World Finance spoke with James Bevan from CCLA on the reality of the global slowdown and how concerned should we actually be.
Come back later for a full transcript of this video.
Year: 2016
Few rideshare companies insist on their drivers having adequate insurance
For drivers who use ridesharing apps, time on the road is a gamble. Most US operators drive using only their private insurance, meaning that their finances could be at stake should an accident happen at the wrong time. Insurers who are quick to fill in the gaps for these drivers could attract a new wave of long-term customers.
Harry Campbell, founder of The Rideshare Guy blog and podcast, told World Finance that insurance is a huge concern for many drivers. “I have no idea why more insurance companies haven’t jumped at this opportunity – it is a huge business opportunity. There are 400,000 [rideshare] drivers in the US alone and, according to my poll of over 3,000 drivers, 90 percent of them do not have rideshare insurance”, he said.
Insufficient cover
A lack of suitable insurance is one of the stronger criticisms levelled at rideshare companies like Uber and Lyft. When drivers don’t pay expensive commercial insurance, they can offer lower fares, but by not having full and appropriate coverage, these drivers put passengers and other road users at risk.
The reality for drivers is more complicated: Lyft and Uber both require drivers to hold private insurance for their vehicles. Drivers are then covered from the time that they select a fare and leave to pick up a passenger up to the very end of the passenger’s journey. What isn’t covered is the time that a driver spends waiting around.
This waiting time, during which a driver has their app activated and is waiting for a passenger to request a ride, is known as ‘period one’. Uber and Lyft offer liability coverage if a driver isn’t sufficiently covered during this time, but still require their drivers to go through their personal insurance first should they need to make a claim. This is where the gaps appear, as drivers are unlikely to be covered while operating commercially under their private insurance. Regular commercial insurance would provide coverage here, but is too expensive for anyone who isn’t ridesharing full-time.
According to Campbell, this makes a little dishonesty regarding ridesharing work very tempting. “There’s no real way [insurers] could find out, but obviously it is still a crime”, he said. “Unfortunately, many Uber drivers don’t have a choice in the matter. If they don’t make a claim and get into an accident during period one, they will not get covered for collision by anyone, but if they do make a claim with their personal insurer and say they were just out driving around, they will be covered. You can see why it’d be tempting to lie.”
A lack of suitable insurance is one of the stronger criticisms levelled at rideshare companies like Uber and Lyft
Dodging potholes
The upside for insurers is that many drivers are now looking for policies that will cover them during this gap. On his website, Campbell has compiled a list of insurers who either won’t revoke policies if a driver is ridesharing, or offer a policy that covers the gap. However, many US states don’t have either of these options available to them. Campbell believes that state regulations and slow-moving insurance companies have left holes that drivers must try and avoid.
“There are many drivers seeking a flexible, commercial insurance-style product that would allow them to give rides off the app, based on usage as opposed to flat fee, regardless of how much/little you drive, but still be covered”, he said.
Campbell also said that many drivers would be happy to change to another provider if the new insurer allowed for ridesharing, with policies within 10-15 percent of a normal premium being a reasonable charge for most.
Outside of the US, regulations vary drastically from country to country, but more examples of rideshare insurance products are appearing across a variety of markets. Aviva Canada, for example, recently announced that specific policies will soon be available for rideshare drivers in Toronto.
“We’re excited to offer a simple and affordable solution within a driver’s existing personal auto policy, thereby providing drivers and passengers with absolute peace of mind that they have insurance coverage while ridesharing”, said Greg Somerville, President and CEO of Aviva Canada, in an online statement.
The new policy will cover drivers for the full extent of their journey, provided that they meet other requirements including passenger limits, clocking in less than 20 hours per week as a ridesharing driver, and not engaging in any other commercial work. Campbell said that the 20-hour limit would be enough for most drivers: according to figures released by Uber in 2015, 51 percent of its drivers work less than 15 hours per week. The cost of the policy is calculated by looking at how often the individual works, as well as their location and driving record.
For insurance companies, opportunities still exist. With most drivers working part-time and not able to obtain expensive commercial insurance, this is where – if regulations allow – insurers should step in. The sharing economy isn’t going away anytime soon, and insurers will have to adapt – it’s that, or risk being left behind.
We must end the age of exploration subsidies
Somewhere around the halfway point of COP21, Oil Change International (OCI) took a moment to shine a light on fossil fuel subsidies, and revealed that support for non-renewables among the world’s wealthiest nations could derail outstanding commitments to climate finance. The findings, which took into account spending in the G7 countries and Australia, showed that the combined annual spend on fossil fuel subsidies totals around $88bn. As a means of comparison, support for the Green Climate Fund is around $2bn.
Looking at the figures for 2013, the US Government handed out $5.2bn in exploration subsidies, Australia $3.5bn, Russia $2.4bn and the UK $1.2bn, mostly in the form of tax breaks for deep offshore fields.
These results feed into a furious debate on the subject of fossil fuel support and whether it compromises the ability of major world governments to act on climate change. Following a (some would say) enlightening two weeks in Paris, where talk of climate finance fiercely divided negotiators, fossil fuel subsidies – particularly on the exploration side of things – have been chastised as a relic of former days.
“The challenge right now is that governments are not updating their fiscal policy to underline much wider objectives, particularly around climate, but also around other issues such as air pollution and energy security, where there is a need to diversify”, Shelagh Whitley, Research Fellow at the Overseas Development Institute (ODI) told World Finance. “For the most part, it has been more a question of governments maybe not taking a lot of these new factors into account when they’re making ongoing decisions, and whether they’re locked into old-fashioned fiscal policy.”
The case for fossil fuel subsidies is less now that the general understanding of the economic, social and environmental costs is greater
The World Bank, the International Monetary Fund (IMF) and the International Energy Agency (IEA) have all called on governments around the world to reform or phase out subsidies, yet a look at the headline figures shows that little progress has been made so far (see Fig. 1). Now that our understanding of the economic, social and environmental costs is greater, there’s no better time than the present to address the disconnect that exists between government actions and ambitions when it comes to climate change.
The same old story
Six years ago, G20 leaders gathered in Pittsburgh and promised to phase out unnecessary government-given support for fossil fuels – yet the situation is little changed. In fact, recent findings show that support for fossil fuels today is greater than it was when the initial pledge was made. This failed promise, together with recent studies that show the world is fast exhausting its carbon budget, has riled critics, for whom action on climate change has come too slowly.
“The big problem with producer subsidies is that we can’t afford to use all of the fossil fuel still buried in the ground – not without triggering runaway climate change”, said Chris Beaton of the International Institute for Sustainable Development (IISD), speaking to World Finance last year. “Claims that helping the fossil fuel industry is good for the economy and jobs are often inflated, or simply not substantiated with published analysis.”
For the very same reasons highlighted in the OCI report, fossil fuel subsidies are under fire. And while not all support should be tarred with the same brush, the case for exploration subsidies is growing thinner by the day. Dough Koplow, founder of Earth Track, told World Finance: “These subsidies create competitive impediments to cleaner energy resources, unlock enormous amounts of carbon from locations that would not otherwise have been economic to develop, and – as with the Arctic – can put at risk fragile ecosystems and other industries that depend on a clean environment.”
One report jointly penned last year by the ODI and OCI noted: “G20 governments’ exploration subsidies marry bad economics with potentially disastrous consequences for climate change.” Chief among the report’s findings was that governments were spending $88bn a year to support exploration; more than double the sum of private investment in exploration. By supporting exploration in this manner, continued the report, G20 countries are creating a ‘triple-lose’ scenario, and diverting funds into damaging investments.
Carbon budgeting
“The world already has a large stockpile of ‘unburnable carbon’. If countries intend to meet their commitments to the 2°C climate target, at least two-thirds of existing proven reserves of oil, gas and coal need to be left in the ground”, the report continued. “Yet governments continue to invest scarce financial resources in the expansion of fossil fuel reserves, even though cuts in such subsidies are critical for ambitious action on climate change and low-carbon development.”
The world economy cannot afford to burn any more fossil fuels than it has on its books, yet the $2.6bn in US exploration subsidies counted in 2009 almost doubled to $5.1bn by the time 2013 hit. This was partly as a result of US policymakers looking to cash in on runaway growth in the local oil and gas sector. Likewise, the UK government has deemed oil and gas majors worthy of additional support, and all in a period where subsidies for clean energy have been cut.
The central question here is whether policymakers – not to mention fossil fuels majors – will acknowledge the existence of a carbon budget and, if so, whether they’ll take steps to reduce their spending. As it stands, needless government-given support for exploration is actively incentivising an overspend, and for as long as these subsidies exist, it’s only natural that producers will expand their horizons.
Historically speaking, subsidies have been linked to energy security, domestic energy production and access to energy, all of which can bring material economic and social benefits to the host economy. “These justifications are often problematic and untested”, according to Koplow.
Rod Campbell, Research Director at The Australia Institute, told World Finance: “While I can understand exploration subsidies of mining in general – or the initial phase of any risky industry – the external costs that fossil fuels involve mean they should not be subsidised in any way.” As such, the case for fossil fuel subsidies is less now that the general understanding of the economic, social and environmental costs is greater.
If governments are serious about preventing a global temperature rise of more than 2°C, they must consider the way in which their actions conflict with the Paris climate deal, not to mention more general commitments to the climate question.
Encouraging reforms
According to the IEA, consumption subsidies in a sample of 40 countries accounts for approximately five percent of GDP and between 25 and 30 percent of government revenues. In the Middle East and North Africa, where the cost of subsidies is particularly acute, the price is closer to 13 percent of GDP and 35 percent of revenues.
In light of these costs, organisations around the globe are calling for subsidy reform in a bid to rebalance energy markets. To give one example, governments in the ODI study spent approximately four times more on fossil fuel exploration than they did renewable energy development.
In the Middle East, where a third of all electricity stems from oil, generous subsidies obscure the potential of low carbon alternatives and so actively incentivises fossil fuel development. Aside from slowing the transition to a low carbon economy, the level of support is at odds with the cost competitiveness and gathering adoption of renewables.
Serious reforms, according to critics, would level the playing field and alleviate some of the pressures weighing on state coffers. And while governments have been slow to act on this point, there is a growing recognition among major world powers that subsidies are in need of a radical rethink: according to the IEA and IMF, almost 30 countries introduced reforms in 2013 and 2014, with many more in the pipeline.
“People need to look at their energy resources as a system”, said Koplow. “They should not subsidise one field over another; should not subsidise any high-cost fields that have large detrimental environmental impacts if developed; and should force oil and gas reserves to compete without subsidies against alternative fuels and demand-side options to boost energy efficiency.”
Not only would reduced support for fossil fuels clear the way for a low carbon transition and significantly reduce environmental pollution, evidence in some circles suggests that phasing out subsidies could yield significant economic benefits. One review, as featured by The New Climate Economy, suggests that the phasing out of fossil fuel subsidies would result in a global real income rise of 0.7 percent per year through to 2050.
When asked about what’s preventing the reforms from happening, Whitley said that there are “several barriers that often interlock with each other, so unfortunately to get rid of one is not usually enough”. Lack of information, vested interests and policy inertia are the biggest three, she said. “It’s often the case that, even if you know all the information about these subsidies and even if you can kind of think of ways of shifting interests… it’s very difficult. It often takes a long time, even if everything is there at your disposal as a government to change policies.”
Putting aside the financial ramifications of such a sharp turn in policy, we should expect to see reforms in the near future as governments begin to make good on promises of reduced emissions. According to Whitley: “Change can happen quite quickly, but it often takes a long time to happen in the first place.” While reforms on this scale are seldom motivated by environmental stimulus, exploration subsidies are one area in which we could soon see an exception.
Several factors could stand in the way of the TPPA’s success
The Trans-Pacific Partnership Agreement (TPPA) is considered to be the largest regional trade agreement ever made. Applying to nearly 40 percent of the world’s economy, with signatories including Australia, Canada, Chile, Japan, Mexico, New Zealand, the US and Vietnam, the TPPA, once it has entered into force, will provide protection to investments made by qualifying investors from one TPP member state in the territory of another TPP member state. Those protections will include minimum standard of treatment, national and most favoured nation treatment, free transfer of funds relating to a covered investment, and prohibition on expropriation without compensation. Enforcement of the rights stemming from these protections will be available through a mechanism set out in the TPPA’s dispute settlement chapter.
Settling international disputes
The dispute settlement chapter in the TPPA is intended to allow qualifying investors to address any disputes that may arise between them and any TPP member state with regards to investments covered under the agreement. Although it is a requirement that the parties make every attempt to resolve their disputes through cooperation and consultation (thus allowing and encouraging the use of other alternative dispute resolution methods, such as mediation), when this is not possible, a qualifying investor will be able to commence arbitration proceedings and participate in the selection of a panel to rule over the dispute.
The dispute settlement chapter gives investors the option of pursuing either institutional or ad hoc arbitration. This means that an investor may submit a dispute to the World Bank’s ICSID arbitration, the UNCITRAL Arbitration Rules (providing that both parties involved in the dispute agree), or any other suitable arbitration institution. If no suitable organisations can be found, rules may be chosen in the alternative.
The result of any such investment arbitration – an arbitral award – will then be binding internationally for both the complainant and the TPP member state. It will be possible to enforce it not only in the TPP member states, but also in any of the 156 countries that have ratified the New York Convention on enforcement of arbitral awards.
Global benefits
The TPPA and its dispute settlement chapter are expected to have wide-ranging benefits to investors whether they are from, or investing into, a TPP member state.
First, existing or potential investors from TPP member states who did not previously enjoy the above-mentioned protections under any other bilateral or multilateral investment treaties will now, for the first time, be able to submit an investment dispute to binding international arbitration. For example, for the first time in history, Japanese investors will be able to make use of this legislation in relation to investment disputes with Australia, Canada, New Zealand and the US. US investors, on the other hand, will be able to do the same with regards to similar disputes with Australia, Brunei, Japan, Malaysia, New Zealand and Vietnam.
While the current situation looks bleak for passage before the end of 2016, there is reason to be optimistic about congressional approval of TPPA
Secondly, the dispute resolution mechanism afforded under the TPPA is also relevant to both existing and potential non-TPP member state investors: for instance, the TPPA’s dispute resolution mechanism provides an alternative for any potential EU investors wishing to have recourse against the US through arbitration, but who do not like the idea of a court-like system (with an appeal mechanism), as currently proposed in the draft Transatlantic Trade and Investment Partnership Agreement (TTIPA) between the US and the EU.
It follows, therefore, that private individuals and companies from non-TPP member states, who possess an existing or planned investment in a particular TPP member state, should consider carefully how best to structure their investments if they would like to benefit from the TPPA and its dispute settlement chapter. This is especially apt if the dispute involves an EU investor hoping to bring itself within the framework of the TPPA’s (rather than TTIPA’s) dispute settlement mechanism. It is important that any such structuring of investment should occur before a potential dispute with a TPP member state has materialised.
Dispute resolution controversy
Despite the fact that investor-state dispute settlement (IDS) mechanisms have been included in numerous investment and trade agreements, including the North American Free Trade Agreement, and the fact that the US has never lost a case brought pursuant to such mechanisms, the concept is nonetheless controversial in certain legal and political circles: some legal scholars have long maintained that such provisions violate protections afforded to citizens by the US Constitution, including Article III, which establishes the judicial branch of the US government. The US Supreme Court ignored this argument in a 2014 decision, which decreed that domestic courts must defer to the arbitrators’ decision and not review the merits. Thus, at least for the time being, such mechanisms are permissible.
Some political leaders, especially progressives, have complained about the lack of checks and balances involved in this process. In particular, they have raised concerns about the challenge to regulatory sovereignty, while the White House has been criticised for including the IDS mechanism in TPPA. Among the arguments that the Administration uses for insisting that IDS provisions be included is the fact that TPPA, for the first time in history, includes a code of conduct for IDS arbitrators. The lack of standards for arbitrators has been a long-standing complaint about IDS provisions in other agreements, and in addition, the Administration repeatedly stresses that more than 3,200 treaties and other trade agreements already contain similar investor rights.
Political reactions
Beyond the dispute resolution mechanism, TPPA has become highly controversial, and so it is expected that Congress will not vote on it until after the 2016 presidential election, during the usual post-election lame duck session of Congress. Furthermore, it is quite possible that if the votes for passage do not materialise in that timeframe, a vote on TPPA could be postponed until the next Administration.
Different industry groups have raised serious questions about the way that their products and/or services will be treated as part of the agreement. Congressional committees are just beginning to delve into the details of the lengthy agreement and will not return to it in earnest for some time.
TPPA has become a key issue in both the presidential and some congressional campaigns, particularly with Republican senators in the lead-up to the tight re-elections of the coming year. While almost all of the Democratic presidential candidates oppose TPPA, most Republican candidates are either opposed to it or have expressed some concerns – some Republican candidates, however, view TPPA as an important step in maintaining US relevance in Asia and denying China free reign on trade in that increasingly important region. Republican presidential candidate Donald Trump, for instance, refers to TPPA as an example of what a poor job he believes that US trade negotiators have done in protecting US economic interests over the last few decades.
The Trade Preference Authority (TPA), which was authorised by Congress earlier this year and gave President Obama so-called ‘fast track negotiating authority’ so he was able to conclude the TPPA negotiations, passed the House of Representatives by a vote of 218-208, with only 28 Democratic members voting for it. The Senate, meanwhile, adopted the measure by the more comfortable margin of 60-38.
Generally speaking, labour unions and other liberal groups strongly opposed TPA, and continue to oppose TPPA. As a consequence, the Obama administration needs to hold virtually all Republican House votes on TPA in order to secure the adoption of TPPA. Obama administration officials are therefore working diligently with House and Senate Republicans to respond to their concerns sufficiently, in order to secure the votes needed for passage.
As with other recent trade agreements, the domestic politics are intense and can result in considerable delay in congressional consideration. Nevertheless, most agreements are eventually approved when the political circumstances improve after an election and intense lobbying by supportive business and other interests are brought to bear. Therefore, while the current situation looks bleak for passage before the end of 2016, there is reason to be optimistic about congressional approval. Similar debates are occurring in most of the countries party to TPPA, but on balance, it is anticipated the agreement will be approved by most – if not all – signatory countries.
Corporate Governance Awards 2016
Angola
Banco de Fomento Angola
Bahrain
Batelco
Brazil
Ambev
Canada
Sun Life Financial of Canada
Chile
Cencosud
China
Air China
Colombia
Grupo Aval
Cyprus
Hellenic Bank
Denmark
Danske Bank
Germany
Deutsche Lufthansa AG
Ghana
GCB Bank
India
Granules India
Italy
ENI
Kenya
Safaricom
Kuwait
Gulf Insurance Group
Nigeria
Zenith Bank
Peru
Buenaventura
Portugal
EDP – Energias de Portugal
Saudi Arabia
Dar Al-Arkan Real Estate Development Company
Singapore
CapitaLand
South Africa
Mr Price Group
Spain
Iberdrola
Sri Lanka
Commercial Bank of Ceylon
Switzerland
Nestlé
Thailand
Thai Oil
Turkey
Turkish Airlines
UAE
Du Telecom
UK
J Sainsbury
US
NextEra Energy
Islamic Finance Awards 2016
Best Islamic Bank, Algeria
Al Salam Bank Algeria
Best Islamic Bank, Egypt
Al Baraka Bank Egypt
Best Islamic Bank, Germany
KT Bank
Best Islamic Bank, Indonesia
Bank Syariah Mandiri
Best Islamic Bank, Iraq
Cihan Bank
Best Islamic Bank, Jordan
Jordan Islamic Bank
Best Islamic Bank, Kuwait
Kuwait International Bank
Best Islamic Bank, Lebanon
Arab Finance House
Best Islamic Bank, Malaysia
CIMB Islamic Bank
Best Islamic Bank, Oman
Alizz Islamic Bank
Best Islamic Bank, Pakistan
BankIslami
Best Islamic Bank, Qatar
Qatar Islamic Bank
Best Islamic Bank, Saudi Arabia
Bank Albilad
Best Islamic Bank, Turkey
Kuveyt Türk Participation Bank
Best Islamic Bank, UAE
Sharjah Islamic Bank
Best Islamic Bank, UK
Bank of London and The Middle East
Special Global Recognitions
Islamic Banker of the Year
Khalid Bin Sulaiman Al Jasser, CEO, Bank Albilad
Business Leadership & Outstanding Contribution to Islamic Finance
H.E Mr Musa Shihadeh, CEO and General Manager, Jordan Islamic Bank
Best Islamic Asset Management Company
KFH Capital Investment
Best Islamic Brokerage Company
KFH Financial Brokerage
Best Islamic Financial Indices
Al Madar Finance & Investment
Best Takaful Provider
Dar Al Takaful
Best Re-Takaful Provider
Saudi Reinsurance Company
Best Islamic Private Wealth Management Company
SEDCO Holding
Best Sukuk Deal
K-Electric Sukuk Deal, Habib Bank
Best Islamic Finance Advisory Firm
Al Madar Finance & Investment
The Rio Olympics are unlikely to revive Brazil’s ailing economy
Despite the boost in tourism and the increase in jobs that the 2016 Olympic Games in Rio de Janeiro will bring for the city and state, the event is no cure for the economic ills that Brazil is currently facing. The story was much the same when the country hosted the 2014 FIFA World Cup, which, while helping boost tourism and productivity, was unable to do so on the magnitude necessary to drag the eighth-largest economy on the planet out of the crisis that it found itself in then and is still grappling with now.
Despite the government’s optimism, Brazil struggled to entice the 3.5 billion people watching the World Cup on their TV sets to fly out and experience the event in the flesh. And while it did manage to pull in a little over a million foreign visitors to the country for the month-long spectacle – exceeding the 600,000 that its tourism board had predicted – it pales in comparison to the two million visitors that Germany welcomed when it hosted the event in 2006.
Part of why Brazil failed to lure in sports lovers, and why it is unlikely to do any better this summer, comes down to the fact that it has been unable to overcome problems in several key areas, including high crime rates and sub-standard levels of investment in infrastructure. “Brazil has attractions; it doesn’t have competitive prices, promotion, or infrastructure”, Diogo Canteras, a partner at the hotel consulting firm HotelInvest told Bloomberg Business in a interview. “The World Cup wasn’t the generator of tourists that was expected.”
The FIFA World Cup was originally billed at a little over $1bn, but ended up costing the taxpayer more than $11bn. The story is much the same for the upcoming Olympics, with the event scheduled to cost a little over $15bn. The government claims that it will improve the global image of Brazil, reminding investors of the huge economic potential of the country, but it is difficult to quantify to what extent.
Four short years ago, the country was the favourite of emerging markets. Since then, however, it has suffered greatly from the collapse of commodity prices
One thing is for certain: the Olympics will help rally the country in the aftermath of widespread corruption allegations – something that the country had thought was a relic of its distant past. With the games fast approaching, many are hoping that the country can use the event as a springboard to move forward and tackle the fundamental weaknesses in its economy, helping it to realise its full potential.
Olympic dreams
Two years ago in March, Federal Police carried out an investigation into money laundering and allegations of corruption at the state-owned oil company Petrobras. During the course of their investigations police discovered that the company’s board of directors had allegedly been accepting bribes from various construction companies in exchange for lucrative development contracts.
The fallout from what is now referred to as the ‘Petrolão scandal’ has been huge to say the least. Investor confidence, both inside and outside Brazil, has suffered greatly. The corruption cases have added an extra layer of pressure on the country’s economy, which has to deal with a depressed commodities market and a global reduction in demand for its exports brought on by the economic slowdown in China.
“When you have very large construction companies and very large oil companies involved in a scandal like this people do not want to sign contracts”, Rogerio Studart, Associate Professor at the University of Rio de Janeiro and former executive director at the World Bank told World Finance. “They do not want to make decisions when it comes to long-term investments. That brings the economy down even further.”
The arrest of prominent business leaders such as Marcelo Odebrecht and André Esteves, along with the detention of major politicians like Delcídio do Amaral at a time when the country needs strong leadership has created a real sense of disappointment among the Brazilian people. Not only has the corruption scandal stripped the country of the leadership it needs to guide it through the current crisis, but it has also reminded those from Brazil that corruption is still alive and well. Many commentators are hoping that the Olympic Games in Rio will help the country heal from the recent bout of scandals, acting as a beacon for the country to rally and unite around.
“Brazilians need economic growth, yes, but they also need dreams”, said Lourdes Casanova, a Senior Lecturer and Director of the Emerging Markets Institute at the Johnson School of Business at Cornell University. “The Olympic Games is an opportunity for Brazil to show the world that it has come of age and is capable of standing side by side with other economic powers.
“I’m from Spain, and of course the Olympic Games in Barcelona in 1992 completely changed the city and the perception of the country in the eyes of the world, so I am hoping that the same will happen for Brazil. But the mood in the country is so low right now that, even though I am sure that the Governor of Rio [de Janeiro] will put on an incredible event, the tremendous economic downturn and the ongoing political divide is bound to have a negative impact on the event.”
From darling to dismal
It would be foolish to write the Brazilian economy off, as so many have already done. Four short years ago, the country was the favourite of emerging markets. Since then, however, it has suffered greatly from the collapse of commodity prices and is discovering just how dependent it is on natural resources to sustain its economic prosperity.
The country’s main export destinations are China ($46.1bn), the US ($25.2bn), Argentina ($19.3bn), the Netherlands ($16.3bn) and Japan ($8.58bn), all of which are dealing with their own unique set of economic challenges, leading to a huge decrease in demand for Brazilian exports.
The competitive devaluation of currencies around the world is another huge problem for Brazil. The engineered decline of the Brazilian real should have helped increase the attractiveness of its exports, but this has not happened to the extent that officials had hoped (see Fig. 1). This is because across the world governments have undermined the impact of this monetary policy by taking similar action themselves.
Another by-product of the global devaluation of currencies is that the purchasing power of the Brazilian real has been significantly eroded, driving up the price of imports. A decline in export demand and a reduction of purchasing power, however, are just two prongs puncturing the country’s economy.
According to Studart, there are several layers of the crisis in Brazil. One has to do with the proclivity of governments and people in general to not realise that the good times will eventually end. “Something that happens to resource intensive economies when prices go up very fast is that they tend to think that the trend is going to last forever”, he said. “So they start being more carefree with certain variables. In Brazil there was clearly a problem with the competitiveness of its industrial sector that was caused by a number things.”
One revolves around inadequate levels of investment in infrastructure, which has impacted the competitiveness of Brazilian businesses across all industry sectors. The Latin American powerhouse has also suffered from a major decline in its industrial sector at the hands of such structural weaknesses and, therefore, productivity has remained low for some time, driving up unemployment. In fact, the unemployment rate in the country rose to 6.9 percent in December 2015, according to data compiled by the Brazilian Institute of Geography and Statistics (IBGE), up from 4.3 percent during the same period the year previous.
“Throughout the commodities boom, these issues could have been dealt with, but there was a continuous decline in the animal spirit in the industrial sector, and so there was a decline in investment in that area”, claimed Studart.
What is more, as pace of economic growth in Brazil began to decline, the government tried to be counter-cyclical. But, according to Studart, the government ran into troubles while it was attempting to enact this fiscal policy because of how rigid its market economic management system is.
“You cannot pump liquidity into the markets like the US and the EU have done, because you have a very tight inflation target system”, he stated. “And you cannot cope with public expenditure because there is a fiscal responsibility law in place. So, in order to deal with all this, the government did things that were not by the book.
“Then the elections came along and you had the crisis of confidence and credibility and in order to counter that they decided to engage in a fiscal and structural adjustment, along with a massive reduction in public expenditures.”
What this created was an economic environment where public spending was down and inflation was through the roof. When this happens the central bank’s only option is to raise interest rates, which forces businesses and individuals to cut back on spending, weakening the economy in the process. Combine all this with a depressed commodities market, a massive drop off in demand, and you have a recipe for economic catastrophe.
Not to be written off yet
Despite the economic woes the country is battling, there are a lot of reasons to remain optimistic. Right now, the exchange rate – which has made Brazil relatively inexpensive – has led to a massive hike in the levels of FDI coming into the country. According to the Banco Central do Brasil (Central Bank of Brazil), the country has attracted more than $15bn in FDI in December 2015, which is way above market expectations.
Overall, the long-term economic forecast for Brazil is still good. There is a significant amount of consolidations and M&A activity emanating from international investors. Brazil has become cheaper in terms of company evaluation, with the crisis impacting the prices of assets and commodities, forcing investors to take a second look at the country.
“The productive investors have a long-term view”, added Studart. “By any measure Brazil is a good investment. It has achieved a lot, but has a long way to go. I am pessimistic in the short term, but I remain optimistic in the long run. Investors, both domestically and internationally, feel the same way I do.”
It is important to remember that Brazil has had crises before, and even though this is one of the largest it has ever had to endure, it is arguably in the best place it has ever been to cope with the downturn. Many of its financial and government institutions, despite the recent scandals, are the best they have been in a long time, which is reason for investors to remain optimistic. Put simply, Brazil may very well be a mess, but it is no Greece.
“Over the last 10 years the country has had so many mood swings when it comes to analysing what is happening in the world that we should be more humble and admit that we may have got it wrong again”, argued Studart.
“I remember at the beginning of the crisis, everyone was talking about how emerging markets and BRICs would save the world and the global economy would recover. Every year there seems to be a shift in focus from better to worse.”
In his opinion, investors and economists need to have a more long-term perspective and should be thinking about where their investments are going to be in the next 10 years or so.
“If you apply this thinking to a country like Brazil, then you realise that this is a country that has faced difficulties, but it has been building its fundamentals and is likely to prevail over the long term.”
The Olympics, therefore, will hopefully serve as a way for the country to regroup, offering a short reprieve and a slight boost in economic activity at a time when the country needs it most.
If the event is a success and operates within budget, which it is forecast to do, then it will help lift the spirits of those within the country and cause those on the outside to remember all the good things, economically and otherwise, that the country has to offer.
The Middle East has ample access to solar power, but is turning to nuclear
Since the Fukushima meltdown in 2011, most of the world has been turning its back on nuclear energy. Although technically cleaner than oil, the risks that it carries, as well as the cost, are deemed by many as too great to pursue. Following the disaster, Germany began to permanently close its reactors; Spain and Switzerland banned the construction of new plants; and multiple other countries took an official position against nuclear power in 2013. It may therefore come as a surprise that a slow adoption of nuclear power can be seen in the Middle East (see Fig. 1), with several countries attempting to secure a spot in the nuclear club.
Last November, Egypt took its first steps towards instigating a nuclear power programme by signing a new deal with Russian state-owned firm Rosatom. The Dabaa-based plant, which will be comprised of four power units that each generate 1,200mW of energy, is expected to be fully operational within the next 12 years. Along with its construction duties, Rosatom has agreed to finance the $20bn project, which will be payable over 33 years, starting with an 11-year grace period.
Jordan also signed a $10bn deal with Russia last year, which will see two reactors built in the north of the country, while Saudi Arabia plans to build 16 units over the next 20 years. Neighbouring UAE, on the other hand, started its own nuclear programme in 2012, when it accepted a $20bn bid from a South Korean consortium to construct four commercial nuclear rectors by 2020. And, of course, there is one country in the region that is already generating nuclear power – Iran.
The arguments for nuclear
There have been various reasons given as to why these states are currently implementing incredibly costly nuclear power programmes. Perhaps the most obvious and plausible is that through nuclear energy, a vital shift away from oil can be achieved. The diversification of a state’s energy mix is increasingly important in today’s unpredictable landscape, with achieving greater sustainability and resilience being key factors in modern-day governance. For oil producing nations, by introducing an alternative energy source, they can benefit from greater export revenue, a commonly cited opportunity cost missed out on due to domestic demand. For non-oil producing nations, such as Jordan, the need for alternative energy is even greater, being a net importer.
“All countries seek to improve the wellbeing of their people by providing affordable and reliable supplies of electric power. Middle Eastern countries are no exception”, William D Magwood, IV, NEA Director General of the OECD Nuclear Energy Agency (NEA), told World Finance. “Nuclear power plants can produce electricity at a large scale for decades without emitting harmful air pollution, enabling economic growth and improved quality of life. While some countries in the region could produce electricity using fossil fuels, doing so consumes valuable export commodities that can have greater value on the global market. In addition to addressing that concern, building nuclear power plants helps diversify the energy supply of any country, making their economies less vulnerable to disruption.”
Countries in the process of economic development naturally contend with a rapidly growing demand for energy. This is particularly true given that when a state opens up more opportunities for business and investment, SMEs multiply in number and an expansion of the middle class takes place – both of which play a considerable role in mounting energy requirements.
The diversification of a state’s energy mix is increasingly important in today’s unpredictable landscape
At present, Egypt is stunted by frequent electricity cuts that disrupt its industries, as well as energy subsidies that cripple the state’s budget on a yearly basis. Quite simply, the need for Egypt to implement a new energy strategy is nothing short of urgent, particularly given its swift decline in gas production. However, with a nuclear programme now firmly afoot, it would appear that greater energy securitisation is imminent for Egypt, which could act as a much-needed catalyst to its struggling economy.
Politically speaking
While there are certainly valid points to be made for energy diversification and increasing export revenue, there is also another side of the picture to be considered. Firstly, it is worth noting that having nuclear power comes with a certain level of international prestige for any state: possessing the technology, capital and expertise required to generate nuclear electricity is a coveted prize for many internationally (See Fig. 2), and so nuclear power is a symbol of strength and a powerful motive for any notable player in the game of global politics.
“It is political because Iran started the process of acquiring nuclear energy way back in the late 1990s, which came to light in 2002”, said Anoush Ehteshami, Professor of International Relations at Durham University. “The completion of the Bushehr power plant by Russian scientists and technology has galvanised other regional countries with an interest, but also [those] with the resources, financial in particular, to seek nuclear energy. They do not want to be lagging behind what was seen, or what Iran portrays at least, as major technological advances. And so these countries, given their financial abilities, felt more or less compelled to follow suit.”
Refuting Iran, which is a major Shia power in the Middle East, is a huge factor for regional players, especially given that tension is once again mounting between Iran and Saudi Arabia as the two carry out a bloody proxy war in Yemen. While keeping up with Israel is also an influential factor, it would seem that Iran’s deal with the P5+1 countries was the real catalyst for Egypt in particular.
Historically speaking, Egypt has long played a leading role in the Middle East, often acting as the bridge to the West and the cultural epicentre to the region. Yet a prolonged economic downturn in recent decades, together with the rise of Turkey, has seen Egypt slip from its once-prominent regional position. As such, it would appear that Cairo endeavours to regain this role through its admission to the nuclear club.
Nonetheless, achieving this is no simple task: Ehteshami told World Finance: “I think Egypt, given its historical weight in the region, has always aspired to be a leader in the region. The general [General Abdel Fattah al-Sisi] is now more or less back in charge, and would want to restore Egypt to what they see [as] its rightful place as the main Arab party. But I don’t see that happening myself: I think Egypt is still a limping sphinx, I don’t think it has the financial or the political capital to reassert itself in the region. This nuclear gambit is little more than an expression of interest to appear to the rest of the region as a power to rival that of Iran.”
That said, it is worth noting that Egypt’s deal with Rosatom was announced shortly after the Turkish attack on a Russian fighter jet in its airspace, which indicates a noteworthy shift in Egypt’s geopolitical standing. With relations between Turkey and Russia expected to worsen, Egypt’s role as Russia’s regional partner could very well augment in the coming years. Also vying for greater regional influence is Saudi Arabia, which sees itself as the natural leader of the Gulf States in particular. In order to consolidate this role – and extend further still – it is vital for Saudi Arabia to stay ahead of the game in terms of military and financial power, as well as technological prowess.
A flawed system
Naturally, achieving nuclear power is a complex process: there are various hurdles to overcome, not least of all the issue of finance for cash-strapped states. “The most significant challenge that developing economies will face is the limited human and industrial infrastructure available to support the safe and efficient operation and safety regulation of nuclear plants. It can take many years to build an appropriate infrastructure. For that reason, many countries in the region have undertaken initiatives to train the engineers and technicians that would be needed to support nuclear operations”, Magwood added.
“Successful introduction of nuclear plants will require the establishment of a strong, independent regulator, first and foremost. If this is done, countries can proceed to seek competitive proposals to build plants from established suppliers who can build plants safely and cost-effectively. They will also need to ensure that the suppliers and contractors needed to support efficient operations will be available over the long operational life of the nuclear plants.”
Moreover, there are several holes in the economic argument presented by nuclear-seeking Middle Eastern states: building a nuclear reactor costs at least $5bn a piece – an unfathomable expense for struggling economies such as Egypt and Jordan; hence the partnership with Rosatom. However, such agreements obviously do not come for free, and while Saudi Arabia and the UAE are in a better position to carry out large-scale infrastructure projects, they too face difficulties in terms of state revenue that have resulted from the current oil price crisis.
“The benefits can only be in the long-run because the capital outlay for generating nuclear power is actually quite substantial”, explained Ehteshami. “It will be many years in the case of Iran, for example, [before] the Bushehr power plant will actually return a profit. So these are all in essence state-managed projects, but none of these states have got bottomless pits of money.”
What makes the scenario even more provocative is that all of these countries already have far easier access to an abundant source of energy: solar power. It therefore seems more logical for them to pursue this sustainable energy source in order to meet growing domestic demand and reduce the volume of oil exported. Furthermore, the cost of generating solar power is substantially less than that of nuclear power, particularly when considering the cost reductions that have permeated the industry in recent years.
Yet, at present, Morocco stands out as the only country in the region taking discernible steps to tap into this enviable asset. The country recently started construction on the world’s largest solar energy production plant, which will allow its move away from a heavy reliance on imported fossil fuels. Rabat has even pledged that by 2020, 42 percent of domestic electricity demands will be supplied by solar energy. That said, the UAE and Jordan have also set targets to expand solar power generation in the coming years, albeit to a lesser degree, which thus makes their nuclear strategy even more curious.
The Russian factor
As a result of the plummeting rouble, the Crimea conflict and economic sanctions, Russia itself is cash-strapped at present, making its mammoth investments in the Middle East somewhat surprising. Certainly, Rosatom’s experience in the field is abundant and the company is the world leader in terms of the number of reactors it currently has under construction (see Fig. 3); factors which make it a logical partner for such projects. Yet it can be argued there is more to the state-owned firm’s big business development push in the Middle East than simply market infiltration.
Receiving financing for these multi-billion dollar projects politically ties states such as Egypt and Jordan to their benefactors – especially given the regional significance of the projects in question. As such, Russia’s partnership indicates a new anchor for the state in the area, at a time when the US is losing much ground geopolitically.
At present, relations between the US and Egypt are at their worst in perhaps decades, as a result of the support lent by the former to the Muslim Brotherhood during its brief stint in power. With a military leader now back at the helm, incumbent ruler Abdel Fattah al-Sisi sees the US as an unreliable partner, and as such is in the market for another powerful ally. Furthermore, the US’ role in Syria and Iraq has reduced its credibility, arguably for the entire region, while its reacquainted allegiance to Iran will certainly cool relations with other nations. All of these factors will collectively contribute to Russia’s mounting political influence in the region.
On your marks
Since the announcement of Egypt and Jordan’s respective deals, there has been talk of a potential nuclear arms race in the Middle East. Of course, such a scenario would take shape in the very long-term, given the length of time and the mammoth costs required to build and maintain nuclear reactors, yet it cannot be denied that such a possibility exists.
Although nuclear energy is indeed a complicated pathway to nuclear weaponry, the former nonetheless enables the technology and expertise required for the latter. As Ehteshami explained, the region is now playing catch-up to Iran, therefore it would be logical to assume that neighbouring nations desire to be on par militarily with their political rival as well.
Military might is a highly significant and pivotal factor in domestic policies for countries in the Middle East, particularly given the levels of instability and turmoil that persist in the region. It is for this reason that Saudi Arabia, despite dealing with a drastic fall in state revenue since the 2014 collapse of oil prices, increased its military budget by 17 percent – to $80.8bn – between 2013 and 2014, making it the fourth largest in the world. Such a financial manoeuvre indicates the sheer importance of maintaining military precedence for leading players in the region and contributes further to the argument that a Middle Eastern nuclear arms race could in fact be on the cards in the not-too-distant future.
The Middle East is a volatile region, and individual states still have a great deal of work to do in their respective stages of development. For some this involves securing a reliable source of energy, while for others it means moving firmly away from oil dependency. In both cases, nuclear energy offers a solution. Yet this solution comes at a great financial cost: given the current global economic landscape, plus the slowdown facing developing countries, there is much to be questioned when the latter decide to pursue multi-billion dollar super projects.
As such, it appears that nuclear energy is the latest pawn in the regional game of geopolitical chess that afflicts the Middle East. With financial partners at the ready to support states in fulfilling their nuclear goals, it seems unlikely that the pool will remain at its current size. Aside from the possibility of plunging these countries into deep economic crisis through the financial burden of nuclear power generation, there is also a real chance that tensions will continue to heat up in the region as players attempt to assert their dominance over one another. And, given most nations’ strained relationship with Iran – the state that set the nuclear precedent in the first place – there is no telling what the end result could be, be it in one decade or in five.
The nature of shipbreaking is casting a shadow over the shipping industry
Every year, thousands of shipping vessels succumb to rust, corrosion and metal fatigue; no longer deemed fit for purpose. When their time eventually comes, these goliaths of the sea are broken down in an attempt to recoup as much money from their demise as possible – a process known as shipbreaking. Ship breakers strip out absolutely everything: nothing is wasted. Any parts that can be sold for re-use aboard another vessel are salvaged first, with the remaining morsels extracted and sold for scrap.
Shipbreaking is an extremely profitable business. Scrapping companies pay roughly $400 per tonne, and so, considering the sheer size of the ships that come ashore to be dismantled, the process can easily add up to scrappers collectively paying a total of anywhere between $3m and $10m for a single vessel.
Shipbreaking takes place all over the world, but the manner in which it is carried out differs considerably: in developed countries, the process is handled the by the book, with scrapping companies forced to adhere to strict environmental guidelines outlined by the United Nations Environmental Programme’s (UNEP) 2003 Basel Convention, which stresses the importance of controlling the trans-boundary movements of hazardous wastes and their disposal.
As a consequence of the comprehensive enforcement of these rules, ship breakers in developed countries must ensure that practically every part of the decommissioned vessel is recycled, with only the small amount of unrecyclable materials left over as waste. The guidelines also ensure that before workers begin the process of dismantling a ship, all potentially dangerous materials, including any toxic or flammable gases and liquids, are removed. This procedure is carried out not only to protect the surrounding environment from leakages or contamination during the scrapping process, but also as a safety precaution for those tasked with carrying out the heavy lifting.
Unfortunately, the vast majority of shipbreaking does not occur on the beaches and dry docks of developed nations: more than two thirds of the industry is based in developing countries, specifically India, Pakistan, Bangladesh and China (see Fig. 1). These countries have historically struggled to meet the international standards of practice, with employees forced to deal with working conditions that threaten their health and safety each and every day. What’s more, many of the workers that are tasked with carrying out this difficult and precarious process receive very little in the way of training, and are poorly paid for their labour.
Major industry bodies have campaigned tirelessly in the hope of getting South Asian scrap yards to adhere to international guidelines in an attempt to reduce shipbreaking’s environmental impact
“Without a voice in the workplace, daily abuses go unchallenged”, Nazim Uddin, the leader of the Bangladeshi shipbreaking union, explained in a report conducted by the global workers union IndustriALL. “Shipbreaking workers have miserable conditions. Workers are paid daily – no work, no pay. They receive no paid leave at all, no bonus, no gratuity, and have no job guarantee. Employers pay no compensation to the killed workers’ families. The High Court rules that each killed worker’s family should be compensated BDT 500,000 ($6,400), but employers do not respect this.”
In response to such allegations, major industry bodies, governments and numerous non-profit entities have campaigned tirelessly in the hope of getting South Asian scrap yards to adhere to international guidelines in an attempt to reduce shipbreaking’s environmental impact, and to improve the lives of workers involved in the industry.
All hands on deck
One of the loudest voices in the battle to improve the conditions in the ship recycling sector belongs to the International Chamber of Shipping (ICS). This organisation has helped to raise awareness about the sub-standard practices that take place within the shipbreaking industry, along with the environmental impact that these have and the dangers that they pose to workers.
“The industry accepts its responsibility to promote the safe and environmentally sustainable disposal of ships in the world’s ship recycling yards, the majority of which are located in developing countries”, Peter Hinchliffe, ICS Secretary General, said in a statement. “Adherence to these transitional measures should be seen as a sign of good faith prior to the entry into force of the IMO regime. But they will also help companies avoid falling foul of the separate EU ship recycling regime, which started to take effect on 31 December, and which is also relevant to ships flying non-EU flags.”
More recently, the ICS has reached out to its members around the world, encouraging them to follow a new set of transnational measures. This will in turn help those members to comply with the International Maritime Organisation (IMO) Hong Kong Convention once the global regime comes into force. The ICS has expressed its hope that the measures it has outlined will help ship owners ensure that when their vessels reach the end of their life on the high sea, they will be recycled in the appropriate manner and scrapped by ship breakers using the correct procedures.
“The transitional measures demonstrate that the shipping industry is playing its full part”, Hinchliffe added in his statement. “It is disappointing that after six years the Hong Kong Convention has still only been ratified by a handful of IMO Member States. Governments need to make this a far more urgent priority if they are serious about improving conditions in ship recycling yards on a global basis.”
As such, despite increased regulatory pressure and the support of international trade associations like the ICS, conditions in many South Asian scrap yards are still abysmal, and have shown little sign of improving.
Graveyard shift
The men whose job it is to dismantle these end-of-life ships once they have run ashore on the beaches of South Asia are more often than not poor, unskilled migrants. The vessels in question are usually full the brim with toxic materials, and the workers must contend with a range of highly flammable gases and liquids. To make matters worse, these unqualified workers are rarely supplied with adequate levels of safety equipment or the essential tools that could make the shipbreaking process altogether far safer and simultaneously reduce the toll it takes on their physical health.
According to the website Shipbreaking in Bangladesh, which is owned and operated by the non-profit social development organisation Young Power in Social Action (YPSA), in order to make up for the lack of equipment that they receive, workers in shipbreaking yards often resort to crude, improvised methods in order to try and protect themselves: “When a new ship arrives, there are containers, chambers and tanks which contain oil, petroleum and poisonous gases”, according to the website.
“One method used for checking the level of danger in these parts of the ship is to lower down chickens [on] a string to check whether there are dangerous gases. If the chickens survive, the first workers will enter to clean for oil, petroleum and other flammable substances. The flammable substances are often burned off before the cutters enter to rip the ship apart. Gas explosions [are] a common phenomenon.”
If the threat of explosions and poisonous gases wasn’t bad enough, workers are also at risk of being crushed to death by cranes and other heavy lifting equipment, which are placed on slick, muddy sand that is unable to adequately support them. The terrible conditions that these labourers work in combined with the lack of adequate safety equipment and the complete disregard for international regulations has led to thousands of ship breakers losing their lives.
The Gadani shipbreaking yard in Pakistan is one of the world’s largest ship recycling facilities. According to an IndustriALL article, its 15,000-strong workforce regularly works 12 hours a day, seven days a week, under horrendous conditions, while their pay is around PKR 12,000 a month – a figure that the union equates to around $113. The organisation also claims that workers at Gadani have no access to clean drinking water or first aid. The net impact of all this is that at this specific ship recycling yard, more than 19 people lose their lives every year.
Changing the tide
In order to bring an end to the needless loss of life and reduce the environmental impact of the industry, campaigners are urging countries around the world to implement guidelines outlined in the Hong Kong Convention, which was adopted by the IMO in 2009. However, so far only Norway, the Republic of Congo and France have fully ratified the convention, while Italy, St Kitts and Nevis, Turkey and the Netherlands have expressed their willingness to adopt the guidelines outlined in the agreement.
“Ship building for 130,000 workers in South Asia is predominantly done in medieval conditions”, said Jyrki Raina, General Secretary of IndustriALL, in the same article. “It is shameful that five years have passed since the Hong Kong Convention’s adoption and only three countries have ratified… The Hong Kong Convention will change lives.”
For the convention to enter into force, 15 states, representing 40 percent of the world’s merchant shipping (by gross tonnage), must be on board. As such, this initial undertaking is evidently not good enough. More widespread support is clearly required if these life-changing policies are ever to be put into effect.
A spotlight on the man who broke the Bank of England
On September 15 1992, the British Chancellor Norman Lamont met with Robin Leigh-Pemberton, the then governor of the Bank of England. The Friday before, on September 9, currency speculation had forced the Italian lira to devalue. As a consequence, Britain was facing the same prospect, putting the European Exchange Rate Mechanism under increasing strain. The two men agreed that they would defend the value of the pound through aggressive action, by buying up the sterling of foreign currency exchange markets.
However, as the end of the meeting neared, news came through that Helmut Schlesinger, the head of the German Bundesbank, had told The Wall Street Journal and the German newspaper Handelsblatt that there would have to be a realignment of currency values within Europe’s exchange rate mechanism. As part of the mechanism, Britain’s currency was supposed to shadow Germany’s. Such a statement, just as the UK was attempting to stave off currency devaluation, was not welcome news. “Schlesinger’s remark was tantamount to calling for the pound to devalue”, Sebastian Mallaby noted in More Money than God, his 2010 book about the history of hedge funds.
Following this news, Leigh-Pemberton contacted Schlesinger, who claimed that his comments had not been authorised. He went on to assure his British associates that the remarks would be clarified in a statement the following day. The problem, however, was that while European markets then closed for the night, across the Atlantic they were still very much in motion. News of the situation soon reached George Soros’ Quantum Fund in New York.
Playing the market
Business magnate and financial investor George Soros had only a month earlier started to build up a considerable short position in sterling. If the pound were to devalue, Soros would make an immense profit. By that afternoon, Quantum Fund’s chief portfolio manager had noticed the news of the German central banker’s fateful comment. As he informed Soros, the magnate saw his opportunity to move against the pound and make his short pay out. “Go for the jugular”, he told his portfolio manager.
The fund then initiated a massive sell-off of the pound and encouraged others to do the same. As European banks attempted to purchase the pound in order to prop up markets the next day – a day that was to become known as Black Wednesday – they saw few results. Two orders of £300m were put in before 8:30am on September 16, but to no effect: Soros’ fund was dumping pounds at a faster rate than the Bank of England could buy them.
“The financial markets generally are unpredictable… The idea that you can actually predict what’s going to happen contradicts my way of looking at the market” – George Soros
As The Times quoted Soros in the aftermath: “Our total position by Black Wednesday had to be worth almost $10bn. We planned to sell more than that. In fact, when Norman Lamont said just before the devaluation that he would borrow nearly $15bn to defend sterling, we were amused because that was about how much we wanted to sell.”
Attempts to raise the interest rate further proved fruitless, even with rates at one point reaching 12 percent, followed by a promise to raise them by a further three percentage points. By 7pm in the UK, Britain had been forced out of the Exchange Rate Mechanism, its currency devalued. Soros’ short position paid off, earning himself over $1bn and the title of ‘the man who broke the Bank of England’ with it.
Finding his fortune
Soros was not a man to be underestimated. After surviving occupation by the Nazis and then by the Soviets in his native Hungary, Soros moved to the US and built himself a financial empire and fortune through his genius as an investor, earning him a spot among the wealthiest men in the world.
Born in 1930 to parents Tivador and Elizabeth in Budapest, Hungary, Soros was originally known as George Schwartz. Tivador, a lawyer and World War One veteran, changed the family name to Soros in 1936, and taught his son the constructed international language Esperanto from an early age.
When George Soros was 13 years old, Hungary was occupied by Nazi Germany. The Jewish Soros family was in grave danger, and survived by going into hiding and using forged documents. The following year, in 1945, Soros also survived the viciously fought Battle for Budapest, which saw close-combat, house-to-house fighting between the Germans and the Soviets.
In 1947, Soros emigrated to London, leaving behind the then Soviet-occupied Hungary. Scraping by as a railway porter and waiter, he studied philosophy at the London School of Economics (LSE) under the esteemed philosopher Karl Popper. After graduating with a bachelors and PhD in philosophy from the LSE in 1954, the future hedge fund mogul found a job selling souvenirs wholesale to seaside shops on Welsh beaches. Not content with this career, Soros applied for jobs at a number of merchant banks, although with little luck, facing a number of rejections or ridiculing interviews. Eventually, however, Singer & Friedlander – a financial services firm based in London – decided to take him on. Soros joined the company as a clerk before moving to the arbitrage department.
Two years later, on the advice of a colleague, he applied for a position at the brokerage house FM Mayer of New York. Here he worked as an arbitrage trader, focusing on European stocks. In 1959 he started working as an analyst of European securities at Wertheim & Co., where he further developed his theory of reflexivity, something that he had first established while studying at the LSE. Building upon the thought of his former teacher, Popper, Soros’ theory aimed to explain the nature of market fluctuations. In 1963, Soros served as a vice president at Arnhold and S Bleichroeder, and it was here that he opened a number of funds, honing his investment strategy and theory of reflexivity.
After developing his method, Soros was able to start applying it in practice, beginning with a fund that he set up in 1966 with $100,000 of his employer’s money. In 1970 he set up his own firm, Soros Fund Management, which eventually grew to be one of the most successful hedge funds in the world.
With an aggressive trading style and a keen eye for short sell speculations, his fund quickly began seeing returns in excess of 30 percent per year, and twice posted annual returns of more than 100 percent. Although he gave up day-to-day hedge fund management in the 1980s, Soros still exerted considerable control over the organisation and continued to make huge profits by playing the market, eventually making him one of the richest men in the world. The US-Hungarian citizen is today estimated to have a net worth upwards of $24bn, and along with being counted among the 30 richest men and women in the world, he is known as the world’s richest hedge fund manager and one of the top 10 richest Americans.
With more free time and cash to spare, Soros was then able to branch out into another interest of his: politics and charity. As early as the 1970s, Soros had started to fund noble causes, including support for dissidents in communist eastern Europe in the 1970s and backing those opposing South Africa’s apartheid system.
In 1993, Soros founded the Open Societies Foundation, which has since dedicated millions of dollars to causes in the pursuit of democracy and liberalism. The organisation supports civil society groups around the world, hoping to promote justice, education, press freedom and public health. Among his most notable work has been the pursuit of the democratisation of his homeland, along with other eastern European nations that were suffering in the grasp of communism. He has also supported a number of other causes, such as advancing the rights of the Roma people in Europe and reforming US drug and immigration laws. The foundation reported a yearly expenditure of $827m in 2014.
Upon receiving an honorary degree from the University of Oxford, Soros was asked how he would like to be introduced during the ceremony. He replied: “I would like to be called a financial, philanthropic and philosophical speculator.”
George Soros in numbers
$24.2bn
Soros’ estimated net worth, 2015
29th
Soros’ position on Forbes’ 2015 ranking of the world’s billionaires
$10bn
The amount of sterling short sold by Soros’ firm on Black Wednesday
$11bn
Donations to various causes between 1979 and 2015
Men of business
The US is often noted, in comparison to Europe, for its lack of prominent public intellectuals – not for want of thinking men or women, intellectuals in the US have, for the most part, tended not to capture public imagination as they have in Europe. Rather, the country seems to look more to men who have proven themselves in the practical world of business and finance.
Acquiring a fortune in the world of business is more of a prerequisite to catching the eye of the American general public than writing an abstruse thesis at the École Polytechnique, or ruminating on the left bank of a certain river. However, the history of his overwhelming success has turned George Soros into someone that people listen to.
American capitalism and the opportunities it offers have produced many such public figures, but few as prominent as Soros. Along with his long list of philanthropic pursuits and advocacy for democratic causes around the world, Soros has positioned himself as a dispenser of economic and financial prophecy and analysis. His success in the industry has allowed him to take up the mantle of market guru. It’s hard not to at least consider the advice of a man who has the achievement of short selling one of the world’s largest economies attached to his name, as morally dubious as such an accomplishment may be.
The year 2015 had its fair share of financial crises and economy-centric headline stories: emerging markets saw their growth slow, and some, such as Brazil, entered crisis point. Oil prices continued to hit record lows. China saw its growth slow down, unbound volatility engulfed the world’s stock markets, and the eurozone stared down Greece, in what very nearly resulted in Greece’s withdrawal from the monetary union.
Less than a month into 2016, however, financial analysts were already predicting that the coming year would be even worse. Most notably, RBS and Société Générale both released ominous warnings of impending financial turmoil, while the Chancellor of the UK, George Osbourne, more soberly hinted at potentially troubling global economic conditions in the upcoming months.
Soros was another analyst to warn of troubled waters ahead: in early January, he announced that we were going to be facing 2008 all over again, as the current conditions in global markets were reminiscent of that fateful year. “China has a major adjustment problem”, Soros warned at an economic forum in Sri Lanka in January 2016. “I would say it amounts to a crisis. When I look at the financial markets, there is a serious challenge which reminds me of the crisis we had in 2008.” As a man who has made his fortune from shorting markets and making confident financial bets on global markets and the future of the world economy, his advice is perhaps worth heeding.
The future of Arctic oil is more uncertain than ever
The great Arctic oil crusade suffered a setback last year when Shell finally called time on its multi-billion dollar Alaska project. Speaking about the decision, sources at the Anglo-Dutch multinational said that the reserves were “not sufficient to warrant further exploration”, despite the fact that more than $7bn had already been spent on offshore developments in the Chukchi and Beaufort Sea. After years of controversy and no shortage of talking points, Shell decided that the risks to its reputation and bottom line were simply too great to stomach. Environmental groups were all too pleased to hear it.
“We hope this will provide a reality check to other companies considering the unpredictable proposition of Arctic drilling, and that investors will transition their funds instead towards low-carbon solutions”, wrote Alexander Shestakov, Director of WWF’s Global Arctic Programme. Greenpeace’s UK Executive Director, John Sauven, added in a statement: “Big oil has sustained an unmitigated defeat. They had a budget of billions, we had a movement of millions. The ‘unpredictable regulatory environment’ that forced Shell out of the Arctic is otherwise known as massive pressure from more than seven million people. For three years we faced them down, and the people won.”
However, as much as environmental groups looked on the announcement as proof that producers were bowing to outside pressure, in reality, this was not quite the case.
Arctic oil is among the worst casualties of the recent oil price slump, which has seen the cancellation or delay of an estimated $380bn in planned projects, according to Wood Mackenzie. What’s more, with 68 major projects – the equivalent of 27 billion barrels of oil – put on hold, it’s little surprise that major names like Shell are scaling back their ambitions and pulling out of capital-intensive operations.
“Company budgets have shrunk drastically and investors are favouring those delivering severe capex cuts”, according to a Wood Mackenzie report. “As a result, there is a growing backlog of deferred greenfield and incremental developments that require significant investment” – of which Arctic oil plays a major part.
The oil industry backslide amounts to little more than a minor setback for what remains a major growth opportunity
Arctic opportunity
This being said, rather than a nail in its coffin, the industry backslide amounts to little more than a minor setback for what remains a major growth opportunity. “Shell’s lack of success is a setback for offshore Alaska exploration and the Chukchi Sea in particular, but does not have wider implications”, Dr Andrew Latham, Vice-President of Global Exploration Research for Wood Mackenzie, told World Finance.
According to a Eurasia Group report for the Wilson Centre, the Arctic is host to an estimated 1,670 trillion cubic feet of natural gas and 90 billion barrels of oil – about 30 percent of the world’s undiscovered gas and 13 percent of its oil. As much of a setback as Shell’s Burger J well is, it’s by no means enough to dampen the industry’s enthusiasm for what is still the most underutilised pool of hydrocarbon resources left on the planet.
For as long as the oil price sits below $50 per barrel, oil majors are unlikely to embrace the Arctic opportunity with quite the same fervour as before. Shell, Statoil and others laid the foundations when oil was traded at around $100 per barrel, but the price collapse in recent months has left billions of barrels beneath the surface and oil majors wondering whether a more appropriate time will ever arrive.
Nonetheless, with OPEC members in possession of 72 percent of proven oil reserves, the Arctic has been hailed as the last great frontier for producers – that is, if they are ever able to unearth the goods. “Low oil prices have generally dampened enthusiasm for oil and gas exploration everywhere, with frontier drilling hardest hit. Companies are focusing their reduced budgets on lower-risk, near-term opportunities, such as appraisal of promising discoveries”, said Latham. “Drilling will hold up best in basins with existing infrastructure and tax shelter for exploration costs against production revenues. Since the Arctic is invariably high-risk, long-term and lacking in infrastructure and tax shelter, it is completely out of favour at these oil prices.”
What’s important to remember here is that Arctic oil and gas reserves are unevenly distributed throughout the Eurasian and North American continents, and though Alaska numbers among the best-known sites, the North American continent is home to only 36 percent of the planet’s total resource base. The interpretation that Alaska is in any way representative is wildly inaccurate, and commentators would be wise to consider a more complete picture.
The brighter side of Arctic oil
While Shell’s failed approach has made headlines around the globe, much less has been said about the many more successful projects in the Arctic pipeline. The biggest stories of the year have centred mostly on cost overruns and missed targets, although a string of developments, most notably on the Eurasian continent, go to show the region’s enduring influence on the global energy stage.
US-based Hilcorp, for example, has outlined plans to build a gravel island that will act as a platform for five or more extraction wells in Alaska. Located approximately six miles off the coast of the Beaufort Sea, the 23-acre island will create a platform from which the company can produce 70,000 barrels of oil a day, or 80 million to 150 million barrels over a 15 to 20-year timeframe.
The proposal is still awaiting approval and will likely struggle to get off the ground before 2017. However, the plan alone is proof that there is opportunity enough to keep major players in the hunt. More impressive than Hilcorp’s island expansion is the evolving situation in Norway, where the government has voiced ambitions to set in motion more Arctic drilling by the year 2017. “New acreage is a cornerstone for long-term activity”, said Norway’s Minister of Petroleum and Energy, Tord Lien, in an interview with Marketwatch. “It’s a good sign for the future petroleum activity in the high north that a broad selection of companies compete for new acreage in the Barents Sea.”
6%
of the Earth’s surface is covered by the Arctic Circle
13%
of the world’s untapped oil reserves can be found there
90bn
The equivalent number of oil barrels in the Arctic Circle
Participants in the latest funding round, according to Lien, included major names such as BP, Shell and Statoil, together with a string of lesser-known names – 26 in all. While the territory is a relatively mature one, the emergence of the Norwegian Barents Sea as a hot new prospect dashes expectations among environmentalists that Arctic oil is becoming in any way undesirable.
“The one bright spot is the Norwegian Arctic: the offshore environment is much easier than most of the Arctic offshore, with sea ice largely absent even in winter”, said Latham. “Norwegian fiscal terms incentivise companies with immediate recovery of 78 percent of their exploration costs, irrespective of production revenues. Several promising oil and gas discoveries have already been made in the Norwegian Barents Sea and new licences continue to be awarded with firm exploration well commitments.”
The Goliat drilling platform is the world’s largest offshore rig. This $8bn joint venture between Eni and Statoil is on course to tap 174 million barrels of Arctic oil, peaking at 100,000 barrels per day. When production begins in the summer of this year, Goliat could follow up a catalogue of cost overruns and delays with one of the most impressive Arctic projects in history. However, uncertainties have cast a cloud over the project’s viability, and some believe that such an enterprise will require an oil price of around $90 per barrel in order to break even over its 15-year lifespan.
East rising
What’s certain is that Western oil producers have made considerably less progress than their Russian and Chinese counterparts, and while those in the US continue to dither, Eastern powers have taken the opportunity to extend their lead.
Russia started work in the Prirazlomnaya field two years ago, and in 2015 produced 2.2 million barrels of the black stuff – over 5,000 per day. What’s more, Gazprom estimates show that the company will more than double production at its offshore site this year, despite EU and US sanctions. Russian producers have already started work on the modernisation of the rig’s drilling installations, technological equipment and safety and telecommunications systems, according to Oilprice.com, with a view to boosting production capacity to 120,000 barrels per day by 2020.
However, where Russia has dominated Arctic oil exploration in the past, China is on course to lead in the future: Chinese oil executives, including Sun Xiansheng, CNPC’s Director General, have made public their Arctic ambitions, which go beyond oil and gas and extend to trade routes. In 2013 the country struck a $400bn gas contract via its Siberian pipeline and paid Rosneft $60bn, on top of an existing $25bn, to pursue offshore oil fields.
With Russia dependent on imports for much of its Arctic equipment and infrastructure, don’t be surprised to see China seize the opportunity and up its investment and share in Russia’s Arctic endeavour. Fears about the financial and environmental ramifications of Arctic exploration remain, however, though Chinese investment would go some way towards alleviating these concerns.
While it’s true that the market for Arctic oil has suffered a setback in recent times, observers would be unwise to assume that producers are giving up on the opportunity quite so easily. The Shell withdrawal has been dubbed a milestone victory for environmentalists, though critics mustn’t overlook the many more successful projects in the pipeline, not to mention the emergence of China as major force in the global energy market. For observers seeking a more complete picture of the Arctic oil market, it’s imperative that their sights extend far beyond the activities of Western powers.
The relationship between corporations and climate change
It’s not uncommon for companies to skew the facts about sustainability to their own ends, though few – if any – have taken their deception as far as Volkswagen. The so-called ‘diesel dupe’ made headlines around the globe in September when the EPA found defeat devices, designed to game the system and ensure that theirs were among the cleanest cars on the market, installed in VW vehicles.
The findings resulted in fines of epic proportions and, more pertinently, the exposure of one of the world’s foremost brands’ attempts to pedal a dishonest product under the guise of sustainability. The ugly saga has some way to go before the full truth of it is known. However, the fact of it up to this point is that over 11 million vehicles were fitted with the device, while millions of consumers – not to mention regulators – were misled about the group’s sustainability credentials.
Even with a new chief executive in tow, plus a revised and revved-up commitment to sustainability, disaffected consumers are eyeing Europe’s leading automaker with suspicion (see Fig. 1) – and deservedly so. “We need a culture of openness and cooperation”, the group’s Chairman of the Board of Management, Matthias Müller, said in a statement following the crisis. “We have to look beyond the current situation and create the conditions for Volkswagen’s successful further development.” However, there is a long way to go before it can hope to reclaim the consumer trust that was lost.
In the cold, hard light of the emissions scandal, we’ve entered into a period where consumers would be wise to question corporate promises on climate change
“VW, in pursuit of increased sales, showed flagrant disregard for environmental regulation and lost its customers’ trust”, Frances Way, Co-Chief Operating Officer at CDP (formerly the Carbon Disclosure Project), said in an interview with World Finance. “As the need for transparent disclosure on climate impacts has entered the mainstream, companies are more accountable to all their stakeholders.”
Today, having long ago declared itself a leading light on the hot button topic of climate change, Volkswagen has joined a long and growing list of companies to have promised and ultimately failed to uphold their sustainability pledges. And while companies are acknowledging the significance of climate change – more so by the day – the VW scandal is a reminder that these commitments are not always genuine.
In the cold, hard light of the emissions scandal, we’ve entered into a period where consumers would be wise to question corporate promises on climate change. The risks posed by rising emissions are well documented, though it seems that many companies are all too willing to set aside the risks in sight of immediate profits.
The climate change question
For the most part, companies recognise that sustainability is not a choice, but a fact of the market. Nowhere else can this commitment be better seen than on the issue of climate change. “Companies understand first-hand the disruption that climate change, unabated, will cause to their supply chains, markets and operations”, said Kevin Moss, Global Director of WRI’s Business Centre, in an interview with European CEO.
Many businesses recognise that climate change could derail their operations, from the physical risks that could threaten their processes, to regulatory challenges that could impact their bottom line. On the flipside, according to Way, tackling climate change is a significant business opportunity: the low-carbon economy was valued at $5.5trn in 2011-12 and is growing at an over three percent clip every year.
This sentiment was echoed last year by a Ceres initiative, known as the Business for Innovative Climate and Energy Policy, or BICEP, when over 1,000 companies signed on to a “coordinated effort to combat climate change”. With Apple, Intel, GM, Nike, Unilever and hundreds of others on board, the climate declaration is proof enough that businesses are beginning to pay attention to the issues at hand.
Farid Baddache, Managing Director for Europe, Middle East and Africa at BSR, has stated that more and more companies are now focusing on climate change. The We Mean Business Coalition, of which BSR is a co-founder, already includes 329 companies and investors who have made more than 500 commitments to reduce their carbon footprints. The supporters so far include major European brands such as IKEA, BT Group, Commerzbank, H&M, Unilever and Marks & Spencer, and each has committed to procuring 100 percent of their electricity from renewable sources.
“After decades of debate, the scientific community is agreed on the science that shows that human activity is causing dangerous climate change”, said Way. “Just as importantly, this is now an established fact for leading businesses who understand that there is no greater threat to the global economy than climate change.”
Speaking about the role of business leaders in facilitating this transformation, Baddache told European CEO: “CEOs must state a vision enabling the transformational changes needed for their company to mitigate risks, capture opportunities and demonstrate leadership, creating value for the long-term.”
Where much of the emphasis in years gone by has fallen on governments, communities and the third sector in shouldering the costs, multinationals are being urged – increasingly so, in fact – to engage with the issue at hand.
“More and more companies are understanding that it is in their own business interest to take action to address climate change. CDP’s 2015 climate change report reveals that compared to 2010, when just under half of companies said they had activities in place to reduce emissions, now nine in 10 engage in these activities”, said Way. “We see that corporations are clearly shifting their strategies to become part of the solution to the climate challenge. The momentous and global nature of climate change means that, ultimately, we need everyone on board to take action.”
Playing its part
According to a working paper authored jointly by the Centre for Climate Change Economics and Policy and the Grantham Research Institute on Climate Change and the Environment, “failure of adaptation measures” by business and governments ranked fifth among the global risks with the highest impact. “Yet, the role and impact of the private sector in delivering adaptation and, more generally, climate-resilient development, is poorly understood, perhaps with the exception of certain sectors – such as insurance, tourism, energy and utilities or the food and beverage sector – which have been more visible in terms of their response to climate risks.”
Internal factors, such as supply chain disruption and company culture, are the most important issues in driving private sector adaptation. External factors will play a much greater part in the near future, however, as extreme weather events, rising temperatures and rising sea levels enter into the mix. Regulatory changes, together with sustained stakeholder and shareholder pressure, will likewise have a bearing on private sector engagement, as companies look to incorporate climate change in their day-to-day decisions.
According to the latest GlobeScan/SustainAbility Survey, 86 percent of over 600 expert stakeholders representing business, governments, NGOs and academia feel that the private sector will play an ‘important’ or ‘very important’ role in advancing climate change solutions.
However, while a commitment to climate change is commendable, wavering from these commitments can breed mistrust among consumers, and doing so serves only to depress public opinion. A survey of 1,500 US citizens, conducted by the Pew Research Centre, shows that 43 percent of Americans view corporations unfavourably. This figure, up from 31 percent in 1985 (see Fig. 2), shows that scandals like the VW diesel dupe threaten to ratchet up the pressures facing corporations. Recognising that action on climate change brings with it valuable brand points and a much-needed competitive edge means that companies have been quick to get in on the act.
The Exxon scandal
As if the situation for corporations wasn’t hard enough, it was made worse recently when the news emerged that ExxonMobil may have been knowingly misrepresenting the evidence for man-made climate change. New York State Attorney General Eric Schneiderman has called for company documents that may prove that the world’s largest oil major has been knowingly downplaying the risks. If true, the oil major could face legal charges for failing to adequately inform investors about the risks to its bottom line.
To briefly cast an eye over the tenure of Exxon’s former CEO Lee Raymond, the company veteran of more than 40 years expressed doubts about whether the planet was warming at all. Not only were his views on the matter at odds with the scientific community at large; they conflicted with scientific studies commissioned by Exxon itself from 1977 onwards.
“In the first place, there is general scientific agreement that the most likely manner in which mankind is influencing the global climate is through carbon dioxide release from the burning of fossil fuels”, wrote James Black, a top expert in the company’s research and engineering division, in 1977. Expanding on his research the following year, Black warned Exxon’s managers that a doubling of CO2 could increase average global temperatures by as much as three degrees Celsius, and as much as 10 degrees at the poles. “Present thinking”, he wrote, “holds that man has a time window of five to 10 years before the need for hard decisions regarding changes in energy strategies might become critical.” In order to prosecute, the state must find false statements concerning climate-related costs, and sources say that the investigation will likely extend to rival oil majors should the results prove fruitful. In short, the message to energy companies is that they can no longer afford to ignore the climate question, and, more than that, doing so risks legal repercussions.
Research conducted by Yale’s Dr Justin Farrell shows that the Exxon scandal is not the only case of a corporation influencing the public’s perception of climate change, with 20 years of data on the subject showing that there’s a relationship between corporate funding and climate change denial. In the study, Farrell went so far as to conclude that corporate funding actually influenced the specific content and language used by climate change sceptics.
Drawing on two sets of data – the first being a network of 4,556 individuals with ties to 164 climate sceptic organisations, and the second being 40,785 climate change-centred texts produced by those organisations in the period spanning 1993 to 2013 – Farrell said that “the text analysis is entirely computational, and it shows an ecosystem of influence”. He continued, writing in the online edition of the Proceedings of the National Academy of Sciences: “They were writing things that were different from the contrarian organisations that did not receive corporate funding… Over time, it brought them into a more cohesive social movement and aligned their messages.”
Where many corporations are happy to make a pledge on the issue of climate change, few are willing to carry these promises through to fruition
Painting it green
While there are signs that corporations are beginning to pay heed to the issue of climate change, cases much like VW, ExxonMobil and those discussed in Farrell’s analysis show that for every success, there is usually a failure. The fear is that the solution to climate change will not come voluntarily from companies, and so those who feel that it might may need to reduce their expectations. For years, corporate promises on climate change have been met with little in the way of scepticism, but this trust has been gradually eroded over time.
“Risks abound for companies who choose to be bystanders or to defend business-as-usual instead of proactively shaping the future of their industries”, said Moss. “They’ll find that the proactive and innovative competitors who look for market opportunities to serve the needs of society in a resource-constrained planet will be the ones to gain an advantage.” And while Moss’ opinion here is very much the general consensus, it has done little to deter companies from skirting their responsibilities.
“In our regular public opinion research on sustainable consumption across 18 countries with National Geographic, statistical modelling shows that greatest barriers to sustainable consumer behaviour were the lack of trust that consumers have in the claims companies make about the environmental performance of their products, and a lack of demonstrated sustainability leadership from both governments and companies (see Fig. 3)”, Stacy Rowland, Director of Public Relations and Communications at GlobeScan, told World Finance.
Ultimately, those misrepresenting the facts about climate change risk seriously damaging consumer trust. “While companies are seen as a big part of the problem, our research with both consumers and stakeholders consistently shows that they are expected to be a big part of the solution. Failing to deliver on this will only drive down trust, and it’s already at historically low levels”, said Rowland.
Those perpetuating green-based environmental initiatives while participating in nothing of the sort – a process more popularly known as ‘greenwashing’ – have polluted the climate question. Similar to whitewashing, where a company might make a coordinated attempt to obscure an otherwise unpleasant truth, greenwashing operates on the same principle, but in an environmental context.
The most often-cited example is a fossil fuel company that might profess to be green, though in reality this ‘greenness’ is only a very minor part of what is, in essence, a not-so-green business. Aside from ExxonMobil, Shell has been on the receiving end of greenwashing accusations perhaps more than any other energy company, and critics have taken pains to bring the company’s environmental commitments into focus.
The examples mentioned here, together with hundreds – if not thousands – of others, have complicated the question of whether corporations are doing enough to combat climate change. Well-intentioned statements often do little to rectify the real issues at hand, as where many corporations are happy to make a pledge on the issue of climate change, few are willing to carry these promises through to fruition. And while there is a growing consensus that meaningful action on climate change from the private sector won’t come without encouragement, there are a few exceptions where climate action takes priority.
A brighter climate
When the White House announced a commitment to the American Business Act on Climate Change in October, environmentalists rejoiced to see that some of the nation’s leading names had set their commitments to climate change out on paper. Apple, which runs the entirety of its US operations on renewable energy, pledged to bring an estimated 280mW of additional renewable capacity online before the end of 2016. Facebook, meanwhile, committed to 100 percent clean and renewable energy, and doubled its previous renewables target to 50 percent, by the year 2018.
Aiste Brackley, Research Manager at SustainAbility, said of these efforts in a recent GlobeScan press release: “The landscape of corporate leadership is dominated by technology and consumer companies that have been at the forefront of investing in renewable energy and low carbon solutions, and being vocal about their initiatives on the global stage.” While the commitments themselves are commendable, there were few in the group for whom the changes amounted to a cultural overhaul.
In terms of scope, surely no other initiative rivals Unilever’s Sustainable Living Plan. Seen in the latest GlobeScan/SustainAbility Survey as having made the greatest contribution to advancing climate change in the last five years, Unilever’s contributions stem from its origins as a purpose-driven company. According to the group, “Today our purpose is to make sustainable living commonplace”. The aim is to decouple growth from environmental impact, all while making a positive social difference, driving profitable growth, saving costs and fuelling innovation.
The consumer goods company was held up as a shining example to competitors at COP21 on account of its commitment to zero net deforestation by 2020, and again when it revealed that the next phase of its plan was to expand its sustainable supply chain initiative. Working alongside Dutch NGO Solidaridad, Unilever has pledged to reach deeper into its supply chain and deliver environmental benefits to the over one million people working, either directly or not, for the company.
Other notable examples include IKEA, whose commitment to sustainability was clear for all to see last year when the Swedish furniture maker pledged €1bn towards renewables and climate change adaptation in poorer nations; that’s on top of the €1.5bn spent since 2009. IKEA’s 23 wind farms and 700,000 solar panels will also go some way towards protecting the company from any price swings in the energy market. Special mention should go also to Tesla, whose recent achievements include advancing battery technology and emissions-free refuelling infrastructure across the globe, and to Patagonia, for repurposing its operational strategy time and again in order to reflect the climate question.
The aforementioned examples, as with many others, are living proof that a commitment to climate change need not come at the expense of profitability. More than that, they show that the private sector has some valuable answers on the climate question. “Consumers vote with their feet – and their wallets – if they feel companies are not transparent and trustworthy. So corporate reputations matter to the bottom line”, said Way.
Granted, there may be some business models that are ill-equipped to make quite the same stand. However, the fact remains that businesses have a responsibility to acknowledge what many consider to be the defining challenge of our time.
The beginning of the end for high street estate agents
People don’t care for estate agents very much. Many have the annoying habit of taking prospective buyers to abodes that are either wildly out of their price range or to houses that show a complete disregard of the specific criteria they are looking for. Then there is the awkward issue of being shown around by someone who is trying every tactic in the estate agent’s handbook to convince potential buyers that the property in question is the perfect fit. Using words like ‘cosy’ in the hope that the buyer won’t realise they have just walked into a matchbox. But worst of all are the extortionate fees.
In the UK, high street estate agents can charge a percentage fee that can range anywhere between 0.75 percent to three percent (including VAT), of the agreed selling price for a property. Consider the fact that the average price of a house in London is £350,000 (around $500,000), and an estate agent could potentially take up to £10,500 home in commission. Then there are all the little add-ons for services – many of which are not necessary – that can tag thousands of pounds onto the estate agent’s bill. For years, the industry has existed like this. It has had little to no outside interference, with few market disruptions or new entrants to give it reason to change its antiquated business model – until now.
Tech injection
Over the last couple of years, more than $1.4bn has been invested into real estate start-ups, according to the tracking site Crunchbase, with a huge proportion of that capital finding its way into the UK market. Investors clearly see an area to exploit: a number of property companies have begun springing up with the intention of shaking up the traditional high street estate agents, who for the longest time have failed to incorporate technological solutions into their business model.
Online companies such as Rentify, easyProperty, Purplebricks and eMoov are all looking to capitalise on the inaction of the traditional estate agents, usurping them as the middlemen of the property market by taking house sales and lettings off the high street and onto the internet.
[High street agents aren’t] embracing technology, which for any business in today’s world is daft and dangerous
CEO of easyProperty – one of the tech start-ups that plan to take a chunk out of the high street’s market share – Robert Ellice, seemed both pleased and shocked that the high street agents have been so unwilling to evolve with the times. “[High street agents aren’t] embracing technology, which for any business in today’s world is daft and dangerous”, he told World Finance. “Over the last five years, consumer behaviour has changed a lot.”
In fact, more than 90 percent of prospective home buyers began their search online and real estate related searches on Google have grown by as much as 253 percent, according to a report by the National Association of Realtors. The mass consumer migration online is not a new phenomenon: people have grown accustomed to using technology to help them look at and buy things online, as it provides access to a wide variety of products and services all in one place; making it even more bewildering that traditional estate agents have failed to react to this glaringly obvious trend.
“When I first got into estate agency… it all had to be done by physically taking people to as many properties as you could, or getting your hands on a black and white photocopy to show them, which doesn’t really let the buyer see very much”, explained Ellice. “Nowadays people don’t want to waste their time traipsing around, especially when they are used to accessing everything all online. And as soon as they’ve seen it they will make a snap decision whether they want to view the property in person or not.”
So far, the high street chains – which still hold the lion’s share of the property market – have only recently adopted online portals, affording customers the opportunity to at least view pictures of the properties that they have on their books. Technological solutions have been around for a while now that would grant their customers increased flexibility, but there has been little movement to adopt such solutions.
The inaction of many high street agents in this area comes down to a number of factors. For starters, many are locked into long-term leases and are burdened by large numbers of staff dotted around offices all over the country, which is a situation that is extremely difficult to untangle.
Adopting a more tech-based business model would lead to a huge reduction in staff. Making large swathes of people redundant is not only an unpleasant process; it is also a costly one. The sector has grown complacent due to the lack of new entrants into the space for many years – leading to an ‘if it ain’t broke, don’t fix it’ mentality among the high street chains.
“There is an inherent problem in as much as that if you read any of the estate agency forums, anything that makes the business more efficient – and I mean literally anything – is met with pushback”, continued Ellice. “A real fear of technology has manifested itself all throughout the industry, which is really sad because… it ultimately deprives the customer of a good service.”
Property 2.0
It is this reluctance to change with the times that online estate agents like easyProperty and eMoov are hoping to take advantage of. This new breed of online estate agents aims to provide prospective buyers, sellers, renters and landlords with increased levels of choice, control and value.
Because these estate agents are online they are able to pass the savings they make on reduced overheads directly to the consumers. Unlike the bricks and mortar of the high street, online agents do not have to fork out money on a store front, company cars or staff. They also provide a lot more flexibility with regards to the services they provide – offering customers a ‘pick and mix’ structure that lets their clients pay for what they need.
“Our model is based around flexibility”, explained Ellice. “So if you have a contract you want to use, use it. If you have photos or floor plans of a property, then why pay for them as one big package when the photos are exactly the same as they were 12 months ago and a floor plan doesn’t really change very often.”
Another area where many people are happy to do without the unnecessary input of the dreaded estate agent is the actual viewing of the property. Most people don’t need someone to accompany them on a viewing and most are far better positioned to talk about their property than an estate agent is. Consumers are also going to be far more happy with the prospect of doing it themselves too when they realise that they can save money by doing so.
Online estate agents like easyProperty provide strength by remaining in the background. Negotiating the deal, matching the right person with the right property – not traipsing around in a car emblazoned with their logo on it and spending two or three hours out of the office to do a viewing that merely raises the total cost to the consumer.
“Online gives an impression of being a DIY offering, and it isn’t”, said Ellice. “With us you have exactly the same service as a high street agent, but at a fraction of the cost. You get premium listings on Zoopla. You get printed brochures and viewings, all for £1,500.
“We will come round and do the viewings if you want. We will come round and do the floor plans. But if they want to take something out, like the viewings, then you can, and if you would prefer to have standard listings on the portals, then they can do it for £825.”
Rapid expansion
It is still early days for online estate agents, but the sector has all the right conditions to make a big impact in the coming years. easyProperty, for example, has already got more than 1,300 sales properties on the market, with 200 commercial properties on the market and a further 3,540 rental properties for customers to choose from. These statistics are made even more impressive when considering the fact that the sale side of the company was launched in September last year, its commercial and lettings business opened in April and September of 2014 respectively.
This rapid expansion has been helped by the huge amounts of funding that the sector has managed to obtain, with tech entrepreneurs and other investors looking to take a chunk out of the high street’s market share. Purplebricks has managed to secure more than £25m in investment and easyProperty has seen similar levels of funding.
Most of this money will no doubt be spent on improving consumer awareness, as many people still use high street chains when buying and selling their homes. But once consumers become aware of the savings on offer and the prospect of never having to deal with an estate agent again, they may never look back.
A history of economic trouble in Argentina
Argentina was once one of the world’s richest economies. Only as recently as the turn of the 20th century, Argentina, along with several European and North American economies, was part of an elite club of prosperous countries – a club that, following the rapid rise of China and other emerging market economies, has grown in size in the decades since.
It is popular to talk about the ‘rise of the rest’. Although the US remains preeminent in its economic sway for the time being, European economies have gradually fallen behind in terms of GDP size as other countries have steadily caught up, rising among the ranks of the world’s largest and most dominant economies. A few years ago, Brazil overtook the UK in terms of total GDP, while Germany recently saw Russia’s economy eclipse its own. For the most part, however, this was to be expected: European nations comprise a small corner of the earth, and as larger nations turn their subsistence farmers into industrial workers (and then service sector employees), overtaking the old powers of Europe is inevitable. It is less of a fall and more of an expected correction and relative decline.
Argentina, however, really has fallen: while a century ago it was one of the world’s most prosperous economies, it has now, according to the World Bank, been downgraded to an upper-middle income country. This rating is still better than that of the majority of countries today, but its relative position is a far cry from scarcely 100 years ago, when its wages rivalled those of the UK. In terms of prosperity, the nation has failed to maintain its position among the European and North American economies it once rivalled. Income per capita is now on average 43 percent of that of the world’s richest nations, among whom it once ranked (see Fig. 1).
A republic on the rocks
Behind this rise and fall has primarily been poor economic policy: a reliance on exports led to both the nation’s initial rise and later decline, while a subsequent attempt to seal itself off from the world economy merely furthered this descent.
Argentina has recently elected a new president, however: the former mayor of Buenos Aires, Mauricio Macri, of the centre-right Republican Proposal party. Since its fall from grace, Argentina has seen persistent poor policy and economic management from its leaders, creating a continually rising and falling economic pendulum (see Fig. 2). As such, the new leader has a formidable task ahead of him. Macri will have to grapple with both a historical legacy of Argentinian economic decline and the country’s currently poor economic performance, which largely comes thanks to his predecessor, Cristina Kirchner.
According to the World Bank’s Latin America and Caribbean Regional Outlook report, which was published in January, the country faces a number of challenges in the coming months and years: while the Argentinian economy saw a modest rebound of growth to 1.7 percent in 2015, the report noted that this was largely due to a surge in government spending. This increase, and the resulting rebound in growth, was unleashed by the previous administration in the run-up to election in the hope of buying the support of the electorate, but was ultimately unsustainable. As such, projected GDP growth for Argentina in 2016 is 0.7 percent.
Net exports, as noted by the report, have been falling, while private consumption is weak. Argentina has also been seeing soaring inflation, reaching over 15 percent in the first half of 2015 and around 14 percent in later months. This figure currently stands at around 20 percent.
Imported difficulties
Of course, some of the problems being faced by the Argentinian economy are cyclical: across the world there are fears of a new global downturn, while Argentina in particular is being hit by the economic troubles of neighbouring Brazil. The Portuguese-speaking giant is Argentina’s largest trading partner, and so some of its economic sectors, including the automobile industry, rely on Brazil for up to 80 percent of their trade. As the World Bank noted in its report: “Growth declines in Brazil tend to have measurable or statistically significant spill-overs to its South American neighbours. A one percentage point decline in Brazil’s growth tends to reduce growth in Argentina, after two years, by 0.7 [percent].”
Yet the country’s woes are not all imported: investor confidence in Argentina is particularly low at present as a result of unease over the nation’s fiscal and monetary policies, particularly with regards to its afflicting debt levels (see Fig. 3). Since the 1980s, the country has defaulted multiple times on its debt obligations; most notably, but not most recently, in 2001, when it failed to pay creditors a total of $95bn – the biggest default in history.
The nation’s credit grade remains consistently low, being at the bottom of ratings compiled by financial advisory service Standard & Poor’s. Furthermore, since the mid-2000s, the country has been locked in a long-running dispute with so-called ‘holdout creditors’ – those holding bonds who refused debt swap options following Argentina’s multi-debt restructuring efforts. This has made Argentina something of a pariah on international bond markets, from which it is effectively barred.
On top of the world
This reputation is in stark contrast to how the Argentinian economy was performing and perceived in the past. Writing in 1905, economics observer Percy F Martin heaped praise upon the future of Argentina in his essay Through five republics of South America: “In spite of its enormous advance, which the republic has made within the last 10 years, the most cautious critic would not hesitate to aver that Argentina has but just entered upon the threshold of her greatness.”
He optimistically predicted that Argentina’s “next generation is destined to see as great a rate of progress in this country’s trade as the past 20 years have witnessed”, while he also showed admiration for the “common sense of the cosmopolitan commercial population”. This cosmopolitan population was made up of waves of European immigrants. While the story of the huddled masses of Europe seeking opportunity in the US now dominates historical memory, many also made a similar journey to Argentina – so many, in fact, that in the early 20th century, half of the capital’s population was foreign-born. These migrants went to find work in the country’s booming agricultural and cattle industry.
In the late 19th century, in the lead-up to the outbreak of the First World War, Argentinian GDP surged at an annual growth rate of 6 percent. Although the world has since seen growth rates much higher than this, at the time it was the fastest rate of growth recorded anywhere on the planet.
This impressive growth rate allowed the country to rank among the 10 wealthiest nations on earth at the time, ahead of France, Italy and even Germany. At the time, Argentina had a per capita income that was 50 percent greater than Italy’s, and nearly twice that of Japan’s. According to The Economist: “Income per head was 92 percent of the average of 16 rich economies.” Furthermore, Argentinians were four times as wealthy as Brazilians.
However, as The Economist starkly noted, “it never got better than this”. Since these glory days, Argentina’s “standing as one of the world’s most vibrant economies is a distant memory”. After a long decade of relative decline, while much of the rest of the world excelled, Argentinians ended the 20th century with an income that was less than fifty percent of that of the Italians and Japanese.
Argentine decline
The country’s great wealth was based on a boom in global trade. The period before World War One was an era of unprecedented globalisation and free trade, of which the Argentinians took full advantage, most notably through the export of beef. The country’s abundant supply of various resources allowed it to find prosperity through exporting to the rest of the world – yet this possibility turned to dependency, putting the country’s fortunes at the behest of the rest of the world. When the era of free trade and economic liberalism fell victim to war and depression, Argentina began its long decline.
For a nation so reliant upon exports, the tariffs and blockades of war were a disaster. They also underlined a fundamental problem with the Argentinian economy: despite being one of the richest in the world prior to the war, it was not a modern, industrialising power like those that it surpassed in terms of wealth were. This meant that it was hit especially hard by the external shock of the new, war-torn era.
This was not unique to Argentina – the period of 1914 to 1945 was a catastrophe for most economies around the world. However, as much of the rest of the world subsequently went through an era of economic reconstruction, Argentina was for the most part left by the wayside.
Then, in 1946, Juan Perón came to power. His political philosophy, now known as Peronism, was a form of corporatism, chiefly favouring large state enterprises and an overbearing regulation on the economy. Of course, state protectionism itself isn’t always responsible for economic failure: South Korea and Taiwan both favoured protectionism in order to foster domestic industries in the 20th century, with the intent of using the method to build up industries to compete on the world market – which they did, very successfully. However, the protectionist policies of the two East Asian tigers and that of Argentina were very different.
Protectionism in Asia was intended to foster industry and ready it for the world market, while Argentina’s was an attempt to withdraw from the world economy and its fluctuations. The present fortune of each country speaks for itself. Under the command of Perón, the state even went so far as to monopolise all foreign trade, a policy generally associated with countries east of the Iron Curtain. The Asian countries also had a greater degree of political stability at the time, boasting secure property rights – something that Argentina was, and still is, sorely lacking.
Argentina attempted to liberalise in the 1970s, but without any industry able to meaningfully compare with international competitors, this only served to precipitate another decline. Peronism had allowed some industries to grow, but they were massively inefficient, shielded from the world market. Any local industry that had been fostered by protectionism was no match for the outside world, and so its products were outcompeted by foreign goods entering the market.
Manufacturing had seen growth in the period of protectionism, but now started a long period of decline. Ultimately, turning in from the world had merely created inefficient industries, rather than providing a protected space in which industries could grow. Between the 1970s and 1990, Argentinians experienced a real per capita income drop of over 20 percent.
The long road ahead
After a century of decline, the Argentinian economy approached the 21st century with a brewing financial crisis, with poor economic policy once again taking a toll on the fortunes of Argentinians. Following a huge build-up of public debt and a period of high inflation in the 1980s, in the following decade the Argentinian Government decided to peg their currency to the US dollar. This was intended to reduce inflation and allow imports to become cheaper through currency appreciation.
While an appreciation of the Argentinian peso was indeed needed, pegging it to the US dollar meant that it overshot the mark. This had a disastrous effect on Argentinian exports, and by the late 1990s Argentina had entered into a deep recession, with unemployment sitting at 15 percent. Along with longer-term issues such as poor tax collection and corruption, the recession resulted in a rise in state spending and a diminished revenue base.
By 1999, creditors had lost confidence in Argentina’s ability to service its debts, leading Argentinian bonds to appreciate. The response was a round of austerity cuts at the behest of the IMF, yet this only further deepened the Argentine recession. By 2001, Argentina had defaulted on its debts and did away with its currency peg: this was the only option afforded to the country, but the subsequent devaluation further impoverished Argentinian citizens.
As capital fled the country, consumer spending collapsed and savings were wiped out. The economy, however, was able to start to rebound after the devaluation, with Argentinian exports once again picking up (see Fig. 4). Furthermore, the onset of a boom in commodity demand in the 2000s also arose, largely fuelled by Chinese and emerging market demand.
However, this once again caused Argentina to become reliant upon exports and vulnerable to external shocks – something that has just recently happened again with the global collapse of commodity prices. Add to this crisis the poorly thought out policies of the previous administration, and the formidable economic task facing Argentina’s new president becomes clear.
The last few years under the presidency of Cristina Kirchner included polices such as “instituting capital controls, running down foreign exchange reserves, [and] in effect having the central bank print money to finance a public deficit”, according to the Financial Times. While these wrongheaded policies were for a while hidden by a world commodity boom, after commodity prices went into the doldrums, the full extent of Kirchner’s economic mismanagement has become apparent.
It would be churlish to expect the new president to be able to completely rectify this century of economic decline: Argentina will not return to its once high-ranking place among the world’s economies anytime soon, nor will the legacy of certain economic calamities be swiftly overcome. However, Macri can set about addressing certain problems with the economy, particularly with regards to cleaning up the mess left by his immediate predecessor.
Argentina has defaulted multiple times on its debt obligations – most notably in 2001, when it failed to pay creditors a total of $95bn
As the World Bank’s report noted, Macri’s new administration is “expected to implement monetary and fiscal tightening in 2016”, which is hoped to lead to a pick up in growth in 2017 “as investment slowly strengthens on renewed investor confidence and leads the recovery”. Along with this, the government has announced that it will make efforts to reach a compromise with holdout bondholders from Argentina’s previous defaults, with the hope that Argentina will lose its pariah status among international creditors. Macri has also pledged to end the policy of capital controls and bring the country’s exchange rate to a more realistic level, while the country’s central bank is also expected to finally move to combat inflation, tightening monetary policy by increasing interest rates.
This will be a tough task, as exports will undoubtedly be hit by such policies and ordinary Argentinians will feel the pinch. Yet it is hoped that the new regime will begin to restore some normalcy to the economy and reinstate confidence in it for businesses. The new fiscal and monetary policies of Macri, after countless years of economic mismanagement, should lay the foundations for a much-needed reversal of fortunes for Argentina. However, none of this will see Argentina return to its former economic glory anytime soon: such a turnaround will require a long-term compromise between being either entirely export dependent or overly protectionist and inward-looking – both of which it has been, and suffered from, in the past.
Argentina must become neither dependent on nor cut off from the world economy, but find a middle ground that allows it to take advantage of world trade, while being able to deal with any external shocks that may arise. Only then can Argentina hope to regain – and sustain – the economic prosperity that it lost a century ago.
Major inflows now come from individual investors, says Eurizon CEO
Markets have been up and down off the back of weak commodity prices and uncertainty. What is the best strategy for investors to weather the storm? Tommaso Corcos, CEO and GM of Eurizon Capital, discusses.
World Finance: Markets have been up and down off the back of weak commodity prices and uncertainty. Here to discuss what’s been happening in Europe is Tommaso Corcos, CEO and GM of Eurizon Capital. Well Tommaso, let’s start with European economies, now they were off to a rocky start for 2016. So what would you say is the investor sentiment on the ground today?
Tommaso Corcos: Well the investors’ sentiment is very conservative at this moment. Not too much given that a lot is already happening in terms of correction, but certainly the speed of the correction of the market, I think that took everyone by surprise in terms of the entity of the correction.
So now a lot of people are really questioning, or which is really a half of the economy, so probably many investors are waiting to be reassured in terms of the capability of certain engines to give support to the world economy.
So, I think that there is a lot of interest in the price of a lot of shares that are reaching interesting targets, but notwithstanding that, there’s still investors that are moving very cautiously, just for the reason that I mentioned.
World Finance: So this sort of investor sentiment, what kind of impact has this had on the asset management industries?
Tommaso Corcos: Starting from the last quarter of the past year and also in the first few months of 2016, we face a slow-down of inflows. But this is pretty normal, I mean you just read every day in the newspapers that the stock markets are going down, that you see a lot of volatility. And so I think that there is a feeling of being more conservative.
So if you have too much invested on the equities, you scale down your risk. Or if you want to invest you take more time to do it and so you wait for better times. I think this is pretty understandable and this is the reason why companies like us must support our distributors in giving the right advice to the savers.
World Finance: Well your company has certainly been bucking the trend with success after success. So what’s been your strategy?
Tommaso Corcos: The strategy is to combine, not only the importance of the performance of the product, but also the capability of giving the right advice, giving the right service to the customer. And this is our mantra, it’s something that we strongly believe, this double combination that is not only performance driven but service driven. Because in the past years the major inflows came from individual investors and not from institutional ones.
Because if you think about what’s happening to the sovereign wealth funds, they really reduced their investment on financial markets. So just being more focused on individual investors means that you must be capable of giving them a lot of service, because they’re not sophisticated like institutional ones.
World Finance: And your principles for responsible investment, talk me through those?
Tommaso Corcos: This is very important. You try to promote the best practice in corporate governance, respecting the environment and taking social responsibility. It’s a win-win situation, because it’s a positive for the final investor that you represent. It is positive for the companies in which you invest, because it’s pretty proven that the companies who practise in terms of corporate governance, have the better performance related to others who do not care for this principle.
Also, it’s very good and positive for the capital in the markets in general, just because a more sophisticated market where all the companies practise this principle is able to lure more investment from institutional investors. And this is very positive, that is why it’s a win-win situation.
World Finance: Now with so much uncertainty in today’s climate, how do you approach risk management?
Tommaso Corcos: In the past few months we scaled down on the risk, waiting for better times and more clarification, first on the economic scenario and second on the profit environment in which we are now. When the market will discount is a factor, we will again raise the level of risk and the fund manager will again increase their position. So risk management in moments like this are important to reduce the volatility of the product performance.
World Finance: So bearing this in mind, what investment trends are you looking towards in the coming 12 months?
Tommaso Corcos: We are still focusing our attention, and the attention of our investors, to move the asset product. What I mean by multi-asset product is an investment solution, an outcome oriented product, giving the possibility to the single customer to enter in a well-diversified solution. So with a single investment they can access the equity market or the bond market.
I think that in an environment like this, where the volatility is still very strong, it must be really clear for the investor what type of product he’s buying, what type of volatility he’s bearing and what type of targets he’s trying to pursue. So that the combination of all these situations can give a product that really feeds the needs of this customer.
