for startups. In essence, it means that governments and policy makers in Africa must provide financing to SMEs in their early stages and help them get

The state of the financial markets in Africa does not inspire confidence. According to the Absa Africa Financial Markets Index (AFMI) 2021, financial markets across the continent’s 23 top economies continue to score poorly across fundamental pillars like market depth, access to foreign exchange, market transparency, tax and regulatory environment, capacity of local investors, macroeconomic opportunity and enforceability of financial contracts.

“A vibrant capital market is one of the primary issues with equities,” explains Savoy. He adds that foreign investors are often reluctant to take up equity stakes in Africa’s SMEs because stock markets are relatively underdeveloped.

This makes it hard to float an IPO and exit.

“Deepening of the financial markets is critical because it creates opportunities for equity investors to exit,” he notes. An important aspect of making financial markets more vibrant is building the capacity of local investors, particularly retail investors, to participate in market activities. In a majority of the countries in the Absa index, foreign investors dominate about 70 percent of trading.

It is evident that it will take years before hybrid finance can take root in Africa. However, the enormous financing gap means that SMEs in the continent are in desperate need for additional financing solutions. Given the importance of the sector, it means the continent has little option but to create an environment for debt and equity instruments to thrive. n

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markets

Energy

Clean energy for Nigeria and beyond The infrastructure of Nigeria’s gas network has been completely revolutionised by Axxela, but they aren’t done yet and have big ambitions for the country’s natural gas pipelines

interview with

Bolaji Osunsanya cEo, axxEla

With huge potential to diversify the Nigerian economy from other fossil fuel alternatives, domestic industries are embracing natural gas as Gaslink Nigeria Limited (Gaslink), a subsidiary of domestic energy group Axxela, steadily expands its natural gas pipeline network into the nation’s transformative industrial clusters.

Today, Gaslink operates an exclusive natural gas distribution franchise in the Greater Lagos Industrial Area (GLIA) through its 100km-plus pipeline network with a throughput capacity of about 140 million standard cubic feet a day (MMSCFD). It is a testimony to the demand for clean and reliable energy that Gaslink accounts for a large proportion of Nigeria’s domestic gas distribution to industrial and commercial users. This number continues to rise with the latest total at 185 industrial customers.

One of the most recent customers for Axxela’s clean energy is Rite Foods, a fast-growing food and drinks manufacturer that was connected to an 18km-long natural gas pipeline in Ogun State in the south-west of Nigeria earlier this year. From the moment Rite Foods switched over to the pipeline, it began to record significant savings in energy costs.

The commissioning marked yet another milestone for Axxela, which is continuing to develop the pipeline system, known as the Sagamu Gas Distribution Zone (SGDZ), to provide natural gas to companies in the region.

Through its subsidiary, Transit Gas Nigeria Limited (TGNL) and long-time partners Nigerian Gas Marketing Company (NGMC), Axxela has been delivering natural gas in the Sagamu corridor since 2019 to a wide variety of companies such as Apple & Pears Limited, West African Soy Industries Limited, Emzor Pharmaceuticals, Celplas Industries FZE and Coleman Technical Industries Limited.

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All of these powerhouse companies play a vital role in the state’s economic development, but until recently their operations had been constrained by the total reliance on more expensive alternative forms of energy. However, with the expansion of the Sagamu pipelines in Ogun State, these companies can now enjoy more energy efficiency and plan for a bigger future in Nigeria.

And there’s more to come. As Axxela’s Chief Executive Officer, Bolaji Osunsanya, explained to World Finance: “Our present positioning enables us to significantly increase our industrial and commercial client footprint across the south-western corridor. The natural gas advantage enables the development of selfsustaining industrial clusters to bolster Nigeria’s industrialisation and socio-economic empowerment.”

Addressing energy needs Most of Axxela’s customers are large users of energy whose price and reliability underpin their success. One of Africa’s biggest cement companies, BUA Cement, has “significantly lowered ex-factory prices,” according to its chairman, as it meets fast-rising demand for new infrastructure right across Nigeria. The latest projections for cement are an increase in demand by over three million metric tonnes a year, a target that will fundamentally depend on the right kind of energy.

Similarly, Dangote Sugar Refinery, the country’s biggest producer of household and commercial sugar, boosted revenues in the first half of 2021 by nearly 28 percent and gross profit by 37.3 percent. Once again, lower energy costs can only have helped the bottom line. Confident in its natural gas supply, Dangote Sugar is now aiming for a global market.

The natural gas advantage, as Osunsanya describes it, is now widely recognised. “Customer preference, especially among commercial and industrial users, is rapidly shifting from diesel to natural gas,” he said.

“Customers are continuously assessing how to achieve cost savings within their operations

because power is often their largest cost centre. The switch from diesel to natural gas is a no-brainer.”

Invested by axxela on gas The numbers tell the infrastructure story. On average, customers save up to half of their fuel costs with natural gas compared with other fossil fuels. And some save more – one heavy user of energy in the Sagamu region slashed its fuel bill by nearly $250,000 a year. Clean piped natural gas also offers advantages in delivery – the costs of storing and hauling diesel, for instance, are considerable. Another problem with fossil fuels in the past has been the variety of methods by which it is misappropriated, and this has bedevilled sustainable and cost-effective utilisation of the alternative petroleum products in Nigeria.

$500m

Transforming gas distribution With a background in banking and a master’s degree in economics, Osunsanya has steered Axxela through a transformational period since 2007, when it was known as Oando Gas and Power. He launched his career as a consultant with Arthur Andersen in Nigeria where he acquired expertise in banking, oil and gas, and manufacturing, which was fundamental in helping him spearhead Axxela’s pioneering role in gas distribution. He started with the erstwhile parent company, Oando plc, in 2001 and moved quickly up the ranks to Chief

markets

Energy

Marketing Officer responsible for nationwide commercial sales. When Osunsanya took over the top job, Axxela was unable to attract the right kind of debt funding. “A great deal of our early growth was project financing from the local markets,” he told the international magazine, The Business Year. However, as the group steadily proved its capabilities, the financial markets came to the party, providing support through lower-cost debt. “With the advent of new investors, we are now reaching out to larger international markets and development finance institutions,” he said.

By 2019, the group had invested $500m in gas infrastructure and since then has continued to finance its expansion through lower coupon rates. The overall result has been greater credibility for Axxela and, most importantly, higher-quality energy for Nigeria’s pivotal industrial clusters.

The Sagamu Gas Distribution Zone in Ogun State is just the latest project for Axxela. Through its subsidiaries and partners, the group has been pushing clean gas into industrial zones for many years. In the process, it has been plugging a gap in Nigeria’s energy infrastructure by coming to the nation’s rescue at a time when the government has withdrawn from investment in industrial-scale infrastructure and invited the private sector to take on the task. “Government can’t do everything,” Osunsanya said.

Today, Gas Network Services Limited (GNSL) delivers compressed natural gas (CNG)

through virtual pipelines in the form of trucks.

From a Lagos-headquartered hub dispensing 5.2 MMSCFD, the natural gas is compressed into mobile tube trailers and shipped to customers who use it as their primary or alternative fuel.

In a highly sophisticated operation, the Italian-made compressors deliver the CNG at 250 barg (a measurement of gauge pressure) to energy-hungry customers within a 250km radius. Right from the start, the service met a need with customers signing up in droves, including brewers, food manufacturers, logistics and ceramics groups.

The quality of the gas is fundamental to the take-up. The hub, which does not depend on the national grid for its own power, is dried and scrubbed before delivery so that it is clean and moisture-free.

Safety first And it has all been done without mishaps. By embedding industry best practice throughout the network, Axxela has not recorded a single accident or damage to either its assets or the environment. The group operates under three ISO standards covering health and safety, environmental management, and quality control.

In the interests of employees, contractors, business partners, customers and other stakeholders, strict protocols are enforced throughout the group on such issues as permit to work, routine audits and inspections in all daily activities.

Another subsidiary, Central Horizon Gas Company (CHGC), a joint venture between Axxela and the Rivers State government, runs a 17km network into industrial clusters located in the thriving Greater Port Harcourt area.

Another subsidiary, Transit Gas Nigeria Limited (TGNL), is developing a mini-LNG plant in Ajaokuta in partnership with Nigerian Gas Marketing Company (NGMC), which will provide another network of pipelines into Northern Nigeria. Upon completion, the Ajaokuta mini-LNG project will provide the same affordable clean energy to industrial clusters in the North as Axxela does elsewhere in the country. The project is already at an advanced stage.

Axxela is not resting on its laurels. Also on the drawing board is the provision of natural gas to remote communities through a floating storage and regasification vessel, one of the most cost-effective forms of providing energy.

And looking further afield, the West African Gas Pipeline offers promising opportunities, particularly so in the wake of the 2018 trade deal, the African Continental Free Trade Area (AfCFTA) Agreement, that promises to boost economic activities in the region.

The 681km-long pipeline links up the gasrich Niger Delta with neighbouring countries Benin, Togo and Customer Ghana. “Growth for preference, our businesses across especially among Nigeria and Africa commercial and will be driven by rising demand for natuindustrial users, ral gas for electricity, is rapidly shifting transportation, heatfrom diesel to ing and processing,” natural gas Osunsanya explains.

“This is due to improved living standards, population growth, rapid urbanisation and a larger industrial sector.”

The numbers look impressive. Axxela estimates demand for natural gas in those countries alone to grow at a compound growth rate of five percent over the next 20 years. “The West African Gas Pipeline is very important to our long-term business plans,” Osunsanya predicts.

Ultimately, Axxela has big ambitions for its energy provision. Current expansion is taking the group beyond Nigeria and into regions along the west coast of Africa. In the meantime, its gas-to-power projects are slated to deliver about 50 megawatts of power to customers in the medium term, with substantial opportunities for further growth. And it all started 20 years ago with the simple conviction that Nigeria’s industries needed cleaner and cheaper fuel. n

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markets

Energy

The revitalisation of a region Projects to harness the rich resources of Eastern Siberia have continued at pace over the last few years, with investments in the construction of the Irkutsk Polymer Plant having reached $1bn. Irkutsk Oil Company is on the precipice of bringing about meaningful change in the region as a result

words by

Natalia Kirichenko lEaDING MEDIa SpEcIalISt, IRKutSK oIl coMpaNy

The Irkutsk Region of Eastern Siberia is prosperous in gas resources, but gas supply is in little use for industrial needs or residents — gasification of the region is only about 10 percent.

Natural gas in Eastern Siberia has not been in demand for decades due to a lack of transportation infrastructure and sales markets.

That’s all set to change with the commissioning of the Irkutsk Polymer Plant in the district of Ust-Kut. As Yakov Ginzburg, General Director of Irkutsk Oil Company, a parent company of Irkutsk Polymer Plant, says: “Reasonable environmental management and the search for new business development areas in the face of OPEC+ oil production restrictions were the key 132

| Winter 2021-22

triggers for transition into the vertical petrochemical enterprise.”

Since 2014, the company has been forming a gas chemical cluster in the north of the Irkutsk Region, which includes gas production, treatment, transportation and processing facilities, two helium plants, and a polymer plant. It is estimated that total investments in gas projects will amount to 500bn Roubles ($7bn); 200bn Roubles ($2.8bn) have already been invested. Gas processing plants and a gas fractionation unit are also scheduled for commission in 2022.

The first helium plant will be put into operation in 2022, with a second plant scheduled to start operations in 2025. The total production output is expected to be 15–17 million litres of liquefied helium per year, turning the Irkutsk Oil Company Group into the second largest helium producer in Russia and among the top 10 in the world.

The Irkutsk Polymer Plant – the construction of which is now 40 percent complete – is

the largest component of the gas chemical cluster. It is scheduled for commissioning in 2024, with a production capacity of 650,000 tonnes of commercial grade polyethylene per year.

More than 2,000 people are currently working on the site of the plant, with the Japanese engineering company Toyo Engineering responsible for design, equipment and material supply, and Gemont (Turkey) working as the general contractor on both the polyethylene and ethylene plants. Engineers and labourers come from all over Russia, as well as from Japan, Turkey, France, Holland and the USA. At the end of 2022 the number of employees will increase to between 7,000 and 8,000.

The total cost of the Irkutsk Polymer Plant is estimated at 250bn Roubles ($3.5bn), which includes the construction of a housing estate for the plant’s employees in Ust-Kut. Compared to initial estimates, the amount has increased due to the rise in the cost of materials including steel and concrete, as well as labour costs for construction and installation work.

markets

Energy

$7bn

Estimated total for investments in gas projects

Left Polymerization reactor Right Installation of a product purge bin

During 2020 and 2021, earthworks and foundations for large equipment were carried out at the site, the installation of which began in June 2021 and was completed in September. In total, 44 units of large equipment have been installed at the polymer plant. They were delivered to Ust-Kut from the South Korean port of Masan via the Northern Sea Route in the summer of 2020. A 500-tonne purge bin was the last piece to be assembled.

Installed in a metal frame at a height of 60 metres, it required two cranes with lifting capacities of 1,600 (the largest in Russia) and 750 tonnes.

One hundred thousand cubic metres of concrete had been poured by the start of November this year, though that figure will have more than doubled by the end of the project.

For comparison, 20,000 cubic metres of concrete were used in the construction of the foundations and concrete trunk of Moscow’s Ostankino Tower, the tallest freestanding structure in Europe. The next stage of work at the site is to install 1,100 pieces of small equipment, auxiliary equipment and systems.

Overcoming the challenges of the region Ust-Kut, like most northern territories, has many problems. In the 1970s, during the construction of Baikal-Amur Mainline railway, it was a pleasure ground for the youth of the Soviet Union. After that, the era of stagnation began. A lack of modern social and community facilities and infrastructure, modern healthcare system and good quality education, as well as deteriorated utilities, have all been a catalyst for migration away from the region. These issues remain unresolved to this day.

One of the challenges facing this ambitious project is a labour shortage – the launch of the polymer plant will create 1,600 new jobs.

Tempting workers to relocate to Ust-Kut to fill those roles will be key to the plant’s success.

In order to ensure comfortable living conditions for its personnel, the company decided to build a residential zone with capacity for 3,000 people, ample not just for plant employees but their families too. Among the facilities on offer, which will also be available to existing residents of Ust-Kut, are 30 housing developments, a school for 520 pupils with a swimming pool and a stadium, and two kindergartens. Commissioning of the first apartment buildings will coincide with the start-up of the plant; the entire complex will be ready by the end of 2025.

The Irkutsk Oil Company has played a vital role in supporting the region’s health system over the course of the pandemic, donating over 700m Roubles (approx $9.1m) so far. One of the key projects was the construction of a modern hospital with its own oxygen station for COVID-19 patients in the city of Ust-Kut. The 60-bed medical facility has single and double wards with modern equipment. The company has also contributed medicines, personal protective equipment and medical devices to other hospitals and medical institutions in the region.

Irkutsk Oil Company has developed its own energy-saving and green technologies

A greener future In Russia, as in the rest of the world, the green agenda has become mainstream. The Irkutsk Oil Company has long been ahead of the curve, implementing as far back as 2009 the sorts of projects that other companies only began adopting with the arrival of the ESG agenda in recent years. Irkutsk Oil Company, for example, was the first in Russia to launch recycling as part of its processes – the reinjection of gas into the reservoirs.

The company is actively engaged in reforestation, planning to plant seedlings over an area of 3,000 hectares by 2023. It’s also engaged in bioresource restoration: 500,000 juvenile graylings were released into the Lena River in the summer of 2021. An additional 120,000 fry are still to be released into the region’s water bodies. In addition, Irkutsk Oil Company has developed its own energy-saving and green technologies, and no PET water bottles are allowed on company property.

There is always scope for new ESG opportunities. A feasibility study is being developed in cooperation with Japanese partners for the production of blue ammonia, for example, a product considered to be the fuel of the future as it does not emit greenhouse gases (CO2).

The company’s specialists are also studying the technologies of CO2 capture, injection and processing, as well as methane emission reduction. The company plans to create an ecoindustrial park for on-site recycling.

Irkutsk Oil Company is laying the foundation for a better future and playing a vital role not just in its own industry, but in its attempt to revitalise a region and play an active part in a global agenda for change. n

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Energy

Focused on success This might not look like a time to be bullish for oil and gas companies, but for W&T Offshore there is a strong sense of optimism for the future

interview with

Tracy W. Krohn chaIRMaN & cEo, W&t oFFShoRE

An independent oil and natural gas producer, focused in the Gulf of Mexico in the US, W&T Offshore has weathered the pandemic and is well positioned in the market. Armed with over $250m in cash, an inventory of high-quality development and exploration opportunities, and a track record of making accretive acquisitions, the company is well placed to navigate a changing operating environment in the US. The Chairman and CEO at W&T Offshore, Tracy W. Krohn, discussed getting through a pandemic, incorporating ESG, and the future of the industry, with World Finance.

By focusing on the Gulf of Mexico for over 35 years, the company has developed the ability to operate efficiently and effectively in the basin amid various shocks like commodity price fluctuations and hurricanes. Currently, W&T is active in 41 producing fields in federal and state waters and has under lease approximately 611,000 gross acres, including approximately 134

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424,000 gross acres on the Gulf of Mexico shelf and approximately 187,000 gross acres in the Gulf of Mexico deepwater. A majority of the company’s daily production is derived from wells it operates. Krohn commented, “Our focus on the Gulf of Mexico has been the key to our success. Due to our expertise, other operators seek us out when looking for partners. We have attracted and maintained an excellent technical team with deep experience in the Gulf. We have also developed good relationships with state and federal regulatory agencies and have an excellent safety record.

All of these elements contribute to our leadership position in the Gulf of Mexico.”

For the oil and gas industry, changes and adaptation have been part of its evolution. In the Gulf of Mexico, W&T has witnessed significant changes to its peers in the basin. Years ago, the area was mainly a reserve of larger corporations that were focused on shallow waters.

Those operators then transitioned to drilling to greater depths and in deeper waters. This was driven by huge amounts of capital and technology required to pursue those higher risk, higher potential opportunities. Today, the players are fewer and the large independents and

majors are focused primarily on ultra-deep waters or onshore, and W&T has prospered as others exited the Gulf of Mexico. “Throughout our history, W&T has capitalised on opportunities that arose in the Gulf. We have built the company through a combination of two main strategies. First, opportunistic, accretive acquisitions and the successful exploitation of those acquired properties. And second, a very successful exploratory and development drilling programme. Moving forward, we will continue to look at both and the relative benefits each offers,” said Krohn.

Working together New policies from President Biden’s administration have also presented changes for the oil and gas industry. In January, the administration announced a moratorium on new oil and gas leasing on federal lands and waters (which was subsequently blocked by a federal judge in Louisiana in June). Despite such political challenges, Krohn is optimistic. He noted, “W&T has successfully operated during both Republican and Democratic administrations for decades. The officials and regulators we work with on a daily basis are good, pragmatic peo-

markets

Energy

ers. To successfully access the credit or equity markets today, ESG is an important Increase in revenues for Q3 2021 consideration. Krohn continued, “We have actually been successfully managing ESG elements for a long time; we just communicate about them differently today. For example, we have an excellent track record of operating in a responsible and safe way that respects the environment and protects workers. That didn’t start recently because of ESG. What has changed is that our processes and reporting are now more formalised and we are communicating more effectively with our stakeholders.”

W&T issued its inaugural ESG report this year and has demonstrated its commitment to improving its ESG performance and transparency by adding ESG targets to its executive compensation programme. The industry is recovering from the impacts of COVID-19 that ignited a collapse in prices, slowed activity and adversely impacted the financial position of numerous companies. W&T was able to work through the situation more effectively than most. “In the early days of the pandemic, when oil prices went negative, we adjusted our capital spending and temporarily shut-in properties that weren’t economic at very low prices.

This wasn’t the first time we have seen a rapid and precipitous fall in prices. We knew what we had to do and quickly took action. Our properties are all conventional fields. They have shallower declines and we can reduce spending for a period of time without a major financial impact,” said Krohn.

85%

We have actually been successfully managing ESG elements for a long time; we just communicate about them differently today ple. Rules and regulations change but we’ve always been able to find a way to work together.”

W&T is not losing sight of the need to remain relevant amid widespread calls for changes to the energy mix in the US. When asked about the transition away from fossil fuels, Krohn offered a pragmatic perspective. “People will have different views on what our energy mix should look like in the future and how quickly we need to make changes to achieve that mix.

However, any transition will take time and the oil and gas industry should play a role in managing that change successfully. That should not be a controversial statement. I do think there will be ramifications if renewable sources of energy can’t deliver on their promises and if proven, reliable sources of energy like oil and gas continue to be starved of investment to such a degree that they can’t make up the demand gap. Political leaders should consider the unintended consequences of that type of scenario.”

Similarly, companies are now learning to navigate a growing focus on sustainability. The company understands that environmental, social, and governance (ESG) is becoming increasingly important to many of its stakehold-

Battling a hurricane In November, the company released its third quarter results showing strong operational and financial results reflective of the improving economy. During the third quarter of 2021, the company saw an 85 percent increase in revenues for the quarter to $133.9m compared to $72.5m in the same period last year. Production for the quarter stood at 3.2m barrels of oil equivalent comprising 1.1m barrels of oil, 0.4m barrels of natural gas liquids, and 10.5bn cubic feet of natural gas. Production for the period was reduced by approximately 5,500 barrels per day as a result of deferred production related to Hurricane Ida, with approximately 80 percent of the company’s production shutin at one point due to the storm. Fortunately for W&T, its assets and infrastructure did not suffer any significant damage. This emanates from the fact that the company has operated in the Gulf of Mexico for years and has seen – and dealt – with many hurricanes. “Hurricane Ida was the biggest weather event in the

Gulf of Mexico this year. When it became clear that it was going to be coming into the Gulf and would be near our assets, we did what we always do in those situations: temporarily shutin production, secure facilities to greatly reduce the potential of an environmental incident, and evacuate our employees and contractors. What impacted us the most was the lack of electricity onshore to refiners and processing plants who buy our production. They were down and we had to wait for them to come back online,” remarked Krohn.

The company announced that its cash position at the end of the third quarter of 2021 stood at over $250m, due in large part to a creative securitisation transaction with Munich Re in May. For many years, W&T used a reserve-based lending (RBL) credit facility that was underwritten by a bank group and secured by its proved reserve base. Over the years, the market for RBL facilities has become less attractive, particularly offshore. Due to losses occasioned by commodity price downturns, many banks have exited the market. The remaining few are now offering less flexible and more onerous commercial terms, which have generally become tougher and less appealing for oil and gas companies. Krohn commented, “Fortunately for W&T, one of our largest assets is our Mobile Bay complex. Those assets are long-lived and have shallow declines, which is a great profile for lenders. Using Mobile Bay as collateral, we were able to work with Munich Re to structure a first-lien secured term loan that appropriately valued the collateral at an attractive cost of capital. The transaction provided us a lot more financial flexibility and dry powder to pursue attractive acquisition opportunities and consider additional exploratory drilling.” When asked about the current state of the M&A market in the Gulf of Mexico, he explained, “The increase in commodity prices in the second half of 2021 has widened the bid-ask a little, making it slightly tougher at the moment. Broadly speaking however, it is a good environment for M&A. Many larger operators are rationalising their portfolios and for some of them, the Gulf is no longer a core asset.

Other operators have balance sheet issues that they are trying to fix following the pandemic and a period of low commodity prices.”

Though doomsayers are forecasting the end of the oil and gas industry, the industry veteran believes the industry will continue to be around for years to come. Krohn stated, “Transitioning the energy mix to one that relies more heavily on renewables will take time. Natural gas in particular can play a really important role during that transition. There is no question that there will be changes, but I am confident in the ability of the people in our industry to adapt.” n

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Energy

The key to full decarbonisation The energy sector needs to change rapidly and radically if the climate crisis is to be averted. Long hailed as a revolutionary low-carbon fuel, the day of green hydrogen is finally dawning to complement the role of electricity, says utilities firm Iberdrola Around the world, momentum is growing behind the renewable energy movement. Nations are searching for solutions to power a cleaner, greener future, and bold plans are being set out to reduce carbon dioxide (CO2) emissions. The race is on to transition to a net zero energy system by 2050, and thus avert the crisis of global warming by limiting the world’s temperature rise to 1.5 degrees Celsius, as set out at the Paris Agreement.

Yet while countries around the globe look to put a stop to rampant CO2 emissions, energy demand is expected to tick ever higher as economies demand more power to facilitate their continued growth and development. The International Energy Agency (IEA) predicts energy demand will rise between 25 and 30 percent in the years to 2040.

Reaching the net zero milestone in a matter of decades while energy use continues to rise will require businesses to innovate and seek out sustainable solutions that are both accessible and efficient. One of them could be hydrogen.

A progressive fuel Solutions for the renewable energy transition can often be found in plain sight in the natural world. Take solar, wind or hydropower. Hydrogen is the most abundant chemical element and as such is found throughout the earth. Its atoms make up water, plants, animals and humans, and in its rarer gas form it is an incredibly valuable fuel. Just take into account hydrogen is always in a compound form.

Today, green hydrogen is used as a cleaner alternative to high-polluting fuels, offering a critical tool in countries’ net zero journeys.

While fossil fuels like oil, coal and natural gas cause damaging greenhouse gases when burnt, the only waste product created by hydrogen is water vapour. As a universal, light and highly reactive fuel, its place in the energy mix is key.

For years, hydrogen has been heralded as a commodity with the power to revolutionise the energy industry.

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But obtaining hydrogen is not cheap, and high costs have restricted its growth. With hydrogen’s green credentials calling the attention of global investors, however, this is finally changing. The Hydrogen Council expects at least $300bn to be invested globally in green hydrogen over the next decade. Meanwhile, the global demand for hydrogen for use as feedstock (in the fabrication of ammonia or its inclusion in chemical processes in refineries or industry) has tripled since 1975 to reach 70 million tonnes a year in 2018, according to the IEA. Its popularity is no wonder, but its environmental impact is not so clear cut. When fossil fuels are used to create hydrogen, carbon dioxide emissions find their way into the atmosphere despite hydrogen’s clean credentials. Currently, hydrogen is almost entirely supplied from fossil fuels, with six percent of global natural gas and two percent of global coal going directly into hydrogen production.

This makes hydrogen responsible for more than two percent of total global CO2 emissions, which is equal to the carbon emissions produced by the UK and Indonesia combined.

That’s why renewable energy champions like Iberdrola believe a key step in decarbonising the planet will involve decarbonising the hydrogen industry. Creating green hydrogen, a version that stems from renewable energy, will slash carbon dioxide emissions and create a truly revolutionary material that will help decarbonise other high-polluting sectors, offer more security to renewable energy and avert a climate crisis.

Renewable technology Hydrogen generated from natural gas, or methane, is also known as grey hydrogen, and it is the form of the fuel that is most commonly produced today. Blue hydrogen is created when the carbon generated by obtaining hydrogen is captured and stored underground through carbon capture and storage (CCS) before it can pollute the atmosphere, although carbon cap-

ture is an expensive and not yet commercially viable technology.

Green hydrogen is the cleanest version of hydrogen available, and it is produced when renewable electricity, created by solar or wind power, is used in a chemical process called electrolysis, which sees the hydrogen atoms that make up water (H2O) being split from the oxygen atoms. Green hydrogen is a small but growing segment of the energy market, currently making up just 0.1 percent of overall hydrogen production, according to the IEA. The World Hydrogen Council predicts that production costs for green hydrogen will drop by 50 percent by 2030, opening the floodgates for green hydrogen to power the future. As the decarbonisation of the economy progresses around the world – a process that is well in motion – and companies continue to build the necessary infrastructure, renewable energy will become cheaper, thus lowering the cost of green hydrogen and making it more widely available. In the longer term, green hydrogen will be important in niche areas that cannot be electrified, such as shipping, aviation, longdistance freight and steelmaking.

Realising its potential Barriers persist, however. Iberdrola itself has invested in renewables for nearly two decades, but further progress is needed. Replacing all the grey hydrogen in the world will require a whopping 3,000 terawatt hours per year (TWh/year) from new renewables, equal to the current demand of Europe.

markets

Energy

70 million Tonnes per year demand for hydrogen in 2018

50%

Amount that hydrogen production costs could drop by 2030

25–30%

Amount that energy demand will rise by 2040

A key step in decarbonising the planet will involve decarbonising the hydrogen industry The shift will be critical for creating a cleaner energy system, as producing green hydrogen that emits no carbon dioxide into the atmosphere would slash the 830 million tonnes of CO2 that is emitted annually by obtaining grey hydrogen through traditional fossil fuels.

For green hydrogen to replace dirtier, polluting fuels, it must be produced at scale. Until the cost of renewables falls, green hydrogen will remain expensive to generate. Electrolyser farms, fuel cells, and other equipment that is

used to obtain and manage green hydrogen, will all see their costs fall from mass manufacturing.

Another aspect to bear in mind is the added safety requirements needed when using hydrogen. Hydrogen is a highly volatile and flammable element, so extensive safety measures must be put in place to prevent leakages and explosions. While these hurdles cannot be overlooked, the benefits of hydrogen extend well beyond its sustainable status.

Hydrogen is also transportable and versatile, as it can be transformed into electricity to power a wide variety of industries, as well as ships, and planes. What’s more, hydrogen could be stored, allowing it to solve some of the mismatches between supply and demand, an issue that is often at the heart of the renewables debate. While prices for new solar and wind power are falling, batteries or other storage solutions are needed for the days when the wind doesn’t blow, or the sun is hidden behind clouds. Hydrogen, which can be obtained through renewables and then stored and used after it is produced, as well as being mixed with other energy sources, offers a flexible solution. Hydrogen can also be transported from renewable-energy-rich countries to areas with less access to green forms of energy, or manufactured in situ if the renewable electricity is transported using the electrical networks up to the consumption areas.

A long-standing relationship with industry has also proved beneficial to hydrogen. Having been used to fuel cars, airships and spaceships since the beginning of the 19th century, today, hydrogen fuel cells are increasingly common for vehicles. Scaling green hydrogen in industries such as the production of fertilisers, steel, shipping and aviation is crucial to hydrogen’s contribution to a clean energy future (see Fig 1).

The electrification of the economy using renewable energy is the world’s best bet at decarbonisation, but decarbonised materials like green hydrogen have an important role to play in sectors where electrification is not yet competitive or technically possible, like steelmaking, shipping or aviation.

A promising future Fig 1

North of Scotland hydrogen programme masterplan

SOURCE: Iberdrola

Iberdrola, a longtime pioneer in renewables, is a leading force in the development of green hydrogen today. Having already fronted projects to transform sectors like the ammonia industry with green hydrogen, the group has announced plans to launch a large-scale green hydrogen project based on photovoltaic energy starting its initial phase in Puertollano, Spain. By 2030, Iberdrola is set to produce 85,000 tonnes of green hydrogen.

Now is the time to act on the vast opportunities presented by green hydrogen. Iberdrola’s investments in green hydrogen technology are driving down costs and committing resources to a greener, cleaner future. For example, the business has spearheaded new developments as part of a broader €150bn investment plan that will fuel the growth of green hydrogen, as well as launching a new business unit solely focused on green hydrogen. By investing in the revolutionary technology of green hydrogen, Iberdrola is making a promise to the future that a cleaner energy industry is indeed on the horizon. n

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Telecommunications

firm values. I lead emporia on three key principles, which I believe are essential to achieving success: respect, discipline, and competence.

Know your market

Closing the digital gap to empower a generation A company on a mission; emporia Telecom is striving to digitally connect and empower people over the age of 65 through simplified telecommunications

words by

Eveline Pupeter cEo, EMpoRIa tElEcoM

My mandate is simple: we need to take older people with us into the digital future. I feel that this is a mission that we hold a responsibility to fulfil as a society. What may sound theoretical at first glance has a practical background. Consider how we take for granted many everyday tasks that now require the use of a smartphone, things such as ticketing, banking and retail shopping. We now live in a world that is hard to navigate without a smartphone and as the Internet of Things (IoT) expands, the adoption of smart tech will continue to grow exponentially in all scenarios, leaving those without the use of such devices increasingly excluded.

Further impacted by lockdowns Across Europe, there are more than 50 million over-65s who are excluded from this new form of always-on communication, and it is our socio-political responsibility to close this widening digital gap between the young and old. The impact of lockdown on this demographic further demonstrates the need for us to do so. As countries across Europe fell into chaos from the pandemic, older people were 138

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left feeling isolated and disconnected.

Without the right tech and know-how, targeted company turnover simple things that are for emporia telecom in 2023 ingrained in everyday life for the younger generations – such as video calls – were not accessible to this important group. The absence of smart technology also meant that when in-person contact was out of the question, online shopping for groceries and ordering prescriptions was not an option for a large segment of this age group. That was a real tragedy.

From my past experience and my journey at emporia I have developed a formula for success. The first step to ensuring continual success is to regularly question your company, its products and services. This is the only way that you can be certain you are serving the end user to the highest standard. My second driver is to set out clear goals and stick to them. This prevents me from ever losing track of my mission.

I’ve also found it is so important to be brave and to believe in yourself and your company.

For example, before the COVID-19 crisis, I said that we would have a turnover of €100m in 2023. I also repeated this during the crisis.

And now, as we start to move forward from the pandemic, I’m holding on to this target. My final step is to define and work to a core set of

€100m

In line with this, I am committed to continuously improving our products in ways that will work towards my mission of closing the digital divide. We are committed to research and have numerous collaborations with universities and international academic institutions including Cambridge University. We also invest heavily in local market consumer and behavioural research in all the areas in which we operate.

This allows us to better understand “It is our the ever-changing socio-political wants and needs of responsibility our target audience and identify any is- to close this sues that we need to widening address. digital gap In addition to creating the products between the best-suited for older young and old” users, the emporia strategy also includes training and support.

For five years now, we have been developing training methods such as our training books, which are included with every product, and the smartphone driver’s licence to introduce older people to new technology. Prior to the pandemic, 1,000 training courses were held in Germany on a single day by emporia and our retail partners – how amazing is that? We also work with several large banks across Europe to share best practice in training this audience to adopt digital channels such as banking apps.

I feel that I hold my own in an industry that is largely dominated by men. There are few female CEOs and business leaders, especially within the telecommunications space. However, in Europe I am in good company with two amazing women: Ursula von der Leyen, President of the EU Commission, who is the political head of over 447 million EU citizens, and Christine Lagarde, head of the ECB, who is responsible for a balance sheet volume of €569bn.

The global population continues to grow and age. This means that by the year 2051, around 10 billion people will populate this planet, of whom more than two billion will be over 60 years old. I believe that communications technology will leap further forward, and it is possible that smartphones will no longer exist, with our transactions and dialogues made via wearables or other such gadgets. Nobody can foresee the future, but at emporia we are confident of closing the generational digital divide.

And I believe we will do so. My motto for life and business is: ‘failure is not an option.’ n

China’s war against its corporate powerhouses

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The Chinese government has unleashed havoc against some of the country’s largest corporations.

It may backfire. Alex Katsomitros investigates hen Jack Ma, the founder of Chinese e-commerce powerhouse Alibaba, gave a speech in Shanghai in October 2020, he didn’t suspect that it would mark the beginning of his demise. Addressing an audience of corporate and government elites, Ma openly criticised the Chinese government for its handling of the economy.

“Outdated supervision” of financial regulation, he claimed, was stifling innovation, while China’s financial regulators resembled an “old people’s club.” To add insult to injury, he called for change, criticising the government’s meddling with private corporations. “The game in the future is about innovation, not just regulatory skills,” he warned.

As it turned out, regulators had little patience for innovators like Ma. The speech would be his last public appearance for several months. The plucky entrepreneur even failed to appear in the final episode of his own talent show, ‘Africa’s Business Heroes,’ which supports aspiring African entrepreneurs. More ominously, his account on Twitter, the altar from where even Chinese entrepreneurs feel free to preach to an audience hungry for their wise words, went silent. Ma’s last tweet to his 655k followers was posted on October 10, 2020, a reminder of his precipitous fall from grace.

The fall of tech barons Ma’s disappearance from the public eye was not an isolated incident. In November 2020, the much anticipated $37bn IPO of Ant Group, Alibaba’s sister company offering financial services, was cancelled over a “significant change” in regulation. As it would emerge,

just a week after his controversial speech, Ma had met with Chinese regulators. Following the meeting, officials issued stricter rules for micro-lending companies, forcing Ant to overhaul its business. Another reason why Alibaba was targeted by authorities was its growing influence in the financial services market, including consumer credit, which surprised Chinese authorities. “In the case of Ant, Alibaba’s finance subsidiary, regulators were increasingly under the impression that they were losing out on oversight of financial flows within China. Alipay and WeChat were taking a near 100 percent market share in the space of payment services providers, so the Chinese government now wants to take back control,” said Kai von Carnap, an analyst at the Berlin-based think tank Mercator Institute for China Studies (MERICS). Last April, Alibaba received a fine of $2.8bn for monopoly abuses;

by October 2021, its stock market value had nearly halved compared to the previous year.

Although the crackdown would probably have happened anyway, Ma’s caustic words made things worse for him, said von Carnap. “Criticising them {regulators} in their faces lit the fuse that made them prove they were serious about institutional changes.”

Alibaba is the most prominent victim of a silent war the Chinese state has been waging against its own soldiers in the economic war with the West: Chinese tech corporations. Another tech powerhouse, DiDi Chuxing, China’s dominant ride-hailing company, is under investigation for data security breaches. Analysts believe that the firm drew the ire of the government by listing on the New York Stock Exchange last June, before the Cyberspace »

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Corporate Battlefield

» Administration of China (CAC) had completed its data security review. Last August, Chinese authorities introduced regulation forbidding teenagers from playing video games for more than three hours a week, a measure that has hit the country’s $45bn video gaming industry; no new games have been approved by China’s gaming regulator since August. Tencent Holdings, a gaming behemoth, had lost around a third of its value by November, while its music branch was forbidden from signing exclusive deals.

At first glance, the clampdown could be interpreted as China-style antitrust action against digital powerhouses that had long overplayed their hand. “In Beijing’s eyes, more regulation on big tech is good for the country’s tech development, because small players will have more room to innovate,” said Linghao Bao, an analyst at Beijing-based consultancy Trivium China. For many years, big tech companies were allowed to skip regulatory oversight in order to grow exponentially, a goal the Chinese government saw as compatible with its own growth goals. These days are now over.

“One common driver behind all these cases is that these companies offended regulators or pursued regulatory arbitrage and angered some major decision makers,” said Xiaomeng Lu, Director in Eurasia Group’s geo-technology practice, adding that Alibaba and Ant were punished for their aggressive ‘choose one from two’ strategy, which prevented affiliate merchants from collaborating with other platforms.

However, the clampdown goes far beyond what would be perceived as antitrust action in the West. Last summer, the Supreme Court outlawed the ‘996’ overtime policy that allows tech companies to employ people from 9am to 9pm, six days a week. In July, China wiped out the country’s $100bn edtech industry overnight by introducing new regulation forbidding companies from providing pupils with core tutoring services and banning IPOs and foreign investment into such firms.

Jack Ma, Founder of Alibaba

Security Law, focuses on the protection of ‘core data’ that affect national security.

“There is a concern that data may be obtained and exploited by foreign adversaries, particularly by the US, endangering China’s national security. This is partly a result of the Snowden revelations, which were a big wakeup call for Beijing,” said Rebecca Arcesati, an analyst at MERICS, specialising in China’s digital and data policies. Companies that don’t comply with the new rules will face severe penalties. “The question is, how can global companies, such as Chinese wireless equipment vendors and digital platforms, guarantee that the data they collect overseas will not be shared with the Chinese state? China’s emerging data governance regime is making the answer clearer: they can’t,” Arcesati warned.

Companies must be regulated more tightly and also play their part in creating a more ‘equal’ society

The state takes over

China’s Most Popular digital Payment providers

Data, singled out last year as a major production asset, lies at the centre of China’s push to tighten its grip on the tech sector. The government already collects huge volumes of data through its social credit system, monitoring citizens via a network of algorithm-powered surveillance systems. It now wants access to data held by private companies, as evidenced by new regulations introduced earlier this year. One of them, the Personal Information Protection Law, requires firms to seek approval from state regulators to move data out of China. Another piece of legislation, the Data

respondents who used payment services in past 12 months

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95%

Alipay

88%

WeChat Pay

43%

Union Pay

25%

Jdpay.com Tenpay.com

19%

Apple Pay

18%

BestPay Huawei Pay

14% 8%

SOURCE: Statista Global Consumer Survey

Foreign companies operating in China may find the new rules too strict or ambiguous, particularly those operating data centres.

“For very profitable firms, such as Tesla, this {compliance burden} may not be a big deal. For smaller players that can’t afford the extra cost, this will add to their operational and financial stress operating in China,” Xiaomeng Lu said.

Many of them already take a conservative approach to data compliance, due to a lack of understanding of local regulation. There is a risk that tighter regulation could put these firms at a disadvantage compared to Chinese competitors by making it more difficult for them to transfer data from China to other markets, Arcesati said, adding that there might be more pressure on companies to create China-specific solutions that will be incompatible with global ones. Last October, LinkedIn became the latest foreign social media platform to leave the country, citing a “significantly more challenging operating environment,” interpreted as a covert reference to censorship.

In November, Epic Games, a US company partly owned by Tencent, stopped accepting China-based registrations for Fortnite, a popular video game. “Investors did not take regulatory risk seriously when it came to China. They assumed it was a free for all, and so long as the economy grew the Party didn’t care who was getting rich and how,” said Shehzad Qazi, Managing Director at China Beige Book International, an independent provider of data on the Chinese economy, adding: “This turned out to be very naive and short-sighted. China remains very investable, but smart money will now seriously price in regulatory and broader political risk.”

Corporate Battlefield

$15.5bn

Amount Alibaba has pledged to donate to charity

The long arm of the Chinese state has also reached corporate board rooms. Large firms have long been required to run ‘party committees’ bringing together executives and party officials to discuss how corporate strategies align with state policies. The government is now pushing for direct board representation through the ‘golden share’ rule, which allows government agencies to take board seats with stakes of just one percent. Earlier this year, a government fund purchased such a stake in ByteDance, the company behind the social media platform TikTok, along with a board seat. “The impact of golden share on companies is still quite limited at this point. The new board member of ByteDance is merely a former mid-level propaganda official,” Trivium’s Bao said. “This person is unlikely to meddle with corporate decisions at ByteDance.” However, some analysts note the novelty and far-reaching consequences of the measure. “You could interpret that as a more public and direct form of influence at these companies,” von Carnap from MERICS said.

Chinese tech companies have also been victims of increasing tension between the US and China. A series of delistings from US exchanges of several Chinese firms, overall worth over $2trn until mid-2021, will consolidate the ongoing decoupling of the two economies.

Many Chinese companies, including Alibaba, are instead opting for a second listing in Hong Kong. NASDAQ Golden Dragon China Index, which tracks New York listed firms, had lost by November a third of its value since the beginning of the year. New rules issued by China’s cyberspace watchdog will make it harder for firms to list outside of China, while newly

introduced US regulation also makes delisting easier for non-compliant foreign firms, following a scandal involving Luckin Coffee, a US-listed firm caught lying about its sales numbers. “In the past decades, overseas listings and the dependence on foreign financial centres was a pragmatic alternative for Chinese companies, given the recognised institutional barriers in China’s financial system,” said Max Zenglein, chief economist at MERICS and expert on China’s macroeconomic development, adding: “This trend {reshoring} was inevitably going to happen. An aspiring economic superpower wants its companies to list at home, not abroad.”

China has launched a campaign to achieve tech supremacy in key areas its government perceives as crucial for the country’s future, from AI to space technology. Surprisingly, the crackdown on consumer-orientated big tech chimes with that policy, according to Eurasia’s Xiaomeng Lu: “From Beijing’s perspective, knocking back on these platforms’ troublesome practices is well-aligned with its goal of tech supremacy – the government wants to steer companies towards ‘hard technology’ investment in semiconductors, AI and quantum computing, and move away from what they view as ‘low-end’ competition.” However, some think that the policy may backfire: “In the real world it is hard to separate online platforms from hi-tech manufacturing, so the crackdown will probably hurt the overall technology push,” said David Dollar, a former US Treasury emissary to China and senior fellow at the Brookings Institution’s John L. Thornton China Centre.

Prosperity for all The purge of tech companies is symptomatic of a broader shift in the Chinese economy. Last August, the party’s financial and economic affairs committee declared that it was necessary to “regulate excessively high incomes” to ensure “common prosperity for all,” a term that has become a synonym for China’s new economic dogma, putting emphasis on fair distribution of wealth. In a speech made the same month, the country’s leader, Xi Jinping, delineated the basic tenets of the “common prosperity” policy, explaining that equality would become a priority by “rationally adjusting” excessive incomes.

The timing of the speech, amid the crackdown on internet giants, sent the message that the era of “growth-at-all-costs” expansion for digital behemoths was over.

Although the Chinese government hasn’t fleshed out the details of the new policy, it is expected that large corporations will face higher taxation, pressure to make donations

and strong antitrust action. Many Chinese corporations and entrepreneurs rushed to embrace the doctrine, donating billions for the common good. Alibaba has pledged to donate $15.5bn to help reduce poverty. But the damage has been enormous, wiping out over $1.5trn of stock market value from China’s biggest tech groups by mid-2021. “Chinese entrepreneurs have benefited greatly {from China’s growth}, but in the wake of their success several societal problems have been created,” said Shehzad Qazi from China Beige Book International, adding: “Now these companies must be regulated more tightly and also play their part in creating a more ‘equal’ society.”

A key part of the new policy is expected to be higher spending on healthcare and social security, a radical shift for a country that, although nominally Communist, lacks a Western-style welfare state. “China has very little redistribution through its taxes and expenditures, so policies such as a property tax and unification of rural For many years, a nd urba n socia l big tech companies services could help were allowed to develop the middle skip regulatory oversight in order to class,” Dollar said, grow exponentially adding: “This would enable China to move away from its over-reliance on investment and develop a more sustainable growth path.” The drift towards a more egalitarian economic policy marks the abandonment of market reforms introduced in the ’70s by Deng Xiaoping that encouraged profit-making, encapsulated by the motto “Making money and getting rich is glorious.” Tech corporations, the poster children of China’s economic miracle, may be the first, but not last, victims of a return to purist Communist dogma. “Since 2013, there has been a systematic reversal by the Party to the extent that private profits are no longer morally justified and getting super-rich is morally wrong, paving the ground for the recent introduction of the ‘common prosperity’ policy” said Zhiwu Chen, who teaches finance at Hong Kong University.

However, many question the efficacy of the policy. “China’s leaders seem prepared to accept a marked short-term slowdown in growth as a price for greater financial stability over the long-term,” said Eswar Prasad, an expert on Chinese trade and financial policies who teaches at Cornell University, adding: “The government’s moves to simultaneously increase state control of the economy and the lack of clarity about its intentions towards private enterprise could intensify volatility and act as a drag on growth in the long-term.” Tighter control may »

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Corporate Battlefield

There is a concern that data may be obtained and exploited by foreign adversaries, particularly by the US, endangering China’s national security

Xi Jinping, President of China

» lead to lower profits, added Chen: “The common prosperity policy is cutting private incentives to invest and start businesses, which will slow down economic growth and hurt the housing market down the road.”

A real estate crisis A crucial part of the new economic policy is reining in debt-fuelled property investment and speculation. Currently, real estate accounts for around 30 percent of the country’s economy, which the government aims to bring closer to single-digit numbers. In 2021, China had 65 million empty homes, many concentrated in ‘ghost towns’; the country’s imminent demographic crisis, with senior citizens projected to account for 40 percent of the population by 2050, means that many of these houses will remain empty forever. Logan Wright, Director at Rhodium Group, a research provider, expects the property sector’s underperformance to continue well into 2022, affecting the country’s growth rates.

The sector’s crisis came to the fore last September when Evergrande, one of the country’s largest property developers, missed a series of bond coupon payments. The company, burdened with more than $300bn of liabilities, has become a symbol of an economic model the government is now rejecting, after decades of unchecked growth. Investors hoped that the central bank would bail out Evergrande, fearing a spillover across the real estate sector.

However, government officials publicly criticised the company for poor management and excessive risk-taking, marking the shift in the 144

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way large corporations are treated by the state.

Regulators have introduced measures to tackle property speculation. The most important one is a planned property tax, expected to deflate the real estate sector. “They are now addressing the real elephant in the room by going after highly leveraged real estate developers. The concern over financial risk trumps their concern over lower economic growth,” said Zenglein from MERICS, adding: “The Evergrande fallout is the result of deliberate measures taken by regulators to rein in risky business practices and it sends a powerful message. Evergrande’s crisis did not come as a surprise, allowing the government to prepare and take necessary steps to contain the situation if necessary.” The firm’s size and links to other developers have raised concerns over a property price collapse that could lead to a financial crisis. Markets may be temporarily over-reacting, said Prasad from Cornell University, but the danger will persist: “Fears that a bankruptcy filing might signal a broader unravelling of the Chinese financial system could precipitate capital outflows, put downward pressure on the currency, and cause at least temporary turmoil in foreign exchange markets.” More companies may also follow a similar path, according to Zhiwu Chen from Hong Kong University, clipping China’s economic prospects. “While official interventions will prevent large-scale crises from happening, the costs from past excessive debt-fuelled investing and business expansion in China will be gradually spread across Japanese-style ‘lost decades,’ with the negative consequences manifested gradually, instead of a crisis.”

Evergrande housing complex

65 mil ion Number of empty homes in China in 2021

130.9%

China’s ratio of household debt to disposable income in 2020

$300bn+

Amount of liabilities Evergrande is burdened with

Corporate Battlefield

FIG 1. China’s Annual GDP Growth 1980-2020 percentage

16 14 12 10 8 6 4 2

1980

1985

1990

1995

2000

2005

2010

2015

2020

SOURCE: World Bank

FIG 2. China’s recent GDP Growth activity

percentage

20

18.3

15 10 6.5 6.3

6

5.9 5.8

5

3.2

4.9

7.9

6.5

4.9

0 -5 -6.8

-10 Jul 2018

Jan2019

SOURCE: TradingEconomics.com

Jul 2019

Jan 2020

Jul 2020

Jan 2021

Jul 2021

Revolution 2.0 To explain China’s authoritarian drift, many scholars turn to a dark page of the country’s history: the Cultural Revolution, an upheaval that cost the lives of an estimated 1.5 million people from 1966 to 1976. In an attempt to consolidate his power within the Communist party and avert criticism over economic mishaps, Mao Zedong unleashed a violent youth movement that paused the country’s economic and technological development. Many scientists were arrested, imprisoned or executed.

Universities stayed closed for several years and entrance exams were cancelled.

However, basic education expanded, particularly in the countryside, with the proportion of children who had completed primary education doubling within a few years. Analysts point to the legacy of this tumultuous period as a lodestar guiding the current leader of the country, Xi Jinping. Like Mao, Xi sees himself as a modern helmsman turning the ship of Chinese society to the familiar waters of egalitarianism, making the wellbeing of the great unwashed living in the countryside the state’s priority, following decades of unbridled economic growth.

In government affairs, Xi is also borrowing a page from Mao’s little red book. Defying the unwritten rule that requires the country’s leadership to pass the torch to a new generation every decade, he is preparing to renew his Presidency for a third five-year term next year, after abolishing the two-term limit and purging hostile party officials. In a bid to win the hearts and minds of low-rank party members,

he often presents himself as an empathetic leader focused on the problems of ordinary citizens, such as unaffordable housing. “The rich and the poor in some countries are polarised with the collapse of the middle class leading to social disintegration, political polarisation and rampant populism – the lessons are profound!”

Xi said in his speech last August.

However, the parallels with Mao end there.

“Xi has some stylistic similarities with Mao, and his authority within the party appears to be strong relative to Xi’s predecessors, but he does not dominate the Party anywhere near the extent that Mao did,” said Andrew Walder, an expert on Chinese history at Stanford University. Unlike Mao, a radical MarxChina has launched a ist who according to campaign to achieve Walder opposed the idea that the Comtech supremacy munist party’s main in key areas its task was to bring government perceives as crucial economic growth, Xi believes that a large for the country’s private sector is esfuture sential for economic development, but only under the tight control of the Communist party. “Xi is essentially a nationalist who deploys Marxist and Maoist symbolism, which is primarily an exercise in nostalgia about the Party’s former revolutionary past. Mao was a radical who was anti-bureaucratic. Xi simply wants to tighten up the Party’s bureaucratic control to ensure that it continues in power,” said Walder.

Despite Xi’s ambitions, China may have reached a point where economic development requires less, rather than more, state control.

Even before the pandemic, growth rates were hovering around six percent (see Fig 1) and are expected to drop further, a major downgrade from the double-digit rates of past decades. The clampdown on fast-growing tech companies has also taken its toll. In the third quarter of the year, (see Fig 2) China’s growth slipped to an underwhelming 4.9 percent, with lockdowns and a problematic vaccination campaign threatening recovery. Private debt is also rising, a sign that China now faces the problems of a mature, middle-income economy. China’s ratio of household debt to disposable income reached a record high of 130.9 percent in 2020. So far, the country’s response to these challenges has been a mix of aggressive nationalism abroad and tighter control at home. However, aiming for a combination of economic growth and national assertion, China may get neither. “Everything nowadays has become a matter of national security, because of Xi Jinping’s all-encompassing definition of what constitutes national security,” said Arcesati from MERICS, adding: “That balance will be difficult to strike.” n

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Afghanistan

Who will control the Taliban’s treasure?

After overrunning the country in August following a 20-year absence from power, can the Taliban achieve an economically durable relationship with the rest of the world?

words by

Adrian Holliday FEatuRES WRItER

Afghanistan, a mosaic of tribal identities making cohesion extremely fraught as well as historically bloody, has around $9bn in assets held overseas. Most of these assets are frozen.

Around 80 percent of the country’s budget is dependent on foreign aid, which has also dried up. “Our engagement with Afghanistan has been suspended until there is clarity within the international community on the recognition of the government,” said IMF spokesman Gerry Rice in September.

“We’re guided by the international community in terms of the recognition of the government in Afghanistan, and we don’t have that.”

Afghanistan’s GDP is also part-reliant on overseas remittances, which are struggling to land safely, if at all. Seventy percent of the country’s population is under the age of 25 so most have no experience what Taliban rule means – till now.

Rich but poor Klisman Murati, CEO of global risk and development research house Pareto Economics, told World Finance that the Taliban are incapable of plugging the public finances void. “If there’s no revenue coming in for the government, there’s no way these civil service salaries can be paid, fully or at all.”

Talk of tacit or implied financial support or recognition from other countries only gets you so far. “Who will take the first step? I don’t think anyone is going to take the first step until they see a robust system of law and that the 146

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Taliban can maintain a functioning society.

Even if they can, there are going to be certain terms and conditions put forward by the West, to make sure they respect the values that the West holds.”

Afghanistan, however, is richly endowed with rare earth metals vital to the world’s transition to a cleaner, greener economy. Back in 2010 a number of US geologists and military officials concluded that, beneath much of the country’s mountainous dust and rock lay huge supplies of copper, cobalt and lithium.

These and other hard-to-excavate earth elements are vital in the production of electric vehicles. If Afghanistan was allowed to develop its mineral resources “it could become one of the richest countries in the area within a decade,” Said Mirzad of the US Geological Survey told Science Magazine in 2010. But under the previous unity government, trust with investors was weak. Corruption between local warlords and the Taliban is extreme and reliable governance looks decades away.

“China has the deepest pockets but has not rushed in to extract the presumed $1trn worth of minerals beneath the Afghan dust,” wrote Dr Vanda Felbab-Brown, Senior Fellow at US thinktank Brookings in August. Felbab-Brown says China bought just a handful of licences, put off by security and corruption worries. Dr Christine Cheng is Lecturer in war studies at King’s College London and also holds a BASc in systems design engineering and she takes a close interest in sustainable technology.

She says China is paying close attention to Afghanistan’s precious metals potential but concurs with Felbab-Brown that super-caution from the international community, both west and east, reins in longer-term planning, for now.

Next-gen terror The priorities of near neighbours China and Russia, she says, is the security situation. “Russia and China, foremost in their mind, care most about how Afghanistan is going to deal with Islamic extremists and they are worried about what is going on in their own territories and worried about the lesson learned as Taliban as victors. Also how ISIS-K is managed and contained…the spillover effects of that.”

Just as concerning is the potential for fracturing within the Taliban itself. “That’s the biggest danger,” Cheng goes on. “The people who negotiated the Doha agreement [signed in February 2020] with the US that’s one faction – the diplomatic part.” Much of this faction was largely in control in the 1990s. “If you listen to the people who were in control in the 1990s and then read what they are writing about their approach to governance, it’s much more moderate than you or I would expect, given how they ruled the first time. You could say they’ve gotten older, wiser, lived abroad perhaps and learned about how they might have done things differently.”

“But those,” she goes on, “who are at midlevel now, those mid-level commanders who actually control things on the ground, they weren’t around in the 1990s and didn’t see much of how the Taliban ruled.

a na lysis

Afghanistan

$1trn

Estimated value of the minerals to be mined in Afghanistan

“So the Taliban,” he says, “will find money.

But it’s a question of what we, the west, are prepared to pay as a price.” He adds: “The Chinese aren’t interested in re-building Afghanistan.

They’re only interested in fuelling their ambitions.”

Brutal reality

Members of the Taliban pictured on the outskirts of Kabul, Afghanistan

So their approach, or world view, is really different. And arguably more radical. They want much harsher restrictions. They want a much stricter Sharia state. That’s causing divisions.”

This fracturing of order within the Taliban is something the west regularly underestimates, other sources confirmed to World Finance. But for many ordinary Afghan families, fracturing is normal. For example, before the US pull-out it was common for a family to have one son employed by the Taliban and another working for the US-supported government.

Afghan families hedge bets to survive.

Klisman Murati says it’s important to remember that any idea of Taliban rule imploding has limited relevance. “The Taliban don’t have de facto control over the whole of Afghanistan. If the Taliban implodes it doesn’t mean much because the rest of the country doesn’t survive off the Taliban.” Only those in Kabul, employed by public institutions funded by international money allowing education and healthcare to develop, are mainly affected.

The Taliban meanwhile have sent a strong signal of their intended direction: their new minister of the interior, Sirajuddin Haqqani, is wanted by the FBI and the US department of state is offering a $10m reward for any information leading to an arrest.

The Chinese aren’t interested in re-building Afghanistan. They‘re only interested in fuelling their ambitions

Just $2 a day Much of the Afghan working population earns less than $2 a day. Many Afghan banks can’t supply enough hard cash to customers and runaway inflation for everyday staples – rice, bread and vegetables – is widespread. The Afghani, the national currency, has been in freefall since August.

So what gives? How, economically, will the country manage medium term? Dr Iftikhar Zaidi is senior lecturer in leadership and strategy leadership and change at Cranfield University and knows the region, as well as the border between Afghanistan and Pakistan from an earlier military career. “You have a government that isn’t liked, for different reasons. These are people who are locked in a version of Islam that only theoretically existed perhaps. They are locked in time but they won’t be brought forward by disengaging.”

He goes on: “The Afghans are sitting on an abundant quantity of chromium. It isn’t a rare metal but the quality of chromium in Afghanistan is high and is economical to mine, compared to anywhere else in the world. Then there are other rare earth metals, like cerium.

So, if we don’t go in, someone will. The Chinese can. They don’t have to do it overtly. They will provide the money to the Taliban, who will mine these metals.”

Dr Bryan Watters, associate professor of defence leadership and management at Cranfield University and a colleague of Zaidi says the major players – the US, EU, China and Russia – haul much historical Afghan baggage behind them. Border controls apart, the country’s untaxable, he says. Watters warns too many people look at Afghanistan through the eyes of an urban elite. “There’s talk about how the people of Afghanistan will not put up with the situation. Get beyond Kabul and the other three big cities [Kandahar, Mazar-i-Sharif, Herat] and I don’t think anything has changed. The urban elite can be dealt with brutally. They’re either being thrown out or they’ll be dealt with. If the Taliban believes the urban elite are a threat to their beliefs and their idea of nationhood, having defeated the Americans, dealing with a few urban elites ain’t going to be a problem.”

“The west may tut-tut but like, Syria and North Korea, will do little,” adds Watters.

Much of the developed world is pulling away from COVID-19 and obsessing over rising energy prices and tangled supply chains. “This isn’t an environment where developed countries are going to increase their aid budget to Afghanistan.” China will probably make sure that there’s just enough financial support to keep Afghans fed and watered – just about – says Dr Zaidi. “It’s a simple population. All they want is $2 a day to survive.”

For the population of 30–40 million (no public census has taken place since 1971) that’s not much money, he says. “You can get $2 into people’s hands, which keeps them happy – and milk the country.” China may manage this with Russia he says, or a consortium of like-minded countries. The west certainly doesn’t want China to have a monopoly on lithium – high grade lithium is low density, floats in water and is of spectacular interest to developed industrial economies transitioning to a more sustainable model – and other metals vital to electric vehicle batteries, medical kit and other uses.

China already controls much of the rare earths market and therefore the prices. But the west has spent enough and spilled enough blood in Afghanistan and the US has made its decision to leave. The question is: what will it do next, and when? n

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Germany

Time to say goodbye After 16 years in power, Angela Merkel did not run for chancellor in the latest German election.

Natalie Keffler asks what the impact of this will be on the German economy, and what legacy has she left?

During her time as Chancellor of Germany, Angela Merkel has shaped the country into one of the most highly reputed nations in Europe. Now, in 2021, she has stepped down from her role, and Germany has been left waiting for the formation of a new government, following an inconclusive election in September.

The Social Democratic Party (SPD) emerged as the strongest option in the election and, along with the Greens and the Free Democrats, have opened formal coalition talks, with Olaf Scholz, Annalena Baerbock and Armin Laschet all looking like the frontrunners for the coveted role of Chancellor.

However, all the parties accept that the situation is complex, and it will take time to come to a satisfactory resolution to form this new government. In the meantime, Merkel and her government will remain as caretakers of Germany until a decision is made.

The rise of Merkel Merkel was born in 1954, and for the first 35 years of her life, she lived in Soviet-controlled East Germany. Here, she worked at a state-run research centre as a research scientist, until the fall of the Berlin Wall in 1989. The historic shift that the fall of the wall brought about led to Merkel abandoning the scientific work she had been carrying out, and instead she turned her hand to what would become a lifelong interest in politics. Merkel was first elected Chancellor of Germany in 2005, becoming the first woman, and the first East German, to hold the 148

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nation’s highest elective office. She has held this position for so long in fact that she has become Germany’s second longest-serving leader of the modern era, after her former mentor, Helmut Kohl, who was also chancellor for 16 years.

During Merkel’s time as Chancellor, she has achieved a great deal, but the aspects she will be remembered for most by her country, and the world more widely, are her commitment to emissions cuts, and arguably even more so than this, her actions with regard to the refugee crisis. Merkel’s decision to allow over one million refugees to enter Germany in 2015 and 2016 is how many supporters and critics will define her legacy. Her support of migration earned her praise by her supporters, and those more left-leaning in Germany. However, these actions were criticised by the far right, who were concerned Merkel represented an open-border immigration policy that had gone disastrously wrong.

What no one can argue with though is Merkel’s popularity over the years, having affectionately been referred to as ‘Mutti,’ meaning ‘mother’ in German. While initially used as a patronising term by her critics, it has since been rebranded as a term of endearment.

While other world leaders have come and gone, Merkel has remained, a figure of stability in Germany, avoiding scandal in a way her predecessors and many other European politicians have not. Merkel has led Germany through a global financial crisis, the Eurozone debt crisis, the immigration crisis, and most recently, the

pandemic. Her unwavering statement of “we will manage” when faced with an escalating immigration crisis neatly encapsulates the spirit with which she has carried the German nation through tough times. Therefore, to find someone who possesses both her stability and strength, someone who can unite all of Germany and the EU, will be a challenge.

New directions Germany’s newly elected parliament held its first meeting on October 26 of this year, following the September election. The German President, Frank-Walter Steinmeier, formally dismissed Merkel and her Cabinet. However, they will remain in a supervisory position until a new government officially takes office. The SPD candidate for chancellor and the former vice-chancellor under Merkel’s fourth government, Olaf Scholz, is one of the leaders tipped to replace Merkel. Scholz has previously served as the finance and interior minister for Germany, and is one of the longest-serving members of parliament.

However, although his experience as finance minister does benefit him, his critics have also thrown accusations his way regarding two big financial scandals, aiming to cast doubt on his suitability as a candidate for chancellor. But in terms of popularity, he’s a runaway leader in the polls; it was revealed in at least one survey that if the German people were voting for their next chancellor, Scholz would be the one they would choose to elect.

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Germany

Fig 1

Angela Merkel’s timeline Heads of government/state between 2005 and 2021

cal rules in 2022, another matter at hand that the new chancellor will have to decide their stance on. One final economic issue that will soon need to be tackled is whether the recovery fund, initially meant as a one-off measure to fund the EU’s recovery from the pandemic, should become a permanent feature within the EU. This fund would require the backing of the new chancellor, and the position that they take on this is crucial, as the other member states look to Germany for leadership. Will a postMerkel Germany continue to lead Europe? It remains to be seen whether the new coalition government aligns Germany closer to or further away from the EU.

Merkel’s legacy

“To find someone who possesses both her stability and strength, someone who can unite all of Germany and the EU, will be a challenge”

SOURCE: Statista Research

For some of the German population, and more widely, other world leaders, Merkel is leaving her final term as a chancellor on something of a high, with unemployment in the country down by six percent, which is half of what it was when she first became chancellor in 2005.

In addition, Merkel’s government’s economic policies have helped Europe’s largest economy recover, twice. However, for some German economists, Merkel’s fourth term as chancellor has been viewed as a time of slippage in the country’s competitive drive, with widespread agreement that Germany’s physical and digital infrastructure is now backward.

Therefore, in the lead-up to the election, promises from other parties included these specifics as areas they would focus on, should they come to power, as well as promising to look at tax and pension reforms.

The view of a post-Merkel Germany Germany has always held a certain weight in European policymaking. Therefore, the next chancellor will not just be responsible for leading Germany through crises, but also the whole of Europe. The predicted coalition is likely to be more in favour of EU integration than Germany previously has been, and there is even more reason that the next chancellor will have to take charge on many issues arising within Europe. One of the tasks awaiting the next chancellor is the need to update The Banking Union, which was first introduced in the wake of the debt crisis. However, this could cause controversy within Germany due to many of the population having concerns that updating this union will lead to them paying massive bills in order to support euro nations that are less financially conservative. In addition, the eurozone is also due to update its debt and fis-

When Merkel announced her departure from German politics, it was widely acknowledged what a significant impact this would have not just on Germany, but Europe too. Her ability to remain in power for so long as chancellor is the reason why she has become a symbol of political stability. However, her ability to ward off political opponents over the years is partly what has led to the current situation, where there isn’t a clear heir to take the reins.

The legacy Merkel will be leaving behind can be summed up as a continuing defence of the liberal world order, a title allocated to her as a result of her consistent support of refugees, as well as her support of the laws that seek to address the climate crisis.

Her policies over the years have contributed to her shifting the Christian Democrats party significantly to the centre. However, this has resulted in a rise of the far right populist group, Alternative for Germany (AfD), who now hold 92 seats in Germany’s parliament, having not previously won seats in the Bundestag prior to 2017. Merkel will remain in a caretaker role until the new government is officially in place, which might not be until Christmas.

After the new chancellor has been appointed, she will be able to completely step back, and will be granted an initial transitional allowance of half her pay, after which time she will be entitled to a pension, from her work as chancellor, government minister, and member of the Bundestag. The next chancellor faces the significant challenge of running a country that has come to be relied upon as one of the world’s great economic leaders. Other countries, particularly within the EU, will look to Germany for guidance and to help Europe recover from the continued economic fallout from the pandemic. For many, Merkel’s departure represents the end of an era. For the first time in over a decade and a half, Germany must manage without its mother. n

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Disaster Planning

WhEN thE paNDEMIc FIRSt StRucK, It WaS thE buSINESSES WIthout a plaN that WERE lEFt paNIcKING aND WhoSE StaFF WERE ovERloaDED

Preparing for the worst?

All savvy businesses have disaster recovery plans for worst-case scenarios, such as earthquakes, fires or security breaches – but what recourse or plans do any of us really have when something on a much larger scale happens?

words by

Ruth Kibble FEatuRES WRItER

After the 2020 pandemic lockdowns, 2021 introduced us to Brexit-induced food, fuel and CO2 shortages, ongoing supply chain problems and scarcity of everything from lorry drivers to Christmas turkeys. Like it or not, daily life frequently feels as though it’s coming close to standstill.

As responsible business owners, at what point should we stop mitigating for ‘disasters’ given that you cannot plan for every possible eventuality? COVID-19 has taught us that if a company’s HQ was shut down in an emergency – flooded or targeted by wrongdoers, say – staff can of course find the agility and flexibility to ‘keep calm and carry on’ in the short term. But with wave after wave of nationwide difficulties to tackle in the domestic sphere, perhaps it’s time for bosses to take business continuity planning (BCP) up yet another level.

Take an example from the US. Grim though the thought may be, before the Columbine high school massacre in 1999 it would have been unthinkable to consider that an active shooter situation might need to be covered in a school’s emergency drill procedures. Twenty years later, thanks to the proliferation of extremism of all 150

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stripes, a gun accessibility culture that is at odds with the rest of the western world, and crucially, an exponential increase in actual firearm attacks, the sad reality is that now every school in the country has a plan and a drill for if a gunman shows up. Mercifully, the possibility of armed intruders in a US school is still not likely, but it is statistically possible enough that the smart thing to do is to prepare for it. Such preparedness has been a common part of US school life for a generation in the hopes that the worst will never come to pass, but that people will know what to do if it does.

Striking the right balance New stories about uncommon occurrences becoming possible or even probable beg the question of just how far strategy and governance now need to go to protect businesses from catastrophe. A balance needs to be struck without a doubt, but it is worth asking the question of how long work could – or should – continue as normal if fuel or power supplies take a severe hit. What are the most important aspects of your business, how can you ensure their continued delivery no matter what, and is there a scenario when that is no longer feasible? And it is not only the details of the plan that are important to consider; it is crucial to win the hearts and minds of the staff delivering that service when they might also be facing significant difficulties outside of

the job if the worst comes to the worst. Against the current political and socio-economic landscape, perhaps it is time to review that line, and approach planning for it head on. When the pandemic first struck, it was the businesses without a plan that were left panicking and whose staff were overloaded, trying to navigate lockdowns and stay safe while muddling through their work as best they could.

Of course, a contract is a contract and we can all be flexible and adapt, changing our lives short term to overcome business road bumps, but what if the country is headed for food shortages or power cuts that last for months on end? Disaster recovery and business continuity are linked, but they are not one and the same. I’d wager that if things really get ugly, not many people would place their employer’s strategic or financial objectives over basic household survival.

Most boardrooms can be crudely divided into ‘hawks’ and ‘doves’; those who take risk with a pinch of salt, and those who are more cautious. But like gas masks being carried in WWII, earthquake and tsunami drills in Pacific countries, or fire drills the world over, with any insurance policy, you prepare for the worst and hope for the best. Office workers being issued laptops rather than desktops as standard to enable working from home in any scenario does not seem overkill by comparison. Back on UK soil, it certainly feels like the needle is moving in the more extreme direction all the time. Against a backdrop of COVID-19, Brexit and climate disaster, perhaps levelling up what we consider the worst-case scenario is not as paranoid as it may seem. It’s one thing having your server backed up and work-from-home policies sorted, but what use is that BCP if someone simply turns off the nation’s lights? n

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Outsourcing

Outsourcing success in the post-pandemic era The COVID-19 pandemic has radically reshaped the world of outsourcing, ushering in new customer demands and expectations as well as driving technological growth. In order to survive and thrive in this new landscape, outsourcing companies will need to adapt Going global words by

Karim Bernoussi cEo & co-FouNDER, INtElcIa GRoup

In the wake of the COVID-19 pandemic, many businesses are choosing to go back to basics.

The extraordinary circumstances of the past 20 months – coupled with the threat of a global economic recession – have prompted companies to refocus on the essential. Many firms are now looking to streamline their business and achieve their highest potential while cutting unnecessary costs and minimising risks.

It is perhaps no wonder, then, that outsourcing is proving to be a popular option in the post-Covid climate. By outsourcing elements of their business that may have traditionally been performed in-house, companies are able to refocus on their core operations and fully devote themselves to ensuring that their business is the best that it can be. Outsourcing can give companies more freedom and flexibility to focus on what really matters – and in the current economic climate, that’s a valuable thing, indeed.

However, as the demand for outsourcing grows, the sector itself is becoming increasingly competitive. This, in many ways, is having a positive impact on the industry: with new competitors entering the market, existing outsourcers are looking to innovate and to explore new business lines and offerings in order to meet customers’ evolving demands.

This healthy level of competition is fuelling some exciting new developments within the fast-paced outsourcing sector, with forwardthinking firms helping to craft a very bright future for the industry.

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The pandemic has prompted a global pivot to digital at a scale that has simply never been seen before. Almost overnight, companies successfully adopted remote work as governmentmandated lockdowns came into effect in the spring of 2020. This not only enabled employees to continue to work from the safety of their own homes, but it also had the added benefit of breaking down many geographic barriers for businesses. With meetings now taking place on Microsoft Teams or Zoom, companies found that they could easily communicate with international customers, stakeholders and investors all at the touch of a button. Simply put, business is becoming more global, and if companies want to survive and thrive in the post-Covid era, they will need to set their sights on the international market.

At Intelcia, we have always had a global outlook. In fact, from our earliest days, we had no intention of staying local. Intelcia was founded in Morocco in the year 2000, and even as the business was just beginning, there was already an appetite for growth and expansion. In 2011, Intelcia took its first real step towards achieving this vision, acquiring a French-based company that not only gave the company a presence in mainland France, but also brought onboard over 1,000 new employees. The move was a logical next step for Intelcia, as it was already working within the French-speaking world, thanks to its Moroccan roots. After establishing a base in France, Intelcia then set its sights on sub-Saharan Africa, opening branches in Cameroon, Côte d’Ivoire and Senegal, followed

by Madagascar and Mauritius. In just a few short years, this strategic expansion saw Intelcia establish a unique pan-African footprint, with the company soon emerging as a market

leader in the Frenchspeaking world.

But Intelcia’s ambition didn’t stop there. In 2018, the year in which Intelcia company opened a was founded multilingual site in Portugal, strengthening its presence within Europe and enabling the firm to Number of countries in support its customwhich Intelcia operates ers in a wide range of European languages. The move has proved a success for Intelcia – by the end of 2021, the Portuguese branch is expected to rank as the country’s second largest outsourcing hub.

Intelcia has been busy founding bases on the other side of the Atlantic, too. Since 2020 – even amid the economic uncertainty caused by the pandemic – the company has successfully launched new operations in the US, Jamaica and the Dominican Republic. And more recently, it has expanded its operations into Spain, the UK, Colombia and Chile, following the acquisition of Spanish outsourcing player Unisono. While Intelcia has certainly established a strong international presence over the course of the past 20 years, its expansion into the Americas marks a significant turning point in the company’s development strategy. The English-speaking world represents a strong

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Outsourcing

automation technologies offer a simple solution. AI-powered chatbots can provide realtime, round-the-clock support to customers when human customer service agents might be otherwise engaged. What’s more, with the pandemic serving to accelerate digital adoption, most customers now expect instant, digital solutions as standard, meaning that the case for AI has never been so strong. At Intelcia, our highly efficient, talented workforce is now supplemented by a host of advanced ‘virtual agents,’ ensuring a quality customer service experience for all of our customers.

Looking ahead

The most successful companies are those that are always looking to improve and advance, strengthening their core products focus for the coming years, and offers a wealth of exciting new opportunities. Now operating in 16 different countries, spread across three different continents, Intelcia has firmly set its sights on becoming a truly global player, offering innovative and multilingual solutions to customers.

Evolving with the times In the fast-moving and competitive outsourcing industry, an international presence is a must. That said, while geographic expansion is undeniably important, diversifying your business lines is just as crucial. The most successful companies are those that are always looking to improve and advance, strengthening their core products and services while introducing new, innovative solutions for customers. Diversification has always been at the very heart of Intelcia’s strategy, and continues to drive the company forward today.

Alongside our core customer service offerings, we are now proud to provide IT services, and currently have 250 employees dedicated to this line of work. Over the next three years, we plan to grow this area of our business to encompass 2,000 employees, who will serve our customers across a range of geographies.

Alongside our IT development and supervision solutions, we are now in the process of consolidating our digital transformation consulting and support services, which we believe

will prove incredibly useful to our customers as they look to digitise their businesses in response to the pandemic.

In addition to developing exciting new business lines, Intelcia is also committed to ensuring that its core business is as efficient and customer-friendly as possible. Since the beginning of the COVID-19 crisis, customer service centres have become the main – if not the only – point of contact between customers and brands. In these testing times, delivering an exceptional customer service experience is more important than ever. In addition to hiring the very best people, ensuring quality training and nurturing talent among our staff, at Intelcia, we are also committed to adopting the latest cutting-edge technologies to ensure a seamless customer service experience.

Over the past four years, Intelcia has invested in artificial intelligence (AI). Before we started on this journey, we made sure that we understood the value that AI would bring to our business, and how it would complement the customer experience. Indeed, as all outsourcing firms will understand, each and every contact centre’s processing capabilities depend on the available agents – and when there is a surge in incoming calls and queries, this can quickly turn into a bottleneck. In this industry, long wait times are, of course, unacceptable. In these instances where there is increased demand for agents, AI and smart

We are now more than 20 months on from the world’s first lockdowns, and are cautiously looking ahead to a post-pandemic future. The crisis has completely reshaped the customer service industry, ushering in new trends and expectations. In the years to come, businesses in the industry will be defined by how they have reacted and responded to this new environment, and at Intelcia, we will use the lessons learned from the pandemic to propel us towards an exciting future.

There’s no denying that technology will play a crucial role in the future of the outsourcing industry. AI will undoubtedly become an increasingly common feature – but customers will gravitate towards those companies that use AI efficiently, respectfully and sensibly.

Intelcia’s adoption of AI has always been driven by a desire to better serve our customers and to create a more harmonious user experience.

Indeed, by automating repetitive, time-consuming tasks, AI gives the gift of time to our customer service advisors – allowing them to focus instead on more valuable ‘human’ activities that can’t be carried out by a machine or an algorithm, such as solving complex customer problems. We know that our first-class employees are one of our finest assets, and that’s why we use AI to complement – not replace – our staff. We are deeply committed to investing in our employees’ skills, and offer training and certification courses at all levels of the organisation. After all, our employees’ success is our success, and we want each and every member of staff to feel proud to be a part of the Intelcia family.

As for our global ambitions, we are setting our sights high: our goal is to reach $1.5bn in revenues by 2025, and to rank among the top 10 outsourcing companies worldwide. If our track record is anything to go by, then this target feels well within our grasp. With our unique geographic footprint, our highly motivated and capable staff and our appetite for growth continuing to propel us onward, Intelcia is very much looking forward to seeing just what the future holds. n

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Construction

the materials used, as well as the heating, cooling and lighting of buildings and Italy to receive from the infrastructure. Sus‘next generation Eu’ fund tainability is not just a matter of corporate responsibility, but it is good for business – and many companies are investing heavily in sustainable practices not just to be good global citizens, but also because it makes great financial sense.

As construction entrepreneurs, we have a responsibility to lead our industry’s evolution towards the practice of maximum respect for the environment, both in terms of construction methods and the life cycle of the built environment. To achieve this goal, the sector must focus on innovation, sustainability, and the circular economy.

€196bn

Modular wooden houses made out of renewable resources

The transition to sustainable construction Many aspects of life as we knew it changed irrevocably when the global pandemic hit, and even though the path to a circular and greener economy was well underway before then, the rebound from COVID-19 should be a catalyst for change in the construction sector

words by

Angelica Krystle Donati cEo, DoNatI IMMobIlIaRE GRoup

After many years of stagnation, the construction industry is finally expected to grow significantly in the next decade according to the Future of Construction, a report published by Marsh & Guy Carpenter. The report envisages a solid rebound from the COVID-19 outbreak this year, with worldwide construction production increasing by 6.6 percent. Construction spending contributed to 13 percent of global GDP in 2020 and this is expected to rise steadily over the next few years. By 2030, global construction output is expected to increase by 35 percent from today’s levels.

Thanks to governmental measures aimed both at reaching environmental targets and kick starting the economy, construction, which has always lagged behind other sectors from a growth perspective due to critically low margins and consequentially low R&D spending, is seeing a renaissance. Italy, for example, has a commitment to reduce CO2 emissions by 55 percent by 2030, and to zero by 2050 within the European ‘green new deal.’ The construction sector will be pivotal in achieving this goal, as the built environment must be upgraded to be more sustainable.

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Meanwhile, the European Union’s ‘next generation EU’ fund will help support recovery of construction in Western Europe with growth forecasts suggesting the sector will expand by 7.9 percent in 2021. Italy will benefit from over €196bn, and 48 percent of this will be spent on construction projects. For example, €68.9bn is destined for ecological transition and 40 percent of this sum (€29.3bn), is intended for energy efficiency and the upgrade of existing buildings.

On the other side of the pond, the US have established the ‘build back better’ programme, which is a projected $7trn COVID-19 relief and stimulus package designed to accelerate economic recovery and for investment in large infrastructure projects proposed by President Joe Biden. It is projected to create 10 million clean-energy jobs.

Sustainability and the circular economy Climate change and the race to net zero are arguably the greatest challenges that the construction industry is facing. The building and construction industry as a whole is responsible for 40 percent of worldwide greenhouse gas emissions and produces 30 percent of Europe’s waste. The industry is finally waking up to the importance of proactively addressing climate change concerns and embracing responsibility for its direct and indirect carbon emissions.

The major contributors to these emissions are

The impact of sustainable objectives To meet sustainability objectives, it is important to positively impact the life cycle of each project as well as improving building methods.

There are many construction techniques available that are less damaging to the environment, and technology and materials choices that make long-term management of an asset more sustainable. The circular economy, for example, is creating added value in the construction industry. According to data from the Italian ‘national association of building constructors,’ the transition to the circular economy system is increasingly becoming a fundamental value for construction companies, with 81 percent of respondents to a recent poll stating that it is key to their future goals.

In Italy, the 110 percent super-bonus is giving a positive boost to the industry as it encourages the private sector to invest in energy efficiency by funding upgrades to existing buildings at no actual cost to their owners. In addition, the use of eco-friendly materials as a standard practice is hugely beneficial in the long term as they do not have an adverse impact on the environment when used and can easily be recycled.

Finally, the use of technology is essential for reducing emissions and preserving the ecosystem. The sector has responded to the COVID-19 outbreak by focusing more heavily on innovation as it is fundamental to respond to the evolving needs of the construction market to ensure the industry’s transformation.

The sector will have to adapt to a changing environment and create resilience to the serious effects of climate change. For its part, the construction industry has all the credentials to meet this challenge, enhance its evolution to a green economy and contribute substantially to the revitalisation of the global economy. n

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Construction

The new iron road Long romanticised as travel from a bygone age, plans for a 21st century makeover for trains and rail networks are gaining momentum as a push for low and zero-emission travel has the potential to ground short-hop flights and promote travel by rail

words by

Selwyn Parker FEatuRES WRItER

Boasting traffic of 750 trains and 25,000 passengers on a typical pre-pandemic day, the city of Salzburg’s award-winning central railway station is a symbol of the revival of rail that promises to gather speed in the next few years. The beneficiary of a massive, 15year reconstruction project that only ended in 2014, Salzburg Central has been transformed from an impressive but unsuitable monument of mid-19th century, steam-powered rail into a modern transport hub that encourages citizens to jump on a train.

A connection point for long-distance and commuter trains, the station is spread over 18 tracks serving points north and south. Covered mainly by glass roofs, the atmosphere is airy and light. Passengers can while away their time until their train departs in nearly 4,000 square metres of shopping area. And there’s plenty of space, a pre-requisite of the new era of rail.

As passengers steadily return to rail travel following the pandemic, the entire rail industry is engaged in a fundamental reform that is transforming stations into people-friendly hubs, applying low-emission technologies and slashing ticket prices in a looming battle with aviation.

And hubs like Salzburg Central are pivotal to the recovery of rail. Authorities all over the world are pouring public funds into stations – many of them historic – that draw people to trains. Turkey’s transport ministry, for instance, has just called tenders for the reopening of a rail link that will take passengers into the historic European terminus of Sirkeci near the Topkapı Palace in Istanbul. Opened in 1872, it was closed in 2013 but will now have a new lease of life. Among many other examples of the revival of great stations, in Paris the long-neglected Gare du Nord, Europe’s busiest station, has finally been approved for a €587m 156

| Winter 2021-22

renovation that will bring it into the 21st century. Serving 700,000 passengers a day before the pandemic, the station has been overdue for a remake, but locals, including the city, blocked the rail authorities with a series of legal actions arguing that the project would spoil the surrounding ambience by turning it into a giant shopping mall.

In truth, the Gare du Nord project embraces a fresh view of rail stations that sees them as hubs for the community as well as for transport. The renovation will provide spaces for concerts and rooftop gardens as well as for shopping and offices, along similar Renovation cost for the lines to Frankfurt upgrade of Gare du Nord and other top-rated station in paris, France hubs like the central stations in Leipzig, Vienna, Amsterdam, and Moscow’s Kazansky.

However, it’s a race against time to have the work done before Paris hosts the 2024 Olympics. It’s a comment on the belated change of attitude towards rail that second-placed St. Pancras in London is housed in a towering historically protected building that would have been pulled down a few years ago and replaced by apartments but for a campaign by conservationists.

€587m

Better than air Driven by concerns about climate change, authorities in many countries are taking unprecedented measures to encourage travel by rail rather than by air. In an action that is certain to be followed by other governments, France is moving to ban flights under two hours, a step that will provide a massive boost to domestic rail travel. The ban is justified by overwhelming evidence of the ecological benefits of rail – numerous studies show that emissions from long-distance rail journeys – approximately two hours or more – are 20 times lower than the average commercial flight. The European Commission would certainly approve of the

ban – it declared 2021 to be ‘year of the rail’ and is backing a wide range of projects that are designed to restore trains to their glory days of the early 1900s when the coal-fired steam locomotive, followed by diesel-fuelled trains, transformed travel all over the world. One of the most loved rail journeys of yesteryear, the night train, is making a comeback in Europe on routes between capital cities. Austrian Railways is increasing its Nightjet trips with affordable fares and a wider choice of accommodation including private cabins, while a French start-up, Midnight Trains, plans to open routes from 2024 under the slogan ‘hotel on rails.’

Next stop: hydrogen trains A technological revolution underpins the revival of rail. Pittsburgh’s Wabtec group has rolled out a battery-electric, hybrid-powered train that reportedly slashes emissions by 11 percent. Hydrogen-powered trains that emit only warm water vapour are already being trialled with promising results – two of them have carried passengers for 180,000km in Germany. In regular operation since 2018, the hydrogen train is the 150-seat Alstom Coradia

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Construction

able. However, fears that commuter travel faces a long-term decline look to be wrong – British research finds that around 70 percent of people expect to return to the office.

Logical logistics

The Alstom Coradia iLint hydrogen-powered train, pictured in Katzhutte, Germany

Invisible to the general public, many of the great ports of the world are rapidly adopting rail to shift goods off the wharves as a cleaner alternative to lorries. The booming Port of Valencia in Spain, for instance, sees more than 4,000 trains a year at a rate of 80 convoys a week, all transporting a wide variety of goods in and out of the country. But that’s not good enough for the port authorities. Under a policy called ‘intermodality,’ Valencia is following Rotterdam, Barcelona and other maritime hubs in switching rapidly to rail in order to slash lorry movements, especially for delivery into the hinterland.

“The railway is key in our present and future strategy because it allows us to reduce costs in the logistics chain, to improve the services we offer in the terminals, and to take loads off the roads and put them on the railways,” explained the port’s president Aurelio Martinez, citing trains as crucial in the decarbonisation route targeting zero emissions by 2030. The ports’ transition is backed by shipping giants such as France’s CMA CGM, which has adopted a fundamental strategy called ‘switch to rail.’

Faster than a jet plane iLint. Combined, the fuel cell and batteries can power the train to a maximum speed of about 90mph for a range of up to 500 miles.

Zero-emission is the holy grail of rail travel. As Railway Age reported in early 2021, “based on emerging technologies in batteries, hydrogen fuel cells and renewable natural gas, zero-emission is a possibility.” In fact, it could be inevitable. The powerful US Environmental Protection Agency (EPA) and the EU have both mandated much tougher future standards for trains and locomotives. From 2025, the EPA’s tier-5 would force emissions of nitrogen oxide to almost nothing and emissions of particulate matter to absolutely nothing. This is not pie in the sky. “Already today, prototypes and many production locomotives have been manufactured that meet these requirements,” Railway Age reports. “In the coming years hydrogen fuel cell trains will appear on 10 railways around the world. Most of these have already been contracted.”

Taking all the developments into account, it looks inevitable that the major stations will welcome low or zero-emission fleets of trains within the next two to five years as more polluting technology is phased out.

But will the passengers come back in In the coming years the aftermath of the hydrogen fuel cell pandemic? Mobiltrains will appear ity experts, who are on 10 railways watching developaround the world ments closely, believe that this is a near certainty, though not as before. Although passenger levels have been creeping up, they remain well below pre-pandemic levels in New York, whose routes were some of the hardest-hit anywhere. The New York Metropolitan Transportation Authority estimates passenger numbers on its two commuter lines in September were down by as much as 70 percent on weekdays. If numbers stay this low, it would be a financial disaster.

But US authorities are working on allaying commuters’ fears by introducing a variety of measures that reduce congestion, such as making thoroughfares one way and managing crowds better on platforms. Many transport-watchers predict that the days of peak commuter congestion could be over as office workers pick their time to go into the city in a trend that would make rail travel more enjoy-

Already rapid before the pandemic, the rate of innovation in rail travel is accelerating.

What’s next? Although it’s still an experimental technology, hyperloop travel at speeds of 1,200km per hour could be around the corner. A company called Nevomo in Poland has raised funds to take the first step that would carry passengers at over 400km per hour as early as 2023, slashing the travel time from Gdansk to Krakow, a distance of nearly 600kms, from the current six hours and 10 minutes to little more than 90 minutes. Based on magnetic technology applied to existing tracks, ‘magrail’ is seen by some as the future of all rail transport.

But this may not be what rail travellers want. New research suggests that commuting by rail is good for us and even improves passengers’ work ethic. A project by University College London and the rail industry has found that taking the train significantly improves a passenger’s workday, including their productivity, motivation, cognitive performance and wellbeing. Released in September just as seasonal and peak travel in Britain was on the rise, the study bodes well for rail in the long run.n

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Chemistry

Free your mind: mastering psychedelic chemistry The long-held taboo surrounding LSD and Psilocybin has held back the field of study for these drugs for decades but they have been enjoying a renaissance of sorts following promising clinical trials for treatment of major depressive disorders, writes Evren Lucas Evidence for the use of plant-based psychoactive drugs can be found in texts spanning hundreds, if not thousands, of years. In book IX of Homer’s Odyssey, Odysseus’s scouts eat what is described as the fruit of the lotus and experience not just a release from all their troubles, but a strong desire to remain where they are, absconding from all sense of duty on their return home from Troy. Over 2,000 years later, Thomas De Quincey’s Confessions of an English Opium-Eater, in which he documented his opium addiction following a bout of toothache while studying at Oxford, said of the drug, that it took him to a place where “the hopes which blossom in the paths of life” are “reconciled with the peace which is in the grave.” Since the ripe seed pod of the opium poppy “resembles the pod of the true lotus” according to the Encyclopaedia Britannica, it is possible that both the people of ancient Mesopotamia and De Quincey were experiencing the effects of the same narcotic.

In 1970, President Nixon signed the Controlled Substances Act, which labelled psychedelic drugs such as lysergic acid diethylamide (LSD) and Psilocybin (both of which can be derived from fungi) as Schedule I, which defines them as having ‘no currently accepted medical use and a high potential for abuse’.

Opium remains a Schedule II drug, the difference being that while still being highly prone to abuse it does have accepted medical uses. The act brought to an end a leading component of the counterculture movement of the 1960s and effectively closed the door on the psychedelic research that started with LSD in the 1940s and 1950s. The revival for research into the uses of those illicit Schedule I drugs began two decades later and it is only now that we are looking seriously at the potential for the regulation of administering psychedelics for the treatment of depression and post-traumatic stress disorder (PTSD).

In the past few years, clinical trials, such as those that have taken place at Imperial College London, and that involve testing the effects of synthetic forms of Psilocybin, MDMA and LSD, have increased in number as interest from scientists and investors alike has taken hold. What

was once considered a scourge on society and what Nixon described as “public enemy number one” is now enjoying something of a renaissance in the field of psychiatry.

In April 2019, Imperial College London opened the world’s first Centre for Psychedelic Research. The centre is led by Dr. Robin Carhart-Harris, who said of the opening: “This

ing: “A better drug for depression or psychosis, or the first real drug to treat Alzheimer’s, that’s going to be a mega, mega blockbuster.” The findings of clinical trials exploring the use of Psilocybin as an effective treatment for major depressive disorders (MDD) suggest that we might be quite close to this.

A research article titled The Economic Burden of Adults with Major Depressive Disorder in the United States (2005 and 2010) by Greenberg, Fournier, Sisitsky, Pike and Kessler has estimated the economic burden of MDD in 2010 at $210.5bn, up from $173.2bn in 2005. This gives some indication of the effect of the 2008 global financial crisis, though of course this is difficult to quantify and one can only imagine what the global pandemic has done for our collective mental health. With MDD estimated to affect over 300 million people worldwide, it might be considered a pandemic within a pan-

Psychedelics are set to have a major impact on neuroscience and psychiatry in the coming years

new Centre represents a watershed moment for psychedelic science; symbolic of its now mainstream recognition. Psychedelics are set to have a major impact on neuroscience and psychiatry in the coming years.”

Buying back in The vaccine heroes of the global pandemic, AstraZeneca and Pfizer, among others within Big Pharma, were once more heavily invested in neuropharmacology, helping to bring antipsychotics to the market, which, coincidentally or not, coincided with the first revival of scientific interest in psychedelics in the 1990s.

Large pharmaceuticals may have shied away from central nervous system (CNS) drugs in the past, but according to a report by S&P Global referencing CB Insights, investment in CNS has been on the rise in the last decade: “The second fiscal quarter of 2019 saw $321m in funding toward mental health and wellness companies, a quarterly record for the therapeutic area.” I wonder whether the renewed interest in psychedelics will provide an investment path back into this broad area. Dr. Kaitin, a professor at Tufts University, is quoted in the report, say-

demic. A report on the findings of a randomised clinical trial by Davis, Barrett and May entitled Effects of Psilocybin-Assisted Therapy on Major Depressive Disorder states that: “current pharmacotherapies for depression have variable efficacy and unwanted adverse effects. Novel antidepressants with rapid and sustained effects on mood and cognition could represent a breakthrough in the treatment of depression.”

I’m tempted to conclude that maybe the ancient Mesopotamians were on to something, though perhaps it would be wise to exercise caution. After all, De Quincey suffered with addiction for the rest of his life and Odysseus’s scouts had to be dragged back to their boats. But my concerns are less about regulation or abuse, and more about the mechanisms by which our brain chemistry is altered. As Kaitin said: “the crux of all this is, we don’t have an understanding of the basic mechanism… of a lot of diseases…there are no good models.” This is why continued research and renewed interest and investment from Big Pharma is so important, but I’m quietly optimistic that these new therapeutic drugs could be the mega blockbuster that MDD sufferers are looking for. n

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Cost of Pandemics

The price of pandemics The COVID-19 crisis stopped economies across the globe in their tracks, but it’s far from being the only outbreak to have shaken the world in the past. From Spanish Influenza to SARS, we look into the costs of previous epidemics and pandemics, and how economies recovered in the aftermath

words by

Laura French FEatuRES WRItER

In April 2020, as the impact of the coronavirus crisis took hold, the IMF predicted “the worst recession since the Great Depression.” It stated that “the cumulative loss to global GDP over 2020 and 2021 from the pandemic crisis could be around $9trn,” forecasting a global economic contraction of three percent over the year. Two months later, the World Bank said we could expect a 5.2 percent contraction across the world.

In the UK, GDP ended up declining 9.8 percent in 2020, the steepest plunge since records began in 1948, and the biggest in more than 300 years, according to estimates. In the US, the economy shrank by 3.5 percent, marking the worst year since 1946. The average unemployment rate in the country meanwhile hit 8.1 percent – the highest annual rate since the wake of the financial crisis in 2012.

Hope on the horizon Thanks in large part to vaccine rollouts, the outlook has improved significantly since 2020; in a Global Economic Prospects report in June 2021, the World Bank projected global growth of 5.6 percent this year, indicating the fastest post-recession rebound in 80 years.

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Unemployment in the US fell to 4.8 percent in September, and businesses are fast recovering; for the first time since July 2004, half of respondents in a recent McKinsey Global survey said they expected their company’s workforce to grow over the next six months. Those businesses also anticipate being more resilient; nearly three-quarters said their organisations were more prepared for future crises now than they were before the pandemic.

And the world has learnt a few lessons too, according to Dennis Carroll, Senior Advisor in Global Health Security at the University Research Co. (URC). “The COVID-19 response has shown us that in order to prevent future pandemics, we need to embrace as a core guiding principle the idea that a threat anywhere is a threat everywhere,” he told World Finance.

“Only through a coordinated global response will we be able to ensure a newly emerged threat can be stopped before it becomes a pan-

“Countries will need to work together to get trade back up and running and deliver vaccines to a larger portion of the world if the global economy is to recover on a more even scale”

demic. Addressing issues of trade also cannot be solved at the national level.”

It’s far from over, of course; recovery is unevenly spread, swayed towards countries with greater access to vaccines (90 percent of advanced economies are expected to regain their pre-pandemic per capita income levels by 2022, according to the World Bank report, compared to only a third of EMDEs).

Countries will need to work together to get trade back up and running and deliver vaccines to a larger portion of the world if the global economy is to recover on a more even scale. It’s also difficult to predict how the virus will fare in the coming months and beyond. “The recovery is not assured,” reads the World Bank’s report. “The possibility remains that additional COVID-19 waves, further vaccination delays, mounting debt levels, or rising inflationary pressures deliver economic setbacks.”

How exactly things pan out remains to be seen – but while coronavirus might be the biggest pandemic we’ve experienced in our lifetime, it’s not the only one history has witnessed. So what can we learn from previous outbreaks and the economic effects they’ve brought about? From Spanish Influenza to Zika, SARS to Swine Flu, we’ve sought out some of the biggest epidemics and pandemics from the past century, and explored just how much they cost national and global economies at the time.

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Cost of Pandemics

Spanish Influenza

SARS

Considered the deadliest pandemic in history and claiming an estimated 20–50 million victims – while infecting a third of the world’s population – Spanish influenza didn’t only devastate lives; it brought down cities across the globe in a way not dissimilar to COVID-19, with many public places shut down in the US and beyond in early 1919.

The pandemic caused widespread labour shortages, exasperated by the fact a disproportionate number of its victims were of working age (15 to 44). Manufacturing output in the US fell by 18 percent, while real GDP per capita dropped 6.2 percent across the globe.

In the US, grocery sales fell by a third and sales at merchants and department stores dropped 40– 70 percent, according to an article in the Arkansas Gazette in October 1918. A report in the Commercial Appeal meanwhile found that coal mine production in Tennessee had dropped by half.

Spreading in three waves in 1918 and 1919, and accelerated by the return of First World War veterans from overseas, the effects on both lives and economies were to last for many years.

While the exact numbers are hard to quantify, partly due to a lack of historical data and partly its convergence with the war, the pandemic has since been called the fourth most adverse macroeconomic shock since 1870, after World War II, the Great Depression and World War I. n

Roll on nearly a century – via the Asian Flu of 1957 and the Hong Kong Flu of 1968, among several other outbreaks – and SARS was born.

When the virus emerged in China in 2002, rapidly spreading to Australia, Brazil, Canada, China, Hong Kong, South Africa, Spain and the US, concerns over its impact on both lives and economies were immediate. While it was contained within a year, registering around 10,000 infections and less than 1,000 deaths in total, the economic costs were stark. The outbreak reduced global GDP by $33bn, according to the World Bank, while China alone is estimated to have lost around $14.8bn, the US more than $7bn and Canada around $5bn.

Airlines were among those hardest hit, with Asia-Pacific airlines losing $6bn on the back of a dramatic drop in the number of business and leisure travellers flying, according to the International Air Transport Association (IATA), and North American carriers registering $1bn in losses. Tourism was another victim; net revenue of Park Place Entertainment, which owns Las Vegas’ Caesar’s Palace and other hotels, tumbled more than 50 percent year-on-year in the second quarter of 2003 as the Asian market slumped, while bars, shopping centres, cinemas and other indoor public places closed in Beijing amid a country-wide lockdown.

Timeline: 1918–1920 Origin: Unknown

Timeline: 2002–2003 Origin: China

A 2008 study; The economic impact of SARS: How does the reality match the predictions? concluded that China lost out on an estimated $3.5bn in domestic tourism that year, while Hong Kong’s restaurant sector saw estimated losses of $260m.

But authors of the study, Marcus Richard Keogh-Brown and Richard David Smith, are cautious of over-estimating the impact of SARS alone, pointing to other influences at the time that added to the economic burden – not least the conflict in Iraq – and noting the rapid recovery seen after the outbreak ended.

“SARS did have a notable effect on certain sectors of some East Asian and the Canadian economies,” they wrote. “However, these losses correspond only to the relatively short period of the disease outbreak, after which consumer confidence returned and many stocks that had diminished were replenished and some purchases which were forgone at the height of the outbreak were made after the perceived risk was reduced.”

That presents some hope for a post-Covid recovery and one that’s already being seen; in June, the World Bank forecasted “the most robust post-recession recovery in 80 years in 2021,” with global growth expected to accelerate 5.6 percent this year thanks to the loosening of restrictions and reopening of venues across the world. How reality plays out in the coming months and years remains to be seen, however. n »

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Cost of Pandemics

»

Swine Flu

Timeline: 2009–2010 Origin: North America If SARS taught the world lessons in how to mitigate a potential global pandemic, H1N1 – or Swine Flu, named for its origins with North American pigs – was the ultimate test. First documented in Mexico on March 17, 2009, the virus quickly spread throughout the country and the US, circulating the globe in two waves before officially ending in August 2010. The last disease to have been declared a global pandemic by the WHO before the coronavirus crisis, it gave economists a brief insight into the damage COVID-19 could cause – albeit with a less fatal profile, killing an estimated 150,000 to 575,000 people and infecting between 700 million and 1.4 billion across the world.

While its convergence with the financial crisis makes its real impact hard to quantify, data from the World Bank estimates that global losses likely totalled somewhere between $45bn and $55bn. Those costs stemmed from multiple factors, including direct costs as well as significant declines in several industries, including food, transport and tourism. Mexico alone registered a million fewer visitors in 2009, according to the data, leading to more than $1bn in lost tourism, while stock markets crashed and economists feared an extension to the global recession. In Canada, the virus is estimated to have cost the economy $1.6bn, according to a 2010 report by the Canadian Institute for Health Information, including $162m in care of hospitalised patients and $40m in 162

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emergency department visits. Other estimates put lost GDP in affected countries at between 0.5 percent and 1.5 percent.But preparedness, sparked partly by SARS, helped in containing the virus; the US, UK and Australia closed schools, while Canada witnessed the biggest vaccination programme in its history, investing $400m in buying 50 million doses of the H1N1 vaccine. Those school closures might have been costly – a study in New York found that closures meant at least one adult had to miss work in 17 percent of households – but they likely paid off.

Research early on in the outbreak by Warwick McKibbin, a senior fellow at the Brookings Institution, found that a worst-case ‘ultra scenario’ could shave $4trn off the global economy. Thanks in part to efforts against contagion, that didn’t happen. But researchers Patrick Saunders-Hastings and Daniel Krewski warn against complacency. “Overall, the 2009 H1N1 pandemic was a mild, albeit costly, global virus,” they wrote in a study, Reviewing the History of Pandemic Influenza: Understanding Patterns of Emergence and Transmission.

“While it has reinforced optimism about pandemic preparedness, it should not necessarily be seen as predictive of future pandemic severity.” And indeed it wasn’t; estimated losses from COVID-19 have already reached the trillions, at least rivalling the ‘ultra scenario’ feared for Swine Flu, and it isn’t over yet. But if it wasn’t for the lessons taught by outbreaks like H1N1, the world might be in a far worse position still. n

Ebola

Timeline: 2014 Origin: Guinea In October 2014, the World Bank said the Ebola outbreak – concentrated in Guinea, Liberia and Sierra Leone – could cost the economy $32.6bn by the end of 2015 in a worst-case scenario. The following month, forecasts had been reined in to $3–4bn, and the following year, total losses were estimated to have been a significantly smaller $2.8bn.

But a study published in the Journal of Infectious Diseases in 2018, taking into account social effects and longer-lasting impact as well as the direct losses, put the figure up to a staggering $53bn. It found the biggest losses were for deaths caused by other diseases as Ebola took healthcare resources and hospital beds.

Healthcare costs totalled $26m, while mitigation measures came in at $67m.

Among the biggest blow, though, was the loss in trade as borders closed (totalling $2.8bn, according to the study). Guinea’s trade with Senegal and Sierra Leone – which relies heavily on cocoa exports – was shut off, while Liberia’s trade with the Ivory Coast was also curtailed. International border closures, flight restrictions (many countries suspended flights to the three worst affected countries) and declines in exports, taxes and business exacerbated the impact. Sierra Leone’s min-

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Cost of Pandemics

STRIKING THE BALANCE BETWEEN SAVING LIVES AND SAVing the economy has been one of the biggest debates of our time

Zika

Timeline: 2015–2016 Origin: Brazil

ing industry – the mainstay of the economy, accounting for 75 percent of the country’s 20 percent growth in 2013, according to the IMF – was meanwhile dealt a blow due to restricted movement of workers.

While direct costs were clearly unavoidable, what’s interesting is that mitigation measures, restricted movement, border closures and other behaviours driven by concern caused the biggest financial drain, according to the World Bank. “The analysis finds that the largest economic effects of the crisis are not as a result of the direct costs… but rather those resulting from aversion behaviour driven by fear of contagion”, reads a statement in September 2014.

“This in turn leads to a fear of association with others and reduces labour force participation, closes places of employment [and] disrupts transportation.”

That’s the central crux of almost every epidemic – the World Bank attributes 80 to 90 percent of the economic impact of recent epidemics to behavioural factors rather than to the diseases themselves. More than 11,000 lives were lost to Ebola, but many more were impacted by its devastating economic toll.

That’s a story that clearly rings true in the coronavirus crisis, and striking the balance between saving lives and saving the economy has been one of the biggest debates of our time.

Governments will likely need to continue walking a very fine line for years to come. n

In February 2016, the World Health Organisation declared the Zika virus – which began in Brazil and is mosquito-borne – a public health emergency of international concern.

The virus, which can cause microcephaly and other congenital conditions in babies of pregnant women, soon spread to the surrounding region and beyond, leading the World Bank to foresee an economic impact of $3.5bn in Latin America and the Caribbean that year. But adding in social impacts, researchers from the John Hopkins Carey Business School put the figure somewhere between $7bn and $18bn.

It wasn’t only Latin America and the Caribbean that had cause for concern – a study published in the journal PLOS Neglected Tropical Diseases by Dr Peter Hotez looked at the potential economic toll on the US if the epidemic were to spread. It concluded that costs could range from $183m to more than $1.2bn depending on infection rates in Florida, Alabama, Texas and other southern states at risk.

In response to concerns, Obama requested $1.8bn from Congress in federal funding for prevention, $1.1bn of which was authorised.

While loss of worker productivity, public perceptions of Zika and the costs of action needed were all taken into account in the World Bank’s estimations, by far the biggest portion once again came from its potential impact on tourism – the analysis predicted a 1.6 percent drop in GDP for countries reliant on overseas visitors, explaining why Mexico, Cuba, the Dominican Republic and Brazil stood to lose the most ($744m, $664m, $318m

and $310m respectively, according to the forecasts). Many feared its impact on the Rio Olympics, but the WHO rejected a call to postpone the games on the grounds that it would “not significantly alter” the spread of the virus (and it didn’t; no cases of Zika were reported by foreign visitors following the event). The impact on tourism was smaller than expected as a result; 410,000 foreigners still came for the games – falling only slightly short of the 480,000 originally projected by the Olympic Committee – accounting for seven percent of the country’s annual tourism volume.

Tourism to the Caribbean was also less heavily impacted than feared, according to Travel + Leisure magazine editor-in-chief Jacqui Gifford, who put it down to the fact that only a small sector of the market was affected by the virus. “There was a little bit of a dip when it came to the Caribbean and Brazil,” she told CBS News in 2019. “But we’re really talking about a specific market and a specific type of traveller – pregnant women obviously and couples that were thinking of conceiving.”

In the end, the number of cases was significantly smaller than initially feared; from 2015 to 2018, the Americas registered 220,000 confirmed cases and 580,000 suspected cases, according to data from the Pan American Health Organisation and the WHO. That’s compared to initial forecasts of up to four million cases in Latin America and the Caribbean, and up to 117 million globally. Mainland US registered 224 cases in 2016 and only seven in 2017, while Europe escaped unscathed. If that proves anything, it’s that epidemics can be as financially unpredictable as they are potentially devastating – and weighing up potential risk with reality is where the true challenge lies. n

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If you can’t get that coffee, computer or car you are after it is because the world’s supply chains are in crisis. Prices are soaring, businesses are closing and many are losing their livelihoods. Is there a global supply chain fix, and what might it look like? Adrian Holliday investigates »

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ptus Utilities, a UK energy and lighting infrastructure and installer company, sits towards the end of its own supply chain. For Ian Winn, group financial director, it’s an uncomfortable place to be currently. “We’re seeing prices increase as lead times lengthen and demand increases, making it very difficult for manufacturers and suppliers to build up stock levels. This is leading to shortages and impacts across the board.”

Winn continues, “We’re not direct importers but two of our most important materials are electric cable and meters, which come in from the continent. Because of Brexit some lead times have now doubled.”

Aptus uses a lot of polyurethane pipe. “But production capacity was taken out of the market last year,” Winn goes on. “That’s reduced capacity to the manufacturers and pushed up prices and introduced scarcities exacerbated by the take-off in construction activity at the back end of last year and this year.” Add in COVID-19 issues for this street light installer.

“Effectively they’re [street lights] fabricated steel. But with COVID-19 people are less able to work closely together.” Aptus is getting around some of the issues by talking to suppliers more, holding more stock. But they also have 20 three tonne long wheel-base on order since March from Peugeot. They’re eking more life out of their existing vans, which is pushing up maintenance costs.

Inexplicable planning failure?

Michael Boguslavsky, head of artificial intelligence at Tradeteq, told World Finance that while the supply chain crisis continues, there’s no lack of supply and demand data to plan around it. “What’s clear is we can’t put this down to a lack of resource,” Boguslavsky said. “Global companies have some of the best operational and risk management systems around but, in the case of microchips, they failed to detect how a shortage would impact operations.”

The technology to detect and anticipate shortages exists – communicating with customers in real-time deploying lightning-fast payment systems right down the supply chain – and is in use in other areas. Banks and the financial trading community use fintech tools that can be repurposed, given care and planning, to other sectors.

Are industries picking up? The evidence looks uneven. Richard Parkinson, port director at Southampton’s UK Solent Gateway, says that while there’s no end of data, understanding it in a holistic way is massively challenging. There are two data issues – context 166

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and access – that are needed for an effective pan-global supply chain analysis, he says. “It may be that each logistic service provider, airline or shipping line holds its own data but perhaps it needs to be collated centrally for a single analysis of end-to-end global supply chains. That may be where the weakness in data lies: each element of the global supply chain holding its own stove-piped data.”

Licence to drive In the UK the food supply chain is being weakened by an acute driver shortage. According to the Road Haulage Association there’s a shortfall of 100,000 missing jobs.

Part of the problem is drivers quitting the UK during the COVID-19 pandemic who can’t – or don’t want – to return via the post-Brexit immigration system, which doesn’t recognise the haulage role as highly skilled. Also, the age of the average UK lorry driver is 55 – just two percent of HGV drivers are under 25 in the UK – so the pool of available UK driver labour is getting smaller.

“The public,” says Hugh Mahoney, CEO of UK food wholesaler Brakes, “are starting to notice the resulting gaps on retailers’ shelves;

in failed waste disposal collections; a nd t h r oug h t he items missing from Cost to send a shipping the menus at their container from Shanghai local pubs and resto New York in 2019 taurants.” The disconnect at government level is a failure to see driving, says Mahoney, “as a part Cost to make the exact of the critical infrasame shipment in 2021 structure that supports feeding the nation, and that this will disproportionately impact smaller farmers, producers and suppliers who will be hardest hit by surging distribution costs.”

In the run-up to Christmas the Conservative government has introduced temporary visas for 5,000 fuel tanker and food lorry drivers to work in the UK. But there still remains a serious shortfall of driving labour. “The EU workers we speak to will not go to the UK for a short-term visa to help the UK out of the shit they created themselves,” Edwin Atema from Dutch-based lorry drivers union FNV said in an interview with BBC’s Radio 4. “In the short term, I think that will be a dead end.”

Demand overwhelms supply The disruption across so many points is a vicious circle. Freight forwarding specialist Unsworth warned at the beginning of October 2021 that Black Friday, Cyber Monday and Christmas were approaching fast. “Consumer spending remains high, and inventory levels across the globe remain very low,” it said.

1970

1980

1990

2000

2,605 3,704 4,008 5,984 8,408

2010

11,076

2019 The Ever Given container ship that ran aground in the Suez Canal, March 2021 SOURCE: UNTAD

Exports out of Asia, it added, have been one of the biggest chokepoints as European demand for goods has overwhelmed the capacity of space and workforce. Worse, several Chinese tech suppliers – including those supplying consumer tech giant Apple – have cut operations in Jiangsu province, a major hub for China’s industrial tech industry due to electricity rationing as the Beijing administration attempts to hit carbon-cutting goals.

HP, Microsoft and Dell are also affected.

Turbulent waters Simultaneously the cost of sending containers from China to Europe and the US has been hit by severe inflation. For some global trade routes the price of standard 40-foot containers saw a 400 percent rise in 2021. In midSeptember the Economist estimated that the spot price of sending such a box from Shanghai to New York cost $2,500 in 2019 but this price was now close to $15,000.

Admittedly a monumentally-sized container ship blocking a vital maritime passageway – the 120-mile Suez Canal – in March 2021 didn’t help. The 220,000-ton Ever Given, en route to Rotterdam, diagonally blocked the canal having been blown off course by high winds. Most vessels passing through the Suez are obliged to use Egyptian pilots to help them navigate this stretch. However, the Ever Given belongs to a new super-class of carriers that are simply too vast for some waterways – including the Panama Canal. Somewhat predictably, the incident was a billion-dollar disruption to global trade as well as garnering a huge amount of press.

* incl. all cargo, such as tanker trade, main bulk and other dry cargo

Forever change?

John Manners-Bell, CEO of Transport Intelligence, a supplier of market solutions to the global logistics industry and Visiting Professor at the London Guildhall Faculty of Business and Law, says global supply chains, post-COVID-19, will irrevocably change. “Globalisation has really been about sourcing things from China,” he says. “Now, companies are very much thinking about diversifying their supplier base. A lot more are thinking about sourcing more from either their own countries or from countries that are much closer.”

“Transportation risk,” he goes on, “has been growing for many companies for some years but has come into focus because of COVID-19.

Geo-political issues such as the trade war between the US and China but also security concerns as well. You can easily see in the future that the world will start to break into supply chain regions.” Some will be China focused while other routes will be close to Europe and the US. In other words, there will be increasing bifurcation, one being Sino-centric and the other more Western-based.

Cooling on China This will bring huge changes as regional trade flows rather than global flows predominate, says Manners-Bell. “There will be some major global companies that will lose out but more regional and national players will benefit.”

Manufacturing is likely to gain considerably from the switch, he says. He cites electric car marker Tesla, which has sourced a great deal of components from inside the US, snipping transportation risk. While Tesla has operated »

Business and political risk – watch those chokepoints While the Suez and Panama Canals are global chokepoints there’s increasing worry over less well-known, but critical, shipping highways. For NATO, the Greenland-Iceland-UK Gap is a concern. This is a 200-mile stretch of ocean between Greenland and Iceland and a 500-mile gap between Iceland and Scotland. It’s where Russian warships push through to reach the Atlantic Ocean.

Both the Chinese and the Russians, in different ways, are looking at creating new chokepoints that can accommodate military operations. In other words, some countries are pivoting seemingly neutral economic infrastructure for political and strategic advantage. The US has always made use of its geographical and military reach, weaponised by 9/11. However, some businesses, hauling considerable supply chain risk behind them, may underestimate the geopolitical nuances They may even, unwittingly, make themselves a target. “Network connections are so complex that policy makers often don’t understand how interventions could produce unexpected consequences,” wrote Henry Farrell and Abraham Newman in the Harvard Business Review.

“When the US announced sanctions against the Russian metals giant Rusal, it did not anticipate that they might bring the European auto industry to a halt, and it had to modify them swiftly. The more businesses’ government-relations offices can do to educate policy makers, the better.”

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Tesla Gigafactory in Austin, Texas, US

largest carrier at that time] removed only 3.5 percent of the global capacity – until the vessels came fully back into circulation with new owners. The current situation is akin to a scenario of three and a half Hanjins all going bankrupt at the same time, with no immediate outlook for the vessels getting back at sea.”

Solutions please » out of its California Fremont factory, originally built by GM in 1962, its new factory in Austin, Texas is attracting many more local suppliers.

That is where it’s building its SUV Model Y and Cybertruck models.

The ‘keep local’ rationale is gaining traction in the UK. A recent EEF survey claimed that the average UK manufacturer has close to 200 suppliers in total with almost 100 percent of manufacturers relying on some materials being sourced from overseas. Many, many companies must be reconsidering their relationship with China, however difficult it is to untangle a supply chain. Multiple supply chains may be one answer. Rising concern over data and privacy is another issue.

In October 2021 the British international freight association (BIFA) said 12.5 percent of global capacity was unavailable in August due to delays. “This means that in August 2021, a full 3.1 million TEU [shipping container with internal dimensions measuring 20 feet long] of nominal vessel capacity was absorbed due to delays. To put this into perspective, the insolvency of Hanjin in 2016 [the world’s eighth 168

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Neil Ballinger, head of EMEA at automation parts supplier EU Automation, says the supply chain manufacturing model itself, for some, would benefit from switching from a linear model to a circular one, slashing production scrap and making better use of existing resources. “Taking care of industrial equipment and implementing a strategic preventive maintenance programme can,” he says, “help manufacturers keep track of their machines’ lifecycles so that they can manage component obsolescence.”

Over time this limits the amount of new equipment needed to buy, he says. The circular route is built upon the three R’s approach: resume, reduce and recycle. It’s attracting more attention as sustainability and climate pressures mount. This approach contrasts against the linear economy model where the focus is more about eco-efficiency per se, rather than overall eco-effectiveness of the system itself.

“It’s also crucial to diversify supply chains,” Ballinger goes on. “Over-relying on one supplier or a cluster of suppliers based in the same area can be a great risk at times of socio-political instability.” While logical enough, many materials companies, according to Professor

Thomas Johnsen from Audencia Business School, have little choice “but to source from distant and high-risk locations, for example, in case of rare and precious materials and metals.” He told World Finance that “cobalt and lithium are essential for a range of electronic devices, including electric cars – and are notoriously difficult to source.”

‘Normal’ labour mode?

Then there is the concern around supply chain ethics and working conditions. In a crisis, it’s harder for companies to keep labour standards and working conditions tight. Supply chain disruption means higher risk of unauthorised subcontracting as wholesalers, agents and others seek alternatives, upping corporate risk.

“The risk of exploitation,” says Jessica McGoverne, director of policy and corporate affairs at ethical trade service provider Sedex, “such as forced labour increases at times of pressure through a combination of factors – supplier pressure, worker shortages and more pressure on workers to work longer hours.”

There’s not just reputational risk but legal and financial. Poor practices and mistreatment of workers – low wages and discrimination – can quickly turn into scandals and negative press coverage, even a drop in share price.

McGoverne says the global garment manufacturing sector has been badly hit by the supply chain crisis with close to 90 percent of businesses exposed to slashed orders. It’s not all bad news: some 20 percent of businesses have diversified and deployed new innovations to respond to the pandemic, she adds.

Amount that robotics and AI could reduce labour costs

56%

Re-negotiated contracts Reduction in order fulfilment time with robotics and AI

64%

Adapting supply chain for e-commerce

Alternative sourcing options

28%

Shortages and out of stocks

28%

SOURCE: Retail Next, Statista 2021

Supply chain fulfillment using robotics

Picking, packing and sorting isn’t cheap To what extent can artificial intelligence (AI) better support the average supply chain? Nigel Lahiri from software provider Grey Orange says industries exposed to labour shortages should look at robotics and AI to slash labour costs as much a third, “while also reducing order fulfilment time by as much as 50 percent.” He says the supply chain crisis, at least in the UK, is in part due to Brexit and loss of a European workforce. “Which reflects,” he told World Finance, “the often tedious and dangerous nature of those jobs within logistics, retail, food service, and manufacturing, which are the industries most affected by the labour shortages.”

“With a lack of labour,” he adds, “businesses within those industries will experience slow order fulfilment and food shortages by Christmas.” As the holiday season gets under way with the promises of record sales, so too does the risk of record returns. This logistics area is one many retailers dread. But some think this is a good area to deploy AI and robotics towards.

AI doesn’t object to repetitive tasks or require a pension, but it drags its own supply chain risk behind it: AI administers highly sensitive business information and only one incident is needed to jeopardise a supply chain. Not everything in a supply chain can be automated. Sales predictions and HR are areas supply chains will always struggle with.

These ‘soft’ skills may never be a fit for robotics – until computers and robots are able to think beyond their own programming. And we’re not there yet, most AI experts say. Social cues, ‘reading’ a human situation – delicate HR circumstances, for example – remain well beyond it.

AI though can be an enabler of supply chain verisimilitude, says Chris Huff, chief strategy officer at software business Kofax.

This has real value as ESG supply chain pressure rises. AI can track data insights that “previously,” says Huff, “might have been ignored because the human labour cost of assembling, analysing and gleaning insights was simply too onerous and costly.”

Applied with care AI can expose poor business practices and work quality. And when AI is used to create digital workflows the quality and cost of work can be rapidly measured.

“Just about every industry,” says Huff, “is struggling to digitally transform as they seek to remain relevant. Each company is looking for the right mix of automation and AI investment to tackle the sheer volume of data.”

Taxing issues What is harder to plan and anticipate is political risk. In fact, it’s impossible. Christiaan Van Der Valk is a tax and regulatory expert at Sovos, a reporting software business. He acknowledges being crisis resistant is an impossibility – but tax digitisation and the reporting around it can streamline supply chain governance, at least. “All companies could benefit from tax digitisation efforts.

The big question is whether governments can converge on more harmonised approaches. There is a real opportunity with modern technology for all stakeholders to benefit from tax reporting and business process automation, provided the diversity of legislative requirements can be reduced over time.” This is ongoing. Van Der Valk says too many businesses see supply chain tax issues as a tiresome ball and chain. “I’d recommend them to instead approach tax as an opportunity. While it’s true tax administrations, in their quest for digital transformation, may place varying requirements on your systems and processes which in the short term make supply chain automation harder, smart organisations transcend it to see a bigger picture.”

And if the tax data is high quality, your tax and business objectives stand a better chance of converging. “This level of externally-consumable data intelligence will open up new opportunities to improve many critical processes such as cash management, supply chain transparency for environmental protection and labeling purposes, and customer service.” So, get serious about understanding what tax authorities want in digital format, he advises, then look hard at how consistent the reporting flows are.

Turning a corner While there are plenty of excuses for understanding the current shortage problem the most pressing challenge is how to restore stability and ease the shortages, and quickly.

When the immediate supply concerns retract, companies and governments will need to consider what kind of insurance or slack they should build into the production system over the longer term.

Just as banks needed to increase their equity buffers after 2008, we perhaps now need to step back from just-in-time production and redefine productivity in light of the supplychain risks being witnessed. n

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str ategy

Recruitment

people in the senior executive market, providing up-to-the-minute intelligence that allows them to plug into up to 90,000 unadvertised vacancies a year. We are regularly adding to this network, broadening the reach of our searches to encompass roles in nations around the globe, across multiple disciplines and sectors.

Market knowledge

Unique network coupled with outstanding talent Despite a turbulent jobs market, the demand for senior roles has remained high. With decades of experience behind them, InterExec is continuing to help its clients secure roles that would be difficult to find alone

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Kit Scott-Brown chaIRMaN, INtERExEc

The pandemic has seen massive fluctuations in the jobs market, affecting a wide range of industries, disciplines and territories. At the senior end of the market, however, there has been surprisingly continuous demand across both industry and geography, for top talent.

It’s not quite business as usual. In this postpandemic world, corporates want and need to expand their top talent to turn around, recover and continue the growth of their organisations.

Companies like InterExec, a London-based consultancy working with C-suite senior executives across all major business sectors, are ideally placed to help.

The transition from one organisation to another brings with it significant prospects of both short and long-term benefit, but demands focus and commitment to achieve the best result. InterExec facilitates that process, working with clients to make crucial decisions about their goals, when and how to move role, and how best to present themselves to the marketplace. Typically, a senior executive seeking a new role will have limited access to sufficient senior contacts in the recruitment market. It might seem straightforward to 170

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find roles at the bottom end of the executive market through selective channels such as advertisements, job boards and websites, as well as via their own personal networking. It’s much trickier at the top end – for roles with salaries in excess of £200,000 – where the market is unadvertised and where personal introductions and contacts are essential. In this ‘hidden’ market, it is almost impossible for executives to get a comprehensive view of relevant opportunities and an unbiased view of their prospects.

We specialise in assisting busily employed senior executives who want to make a move but do not have the time or market access to conduct an effective search. Future Choice, a system we developed over the last 30 years, enables the individual to identify their needs and skills. This way, drawing on our extensive knowledge of the market, we can work together to identify the positions that meet these prerequisites, whether they are financial in nature, or relate more broadly to job satisfaction.

With a global network of leading search consultants and over four decades’ experience, we are well placed to ensure that clients are presented with a strong range of options, whatever their field. InterExec staff – a combination of former company directors and executive search consultants – have daily access to thousands of the most influential

The entire consultation process can be completed in little more than four hours, with search consultants working at a time to suit the client wherever they are in the world. By keeping the process as streamlined as possible and minimising interruption to normal workflows, we enable executives to stay focused on their current role while setting the stage for the next phase of their career. We then use our market knowledge to identify the people to whom confidential approaches can be made, to source relevant unadvertised opportunities. For executives seeking their next new challenge, confidentiality is crucial. The aim is always to minimise Number of unadvertised execuunnecessar y mar- tive vacancies that InterExec ket exposure while accesses each year maximising a client’s range of options when it comes to changing roles. The world is small at the highest levels of business and executives must tread carefully.

Our processes guarantee absolute discretion.

Whether the client is seeking full-time executive employment, interim management, non-executive, consultancy/portfolio roles or employment in a PE/VC environment, the channels to market are very similar. In our talks to the marketplace on behalf of the client, we work hard to fully brief those working on behalf of prospective employers so as to minimise the amount of time the client might need to spend at interview.

Some people have a very clear idea of their objectives in a job transition and some are more open-minded as to where they should best go for the future. Either way it is crucial that the client’s target roles be achievable, based upon their expertise and prior experience, and that the way we present the client to employers enhances their prospects.

Standard procedure includes verifying clients’ qualifications, references, identity, skills, achievements and entitlements – because all this information is set out in advance of our conversations with those looking to fill particular roles, time is saved for all involved and the best result can be achieved.

The unique InterExec process and network has proven to be a powerful asset to senior executives seeking their next challenge. n

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TikTok made me buy it From cleaning products to milk frothers and everything in between, TikTok has been credited for making all manner of products go viral. With video views quickly translating into sales, the app is fast becoming one of the most important marketing tools that brands have at their disposal, writes Rachel Richards Move over, millennials: Gen Z is here, and is ready to spend. Generation Z – or those born between the years of 1997 and 2012, for the uninitiated – now account for a staggering 40 percent of consumers worldwide, wielding a mighty global spending power of $200bn a year, according to research carried out by Bloomberg. And with many Gen Zers still living at home, they also influence what their parents are spending money on – to the tune of a cool $3trn per year. No wonder brands are desperate to win over this lucrative new audience.

Every generation is different to the one that came before it, with new characteristics and spending habits. Members of Gen Z are arguably among the first generation of true digital natives, having been exposed to the internet from the very moment that they were old enough to hold a smartphone. But it’s not just their ease at using digital channels that sets Gen Zers apart from generations past – they are also unique in where they choose to spend their time online. Showing far less interest in ‘traditional’ social media sites such as Facebook, members of Gen Z are much more likely to be found scrolling through 15-second videos on TikTok. All of those 15-second clips quickly add up, however, with 20 percent of Gen Zers reporting that they spend more than five hours per day on the app, according to research carried out

by Joy Ventures and getWizer. With young consumers investing so much time into TikTok, the app is fast becoming one of the most potentially lucrative marketing tools that brands have at their disposal, representing a new way to engage with a spend-happy audience.

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Gen Zers are now spending more than they did pre-pandemic, with many of these purchases fuelled by online trends and viral videos. Just one breakout TikTok video can propel a brand to overnight stardom and skyrocketing sales – but what is the secret to achieving this coveted 15 seconds of fame?

The TikTok effect Just four years on from its international launch, TikTok’s influence is undeniable. Even those who are unfamiliar with the app itself will have perhaps felt its impact in the offline world. If you have visited a book shop lately, you may well have seen a stack of books neatly arranged in a designated ‘as seen on TikTok’ section. Or perhaps back in March of this year, you may have found yourself suddenly unable to get your hands on any feta cheese at the local supermarket – well, blame TikTok. A viral ‘feta pasta’ recipe was said to be responsible for causing a global shortage of the popular Greek cheese, as TikTok users quickly cleaned up the dairy aisle in their rush to recreate the dish.

From feta cheese and books to eye cream and cleaning products, TikTok has the power to make everyday products ‘cool.’ While the app might be best known as the home of funny comedy skits and viral dance routines, there is also a strong consumerist element to TikTok. Clothing hauls and in-depth product reviews regularly amass millions of views and many thousands of likes, with all of this online engagement very quickly translating into reallife sales. Indeed, 49 percent of TikTok users have confessed to purchasing a product after seeing it reviewed, promoted or advertised on

the app, according to a 2021 Adweek survey on consumer behaviour. This gives TikTok users – approximately one billion of them, at the last count – an incredible spending power, and an ability to propel a business to record-breaking sales. Take trendy mochi ball company, Little Moons, for example. After going viral on TikTok, the company saw its sales shoot up by 700 percent in a single week at UK supermarket Tesco, leading its founder, Vivien Wong, to give credit to the app for helping the company to reach sales of £26m in the year to June.

Elsewhere, skincare company Peter Thomas Roth was forced to ramp up production of its eye cream after a product-testing video racked up over 50 million views, causing a surge in demand across the globe. In the fast-moving viral video world, views mean sales, and sales mean success. Simply put, brands can’t afford to dismiss TikTok as just a fad. The video-sharing app is here to stay – even toppling tech behemoth Facebook from the top of the official list of most-downloaded apps for 2020 (see Fig 1).

If brands are able to successfully harness the power of TikTok, then the rewards are both plentiful and immediate.

Tapping into the Gen Z mindset Of course, success is by no means guaranteed for brands seeking TikTok fame. For years now, companies have thrown vast sums of money at social media marketing campaigns, with rather mixed results. When it comes to social media platforms themselves, some have fared better than others – advertising has made Facebook into a trillion-dollar company, for example, while Twitter has famously struggled

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$200bn

Annual spending power of Generation Z

4.6 billion

Views for videos with the hashtag #TikTokMadeMeBuyIt

with monetisation. It has taken much trial and error for social media companies to get their advertising strategy right, and even today, many sites still have much to learn. In just four short years, however, TikTok has managed to establish itself as the social media marketing tool of the future.

According to research carried out by Kantar, users are less likely to perceive ads negatively on TikTok compared to other social media platforms, and find ads on the app to be more trendsetting than those featured on other sites. Significantly, 72 percent of those surveyed said that they felt that ads on TikTok were inspiring, while a further seven in 10 research participants said that they found adverts on the platform to be enjoyable to watch.

But to understand why TikTok ads are seemingly so successful, we first have to consider the app’s main user base: Generation Z. Firstly, as digital natives, members of Gen Z are familiar with online marketing tools and tactics, and have been from an early age.

As such, they are unlikely to be drawn in by ‘traditional’ social media ads, and have a low tolerance for anything that feels hackneyed, derivative or unoriginal. In many ways, Gen Z has seen it all before, and are drawn to fresh takes on advertising – such as the high-energy, informative and experimental ads that can often be found in TikTok feeds.

The second key to success is also linked to Gen Z’s unique position as true digital natives.

Coming of age in the internet era, Gen Zers

Fig 1. Top 10 most downloaded apps in 2020 Worldwide

#1

Tiktok 850M

#6

Messenger 404M

#2

WhatsApp 600M

#7

Snapchat 281M

#3

Facebook 540M

#8

Telegram 256M

#4

Instagram 503M

#9

Google Meet 254M

#5

Zoom 477M

#10

Netflix 223M

SOURCE: APPTOPIA

Just one breakout TikTok video can propel a brand to overnight stardom and skyrocketing sales

are used to the constant distraction that digital devices offer. It’s no secret that our smartphones are having an impact on our attention spans and our ability to concentrate. In 2015, Microsoft released a study concluding that the average human attention span has shrunk to just eight seconds – down from 12 seconds in the year 2000, making us more distracted than the famously forgetful goldfish.

Increasingly, social media companies have sought to exploit our desire for distraction, designing their feeds to be deliberately addictive to users – the ‘pull-to-refresh’ feature common on many social media apps has been compared to a casino slot machine, in the way that users will pull the metaphorical lever in hopes of a reward. The very nature of TikTok’s platform, which rolls from one short-form video straight into the next, appeals to users accustomed to distraction. In keeping ads both attention-grabbing and, more importantly, short, brands can use TikTok to successfully tap into the splintered attention spans of the permanently online.

The third, and perhaps most important, factor behind TikTok’s marketing success is the way in which ads on the platform successfully appeal to Gen Z’s desire for community and connection. As the most connected generation in history, it is perhaps unsurprising that Gen Zers place a priority on their relationships with others – both offline and online. More than any generation before them, Gen Z are hyper aware of their identity, and are keen to find a tribe with which they belong.

For Gen Zers, products and brands are another way in which they can express their identity and show their belonging to a particular community, making them particularly susceptible to TikTok trends. Viral products and TikTok-famous brands can quickly amass a cult following online – with users quick to purchase any item that will make them feel part of the trend. It doesn’t matter if that trend is cooking, cleaning or reading: the important part is that the purchase brings the user closer to a coveted sense of community.

If brands were ever in any doubt over the influence that TikTok has over consumer behaviour, the evidence is simply overwhelming: videos with the hashtag #TikTokMadeMeBuyIt now boast over 4.6 billion views and counting.

For an app that is still so early in its lifespan, it has completely disrupted the world of social media marketing. It’s high time that brands sit up and pay attention to the TikTok phenomenon – well, for 15 seconds or so, at least. n

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The finance sector sees the light – a review of a turbulent 2021 ‘May you live in interesting times’ goes the expression and it is not without a sense of irony that in these very interesting times, interest rates have been at historic lows to lessen the impact of the pandemic. The World Finance awards recognise those who have gone above and beyond during this time, showing resilience and remarkable strength of character As emergency government lifelines to companies decline in the wake of the pandemic, financial institutions face the balancing act of managing credit to the millions of businesses around the world that are still vulnerable. A study by the International Monetary Fund of firms of 26 European countries showed that the number of illiquid – effectively bankrupt – businesses would have more than doubled without official support. “Liquidity (ready cash) provided to companies prevented cascading bankruptcies,” IMF economists wrote in a blog in late 2021.

Yet the position of many firms remains dire as they struggle back to viability, making an unprecedented partnership between the world of finance and governments an essential element of a return to normality. The continuing support scheme in Ireland for small businesses, for instance, is fairly typical of the way forward.

Investors are expected to share much of the burden while government agency Enterprise Ireland undertakes the task of assessing their long-term viability.

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insolvency specialists have a field day. As the IMF notes: “For those firms that have to restructure debt or be liquidated, out-of-date court debt-restructuring and insolvency regimes will need to be enhanced.”

In this searing process, NPL may become a household acronym. As Scope Ratings predicts in an analysis of risks to financial institutions, “the odds of a systemic banking crisis are low, but delinquencies arising from the pandemic will increase as banks move to formal recognition of non-performing loans (NPLs).” The consequences to banks will be weaker profitability in what is “a real issue.” Indeed the European Central Bank has expressed its own concerns about the quality of bank assets in this inevitably drawn-out recovery.

Going green Looking ahead, in a sea change in the principles of credit, net-zero financing has become official as central banks reveal how they expect all institutions to follow new guidelines on sustainable lending. One of the first off the mark is the Bank of England, which in early November released details of how it will green its corpo-

rate bond purchase scheme that, it says, “is consistent with targeting a 25 percent reduction in the weighted average carbon intensity of the portfolio by 2025 and full alignment with net zero by 2050.”

This is a wake-up call for finance institutions and corporates alike. It means the Bank of England won’t buy firms’ bonds unless they satisfy its criteria. The greener the firm, the more attractive its bonds are. “Purchases of eligible firms’ debts will be ‘tilted’ towards the stronger climate performers within their sectors,” promises the Old Lady of Threadneedle Street in a clear warning to the rest.

The implications for corporate treasurers everywhere are profound because many central banks are following suit, prodded by the Financial Stability Board, which has been working along these lines for some years, and the European Central Bank. The all-important net-zero criteria that firms should follow are clear enough. The Bank of England has drawn up four metrics: the emission intensity of their activities, current progress in cutting emissions, the quality of their climate disclosure, and a clear target for reducing emissions.

Firms whose targets have been verified by a reputable third party will earn more credit, which is central bank-speak for selling more bonds.

But there’s a sting in the tail. Firms that slip behind the criteria – weaker performers – face the prospect of reduced purchases, removal from the eligible list or even having their bonds sold off. The bank describes this

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carrot-and-stick approach as ‘incentivisation’ – and it certainly is that. So there’s a new lending paradigm sweeping the world of finance and there won’t be any excuses. “It’s not easy being green but that shouldn’t stop us,” said the Bank of England’s executive director for markets, Andrew Hauser.

How low can rates go?

most of the recent rise in prices reflects global supply shortages and bottlenecks

One of the post-Covid headaches for investment and wealth managers alike is where interest rates are heading – and nobody really knows because of the all-pervasive quantitative easing that has skewed standard economic thinking. As the year drew to a close, most central banks were holding official rates at record lows. At the last count, the US Fed’s rate was 0.250 percent, Australia’s 0.100, South Korea’s 0.750 and the UK’s 0.100, posing a nightmare for retail banks, fixed-rate investors and the money markets in general. Only a few central banks were heading in another direction, like Chile on 2.750 percent.

The problem is that inflation is on the rise, but what’s causing it and how permanent is it

World Finance Digital Banking Awards 2021 It can be universally agreed that the ‘shift to digital’ is well underway, catalysed by the global pandemic. In the wake of volatile conditions caused by the health crisis there has been a panoply of innovative apps and services arriving just in time to support customers in these difficult times. The World Finance Digital Banking Awards 2021 recognises those looking to secure a brighter future and a more connected world as the great recovery begins.

likely to be? According to Ivan Petrella, professor of economic policy and forecasting at Britain’s prestigious Warwick Business School, “looking beyond the aggregate numbers shows that most of the recent rise in prices reflects global supply shortages and bottlenecks.” He expects price pressures to be temporary, in the UK at least.

Another complication is that the pandemic has distorted normal savings patterns. In late 2021, Bloomberg Economics calculated that Americans still aren’t spending excess savings while Europeans drew theirs down only slightly. Confounding predictions yet again, Italians actually saved more. If people aren’t buying, prices stay down, according to the classic economic dictum. But how long will that hold?

It is however certain that QE, a tool that only dates from 2009 in most economies, is here to stay for a while yet. As such, it continues to overshadow practically every sector in finance because of the way it depresses interest rates among other effects. And how long will QE take to unwind? The Bank of England’s QE programme, for example, has hit unprecedented proportions, bringing the bank’s balance sheet to about £1trn. That’s equivalent to half of Britain’s entire gross domestic product, which is, as the bank acknowledges, “an unprecedented figure in the Bank of England’s 327-year history.”

Able to be stable Country Best Consumer Digital Bank Andorra MoraBanc Brunei Baiduri Bank Bulgaria Postbank Costa Rica BAC Credomatic Dominican Republic Banreservas El Salvador BAC Credomatic Germany Deutsche Kreditbank Ghana Absa Bank Greece National Bank of Greece Honduras BAC Credomatic Indonesia PT Bank CIMB Niaga Mexico BBVA Mexico Nicaragua BAC Credomatic Nigeria Standard Chartered Panama BAC Credomatic Qatar Qatar Islamic Bank Saudi Arabia Al Rajhi Bank Standard Chartered Singapore South Africa ABSA Bank Sri Lanka Peoples Bank Turkey IS Bank UAE Mashreq Bank UK Barclays USA Bank of America Zambia Atlas Mara

Best Mobile Banking App MoraBanc App Baiduri b.Digital Personal m-Postbank Banca Movil BAC Credomatic Banreservas Banca Movil BAC Credomatic DKB-Banking Absa Banking App NBG Mobile Banking Banca Movil BAC Credomatic OCTO Mobile BBVA Mexico Banca Movil BAC Credomatic SC Mobile Banking Banca Movil BAC Credomatic QIB Mobile alrajhi bank SC Mobile Banking ABSA Abby People’s Wave isCep mashreq neo Barclays Mobile Banking Bank of America Mobile Banking Atlas Mara Zambia Mobile Banking

Only those close to the action understood how close to chaos the world of finance was during 2020 and a good part of 2021. As America’s Randal Quarles, chairman of the Financial Stability Board (FSB) that has been in the forefront of managing the crisis, remarked in a speech in October: “Living through the events of last year was an experience of near chaos. The world had stopped functioning the way it should, leading to unexpected – and in some cases almost unimaginable – outcomes, including in our financial markets.” Among many other interventions the FSB worked with the world’s major banks to provide loan modifications to clients that helped keep them afloat in the interests of financial stability.

In the recovery, notes Quarles, non-bank financial intermediation markets will be crucial, citing in particular the short-term funding markets that have been roiled. “The money market fund sector has more than $8trn in assets under management globally,” he points out. Looking ahead, the FSB wants the money markets to become more resilient in what looks like a five-year programme. In this and other reforms designed to strengthen the financial sector as a whole, regulators will be more active »

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World Finance Investment Management Awards 2021 The past 18 months has been all about looking at the bigger picture, and if there is one additional skill that asset managers have needed to hone, it has been the ability to better analyse these shifting trends so that they can serve a modern investor who is digitally literate and operating in a much-changed landscape amid the devastating effects of the pandemic and now a renewed focus on climate change.

The winners of the World Finance Investment Management Awards 2021 are those who have been able to adapt best to this rapidly changing environment and tailor their service offering accordingly.

Best Investment Management Companies, by country Country Company Bahrain SICO BSC Belgium KBC Asset Management Brazil Bradesco Asset Management Chile BCI Asset Management China Ping An Asset Management Company Colombia Sura AM Greece Piraeus Asset Management Mexico BBVA Asset Management Philippines BDO Unibank Saudi Arabia Alistithmar Capital Singapore UOB Asset Management Thailand UOB Asset Management Turkey Ak Asset Management UAE Mashreq Capital Vietnam Phat Dat Estate Development Corporation

» than ever. “The global regulatory framework, done right, is like a tightly woven piece of fabric,” approves Quarles.

And the FSB is keeping a close eye on digital assets as they go through the roof. Between early 2020 and late 2021, the market capitalisation of crypto-assets soared from below $200bn to $2.4trn, while the rate of increase in stable coins isn’t far behind – from $20bn in market cap to over $130bn. As the FSB frets, crypto-assets aren’t easily regulated because “they operate in the digital ether where they can easily cross national borders.” That’s why nobody rules crypto-assets out as potential systemic risks.

World Finance Wealth Management Awards 2021 The late-2021 release of the Pandora Papers has increased pressure on wealth managers to ensure they invest clients’ money, particularly politicians and public figures, in impeccable assets. This has never been a problem for those at the very top of the industry, and the winners of the World Finance Wealth Management Awards 2021 reflect the expert characteristics of those who are disciplined in structuring and planning wealth for investors.

Best wealth management providers, by country Country Company Argentina Andes Wealth Management Armenia Unibank Prive Austria Schoellerbank Bahamas RBC Dominion Securities Belgium BNP Paribas Fortis Bermuda Butterfield Bank Brazil BTG Pactual Canada RBC Wealth Management Chile BTG Pactual China CreditEase Wealth Management Colombia BTG Pactual Denmark Nordea Asset Management Finland Taaleri Wealth Management France BNP Paribas Banque Privée Germany Berenberg Georgia TBC Wealth Management Greece Hellenic Asset Management Hong Kong Nomura Hungary Hold Asset Management India ICICI Securities Indonesia Bank of Singapore Italy BNL BNP Paribas Japan Sumitomo Mitsui Trust Asset Management Co Kuwait NBK Capital Lithuania INVL Luxembourg BGL BNP Paribas

that Evergrande owes to banks, bondholders, employees and suppliers, without possibly causing systemic damage? In early November it was reported that a division of the group had failed to make over $80m of payments.

“The world is being forced to contemplate a scenario it had never seriously considered: a made-in-China financial crisis,” presciently notes University of London’s professor of international economics Paola Subacchi in an article for Project Syndicate. Certainly, the possibility of the property giant’s bankruptcy provoked earnest discussions at the International Monetary Fund’s annual meeting in mid-October.

Ever smaller As Chinese regulators battle with the potentially catastrophic problem of ailing Evergrande, the country’s second-largest property developer, a cloud hangs over the world of finance. The crucial question is: can the markets survive a $300bn loss, which is the amount 176

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“The global regulatory framework, done right, is like a tightly woven piece of fabric”

Country Company Malaysia Affin Hwang Capital Mauritius Bank One Netherlands ABN AMRO MeesPierson Nigeria FBN Quest Merchant Bank Norway Nordea Asset Management Oman Bank Muscat Philippines BDO Private Bank Poland CITI Handlowy Portugal Santander Wealth Management and Insurance Qatar Qatar National Bank Saudi Arabia SABB Singapore Nomura Spain Alantra Wealth Management Sweden Carnegie Switzerland BNP Paribas Wealth Management Taiwan Cathay United Bank Thailand Phatra Securities UAE Rakbank US Merrill Lynch Wealth Management UK Schroders Vietnam SSI Securities Best Multi-Client Family Office, Liechtenstein Best Real Estate Investment Company Most Innovative Wealth Manager, Europe Best Wealth Management Software Provider

Kaiser Partner SFO Group XSpot Wealth Comarch

As Professor Subacchi notes, crashes of this magnitude all too easily have global ramifications, citing the Financial Crisis that followed the failure of Lehman Brothers in 2008, the US Fed’s bail-out of hedge fund Long Term Capital Management a decade earlier to protect the financial markets, and also in the 1990s the collapse of Japan’s real-estate bubble. Although Subacchi expects Chinese regulators to manage Evergrande as best they can, it raises big issues about China’s heavily exposed offshore credit market. The implications are fundamental because this market has been pivotal to the government’s long-term strategy of making the renminbi a genuine international currency.

Any major defaults would make foreign investors even more gun-shy than they already are about trading renminbi-based assets in the offshore market. Meantime, Chinese regulators have one of the biggest ring-fencing problems of all time if they want to instil confidence in the renminbi. Elsewhere in the region, the finance industry in Asia-Pacific has always been »

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World Finance Global Insurance Awards 2021 With insured losses from natural disasters hitting $42bn in the first six months of 2021 – a daunting 10-year high – the global insurance industry must be wondering what waits in store for the next decade ahead. After all, a huge number of climate scientists predict there will be a marked increase in climate-triggered catastrophes. The role that the insurance industry has to play in alleviating fears in the face of immense and unpredictable risks is vital. The winners of this year’s World Finance Global Insurance Awards 2021 are the organisations willing to address the changing needs of their customers having performed impeccably throughout the year.

Best General insurance & Best Life Insurance companies, by country Argentina General – MetLife Life – MetLife Australia General – QBE Life – Tal Life Austria General – UNIQA Group Life – Vienna Insurance Group Bahrain General – GIG Bahrain Life – Bahrain National Life Assurance Bangladesh General – Nitol Insurance Life – Popular Life Insurance Company Belgium General – KBC Life – Belfius Insurance Brazil General – Bradesco Saude Life – Sulamerica Cia Saude Bulgaria General - Insurance Company Lev Ins AD Life – UNIQA Life Insurance Canada General – RBC Insurance Life – Sun Life Financial Caribbean General – Sagicor Life – Sagicor Chile General – ACE Seguros de Vida Life – SURA China General – Ping An Property & Casualty Insurance Co Life – New China Life Colombia General – Liberty Seguros Life – Seguros Bolívar Costa Rica General – ASSA Compañía de Seguros Life – Pan American Life Insurance Cyprus General – General Insurance of Cyprus Life – Eurolife Czech Republic General – Komercní banka Life – Allianz pojišt’ovna Denmark General – VIG Life – Topdanmark

Egypt General – Allianz Egypt Life – Allianz Egypt Finland General – Fennia Mutual Insurance Life – Fennia Life France General – Covéa Insurance Life – CNP Assurances Georgia General – Aldagi Life – Aldagi Greece General – EuroLife FFH Life – NN Hellas Honduras General – Ficohsa Seguros Life – Pan-American Life Hong Kong General – China Taiping Insurance Life – Sun Life Hungary General – Allianz Hungária Life – Magyar Posta Életbiztosítás India General – ICICI Lombard Life – Max Life Insurance Indonesia General – Sinarmas Life – FWD Life Indonesia Israel General – Phoenix Life – Clal Insurance Italy General – UnipolSai Life – Poste Vita Japan General – Mitsui Sumitomo Insurance Life – Nippon Life Insurance Company Jordan General – Middle East Insurance Company Life – Arab Orient Insurance Company Kazakhstan General – Nomad Insurance Life – Kazkommerts-Life Kenya General – CIC Insurance Group Life – Britam Kuwait General – Warba Insurance Life – Warba Insurance

Lebanon General – AXA Middle East Life – Bancassurance Luxembourg General – AXA Luxembourg Life – Swiss Life Malaysia General – Berjaya Sompo Insurance Life – Hong Leong Assurance Berhad Malta General – GasanMamo Insurance Life – HSBC Life Assurance Malta Mexico General – GNP Life – Seguros Monterrey New York Life Netherlands General – A.S.R. Life – A.S.R. New Zealand General – Tower Insurance Life – Asteron Life Nigeria General – Zenith Insurance Life – FBNInsurance Norway General – Fremtind Forsikring Life – Nordea Liv Oman General – OQIC Life – OQIC Pakistan General – Adamjee Insurance Life – EFU Life Peru General – RIMAC Seguros Life – MAPFRE Philippines General – Standard Insurance Life – BPI AIA Poland General – LINK4 TU SA Life – Warta Portugal General – Allianz Seguros Life – Grupo Ageas Portugal Qatar General – Qatar Insurance Company Life – Q Life and Medical Insurance Romania General – ERGO Group Life – Allianz-Tiriac

Russia General – AlfaStrakhovanie Life – Renaissance Zhizn Insurance Saudi Arabia General – Al Rajhi Takaful Life – MEDGULF Serbia General – Generali Osiguranje Life – Generali Osiguranje Singapore General – AIA Singapore Life – AIA Singapore South Korea General – Hanwha General Insurance Life – BNP Paribas Cardif Spain General – Grupo Mutua Madrilena Life – Zurich Sri Lanka General – Continental Insurance Life – Ceylinco Life Insurance Sweden General – If.Skadeforsakring Life – Folks Switzerland General – Helvetia Life – Swiss Life Taiwan General – ShinKong Insurance Company Life – Fubon Life Insurance Thailand General – Navakij Insurance Life – Thai Life Insurance Turkey General – Zurich Sigorta Life – Anadolu Hayat Emeklilik UAE General – Oman Insurance Life – Oman Insurance UK General – AXA UK Life – Legal & General US General – Mylo Life – Lincoln Financial Group Uzbekistan General – Kafil-Sugurta Life – New Life Insurance Vietnam General – Bao Viet Life – Bao Viet

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» quick to adopt technology – indeed, much of the technology originated there. And it looks like customers aren’t far behind. According to Fitch Ratings’ review of the fintech market in south-east Asia – a vast and populous region encompassing Indonesia, Philippines, Vietnam, Thailand, Myanmar, Malaysia, Cambodia, Laos, Singapore, East Timor and Brunei – bank clients have embraced digital banking pretty much in tandem with the spread of the internet. The implications for traditional banking could be profound, predicts the ratings agency. “South-east Asia’s fintech companies are likely to sharpen their focus on profitability as the industry gains scale,” it forecasts, citing COVID-19 as a contributing factor because it effectively kept people out of the branch offices.

World Finance Energy Awards 2021 The capital markets are seen as bankrolling the European Union’s goal of carbon neutrality by 2050, a target that Brussels estimates will cost approximately $556bn in additional investment a year for the next decade. It has become startlingly clear that we are all on the precipice of great and necessary change within the energy industry to help mitigate climate change, eliminate carbon emissions and also address our increasing energy needs.

The World Finance Energy Awards 2021 celebrate the companies that are well aware of the challenges and that have a plan in place to transform not just their sector, but also the world.

Best Independent Oil & Gas Company Africa Asia Eastern Europe Latin America Middle East North America Western Europe

Seplat Energy Pharos Energy Irkutsk Oil Company PetroRio Genel Energy W&T Offshore Neptune Energy

Best Downstream Company Asia Thaioil Africa Puma Energy Eastern Europe Tatneft Latin America Petrobras Middle East ENOC North America PBF Energy Western Europe OMV

Best Fully-Integrated Company Africa OANDO Asia PTT Plc Eastern Europe Gazprom Latin America PETROBRAS Middle East ARAMCO North America Exxon Mobil Western Europe TotalEnergies

Best Exploration and Production Company Africa Zenith Energy Asia PGN Saka Eastern Europe Rosneft Latin America Karoon Energy Middle East ADNOC North America Total E&P USA Western Europe Wintershall Dea

Best Drilling Contractor Africa ODENL Asia PV Drilling Eastern Europe KCA Deutag Latin America DLS Archer Middle East Foresight Offshore Drilling North America Independence Contract Drilling Western Europe COSL Drilling Europe

Best Upstream Service & Solutions Company Africa Grupo Simples Asia Bumi Armada Berhad Eastern Europe BENTEC Latin America SBM Offshore Middle East Offshore International (OFCO) North America Schlumberger Western Europe Solstad

Best EPC Service & Solutions Company Africa Sonamet Asia Dyna-Mac Eastern Europe SAIPEM Latin America Estaleiros do Brasil Ltda Middle East Enppi North America KBR Western Europe Worley

Best Energy Law Firm Africa Centurion Law Group Asia Ashurst Eastern Europe ALRUD Latin America Canales Auty Middle East Shahid Law Firm North America Babst Calland Western Europe White & Case

Most Sustainable Company Africa Axxela Group Asia Bangchak Corporation Eastern Europe MOL Group Latin America Grupo Dislub Ecuador Middle East Qatar Energy North America Lotus Bio Energy Solutions Western Europe REPSOL

Best Solar Energy Company Africa Moroccan Agency for Solar Energy (MASEN) Asia UNITED RENEWABLE ENERGY Eastern Europe Enel Green Power Latin America Atlas RenewableEnergy Middle East ENERGIX Clearway Energy North America Western Europe X-ELIO

Best Nuclear Energy Project Middle East Barakah Nuclear Power Plant (by ENEC)

Best Solar Energy Project Africa Noor Ouarzazate Solar Power Station (by MASEN)

Best Nuclear Energy Company Middle East Emirates Nuclear Energy Corporation

Best Wind Energy Company Western Europe

The unbanked market Other factors are at play in a region that promises to become a fintech powerhouse. There is a huge unbanked market among a total population of over 580 million – by some estimates more than half have no traditional bank accounts at all. In the Philippines, for instance, roughly 30 percent of the population do not have an account and less than 10 percent has ever borrowed from a financial institution, preferring to borrow from family or friends.

Also, local regulators favour fintech because it will boost financial inclusion, provided the entrants abide by the rules. “Aggressive business practices are likely to attract a strong regulatory response,” warns Fitch. “We expect stiffer sector regulation as the industry expands.”

However, the incumbents are fighting back. Their deeper pockets can more easily pay for the essential new technology and most observers expect a battle royal to sign up the 290 million unbanked potential clients over coming years. Also, the incumbents may have the ear of the regulators in the region. As Fitch Ratings notes, they are increasingly reluctant to accept new applications for digital banking licences – or, like in the Philippines, have stopped altogether.

As a result, reports Fitch, “the largest conventional banks are unlikely to see material rating impact from the entry of neobanks, which are fully digital, in the near to mediumterm.” That means that the Philippines will end up with up to seven neobanks compared with four in Singapore (so far) and up to five in Malaysia. After the havoc wreaked on the global finance sector by the pandemic, the prospect of many millions of people in this fast-developing region receiving the benefits of a bank represents a beacon of hope.

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SSE Renewables

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World Finance Innovation Awards 2021 Innovation has been a buzzword for some time now, and it’s always been easy for companies to make claims in that direction when actually they are just following a trend. However, the winners of the World Finance Innovation Awards 2021 include trend-makers in their respective industries, those who are working on cutting-edge innovation and initiatives, whose R&D consistently yields results and whose operating methods shift to new and transformational models. We celebrate those who truly encompass the word ‘innovation’ and are enjoying well-deserved success as a result.

Most Innovative Companies, by Industry Industry Company 3D Printing Desktop Metal AgTech AgriCircle Beauty Busy Biopharmaceutical Annexon Biotechnology TurtleTree Building Products Suppliers Egyptian German Industrial Corporate Carbon Capture Technology Calix Chemicals Lake Chemicals & Minerals Coffee Kaffe Bueno Diagnostics Medicortex Digital Health Haima Health Initiative Electronics Fairphone Energy-Efficiency Technology Seppure Energy Storage Energy Exploration Technologies (Energy X) Financial Services Tools QuickFi by Innovation Finance FinTech Channel Vas Channel Food Frulact Healthcare Biotech CHAIN Biotechnology Hydrogen Technology ITM Power Irrigation Systems Technology CMGP - CAS Parc Industriel Logistics Convoy Medical Devices OrCam Technologies Microfinance Letshego Nanotechnology Perpetuus Carbon Technologies Outdoor Kona Renewable Energy Technology PNE Security Cloudflare Okra Solar Solar Energy Technology Sustainable City Development Diamond Developers Telecommunication Arpuplus Transportation Mosaic Global Transportation

The WF100 – 2021

The World Finance 100 recognises the businesses and individuals that have forged a pathway to success in 2021. As we prepare to see in the new year, we are honouring the most resilient, forward-thinking firms that have shown tremendous tenacity in these continually testing times. Congratulations to all those who made the final World Finance 100 list. The full list can be seen online at: www.WorldFinance100.com/2021/ and selected winners include:

Investae

Fintech In an overcrowded marketplace, it is becoming increasingly difficult to get investors’ attention. Nonetheless, over the past three years Investae has captivated the attention of hundreds of professionals from the financial industry by providing an answer to one of the most important questions faced by the industry: how can we make capitalraising easier? Investae serves financial companies, boutique investment firms, bond issuers, fund managers, wealth managers and private bankers. Investae brings a forward-thinking solution: an all-in-one platform providing a roadmap, marketing and sales tools and ongoing support to simplify and exemplify the capital-raising process.

Afschrift Tax & Legal

Law The events of this year have shown that it has never been more important to have a good grasp on both your personal and business finances. Headquartered in Brussels, and with offices in Antwerp, Geneva, Fribourg, Luxembourg, Tel Aviv, Madrid and Hong Kong, Afschrift has offered a knowledgeable and dependable service throughout the course of 2021, guiding its clients through these most turbulent of times. Its experts, all of whom also occupy high academic positions, are widely versed in every aspect of tax law and are able to address the most complex national and international tax planning issues. In this uncertain climate, the firm represents a reliable, guiding force in the industry.

XSpot Wealth

Investment XSpot Wealth started out with a clear vision to bring top wealth management services to all. It was a time of huge regulatory change within the wealth management industry and XSpot Wealth realised they could be part of this change. With a specific focus on fintech, smart algorithms and AI already in use, the XSpot Wealth team realised they could democratise investing and help everyone at the start of their investment journey.

Since 2014, they have been focused on smart technology and low fees to provide outstanding customer service and accessible investments for all.

Intelcia

Outsourcing Intelcia is a global player specialising in outsourcing, which has supported its clients for 20 years, offering tailor-made services that meet international standards by combining talents, technologies and processes. In order to allow its customers to focus on their challenges and core business, Intelcia proposes a global onshore, nearshore and offshore offer around a cluster of four main solutions: customer relationship management, IT solutions outsourcing, BPO and digital services. Today, the group serves its customers throughout the world through 35,000 employees operating in 85 centres spread across 16 countries in Africa, Europe and the Americas.

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Driving towards a greener future Trucking is one of the largest industries in the US, but as well as being a lucrative sector, it is also one of the most carbon intensive. Yet much of this is preventable and one firm is making inroads to improve sustainability

words by

Jennifer Wong hEaD oF SuStaINabIlIty, coNvoy

Nearly all merchandise and commodities consumed in the US have been transported via ground at some point in their supply chain.

According to American Trucking Association (ATA) data, the trucking industry hauls about two thirds of all freight, which equates to 11.8 billion tons. As a whole, the industry is estimated to be worth $800bn, representing 80.4 percent of the nation’s freight bill. The trucking industry employs approximately three million people directly and a total of about 37 million trucks are registered for business purposes running 175 billion miles annually to move truckload freight across the country.

This leaves no doubt that the freight industry – primarily trucking – is the core of the US economy.

The breakdown in the supply chain Yet as we are seeing on the news, the US supply chain is currently in a state of chaos. The major California ports of Los Angeles and Long Beach have as many as 100 ships lined up in 180

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the surrounding waters for weeks waiting to unload thousands of containers. Much of the blame has been placed upon the trucking industry crisis – an acute shortage of truck drivers estimated to be about 80,000 by the ATA. This means that cargo, once unloaded, is not being moved out of the ports quickly enough, thereby contributing to the bottleneck.

Despite the trucking industry’s significance to the US economy, it suffers from a decadesold problem of inefficiency that contributes to the fragmented supply chain. Traditionally, shippers had two choices when it came to moving their freight. They could work with brokers who connected them to carriers for a fee. Or they could hire asset-based carriers who maintain their own facilities and truck fleets. Both systems operate with high rates of inefficiencies because the industry is largely composed of small trucking companies with six trucks or fewer.

Disrupting the trucking industry In 2015, Convoy entered the marketplace with a clear vision of designing a revolutionary technology-based model in the trucking industry to seamlessly address decades-long inefficiencies. By focusing on waste and inefficiency reduction, Convoy envisioned reducing costs for

shippers, improving the lives of truck drivers, and working to save the planet by ultimately decreasing carbon emissions. The trucking industry, in fact, contributes more than 87 million metric tons of carbon emissions in the United States annually.

Convoy designed the first-ever digital freight network that leverages technology and data to streamline operations and ultimately optimise how millions of truckloads move around the US. Convoy’s network is an open, fully connected freight marketplace that uses machine learning, automation, and other software services to efficiently connect shippers and carriers. Convoy’s technology has introduced the notoriously inefficient trucking industry to a system in which trucks are better utilised, costs have come down, and the quality of services has greatly improved.

The Convoy effect Since Convoy began operating, the trucking industry has witnessed a variety of improvements. In operating our efficient digital freight network, Convoy has automated the traditional freight brokering process including the matching, pricing, and scheduling of trucks to shipments. As a result, there have been multiple benefits for all players across the value

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Convoy’s goal is to continue to improve our technology deployment to serve the trucking industry more effectively

$800bn

Value of the trucking industry

chain. For example, as new carriers join the Convoy network, capacity increases, thereby enabling shippers to get lower costs to move freight. And as the volume of freight increases with each new shipper, the life of truck drivers has also vastly improved because they now have more options, better routes, fewer empty miles, and therefore can earn more.

As the marketplace utilising Convoy’s digital freight network grows, the company’s machine learning algorithms can simultaneously optimise thousands of live and drop loads, thereby providing drivers with bundled loads that reduce empty miles and dwell times, all of which occurs while automatically adjusting for changing conditions in the supply chain.

Using technology to address empty miles Historically, the trucking industry was designed to operate in such a way that a truck is loaded for the trip from port to inland, but travels empty on the trip back to the port – thereby creating the challenge and disadvantage of ‘empty miles.’ Yet with Convoy’s Automated Reloads programme, participating carriers book multiple loads at a time, helping them earn more, minimise empty miles, and eliminate waiting time between jobs. Convoy algorithmically evaluates and optimises how

loads can be grouped in real time without human intervention. This enables carriers to bid their rates or instantly accept pre-planned combinations of loads as a single job, ensuring they stay on the road pulling loads and delivering a high quality of service.

Our research shows that trucks run empty up to 35 percent of their total miles. This significantly impacts driver earnings, the cost of fuel and other expenses, and the environmental impact, making deadheading a losing proposition for all. Convoy’s Automated Reloads programme reduces empty miles from the industry standard of 35 percent to 19 percent simply by bundling shipments into a single job for a driver.

If the trucking industry as a whole could adopt the same efficiency improvements, Convoy estimates it could reduce CO2 emissions by 47 million metric tons. Convoy has, in fact, committed to reaching net-zero carbon emissions in its own business by 2040 – a full 10 years ahead of the goal set in the United Nations’ Paris Agreement.

Investing in a new future for trucking Convoy’s mission of transporting the world with endless capacity and zero waste has attracted the attention of many notable individuals committed to environmental sustainability and disruption, including Amazon founder Jeff Bezos, Microsoft founder Bill Gates, and former Vice President Al Gore’s firm, Generation Investment Management.

Other investors include Salesforce CEO Marc Benioff, Code.org founders Hadi and Ali Partovi, former Starbucks president Howard

Behar, U2’s Bono, and many others who have contributed approximately $700m to the startup.

The financial backing by these investors has helped Convoy with our ongoing product improvement and expansion strategy as we experience tremendous marketplace demand, while also positioning the company for longer-term growth and success. Convoy has been able to hire an incredible team to build the technology and scale the business nationwide, thus creating one of the most innovative and disruptive brands in the supply chain. Over the years, Convoy has attracted executives such as former Expedia Group CEO Mark Okerstrom who joined Convoy as President and COO, and CTO Dorothy Li who came from Amazon, both of whom are part of the company’s 1,000-person workforce.

Convoy’s goal is to continue to improve our technology deployment to serve the trucking industry more effectively. There are tremendous opportunities to automate and drive new efficiencies in trucking and it is our goal to deliver solutions that are not only grounded in technology and data science, but also benefit the environment by eliminating unnecessary carbon emissions whenever possible.

While the trucking industry is still in the early stages of a massive transformation, we have seen a number of competitors trying to replicate our business model. This is only validation of the value and importance of driving greater efficiencies to trucking and logistics.

Ultimately the only competitor Convoy wants to eradicate is waste, which remains rampant in our supply chain. n

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Shaping zero With a longstanding focus on economic growth in the infrastructure sectors, the catastrophic consequences of carbon emissions have been largely ignored. We must now effect necessary change with a view to eliminating carbon emissions completely

words by

Rachel Skinner ExEcutIvE DIREctoR, WSp uK & pRESIDENt oF thE INStItutIoN oF cIvIl ENGINEERS (IcE) FoR 2020–21

Choosing climate action as the theme of my ICE presidency was an obvious choice. I’m an engineer, having trained first as a geographer. My background is infrastructure, people, planet and places. So climate change – with a focus on net zero carbon and climate resilience – is a priority topic, both personally and professionally. Yet until very recently, the infrastructure sectors (energy and also transport, buildings, digital, water and waste) have been able to ignore climate impacts or treat them, at best, as an add-on. We have had far greater focus on economic growth and gain as a primary outcome, at the expense of social and environmental aspects. This mindset is now the cause of massive problems worldwide. But it’s the way public infrastructure and the environment is planned and built that must change – we must change. That means engineers, city and municipal planners, construction professionals – all of us have to adapt in order to make a major difference in the years ahead.

Commitment is overdue To reach a net zero balance by 2050, we must cut the total carbon emissions connected with today’s infrastructure systems in half by 2030.

This gives us a chance to slow the pace of climate change. Though even if we achieve this, we can expect decades of a worsening climate ahead of us, so in parallel we must build in better resilience to cope with more frequent extreme weather events across the world: storms, floods, fires, droughts and more.

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This is urgent. Our existing infrastructure systems remain highly carbon intensive, as they are used and relied upon by billions of people every day. Today’s decisions about whether we build, what we build, where we build and how we build are key to build-stage carbon impact, but we must also take into account the carbon emissions linked to the existence, operation and use of infrastructure over many generations. We already have some of the right tools, ideas and know-how to start to address the climate crisis. The key now is turning climate worry and climate talk into climate action.

And I say none of these things from an activist mindset. It’s simply the most responsible thing to do, given the scale of our collective challenge. You only have to spend time with your own children, or their friends, for a sense of how they see the future. We have to listen to the next generation – and to 70 years of climate science that already lies behind us. So our job now, as engineers, is to influence and bring about the slashing of carbon, to deliver the art of the possible. And there is no time to waste.

New carbon ‘lens’ needed We have to rethink how we approach infrastructure design to be more ‘carbon conscious’ in everything. For some clients this is a fairly new lens to look through, alongside other crucial drivers that remain, such as quality, cost, safety, productivity and social inclusivity. Fundamentally, the earlier in a project lifecycle carbon awareness starts, the greater the chance to build value through longer-term carbon savings, often without additional cost or risk. We need to ask the difficult questions about whether ‘new-builds’ are required or whether existing assets can have an extend-

“The key now is turning climate worry and climate talk into climate action”

ed life. We need to design with carbon firmly in mind, so that quantities of materials such as traditional concrete and steel can be reduced for the benefit of both cost and carbon dioxide. In time, we must aim to eliminate carbon emissions altogether, but in practice we will need to get into the habit of quantifying and then minimising whole life carbon emissions, before mitigating or offsetting any residual impact.

This last piece is evolving fast – it’s also widely misunderstood – but it’s crucial. Just as we mitigate other impacts in everyday technical design practice, we have to embrace and design in offsets directly and accurately. The good news is there’s a range of nature-based solutions that work with carbon capture tech that will become more commonplace, boosting credibility around net zero client work.

Generational pressure is a good thing The generation coming into the workplace has grown up with climate change so there’s no uncertainty phase that held earlier generations back. There are pent-up frustrations from this group that we – as today’s responsible adults – still haven’t addressed climate change with real urgency, underpinned by fairness and social justice. Young and emerging professionals, whatever their role, must use their influence, knowledge and power to keep pushing the carbon infrastructure agenda to the top, for all our sakes. I am, personally, hopeful that it will succeed. But there’s no more time to waste. We must start now and not allow ourselves to slip back. n

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Sustainability – A buzzword for many, a commitment for onsemi The world is slowly waking up to the fact that urgent action is needed in order to prevent catastrophic changes to the climate. For companies such as onsemi it is not just about being a good corporate citizen: sustainability is a defining part of its transformation Innovation-led sustainability words by

Thad Trent ExEcutIvE vIcE pRESIDENt & cFo, oNSEMI

Since joining onsemi in February of this year, CEO Hassane El-Khoury and I, together with the rest of our leadership team, have been working on the transformation from the former ‘ON Semiconductor’ to the new ‘onsemi.’ On August 5 during our analyst day, we revealed our new trade name ‘onsemi’ and a refreshed brand as the next step in the company’s evolution to establish itself as the leading provider of intelligent power and sensing technologies.

With a continued focus on the automotive and industrial end-markets, onsemi has sharpened its strategy to drive disruptive innovation that contributes to a sustainable ecosystem of highgrowth megatrends such as vehicle electrification, advanced safety, alternative energy and factory automation.

We consider the changes in strategy a transformation of the company rather than a turnaround. Instead of looking at product lines, we now focus on the markets where our solutions can add value. By moving capacity to markets and solutions we want to sustain, we are shifting our product mix. Our new company name shows that we are not about what we make but what we provide our customers with: intelligent power and sensing technologies that help our customers solve their toughest challenges.

The results over the last few quarters are evidence of this. Adding value to our customers’ solutions has translated into a significantly increased growth margin, earnings per share (EPS), cash flow and record revenues. The new direction of onsemi, focused on our vision to empower a sustainable ecosystem, has already led to our transformation to a company with a more predictable financial performance.

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Today, the industrial and automotive end-markets are responsible for two-thirds of global greenhouse gas emissions. By applying its intelligent power and sensing technologies to these markets, onsemi has an immense opportunity to do its part in achieving a net zero economy.

As we see it, climate change presents not only a risk to the environment, humans and animals globally, but plenty of opportunities for innovative business solutions.

We define disruptive innovation as providing our customers with differentiated solutions that add value to their own products and that contribute to a sustainable ecosystem. We are doing this at onsemi by powering the electrification of the automotive industry with intelligent power technologies that allow for lighter and longerrange electric vehicles and enable efficient fast-charging systems. We are also enhancing the automotive mobility experience with our intelligent sensing technologies with imaging and depth-sensing that make advanced vehicle safety and automated driving systems possible.

In the industrial market, we are propelling the sustainable energy evolution with our intelligent power technologies for the highest efficiency solar strings, industrial power and storage systems, while enabling Industry 4.0 with our intelligent sensing technologies for smarter factories, buildings and homes.

This includes high-efficiency power solutions with both insulated-gate bipolar transistors (IGBTs) and silicone carbide (SiC) for increased power throughput for charging stations and energy infrastructure. For factory automation, we offer high-speed sensing for robotics, scanning and inspection and the widest intelligent power portfolio across all voltages and technologies. In addition, we are leveraging some of our high-efficiency, intelligent power solutions to optimise power consumption in adjacent markets such as the cloud and telecom infrastructure.

2040

year by which onsemi plans to achieve net zero emissions

Net zero emissions by 2040 While our company has a long history of dedicating itself to sustainable products and being a good corporate citizen, this year, onsemi has publicly committed to applying its research and design expertise and pledged to adapt its own operations to achieve net zero emissions by 2040. As our CEO stated on our analyst day, sustainability is what governments are asking for, employees are demanding, shareholders are requiring, and companies are investing in.

But first and foremost, we are doing this because it is the right thing to do.

To achieve net zero emissions by 2040, we are implementing an aggressive strategy.

But what it takes to get to net zero emissions is often misunderstood and not all climate pledges are created equally. So, what does net zero mean? How does this compare to what our competitors and other companies are doing around climate change? You have likely seen companies commit to being carbon neutral or net zero and there is a world of difference between the two of them.

Carbon neutral commitments do not require companies to eliminate any present or future emission from their operations. Instead, this type of commitment allows a company to continue its business-as-usual practices so long as it purchases enough carbon offsets to negate its emission activities. Carbon neutral pledges are not aligned with the Paris Agreement.

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Before purchasing offsets equal to the emissions that cannot be avoided, net zero pledges require an ambitious 1.5 degrees Celsius aligned science-based target for emission reductions across the whole value chain.

This means that the company ensures direct emission will not contribute to a global temperature rise exceeding 1.5 degrees Celsius above pre-industrial times. Net zero pledges align with the Paris Agreement.

The three pillar strategy With this commitment, we have set the most ambitious goal among our competitors and will surpass the Paris Agreement’s goal by a full decade. Our strategy is focused on three pillars: Firstly, ‘capitalise on efficiency’: Every ton of carbon dioxide (CO2) avoided is a ton we do not need to eliminate or offset. Our employees have already demonstrated their innovative abilities to create such efficiencies. We reduced our emissions by 12,101 metric tons of CO2 in 2020 through 49 projects centred on increased energy efficiencies.

Investments in facilities, processes and equipment to increase energy efficiency can reduce our greenhouse gas footprint by as much as 15 percent by 2040. We will also be focusing on our process gas usage as there is substantial opportunity for efficiency in this area.

Secondly, ‘renewable energy’: To achieve net zero, companies need to invest in renewable energy equal to the emissions associated with their energy consumption. Offsets cannot be used for electricity-related emission in a net zero model. The company will transition to an emissions-free renewable energy portfolio to achieve this goal. We plan to use 50 percent renewable energy by 2030 and 100 percent by 2040. We will engage with energy providers to identify power purchase agreements in locations where it is feasible to recoup investment costs in long-term agreements. To assist in our shift to renewable energy, we joined the Renewable Energy Buyers Alliance to ensure a rapid transition to a cleaner zero-carbon energy future.

And the third pillar, ‘offsets and inf luence’: For non-electricity emissions that cannot be eliminated, we will purchase certified carbon offsets equal to their amount.

Green-E and Gold Standard certified offsets are the most credible and will be prioritised in our strategy. Science-based targets also require goals for reducing emissions in the supply chain. We will leverage our Responsible Business Alliance membership to engage suppliers on emissions reduction.

No goal is worth the paper it is written on without continuous measurement of progress against it. Our CSR report will be a key resource for anyone wanting to see our

progress toward net zero emissions. We will report our emissions on a scope one, two and three basis. The scope of the emissions speaks to what kind of emission it is and how it relates to onsemi business operations.

Scope one emissions are direct emissions from company-owned and -controlled resources. The company will focus on removing scope one emissions as part of its net zero goal by capitalising on efficiencies in locations we operate in. Scope two emissions are indirect emissions from the generation of purchased energy, which we will eliminate by converting to 100 percent renewable energy.

F i n a l l y, s c o p e three includes indirect emissions that Sustainability is occur in the supply cha i n of on sem i, what governments including both upare asking for, stream and downemployees are stream. As part of demanding, our net zero stratshareholders are egy, we will elimirequiring, and nate these emissions companies are by working with our suppliers to impleinvesting in ment their ow n emission reduction targets and offsetting the excess. In 2020, we started tracking some of them and will build the rest of scope three emissions into our reporting as we continue on this journey.

Lastly, our efforts have not gone unnoticed. Our sustainability programmes have been recognised many times over the years. For a second consecutive year we were declared the winner of the 2021 World Finance Sustainability Award in the category of the ‘Most Sustainable Company in the Semiconductor Industry – 2021.’ Some other examples are our Platinum award from Ecovadis for 2020, only awarded to the top one percent of companies assessed.

This year we are ranked number 10 and the top-rated semiconductor company on Barron’s 100 most sustainable companies. For the fourth consecutive time, we are listed on the Dow Jones Sustainability Index for North America. We are also rated PRIME

by ISS-ESG. There is no question that there will be some learning on our way to net zero emissions, but our plan is in place and we are dedicated to its execution from the top down. We will measure our progress, make corrections as needed and pursue our goal with determination. In the end it comes down to what we started with: committing to net zero is the right thing to do. n

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Through the looking glass: innovating sustainability at BA Glass Regarding green technologies, we continuously invest in our production facilities, implementing the most innovative ideas. In 2020, BA built a new furnace and rebuilt two others, and with these projects, a drop of 13 percent in energy consumption was achieved, representing a reduction of 23,000 tons in CO2 emissions. BA has been investing in clean energy and has a medium-term plan to cover the roofs of all the plants and warehouses with solar panels. With this investment, we expect to be reducing the annual CO2 emissions by more than 25,000 tons.

real insights into their needs and concerns.

In 2021, to respond to consumers’ demands for more sustainable packaging, BA launched ‘Pure,’ a new brand that aims to make glass more environmentally friendly through conscious design and production. ‘Pure’ has three distinct lines that express the different approaches to reach one same goal – to make the world a greener place. PURE Life, from BA’s conscious thinking and commitment of producing the most sustainable packaging.

PURE Premium, from the consumers’ need of having a unique and special experience respecting nature.

And finally, PURE Innovation, that comes from the company’s ambition to challenge and be challenged by the market, its customers, and consumers. The constant drive for

Additionally, BA has been working towards the increase Given to ba’s environmental fund of cullet in its production process, but to research sustainability its availability in the market is still below the needs of the industry. To promote and boost recycling behaviours in Europe, BA is proud to have joined the Close the Glass Loop Programme of FEVE. The goal is to reach a European collection rate of 90 percent by 2030, up from the current 76 percent, by joining forces with municipalities and recyclers.

But we seek more and we treasure the close relationships with suppliers, customers, consumers, and partners, which allows us to have

excellence, promoting benchmarking with other industries, and the sense of ownership and initiative of our people, allows the generation of new ideas and the implementation of innovative projects. The improvement of our production processes and the execution of several projects on BA digital transformation, are examples of it.

Therefore, we invite you to get to know more about BA’s commitments, on our social platforms, as well as our online sustainability reports. At BA, we believe we can make the difference with our people who dream about engineering transformations and of disrupting paradigms. We stand for our people, our customers, and our partners. And, like the glass we produce, we stand for life! n

With a more urgent focus on the overall health of the planet, it has never been more important to ensure the use of safe and sustainable packaging materials and production methods Going green words by

Sandra Santos cEo, ba GlaSS

As a company, BA Glass aims to go beyond just making glass containers. We aim to build a greener pathway by engaging different stakeholders to reduce the impact of our actions on the planet’s future. Given its natural properties, glass is the only packaging material that blends in with nature. It preserves the taste and ensures that there is no level of food contamination. Glass represents the safest material not only for humankind but for the world.

The industry faces continuous challenges regarding waste and gas emissions reduction, carbon footprint targets, talent attraction, and other materials’ competition, among many others. But not even a year of crisis with the global pandemic has prevented progress on topics such as sustainability, digitalisation, health protection and human wellbeing.

In fact, despite the unfavourable context, last year we accelerated the development of several projects that publicly express our commitment in the transformation of glass as the most sustainable and healthy packaging material on our planet. Furthermore, our shareholders decided to increase the environmental fund created last year, dedicating more than €7m to the cause. This fund supports research and development for CO2 capture and reuse initiatives.

In an era when the planet’s natural protection is under threat, environmental sustainability is at the heart of the group’s decisionmaking. Besides the internal goals and the public commitments shared in the Porto Protocol, BA decided to reinforce its public dedication to the environment. For that, another important step was taken at the beginning of 2021, as we joined the Science-Based Targets Initiative, an organisation that drives companies to establish ambitious science-based emissions reduction targets. We are now developing a roadmap that will enable us to reduce our carbon footprint by more than 50 percent by 2035.

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From vegan products to cellular meat startups, the alternative meat market is booming, creating huge opportunities for investment as well as a more sustainable world. But from changing mindsets to turning traditional agriculture on its head, there are still major obstacles to overcome. Laura French investigates

I

n November, McDonald’s began rolling out its McPlant burger in the US, following its launch a month earlier in the UK. The same month, Cadbury introduced its plant bars, while in May, milk alternative Oatly surpassed all expectations with a $1.4bn debut IPO. All of these point to one thing: vegan living is now firmly the province of the mainstream, and it’s opening up a whole raft of opportunities for investors – while simultaneously rocking the food industry at its core.

A recent report by Barclays estimated the alternative meat market could be worth £100bn by 2029 – up from £10bn in 2019 – replacing 10 percent of the global meat industry. Credit Suisse went even further, suggesting its value could hit $1.4trn by 2050. More than 40 percent of consumers in the US now opt for non-dairy milk, according to research by the Plant Based Foods Association and the Good Food Institute, while one in six households choose plant-based meat. That’s led sales growth in vegan meat, dairy and eggs to outpace that of animal products for the third year running in the country.

Joining the bandwagon It’s not only McDonald’s, Cadbury and Oatly getting in on the trend, of course; research by Mintel found that more than one in 10 meat, fish and poultry launches in the UK are now positioned as meat alternatives. Plant-based

California brand Beyond Meat – which collaborated with McDonald’s on its latest vegan addition and is backed by celebrities including Bill Gates and Leonardo DiCaprio – raised $36.8m in net proceeds at its IPO in 2019, with stock prices surging 163 percent on the first day. Kellogg’s vegetarian brand MorningStar Farms is estimated to generate around $450m each year in revenue, while Danone is targeting $6bn in plant-based sales by 2025 and recently bought Earth Island – producer of vegan mayo Vegenaise – following its $12.5bn acquisition of plant-based manufacturer WhiteWave Foods in 2016. IKEA has meanwhile pledged to make half of its restaurant meals plant-based by 2025, while Nestlé has just re-introduced its Garden Gourmet range in the UK in response to growing demand. Aldi, Lidl, Tesco, Sainsbury’s, Unilever and Marks & Spencer are just a few of the other big-name brands to have added vegan sidekicks, counting among the world’s top 10 companies to be investing in the sector, according to Mintel GNPD.

Eco-conscious consumers The trend is being driven by a number of things – not least environmental issues, according to Sophie Moule of PI Data Metrics, which found a 77 percent increase in online searches for ‘vegan’ from 2018 to 2019. “If we analyse where the spikes are in consumer searches for vegan products, they undoubtedly align with key documentaries being released on Netflix and »

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Meat in the middle

» other streaming platforms,” she told World Finance. “Shows like Cowspiracy: The Sustainability Secret and David Attenborough’s A Life on Our Planet definitely influence people to research what they can do to reduce their impact on growing issues surrounding climate change.”

Research by Mintel found that 36 percent of consumers who switched from dairy to plantbased products were indeed driven by environmental concerns, while health and animal welfare were the biggest motivations for those participating in Veganuary. The environmental impact animal rearing can have is no secret; traditional animal farming accounts for around 18 percent of greenhouse emissions and uses 70 percent of the world’s water, according to the Food and Agriculture Organisation of the United Nations (FAO), taking up 47,000sq miles of land each year. A much-quoted study by the University of Oxford declared that veganism was the “single biggest way” to reduce environmental impact and could cut an individual’s carbon footprint from food by up to 73 percent.

£10bn Value of the alternative meat market in 2019

£100bn Estimated value of the same market by 2029

28%

Of the world’s meat is currently consumed by China

$86bn

The annual value of the Chinese meat market

Meat demand Despite this, global meat consumption has grown at an alarming rate in recent decades; according to World In Data, across the globe we now produce more than three times the quantity of meat and more than double the amount of milk compared to 50 years ago. In China, production has surged by more than 10 times, from 7.7m tonnes in 1968 to 88.1m tonnes in 2018, making the country now the world’s biggest meat producer.

In the US, production has more than doubled from 20.3m to 46.8m tonnes, while in Brazil it has surged from 2.8m to 29.3m tonnes.

Many believe these levels are simply impossible to sustain. According to Credit Suisse, current trends combined with an exploding population – expected to hit more than 10 billion by 2050 – could see food-related emissions grow by another 46 percent by 2050, while demand for agricultural land could rise by 49 percent.

“This is incompatible with the need to achieve a net-zero emission environment globally by 2050,” wrote the authors. “If we are to meet this goal, we need to change what we eat, how much we eat, and how we produce our food.”

We need to change what we eat, how much we eat, and how we produce our food

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The 2014 documentary, Cowspiracy, explored the impact of animal agriculture on the environment

Meat in the middle

David Yeung, Hong Kong-based co-founder and CEO of Green Monday, agrees. “There’s absolutely no doubt that plant-based is the future, because from the macro point of view, there’s just no way our current way of eating and our current way of consumption can be sustained,” he told World Finance. “So it’s only a matter of time before we shift towards that direction, whether from mainstream consumers, corporates or governments, who I believe will start to make very clear guidance.”

That guidance is starting to trickle out; the BBC recently reported on a leaked UK government research paper that had recommended people “shift dietary habits” towards a plant-based future. The Behavioural Insights Unit, who wrote the paper – which was quickly deleted after publication and highlighted as academic research rather than official policy – reportedly recommended taxing producers or retailers of high-carbon foods to encourage consumers to buy plant-based and local food in a similar way to the sugar tax introduced in 2018.

Cultural barriers

40%

Of consumers in the US now opt for non-dairy milk

$6bn

Target for Danone in plant-based sales by 2025

But there are several challenges to overcome before a plant-based future really does become a global phenomenon – not least in China, according to Yeung. “In Hong Kong, the readiness for a more plant-based diet is there,” he said. “But in mainland China, from both a climate change and animal welfare standpoint, the level of awareness is not the same.

For many years, people did not have as much access to meat, so it’s kind of a symbol of affluence now, and it’s not immediately easy for the country to change course,” he said.

China currently consumes 28 percent of the world’s meat and half of all its pork, data from the OECD shows, with a meat market worth $86bn. Annual per capita consumption is still significantly below Europe and the US – in the US it was 102kg in 2020, compared with only 26.9kg in China the previous year – meaning there’s potential for consumption in the country to rise even more in the coming years.

China’s government has taken steps to prevent this; in 2016, the state released dietary guidelines to help halve the country’s meat intake with the aim of meeting its goal to become carbon neutral by 2060. Other green shoots are starting to appear – the country’s plant-based market is forecast to grow at 20 to 25 percent annually, according to research by the Good Food Institute, up from an estimated 6.1bn yuan (£675m) in 2018.

But shifting to a plant-based lifestyle requires more than just accessibility to vegan products – it’s about a change in deep-set

There are several challenges to overcome before a plant-based future really does become a global phenomenon mindset and culture. Research by Mintel found that in China, “consumers still perceive animal protein as a critical part of their daily diet, providing essential nutrition,” for example. That’s not a sentiment unique to China. While many tout the health benefits of a plant-based lifestyle, others point to potential deficiencies in a meat-free diet (in 2016, the German Society for Nutrition even recommended against vegan diets for children, pregnant women and adolescents).

Perhaps partly for these reasons, only 46 percent of over 65-year-olds asked in a study, Older Consumers’ Readiness to Accept Alternative, More Sustainable Protein Sources in the European Union, considered plant-based protein an acceptable alternative to meat protein (and only 12 percent considered it ‘very acceptable’). “The high acceptance to eat meat, dairy and seafood among our sample of older adults underscores the important status of animal-based protein in the habitual Western diet,” wrote the authors. A separate survey in the UK by OnePoll found that the cost and effort associated with plant-based alternatives were among the key barriers to meat-eaters going vegan – alongside simply liking meat too much, which accounted for more than half of responses.

A lab-grown future?

These obstacles suggest that worldwide veganism might still be some way off yet – but there are other sustainable alternatives coming into the limelight. Among the most talked-about of the moment is cultured meat, produced from animal cells in labs, without the need to raise and kill livestock.

Consulting firm AT Kearney estimated that by 2040, 35 percent of the $1.8trn global meat market would be grown in labs (compared to 25 percent being replaced by vegan alternatives). A report by Facts and Factors meanwhile predicted the sector could be worth $248m by 2026, up from $103m in 2020, while the Good Food Institute found the industry experienced its best investment year ever in 2020, with more than $366m in funding received.

Consumers are open to the idea, according to research; in a survey published in May by »

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Meat in the middle

» the Foods journal (US and UK Consumer Adoption of Cultivated Meat: A Segmentation Study), 80 percent of respondents in the UK and US said they were either moderately or highly likely to try cultured meat.

And as with the plant-based trend, bigname companies are getting in on the game.

Bloomberg recently reported that Nestlé was in talks with Israeli lab-meat startup Future Meat Technologies (FMT), which famous US meat producer Tyson Foods has already invested in – and which claims to emit 80 percent fewer greenhouse gas emissions than traditional meat production. Nestlé confirmed in a statement to Bloomberg it was indeed evaluating “innovative technologies to produce cultured meat or cultured-meat ingredients with several external partners and startups.”

FMT is far from being the only company scaling up; in February, Israeli firm Aleph Farms hit the headlines for having produced the world’s first ribeye steak through 3D bioprinting. A few months later, the company raised $100m in funding to help bring its beef to market as early as next year – marking one of the industry’s biggest financing rounds to date – with new supporters joining existing investors such as food giant Cargill.

In September, Chinese startup CellX meanwhile unveiled its lab-grown pork and said it was aiming to be producing and selling cultured meat by 2025, while in July, US firm Wildtype opened a pilot plant in San Francisco to produce cell-cultured salmon. The startup plans to open a cell-based sushi restaurant next to the plant and is currently seeking regulatory approval from the US Food and Drug Administration (FDA). Upside Foods – formerly Memphis Meats – also hopes to roll out its lab-grown produce in the US this year pending regulatory approval, and counts Bill Gates, Richard Branson and Cargill among its investors; the company raised $161m in 2020.

Ongoing obstacles But there are still obstacles to overcome before cultured meat can come to market across the world – not least affordability, practicality and regulation, according to Green Monday’s Yeung. “Because most of these lab-grown products will require bioreactors, how fast can they scale?” he said. “How affordable would the products be? And when will these kinds of products get approved? Those are the key barriers, but I’ve no doubt that ultimately cultured meat could become one of the solutions.”

Some governments have already taken action – in December 2020, Singapore became the world’s first country to give the go-ahead on cultured meat, granting regulatory approval to cell-cultured chicken nuggets made by Californian startup Eat Just.

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Private members’ club 1880 soon became the first restaurant on the planet to serve labgrown meat. And Qatar might soon follow in Singapore’s footsteps; Eat Just is building a cultured meat factory in the country, marking the first of its kind in the Middle East, with $200m in backing by sovereign wealth fund Qatar Investment Authority (QIA). The company said in a statement it was expecting regulatory approval “very soon” and was identifying restaurants in the country where the products could be sold. There’s nothing to say other nations across the globe might not soon start to follow suit.

Impacting agriculture For many, it’s therefore a case of when, rather than if, both lab-grown and plant-based alternatives start eating their way into the traditional meat market (see Fig 1). Impossible Foods CEO Pat Brown, for example, recently said he wanted the company’s vegan products to replace all animal farming by 2035.

Fig1. Global market value of plant based meat usd Billions

35.5 31.0 26.8

11.1

2019

12.9

2020

14.9

2021

17.2

20.0

23.1

But while that might well bring about huge environmental benefits, what would it mean for the conventional agriculture industry and the people within it? Transitioning to a new dietary model means uprooting one of the world’s biggest sectors from the bottom up – and that impact is not to be undermined.

Indeed the effects are already starting to be felt by farmers in the US, according to Jeri Devereaux of JD Consulting, who specialises in helping farms transition from animal to plantbased agriculture. “As more people embrace a plant-based diet, the effect is experienced in every area of farming and ranching, including the farm owners, their workers, animal truckers and meat and dairy processors,” she said.

“If farmers don’t embrace regenerative measures and diversify their agriculture production to include non-GMO food crops for humans, the reduction in consumption of meat, dairy, chicken and other animal products will absolutely affect their bottom line and their ability to meet new market demands,” she said.

“The USDA’s Economic Research Service found a 22 percent decrease in the consumption of dairy milk beverages from 2000 to 2016, and in the same time period, the consumption of plant-based milk increased by triple digits,” she added. “We are already seeing small family dairies collapsing into bankruptcy along with major producers like Dean Foods and Borden Dairy Company filing for Chapter 11.”

Transition period 2022

SOURCE: Statista, Polaris Market Research

2023

2024

2025

2026

2027

The obvious solution for farmers would be to make the transition from animal to plantbased agriculture – but how easy this would be is up for debate. A research paper by the Break-

Meat in the middle

Farming constraints

73%

Reduction in an individual’s carbon footprint by becoming vegan

through Institute looked at exactly that and found three groups whose livelihoods would be most at risk; those growing soy and corn for animal feed (which accounts for around 95m acres of farmland in the American Midwest, according to the USDA), contract farmers growing pork or poultry, and meatpacking plant workers.

But while the report highlighted several threats, it also found potential new opportunities; animal feed farmers could possibly switch to farming plant-based ingredients such as peas (used in meat substitutes by the likes of Beyond Meat), oats and other products, or continue producing feedstock for cultured meat, for example. Animal farmers could meanwhile still raise small numbers of livestock for cellular agriculture.

There could be several advantages to these changes, according to the report: “First, some of these crops could be more profitable. Second, production could represent a chance for farmers to diversify their income sources, in turn offering greater resilience. Third, because many leguminous crops can be incorporated into rotations with double-cropping, they could represent an additional rather than an alternative source of income.”

Several players in the industry are attempting to help farms make the transition; Cargill has invested around $100m in US pea protein producer Puris, which works with farmers in the US to get its ingredients. In Sweden, Oatly began purchasing oats from a livestock farmer in 2017 that had previously been growing them for animal feed. The company has since worked with several other animal farmers to do the same.

Yet there are still likely to be significant challenges in making the change, according to Devereaux. “Because of contracts and loans on animals usually tied to production contracts, farmers cannot and should not simply leap from their current business model to new, plant-based models,” she said. Governments could play their part in helping to make the transition – for example by introducing a subsidy system that supports the switch from animal to plant-based farming. The Breakthrough Institute report points to other potential areas of focus, including “regulatory clarity” on alternative-meat products, incentives such as tax credits for rewilding unused land and programmes to support the transition such as “debt forgiveness, compensating for losses incurred, and funding re-training initiatives.”

Even then, however, there are further constraints; geographical factors limit what can actually be grown where, for example. In the US, almonds (often used for plant-based milk) can only grow in warmer regions such as Florida and Southern California, excluding farmers in other parts of the country from getting involved. Contract chicken and pig farmers meanwhile don’t necessarily have enough land to grow the relevant crops. Then there are cultural and psychological barriers. “This will require farmers and ranchers to leave an often generational way of life and an understanding of the business of agriculture,” said Devereaux.

“Farmers will need to educate themselves while moving into new product areas and embracing new ideas around farming.”

A sustainable balance Of course, it’s unlikely conventional farming is going to suddenly disappear overnight – it’s likely to be a gradual transition, and many believe that even as alternatives come to bear, there will always be a place for it. Where pressure is likely to mount, however, is on the way that agriculture is done. Research shows that regenerative agriculture – essentially crops

Rank Top 10 vegan cities 1 2 3 4 5 6 7 8 9 10

Chiang Mai, Thailand Ubud, Bali, Indonesia Phuket, Thailand Tel Aviv, Israel Portland, Oregon, US Lisbon, Portugal Brighton, UK Salt Lake City, Utah, US Amsterdam, Netherlands Prague, Czech Republic

Vegan restaurants (per 100,000 residents)

30 19 13 8 7.5 7 6 5 4.6 4.1

that capture carbon in the soil – can help to limit carbon emissions, and the US is already taking action to encourage these practices.

Carbon credits have been introduced under Biden, providing payment to farmers who grow carbon-capturing crops, and other initiatives are currently under discussion.

Meanwhile in the UK, the National Farmers Union has set a goal to achieve net zero carbon emissions from food production by 2040. Deputy President Stuart Roberts is quick to point out that greenhouse gas emissions from beef production in the UK are half that of the global average. “When people buy British meat and dairy they are buying sustainable, local food, often produced in areas where it is difficult to grow other foods,” he told World Finance. “The same cannot always be said for plant-based proteins. People should know that if they want to reduce their carbon footprint at the same time as continuing to enjoy meat and dairy products, they can.”

Shifting to a plant-based lifestyle requires more than just accessibility to vegan products – it’s about a change in deep-set mindset and culture Demonising agriculture is therefore only one side of the argument; and even plant-based eating can take its environmental toll if it’s not handled carefully and sourced locally. As with everything, there’s no silver bullet to a pleaseeveryone, perfectly sustainable future – but the answer likely lies in striking a balance between moderate, sustainable meat rearing, lab-grown alternatives and plant-based living.

That’s exactly what the EAT Lancet commission set about to do in its science-backed ‘planetary health diet,’ released in 2019 with the goal of feeding a future population of 10 billion, while simultaneously addressing climate change issues. The diet includes cutting global consumption of red meat and sugar by half, while doubling vegetables, fruit, pulses and nuts in a 2,500-calorie-a-day flexitarian model.

While that kind of model might sound like a distant dream, it might be closer than we think.

With more and more consumers adopting a flexitarian lifestyle, more and more companies offering vegan options and an ever-greater awareness around both health and environmental issues, it’s not a totally unachievable target – and one we might have no option but to accept in the coming decades as the true impact of an exploding population, a rising global middle class and a current food system that’s impossible to sustain all come to bear. n

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The Econoclast

David Orrell AUTHOR AND ECONOMIST

Taboo economics Economists pride themselves on having an objective, dispassionate, scientific view of the world. But could the profession actually be shaped and defined by taboos – no-go areas where economists are afraid, or refuse, to tread?

The word ‘taboo’ was introduced into the English language by Captain Cook from the Tongan word for prohibited or forbidden, in his 1784 book A Voyage to the Pacific Ocean. It is associated both with the holy, and the unclean. In his 1890 book The Golden Bough, the Scottish anthropologist James George Frazer argued that taboos were a throwback to the age of magic.

Human belief progressed through three stages: primitive magic was followed by religion, which in turn was followed by science. Taboos belonged to the first stage, and could be viewed as a kind of negative magic: “The aim of positive magic or sorcery is to produce a desired event; the aim of negative magic or taboo is to avoid an undesirable one.”

So what would qualify as an economic taboo? Well, to start with something basic, how about money. Economists of course use money as a metric all the time – but they have long avoided talking about how the stuff is actually created. In fact, as economist Richard Werner remarked in 2016, the subject “has been a virtual taboo for the thousands of researchers of the world’s central banks during the past half century.” According to economist Norbert Häring, “Cursory observation suggests that credit creation or money creation are taboo words in the leading journals.”

The creation of money Textbooks have traditionally dodged the subject by saying that the process is controlled by central banks, but the reality is that the vast majority of money (about 97 percent in the UK) is created directly by private banks. When banks issue loans such as mortgages, the money isn’t taken from somewhere else; it is just created on the spot, as if by magic. The taboo around money creation has started to lift in recent years, beginning with a Bank of England paper 194

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in 2014 that admitted that the standard textbook story was wrong. But it does seem odd that the misunderstanding could have persisted for so long. One reason perhaps is that, as banks have long known, the best way to make money is to literally make it. Money creation through loans is very good business, because the bank can charge interest on all that new money. As Häring notes, this “pecuniary benefit” is not discussed in the textbooks, which again “points to a taboo imposed by the interest of a very powerful group.”

WhEN baNKS ISSuE loaNS Such aS MoRtGaGES, thE MoNEy ISN’t taKEN FRoM SoMEWhERE ElSE; It IS JuSt cREatED oN thE Spot, aS IF by MaGIc Still, other kinds of business are profitable too – so what makes money special? The reason is related to another taboo topic – which is the subject of power. Classical economists and thinkers such as Thomas Hobbes and Adam Smith recognised the connection between money and power – as the latter wrote, “Wealth, as Mr Hobbes says, is power…the power of purchasing a certain command over all the labour, or over all the produce of labour which is then in the market.” But it has since fallen from favour. In fact the economist Blair Fix did a wordfrequency analysis of economics textbooks, and found that “What defines econospeak is that power is conspicuously absent.”

This reluctance to address power is right there in the very definition of economics. The English economist Lionel Robbins wrote in 1932 that “Economics is a science which stud-

ies human behaviour as a relationship between ends and scarce means which have alternative uses” and similar definitions still appear in modern textbooks. Gregory Mankiw’s widely used textbook Principles of Economics, for example, defines economics as “the study of how society manages its scarce resources.”

The crowbar of power But if you look at how scarce resources are actually allocated in the real world, it would be more accurate to say that what counts is power.

Money is certainly a tool used by the powerful – as Nietzsche said, “money is the crowbar of power” – but other things can work too, like an army. And if anything, it would be more accurate to say that economics avoids the question of how we distribute resources – and indeed has long treated it as taboo. Robbins wrote that, because the subjective utility of one person cannot be measured versus that of another, the whole question of fair distribution is “entirely foreign to the assumptions of scientific economics.” Or as Nobel laureate Robert Lucas put it in 2004, “Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution.” As an example, today one of the most obvious economic signals is that, on average, white males earn more than other people.

Yet given the lack of interest in power relationships, it is perhaps unsurprising that the words ‘sexism’ and ‘racism’ are missing entirely from the economic corpus, according to Fix. As the New School’s Darrick Hamilton argued in a lecture, “What we need to do as economists is a better job at understanding the roles of power and capital in our political economy.” A first step is to relax some of those economic taboos, and restore money and power to their rightful place at the centre of economics. n