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Can neobanks take on the old guard?

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When Mariano Pennello, a 58-year-old welder from the small French town of Bédoin, deposited €22,000 in a savings account he had opened using the mobile application of the German digital bank N26, little did he know that he would be engulfed in a Kafkaesque nightmare. At four percent, the interest rate seemed attractive compared to what conventional banks offered, he says.

When he tried to withdraw the amount in April, he realised it was not possible. The firm would not respond to emails and phone calls, until his account was frozen without any explanation, while the application had been blocked. Radio silence ensued: “I don’t even know if my account has been hacked.

They won’t answer my emails,” he says. He has sent all relevant documents to the company’s headquarters in Germany and is now planning to file a complaint with the French police unit responsible for cybercrime. “If {N26} is really a bank, they should have put in place policies and staff for this type of technical problem,” Pennello says. “This is not normal.”

Banking for a new generation
Pennello is far from alone in his predicament. N26 has been facing a flurry of customer complaints over abruptly closed down accounts in several European countries. In a public statement, the firm said that this was part of a crackdown on fraudulent accounts. Many other digital banks have faced similar problems. Resolver, a UK online complaints service, reported a total of 1,850 similar complaints last year, most related to account freezing.

However, these are only teething problems for a burgeoning industry of fintech firms, known as ‘neobanks’ or ‘challenger banks,’ offering services traditionally provided by banks to retail customers. They are all committed to ‘unbundling’ the banking sector, namely picking apart its value chain and keeping the profitable bits, just like other digital disruptors have done in their sectors. Currently, there are around 400 of them worldwide, serving approximately one billion customers, with the size of the market reaching $47bn in the US (see Fig 1). Grand View Research, a market research firm, expects the global market to be worth $722bn by 2028.

One reason for the success of challenger banks is the seamless digital experience they offer. Unlike traditional banks burdened with antiquated infrastructure, they are building their databases from scratch, which allows them to develop new services. Their speedy, bot-powered customer experience is tailored to the needs of young digital natives. And as digital-only firms, they don’t have to open costly branches, offering instead lower fees, higher interest rates, and swift sign-up processes. Another difference from legacy banks, says Dylan Lerner, a fintech analyst at Javelin Strategy & Research, a US market intelligence provider, is that they provide personalised services, rather than one-size-fits-all products. “A neobank will not give you just a credit card. They will help you build your credit,” he says. The result, Lerner argues, is that traditional banks are losing their grip on customers, with an ensuing fragmentation of their relationship with them. “For traditional banks, it’s death by 1,000 cuts,” he says.

The pandemic has accelerated this trend, pushing depositors to turn to digital banking. In the US, neobanks gained new customers by offering early access to federal stimulus checks. Eversend, a neobank tending to the needs of the African diaspora, increased its transaction volume from $800,000 in 2019 to $253m in 2021. “Lockdowns forced people to stay at home and adopt digital financial services,” says the company’s founder Stone Atwine. “It was a horrible time for humankind, but it did accelerate technological adoption.” Neobanks have also won hearts and minds by offering services that became popular during lockdowns, such as cryptocurrency trading and peer-to-peer payments, according to Dan Dolev, a fintech analyst at Mizuho Securities, a Japanese investment bank. Traditional banks are anxious to respond to these challenges. Some try to replicate the digital experience neobanks offer, providing perks such as virtual card display, speedy mobile on-boarding, digital wallets and payment-linked rewards. Some have rushed to acquire neobanks; Société Générale has acquired Shine, a neobank targeting entrepreneurs.

Others have set up their own digital-only services. Cogni, a blockchain-powered neobank, is the brainchild of Barclays’ accelerator programme. Goldman Sachs has launched Marcus Invest, offering an app-based investment banking experience. However, such experiments can be short-lived, given that digital offshoots must be incorporated into existing infrastructure. Neobanks will always have the upper hand when it comes to digital services, Dolev says: “You only need one car. If one of these neobanks takes up this role, then the old bank becomes a back-office lender,” he says, adding: “The worry is that banks become marginalised, unknown and brandless lenders.”

Emerging markets
Neobanks are particularly successful in markets where most people never had a bank account. Last December, Brazil’s Nubank became the most valuable financial firm in South America with a valuation of almost $50bn and over 50 million users, following its IPO in New York. Digital banking is the future in a region where half of the population is unbanked or underbanked, but more than seven out of 10 people own a mobile phone, says Romina Simonelli, Chief Payments Officer at Ualá, an Argentinean neobank backed by SoftBank and Tencent. The company has launched ‘Aula Ualá,’ a platform deciphering the intricacies of personal finance for the layman through downloadable material, videos and free courses.

As digital-only firms, they don’t have to open costly branches, offering instead lower fees, higher interest rates, and swift sign-up processes

Some neobanks skip developed economies altogether to focus on up-and-coming emerging markets. TymeBank, a South African neobank, has raised $110m to fund expansion into Southeast Asia. Paytm, the biggest payment service in India with over 450 million registered users, is planning to expand into credit. Firms like Eversend have revolutionised the booming remittance industry. “It is delightful to sit in Paris and send euros to my grandma in western Uganda instantly, using a single app,” says Atwine. “With traditional banks, this process takes two to five days, costs a lot more, and requires my grandma to take a trip into town for cash pickups.”

Regulatory risks
For regulators, neobanks pose a conundrum. The plethora of new players brings much-wanted competition in a sector notoriously averse to innovation.
However, their disruptive force has sparked concerns over money laundering and fraud. Last April, the UK financial regulator questioned the efficacy of the mechanisms some neobanks employ to tackle financial crime, following an increase in suspicious activity. Established banks have an advantage in this area by spending billions to monitor transactions, according to Javelin’s Lerner, while neobanks do not have the necessary infrastructure. But this could lead to more innovation, he argues, with ‘reg-tech’ start-ups helping neobanks meet their compliance needs. Rapid international expansion, as in the case of N26, has also vexed customers: “We are in Europe and I believe that the French laws should be as valid as the German laws,” says Pennello whose N26 account was frozen. “I have always been banking with French banks and never had any problems.”

US regulators have adopted a strict approach, forcing neobanks to partner with traditional ones. Chime, the most popular US neobank, has been ordered by Californian authorities to remove the word ‘bank’ from its marketing material. Regulators may also dent their profits from debit interchange and instant deposits, Dolev predicts. In Europe, many neobanks have obtained banking licences, thus being able to expand into lending, investment and net interest margins.

The EU’s Payment Services Directive has compelled banks to open access to customer data that digital upstarts can use to develop their products. “In the US, conventional banks have greater lobbying power,” says Nathalie Janson Calamaro, a banking regulation expert who teaches at NEOMA Business School. But even in Europe, neobanks have only obtained ‘light licences’ with certain limitations; as soon as European banks sense a threat, there will be more pressure to restrain competition and effectively stifle innovation, Calamaro argues.

In search of a business model
The biggest concern over the future of neobanks is that most will never make enough money to stay afloat. Currently, just five percent of them are profitable, according to a report from Simon-Kucher & Partners. Few have been permitted to offer full-fledged credit services, the riskier but also most profitable part of the banking business, and are instead stuck with low-spending customers. In most cases, ‘freemium’ pricing models that rely on customers paying monthly subscriptions to access extra services have attracted small numbers of depositors.

Banking remains a highly localised market due to cultural and regulatory differences, unlike other sectors that saw digital pioneers rapidly expand around the globe. A case in point is the recent failure of European neobanks to break into the US market. Multinationals with big pockets may also intensify competition in the future. Telecoms powerhouse Orange and IKEA owner Ingka Group are expanding into the banking sector, while Apple and Amazon have launched payment services that may indicate bigger ambitions. Decentralised finance firms like Compound could also provide credit-hungry customers with an even fancier digital alternative than neobanks.

Neobanks face the same problems other pioneers had to tackle before becoming the new mainstream. Even the term ‘neobank’ remains controversial. Some of these digital upstarts eschew it altogether, fearful of regulatory scrutiny. Others openly embrace it, despite offering only a fraction of the services provided by traditional banks. For his part, Pennello thinks they should be treated like normal banks: “Governments and regulators should supervise them a bit better,” he says.

Wall Street’s banking icon

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After 16 years at the helm of the United States’ biggest bank, trillion-dollar giant JPMorgan Chase, Jamie Dimon is not afraid to speak his mind. Everything from bitcoin (“I personally think that bitcoin is worthless,” he said in 2021) to the Chinese government (“The Communist Party is celebrating its 100th year. So is JPMorgan. And I’ll make you a bet we last longer,” he said at an event in Hong Kong) is fair game in his mind. His forthright comments have occasionally landed him in hot water – he had to apologise for his comment about China, for instance – but Dimon’s penchant for plain speaking has earned him more fans than enemies. Indeed, he was described in the New York Times Magazine in 2010 as “America’s least-hated banker.” Today, the view still holds true.

“With apologies to Brian Moynihan [the CEO of Bank of America] and Charlie Scharf [the CEO of Wells Fargo], among others, Jamie Dimon may be the most respected US bank CEO, known for his candour, charisma and self-confidence,” James Shanahan, senior equity research analyst at Edward Jones told World Finance. Having now earned the title of the longest-serving CEO on Wall Street, World Finance looks back on the iconic banker’s career.

A budding banker
Born in Queens in New York City in 1956, Dimon was the grandson of a Greek immigrant who worked as a stockbroker in the city. His father followed in his grandfather’s footsteps, also becoming a stockbroker, and Dimon’s own financial career began to take shape after his graduation from Harvard Business School in 1982, where he was described as “one of the very brightest guys in finance” in his class by a professor in BusinessWeek magazine in 1996. One of the first signs of Dimon’s confidence in his career path materialised soon after his graduation, when he turned down a job at Goldman Sachs, where he had previously held an internship. Instead, he opted to work with Sandy Weill, a family friend who would go on to become a pivotal mentor to Dimon. Weill offered Dimon an assistant position at American Express, and in 1995 he told the New York Times, “After a week, he was telling me how we could do things better.”

Dimon and Weill stuck together throughout the coming years, and in 1986 when Weill took control of Commercial Credit Company, Dimon joined him to help build a banking empire. Although it was a small business at the time, under the combined efforts of Weill and Dimon and through a series of mergers and acquisitions, the business went on to become Citigroup, now one of the largest banks in the US – and indeed the world. Dimon was a key member of the team, taking roles as chief financial officer, executive vice president and later as president. However, as Dimon strived to achieve more, the partnership between he and Weill that had once been so fruitful came under strain. In 1998, Weill made the shock decision of firing Dimon from Citigroup.


A crossroads moment
Following the split with Weill, Dimon took a break from the financial services industry. He looked into other lines of work, thought about what career paths would make him happy and considered how stepping away from leadership positions in the banking industry would allow him to spend more time with his family. But he couldn’t stay away from Wall Street for long. Although he had contemplated other careers, he told Money magazine, “My craft is financial services. Right or wrong, that’s what I know, and I’m pretty good at it.”

Dimon returned to the financial industry as chairman and CEO of Bank One, the fifth-largest bank in the country at the time. Bank One was reeling from a number of management mistakes – not to mention a $511m net loss – when Dimon was brought on board in 2000. It also had a serious culture problem following a merger from which the two separate sides had never fully integrated.

Known for his detail-orientated approach, Dimon led a review of the business’s portfolio, and Bank One embarked on an intensive clean-up mission, involving cutting the company’s dividend, slashing bonuses – Dimon’s included – and weeding out weaker members of the team. Not long after he had steadied the ship at Bank One, Dimon steered it straight into a merger with JPMorgan Chase, with the ambition of creating a true global banking giant, the likes of which only Weill’s Citigroup could compare. In some ways, the deal seemed too good to be true. JPMorgan Chase’s prowess in corporate banking and Bank One’s consumer financial services experience were a perfect match. Yet ever the conservative, Dimon still hesitated before greenlighting the merger. “It’s terrifying. Do you push the button or not?” he told Fortune. “But if you don’t and this opportunity is gone when you want it later, you’ve made a horrible mistake. So I pushed the button.” In 2006, Dimon succeeded William Harrison as CEO of the combined business.

Building a banking giant
Since joining JPMorgan Chase, Dimon has ramped up value for the bank’s shareholders. The bank’s share price has grown by around 200 percent since Dimon became CEO of the business, while its annual net income has risen from $13.6bn, on revenue of $61.4bn in 2006, to the eye-watering $48.3bn in net income on revenue of $125.3bn recorded in 2021. The business is now the US’s largest credit card issuer, with more than 4,800 branches operating in 60 countries, and it holds nearly $1trn more in assets than its closest competitor.

In his latest letter to shareholders, Dimon credited the business’s “financial discipline, constant investment in innovation and ongoing development of our people” with enabling it to “persevere in our steadfast dedication to help clients, communities and countries throughout the world.” Dimon also praised the business for growing its market share and making investments in products, people and technology “all while maintaining credit discipline and a fortress balance sheet.”

Throughout his career, Dimon has been known to take a closer approach to the running of his bank than his peers do. He is known for interrogating his executives with lists of questions, digging into the weeds of the business’s balance sheet and never missing a detail. “Dimon has shown a knack for spotting risks and opportunities, and by responding boldly. In recent years, for example, there has been aggressive growth in the formation of financial technology companies (or fintechs), which have directly targeted JPMorgan, especially in the areas of payments and wealth management,” Shanahan told World Finance. “Dimon has made a number of acquisitions over the past couple of years to address the threats head-on.” Just a few of these acquisitions in recent years include the purchase of OpenInvest, a California-based provider of values-based financial solutions, and Nutmeg, a UK-based digital wealth manager, in 2021, and stakes in Viva Wallet, a European cloud-based payments company, and C6 Bank, a Brazilian digital bank.

Recent deals have also opened new lines of business for the bank, such as its acquisition of corporate luxury travel agency Frosch and its purchase of The Infatuation, an app that helps consumers choose local eateries in cities around the world.

Hard lessons
But it hasn’t always been smooth sailing for Dimon. Although JPMorgan Chase dodged the worst of the 2008 financial crash, thanks to its ‘fortress balance sheet,’ the business wasn’t immune to the fallout – in the two years following the crash, Chase lost a whopping $51bn in faulty mortgages, unpaid credit cards and other bad loans – and a hostile sentiment towards bankers began to seed itself in American culture.

The London Whale saga, when a single trader lost the bank at least $6.2bn in 2012, following which JPMorgan Chase was fined more than $1bn and forced to admit violating securities law, has been called by Dimon “the stupidest and most embarrassing situation I have ever been a part of.” In the business’s annual letter in 2013, Dimon apologised for the situation, which had also involved a very public takedown by a US Senate subcommittee, and he took a 50 percent pay cut that year. “For a company that prides itself on risk management, this was a real kick in the teeth.”

Dimon continued, writing: “We learned – or were painfully reminded of – hard lessons from the London Whale problem. I know we will always make mistakes – that is unavoidable. What we continually strive for is to keep those mistakes small and infrequent. I certainly hope the London Whale is the largest mistake I am ever a part of.”

Dimon has been on a personal mission to improve the image of bankers, becoming the face of the industry and a driver of positive change

Although it will likely be his biggest blunder, the London Whale scandal hasn’t been Dimon’s only public misstep. He was also deeply involved with the failed initial public offering (IPO) of co-working space WeWork in 2019 – an event which Fortune magazine described as “one of corporate America’s most spectacular meltdowns,” and in which nearly $40bn of value evaporated overnight. WeWork’s fall from grace ensnared Jamie Dimon, whose company had backed the firm through its investment funds, arranged loans for founder Adam Neumann and acted as lead bank on the disastrous IPO attempt.

Yet even here, Dimon worked quickly to clean up his mess. It was Dimon who convinced Neumann to step down as CEO after the failed listing. “He told me, ‘Adam, you have done a great job until now but you will have to put the company first,’” Neumann told the Wall Street Journal. “I trusted Jamie and I looked up to Jamie. I still do.” Dimon also said he had learned lessons from the failure personally. “There are a lot of lessons to be learned, by everybody involved, and I’ve learned a few myself,” he said in an interview with CNBC. He said having “proper corporate governance” and an independent board before filing to go public were key lessons.

Even more recently, Dimon suffered a public rebuke when shareholders voted to reject a special $52.6m stock option award that the bank’s directors had given him to stay on as CEO of the business for five more years. Although Dimon will keep the award as the vote was merely a formality, it represented an important test of investors’ changing attitudes towards executive pay. In fact, over the last 12 years, JPMorgan Chase shareholders have voted their approval of compensation eight times.

Despite these missteps, JPMorgan Chase has often stood head and shoulders above its competitors thanks in large part to Dimon’s leadership. Even when the 2008 global financial crash hit, the business remained profitable every quarter. What’s more, Dimon has been on a personal mission to improve the image of bankers, becoming the face of the industry and a driver of positive change.

A force for good
Over the decades that Dimon has worked in leadership positions at JPMorgan Chase, Bank One and other titans of the financial services world, the expectations of what chief executives can and should do for their wider communities has changed dramatically. This change has not only been taken up by Dimon, but it has partly been led by his own hand. For example, in 2019 Dimon helped lead an influential corporate group of nearly 200 chief executives to agree on a new meaning of ‘the purpose of a corporation.’

As chair of the Business Roundtable, Dimon helped shape a new definition from the lobbying group, transforming the original mission statement, which was centred on answering to stockholders, to one that was more focused on ‘conscious capitalism,’ a recognition gaining steam in corporate America that businesses have responsibilities to society as well as shareholders. “The American dream is alive, but fraying,” Dimon said in a press release from the Business Roundtable. “Major employers are investing in their workers and communities because they know it is the only way to be successful over the long term.

These modernised principles reflect the business community’s unwavering commitment to continue to push for an economy that serves all Americans.” The 181 chief executives that signed the statement agreed to commit to delivering value to customers, investing in employees, dealing ethically with suppliers, supporting the communities in which they work and, finally, generating long-term value for shareholders.

Dimon has always had a knack for seeing the bigger picture, and this has certainly been evident in his work to build a strong team in the financial services sector. “He has demonstrated an exceptional ability to identify and develop talent, as evidenced by the routine appointments of JP Morgan’s senior executives to leadership roles among the company’s largest competitors,” Shanahan told World Finance. JPMorgan Chase has also been a leader in supporting women in its business – as well as in wider society. In 2013, the business created a programme called Women on the Move that would support female employees as well as businesses owned by women. Another key aim was to support women in achieving better financial health.

For a corporate leader as high up the ranks as Dimon to be grounded by the everyday realities of their customers is rare, but it is a sentiment Dimon often embodies. In his 2021 shareholder letter, Dimon stressed the impact that JPMorgan Chase has on everyday people. “While JPMorgan Chase stock is owned by large institutions, pension plans, mutual funds and directly by individual investors, in almost all cases, the ultimate beneficiaries are individuals in our communities. More than 100 million people in the US own stock, and a large percentage of these individuals, in one way or another, own JPMorgan Chase stock,” he wrote. “Many of these people are veterans, teachers, police officers, firefighters, healthcare workers, retirees or those saving for a home, education or retirement. Your management team goes to work every day recognising the enormous responsibility that we have to our shareholders.”

The next challenge
Dimon has done much over the past two decades to influence corporate America, the banking sector and the boardroom at the industry’s biggest bank – in most instances, changing ways for the better. But how will he deal with the new barrage of challenges facing the global economy? Not only is the US still reeling from the impact of the COVID-19 pandemic, but inflation is running rampant thanks to a multitude of economic challenges. The clouds appear to be gathering over the economy.

In his latest shareholder letter, Dimon cited “challenges at every turn: a pandemic, unprecedented government actions, a strong recovery after a sharp and deep global recession, a highly polarised US election, mounting inflation, a war in Ukraine and dramatic economic sanctions against Russia.”

He continued, recognising the unique position the US is currently in: “Adding to the disruption, these events are unfolding while America remains divided within its borders, with many arguing that it has lost its essential leadership role outside of its borders and around the world.” He called for individuals to work together across private and public sectors. “JPMorgan Chase, a company that has historically worked across borders and boundaries, will do its part to ensure the global economy is safe and secure,” he wrote. The letter reads at times as if it were written by a politician rather than a corporate leader – does this offer a sign of where Dimon’s career could lead next? His name has been rumoured as a potential choice for the US Treasury secretary since 2009, under presidents Obama, Trump and Biden. While he has said he “never coveted the job,” his popular appeal will mean he remains relevant long after he steps down as JPMorgan Chase’s CEO.

Yet after several threats of leaving the business, Dimon is dedicated to another term of five years at the helm of JPMorgan Chase, so the industry can bank on his steadying influence and iconic leadership style, with one eye always trained on the next crisis, through whatever comes next.

Indeed, looking back to Dimon’s 2013 annual statement, published following the London Whale scandal, an insight into the chief executive’s mindset is offered. “In prior annual reports, we told you we cannot promise you results but that we do promise you, among other things, consistent effort and integrity,” he wrote at the time. “In that spirit – I make this promise: We will be a port of safety in the next storm.”

Can we tame inflation?

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Having seen operational costs rise by up to 15 percent since last summer, Clearly Drinks, a UK soft drinks manufacturer, had no other option but to increase the prices of its fruity water bottles by at least five percent. “Price rises and inflation have been on the horizon for quite some time now, but businesses are really starting to be significantly impacted,” says a despondent yet hopeful Claire Conolly, chief financial officer at the Sunderland-based company, adding: “As a manufacturing business, we have to be extremely agile and work smarter to remain a profitable business.”

Like many other businesses affected by inflation, the company has to improvise to stay competitive, investing in new technology and looking at different suppliers to bring costs down. But is that enough to chug along until the current wave of inflation fizzles out? “The firm has managed to continue its sustained growth against the difficult economic backdrop,” Conolly says. “We are hoping that these measures can be maintained for the long term.”

An old problem returns
Like Clearly Drinks, many businesses around the world are wondering how long this period will last. Inflation across the EU is expected to reach 6.8 percent this year, above the ECB’s two percent target. The UK, burdened with Brexit-linked inflationary pressures, saw inflation reach nine percent this April, a four-decade record. The picture is similar in the US, with inflation peaking at 8.3 percent, despite showing signs of slowing down in late spring. Global inflation more than doubled compared to last year and is forecast to land at a whopping 6.2 percent, according to the International Labour Organisation.

One reason why the current bout of high inflation has caught policymakers and central banks off guard is its previous absence from public discourse. Just before the pandemic threw the global economy into disarray, the economic press was exploring the opposite question; in 2018, The Economist ran an article entitled ‘Where did inflation go?,’ an allusion to historically low levels of inflation. “In the 20th century, inflation was almost a chronic problem. In the 21st century we thought we had got rid of it, but it now seems to return,” says Michel-Pierre Chelini, an expert on the history of inflation teaching at the University of Artois, adding: “This is the first time in the 35 years we have used annual indices that prices have really risen above a meagre one or two percent.”

Life struggles to return to normal in Shanghai as the pandemic lockdowns continue

Indeed, in the past decade, inflation in the eurozone only temporarily surpassed the two percent threshold; crisis-hit countries such as Greece sustained years of deflation. During the same period, the US experienced only one year of inflation higher than two percent (see Fig 1). The pandemic consolidated this trend, disrupting global supply chains and wiping out whole sectors, such as hospitality.

Most economists expected the turmoil to end in 2021, with the advent of vaccines offering a semblance of economic normality. Rating agencies were confidently predicting a solid economic recovery, enabling businesses and consumers to return to their pre-Covid habits. Some experts even forecast the advent of the new ‘roaring 20s,’ a reference to the interwar period of prosperity.

It was not meant to be. A confluence of events, including the war in Ukraine, a resurge of the pandemic in China, and post-Covid supply chain blues, has poured cold water on optimistic forecasts. Currently, the World Bank expects global growth to reach 2.9 percent this year, down from 4.1, while the IMF has downgraded its forecast for 143 countries.

Inflation lies at the heart of the problem, eating away at living standards across the world. Although economists now agree that high inflation is not a temporary phenomenon, they are divided on its origins, an issue that has taken on a political life of its own. Some point to supply-related reasons, such as choked ports and microchip and energy shortages. “Policymakers assumed that the initial drop in aggregate demand would have been long-lasting, while the negative supply-side effects of the pandemic were initially expected to be temporary,” says Alessandro Rebucci, an economist at Johns Hopkins University. “It turned out that the exact opposite happened, and nobody could have predicted that in 2020 or early 2021.”

Constrained supply may be linked to the shrinking number of employees returning to the office. With an increasing rate of retirement among older generations and a big chunk of workers skipping sectors like hospitality altogether, a trend dubbed ‘the Great Resignation,’ unemployment has hit record lows in many advanced economies. The US labour market is showing signs of overheating, with over five million job vacancies remaining unfilled.

Many economists, however, point to increased aggregate demand as the culprit, due to an unexpectedly rapid recovery. Government handouts to workers protected disposable income at a time when consumption was artificially constrained, creating excess savings; in the US, fiscal stimulus totalled $2trn just in 2021. “The amount of support that was provided on both the monetary and fiscal side in terms of stimulus has led to extremely strong aggregate demand, and that is as important, if not more important than supply,” says Robert Rich, Director of the Center for Inflation Research at the Federal Reserve Bank of Cleveland.

China’s Covid woes
One reason why experts expect inflation to persist and global growth to stall is China’s lacklustre economic performance. The Asian country is facing a renewed phase of Covid restrictions, with lockdowns in industrial hubs holding up production. Restrictions in Shanghai, a city that handles a fifth of China’s trade, may exacerbate global supply chain pressures and drive up inflation, according to the credit rating agency Fitch Ratings. The measures have limited the ability of manufacturers to hire employees, obtain raw materials and export goods, with cargo flow coming to a standstill.

Shanghai Port in China

Unwilling to purchase Western vaccines, the Chinese government is sticking to a zero-Covid policy, fearing that the country’s high percentage of senior citizens could clog up the healthcare system. Chinese consumers have resorted to panic buying, driving up prices. “China’s zero-Covid policy is adding fuel to the fire of global inflation, especially in countries where monetary policies have been extremely loose since the start of the pandemic,” says Zhiwu Chen, Professor of Finance at the University of Hong Kong. To add insult to injury, the Chinese economy is also facing headwinds elsewhere, with the default of Evergrande, a leading property developer, sparking concerns over a collapse of the construction sector.

China’s woes would be inconsequential for the developed world if the Asian country wasn’t so important for global trade, accounting for 15 percent of merchandise exports. Analysts from the US think tank Peterson Institute for International Economics argue in a recent report that China is covertly driving up global inflation through import restrictions and tariffs on fertilisers, pork and steel.

A pricey war
Pandemics aside, if there is a single event that has exacerbated the world’s inflationary woes, it’s the war in Ukraine. “Before Russia invaded Ukraine and the West imposed sanctions, economists were expecting inflation to peak up,” says Rebucci. The conflict has sparked an abrupt energy crisis, reminiscent of the oil crisis in the 1970s when oil-producing Middle Eastern countries imposed an embargo against the US in protest of the country’s military support of Israel.

Until February, Russia was the EU’s leading supplier of natural gas, oil and coal, providing a quarter of the bloc’s energy. Many EU countries have rushed to close deals with other oil producers and even reopen coal plants. However, dependence on Russia is particularly acute in the gas market, with 40 percent of EU imports coming from the country and some EU members like Hungary and Austria being nearly totally dependent on Russian gas.

Western sanctions have limited EU-Russia trade to a minimum. This May, EU leaders announced a partial Russian oil ban, with an exemption for supplies provided via pipelines. However, many energy experts are warning that a full-scale ban on Russian energy could trigger a steep recession across the Eurozone.

For its part, Russia, itself facing inflation of 17.8 percent, is playing hardball, well aware that inflation dominates the political agenda across Europe. Its government has threatened to cut off exports if sanctions remain in place, a threat partly realised last April when Russian state company Gazprom said it would stop supplying Poland and Bulgaria, following their refusal to pay in rubles.

Another reason why the war has sent inflation rates through the roof is that Ukraine and Russia are among Europe’s largest producers of key foodstuffs. Ukraine, known as ‘the breadbasket of Europe,’ exports around 12 percent of the world’s wheat production, with Russia accounting for another 17 percent; combined, they account for more than 80 percent of global sunflower oil production.

The war has disrupted agricultural production in Eastern Ukraine, leaving crops to rot and forcing farmers to take up arms. This May, the head of the European Investment Bank said that the country is “sitting on €8bn worth of wheat” that it can’t export. The two belligerents also produce large amounts of fertilisers, chemicals and steel.

Analysts fear that a prolonged war could push prices even higher, sparking an unprecedented commodity shock.

Europe facing inflationary Armageddon
One reason why Europe is vulnerable to inflationary pressures is that Germany, its economic powerhouse, has been hit by the dual crisis of post-Covid blues and the war, with its energy-intensive, export-orientated economy being particularly vulnerable. Experts have halved their 2022 growth forecasts for the country, while the government expects annual inflation to reach 6.1 percent. Fears over a long period of inflation have strengthened voices calling for the ECB to raise interest rates, which have stayed in negative territory for over a decade. Despite facing inflation rates similar to other advanced economies, the institution has until recently refused to follow the steps of the Fed and the Bank of England. ECB President Christine Lagarde has said that the US and Europe are “facing a different beast,” with US inflation being a result of a tight labour market, whereas the war is the main problem for Europe. “If I raise interest rates today, it is not going to bring the price of energy down,” Lagarde said.

However, with Eurozone inflation set to rise up to 7.7 percent, the bank has decided to tighten its monetary policy, raising rates by 0.75 percent by September and ending its bond-purchasing programme. In May, ECB Governing Council member Robert Holzmann said that the bank should raise rates three times this year and up to 1.5 percent. Reluctance to raise interest rates derives from deep-seated fears that this may trigger a recession and possibly a new sovereign debt crisis. “Monetary policy will have limited effects on inflation at best,” says Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, an asset management firm, adding: “The whole point of ‘normalisation’ is to remove crisis measures as fast as possible, including asset purchases and negative rates. Their main justification is that with inflation so high, there’s a risk that inflation expectations get de-anchored, leading to a wage-price spiral.”

Stagflation and the tumultuous 1970s
An even graver concern is that the world economy is in for a period of low growth and high inflation, a phenomenon known since the 1970s as ‘stagflation.’ Economists look back to that era to draw lessons for today, given that it combined a war-driven energy crisis and double-digit inflation rates. Growth remained stubbornly low for the biggest part of that decade, while most Western economies saw unemployment rising to unprecedented levels.

The prospect of stagflation looms large in current policy debates, due to the lack of the monetary tools to tackle the problem at its root

A case in point is the UK, which experienced the infamous ‘winter of discontent’ in 1978 with three-day workweeks, along with a monetary crisis that led to a humiliating intervention from the IMF two years earlier.

However, parallels end there. Today, Western economies are less dependent on oil, while the fracking revolution has turned the US into a net energy exporter. Employment is at record-high levels and trade unions have less clout to push wages higher, which are no longer indexed to inflation anyway. “Europe is not fragmented {like in the 70s} with its members competing against each other for much smaller global export markets. We are not in the 1970s and we are not going back to those times,” says Professor Rebucci from Johns Hopkins University. Another crucial difference is that central banks are independent, which means that they can take measures to tackle inflation without having to worry about political interference. Central banks and policymakers can also draw upon the lessons from the 1970s, says Robert Rich from the Centre for Inflation Research, using effective communication tools to manage inflation expectations, given that the Fed is no longer considered a secretive organisation and its goals are more clearly defined. “There has been very much improved communication and enhanced transparency for the efficacy of policy,” he says, adding: “In the US, we now have a very specific objective for inflation, which is two percent.”

President of the European Central Bank Christine Lagarde

Despite these differences from the 1970s, the prospect of stagflation looms large in current policy debates, due to the lack of the monetary tools to tackle the problem at its root. Half a century ago, the antidote to the malaise of inflation was raising interest rates. This is no longer an option, given that it would increase borrowing costs for indebted firms and depress growth. The result, according to critics, is that central banks face an impossible dilemma: raising interest rates could trigger a recession, while sitting on their hands could usher in a long period of stagflation.

For many economists, the fault lies squarely on the combination of reckless money printing and lax fiscal policy during the pandemic. Since 2020, the Fed has added some $5trn to its balance sheet, accumulating around a quarter of US public debt, with central banks around the world following suit.
“Central banks should have raised interest rates earlier. Now it’s too late, it won’t have any effect on inflation,” says Huw Dixon, an expert on inflation who teaches economics at Cardiff University. “The main job of the Bank of England and the Fed is to keep inflation down, but they took their eye off it, particularly during the pandemic.” Some extend this argument to the period following the credit crunch in 2008, when central banks aggressively cut interest rates and unleashed quantitative easing, both perceived back then as temporary measures. “We were supposed to go back to normal after a year or two, but interest rates have been practically zero since 2008. This has never happened before in history,” Dixon says.

US Secretary of Treasury Janet Yellen

The question of who will pay for high inflation rates already dominates the political agenda in most advanced economies, with governments taking a range of measures to alleviate the pressure on households, from tax cuts to energy subsidies. “Inflation is essentially a wealth tax, so people who have lots of money will find themselves worse off if they haven’t got gold or shares,” says Dixon. But for others, it may have been worth it to avoid a bigger crisis. “Monetary and financial policy during the pandemic may have cost us some basis points of inflation, but the jury is out on whether it was the right thing to do,” says Rebucci, adding: “If we can help a generation of young people enter the job market with the same conditions as their predecessors, we will have accomplished a lot.”

Inflation can have political repercussions too. Economic tumult in the 1970s led to a fierce effort to tackle inflation at all costs, contributing to the reversal of the political pendulum in most advanced economies in the early 1980s. “Households with a low standard of living and a margin of financial security close to zero can be strangled by inflation, living in constant fear of plunging into a cycle of inexorable debt,” says Chelini, the inflation historian, adding: “This can lead to individual withdrawal and despair or the formation of a ‘coalition of discontent’ that can politicise the issue.”

The debt conundrum
Both governments and private businesses sit on historically high levels of debt. Global debt reached a record $226trn in 2020, according to the IMF. Raising interest rates too high and too soon could push many ‘zombie companies,’ sustained through easy credit since the Great Recession, to bankruptcy. “Consumer confidence is at an all-time low, and this latest hike {of inflation} has come as a devastating blow for businesses already struggling with the increased cost of debt,” says Neil Debenham, CEO of Fintrex, a UK corporate consultancy for SMEs.

Households with a low standard of living and a margin of financial security close to zero can be strangled by inflation

Higher interest rates could constrain the ability of debt-burdened governments to borrow. Italy is a main concern for the ECB, with a debt-to-GDP ratio of over 150 percent. However, markets may also factor in domestic political conditions and particularly the Italian government’s prudent fiscal policy, argues Rebucci: “This is not a time to worry about Italian default, since the current government is trying to leverage European funds to support investment.”

Some suggest that a period of high inflation could reduce the value of public debt, a policy that benefitted many European countries following the Second World War. During that period, the interest rate on government debt was lower than inflation, a phenomenon known as ‘financial repression,’ helping countries like the UK, whose sovereign debt had peaked at around 270 percent of GDP, shrink their debt burden. Governments may use a similar trick now to deal with rising debt levels.

“It’s certainly a way out of it, but not necessarily a good way,” Dixon says, adding: “Inflation is like a tax aimed at redistribution from lenders to borrowers, and the government is the biggest borrower.” However, that post-WWII period is not coming back, according to Dixon, since it was high growth rates, rather than inflation, that did the trick: “GDP increased significantly while debt remained roughly constant. Currently, we are very good at raising nominal GDP, but real GDP doesn’t go higher.”

For optimists, the current bout of inflation is a temporary, even necessary phase to return to economic normality. “Inflation will be managed by central banks and will soon be brought under control. Two years from now we will have stopped talking about it,” says Rebucci. Signs that inflation rates were slowing down in May have already breathed some optimism into markets. But pessimists beg to differ, warning that the hard part lies ahead. “Historically, inflation ends in tears,” says Dixon, adding: “Nearly all inflationary periods we had in Britain ended with a recession. That’s why it has always been a big priority to avoid high inflation in the first place.”

Betting on a meta future

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In the 1992 sci-fi novel Snow Crash, author Neal Stephenson envisioned a ‘metaverse’ – a world where, in the face of a global economic collapse, the protagonist dons a headset to escape reality and enter a virtual space where avatars stroll the streets, digital shops line the pavements and electronic currencies rule the roost.

Roll on 29 years and that vision is close to becoming reality. In October 2021, Mark Zuckerberg announced plans to “bring the metaverse to life,” rebranding Facebook’s now-eponymous name to Meta and investing $10bn in the virtual space.

In Zuckerberg’s vision, consumers would be able to “work, learn, play and shop” in a 3D digital world, creating avatars of themselves to do business, study and visit friends across the globe via virtual and augmented reality.

It might still sound like the stuff of fiction, but Facebook isn’t the only one getting involved. In November 2021, Microsoft unveiled Mesh for Microsoft Teams, a mixed-reality platform described in its blog post as a “gateway to the metaverse,” designed to allow employees to create avatars of themselves and attend virtual meetings. A few months later, the company bought gaming giant Activision Blizzard for $68.7bn in a record-breaking deal that would “provide building blocks for the metaverse,” in the words of Chief Executive Satya Nadella.

Entertainment companies such as Nvidia (inventor of the GPU), Epic Games – developer of the Fortnite platform, where Ariana Grande hosted a virtual concert last summer – and Unity (the world’s leading platform for creating 3D content) are all investing in the metaverse too, while Chinese giant Tencent has filed for 100 metaverse trademarks.

Disney has meanwhile appointed an executive to lead its metaverse efforts, while Manchester City football club has announced plans to build a virtual Etihad stadium in the metaverse in partnership with Sony.

Entire cities are getting in on the game too; Seoul has invested KRW 3.9bn (around $3m) in creating a metaverse, with digital twins of its key attractions set to launch in 2023, and Shanghai is also aiming to offer public services via the metaverse in the coming years.

Transformational moment
While some have downplayed all this as mere hype, others are betting on a metaverse future. Crypto company Grayscale has forecasted a market opportunity of $1trn in yearly revenues, while Morgan Stanley has predicted China’s metaverse market alone could be worth nearly $8trn in the future. A recent report by JP Morgan (Opportunities in the Metaverse) meanwhile concluded “the metaverse will likely infiltrate every sector in some way in the coming years.”

Some believe it could transform the way we do business and live our wider lives altogether. Among them is Melanie Subin, Director at the Future Today Institute, a strategic consultancy that helps organisations prepare for the future.

“I believe it’s almost inevitable that the metaverse will become very pervasive over the next decade,” she told World Finance. “For many, augmented reality devices such as smart glasses are likely to entirely replace the multiple devices we use today, such as smart watches, smart phones and earbuds.”

Yesha Sivan, author, professor and CEO of business platform i8 ventures, agrees. “The metaverse, when it comes to fruition, is going to change our lives much like the internet has completely changed our lives,” he said in a recent interview with German news channel DW Business. “The interesting question, of course, is which domain is going to be affected first.”

Defining the ‘metaverse’
All of this is leading many to question what the metaverse actually is – and what opportunities there might be within it.

Most envisage a world accessed by virtual or augmented reality headsets, where users interact with others via their virtual selves, or avatars. In its fully realised form, sights, sounds and smells would replicate reality – or an enhanced, customisable version of it – with devices “emitting scent particles and altering the feeling of ambient temperature,” according to Subin. “The metaverse will maximise our visual and auditory experiences, and introduce our other three senses into the mix,” she said. “It’s this expansion of sensorial experience that will make any metaverse interaction truly immersive and embodied.”

In the ideal meta-world, users would also be able to hop from one company’s metaverse (such as Meta’s) to another (such as Microsoft’s). “The theory is that each person or organisation would build their own one, but they are all inter-operable and they all speak to each other,” Tom Harding, Bristol-based partner in law firm Osborne Clarke’s commercial team, told Business Live.

How and where this might be used most remains up for debate. For some, its value lies in gaming and entertainment – a place where visitors can prowl the streets under any identity they wish, holidaying in far-flung corners of the world, attending exclusive music events, gambling in virtual casinos and buying digital twins of their favourite fashion products.

For others it’s a space for investment, where savvy types can purchase, develop and sell non-fungible tokens (NFTs) such as digital artworks and virtual real estate, creating whatever they can dream up in their plot of digital land and monetising it in a way not dissimilar to the real world.
Others point to education, business, tourism, medical and military uses; Microsoft has already been contracted to produce augmented reality headsets for the US army in a $22bn deal, for example, indicating the military’s intentions to branch into the virtual realm.

Beyond all of this, the metaverse is fundamentally a space for limitless creativity, according to Vipp Jaswal, Chief Executive of the Interpersonal Intelligence Advisory and a C-Suite Advisor. “The greatest strength – as well as the greatest weakness – of the metaverse is that there are no restrictions,” he told World Finance. “It allows for an explosion of creativity. And it allows individuals to recreate themselves into whoever they want to be.”

The business of metanomics
It’s not just consumers who stand to benefit from Web 3.0. Many have pointed to opportunities in business – from making global communication and remote work easier to opening up whole new revenue streams.

“When you think about the economics of the metaverse—or metanomics—there are opportunities in almost every market area,” reads the JP Morgan report. That includes testing products in a digital environment to lower costs – which is exactly what Hyundai is doing with its Meta-Factory, a digital twin of its Singapore factory, announced in January and set to be complete by the end of 2022. As well as the obvious financial benefits, virtual testing means minimising resources and boosting a company’s sustainability credentials.

Others point to mass job creation in the metaverse. From 3D designers and content creators to digital event producers, the virtual realm has the potential to produce a whole new economic sector. It’s easy to see how certain industries stand to gain, too. There are obvious opportunities in the gaming sphere; Fortnite generated more than $9bn in revenues in 2018 and 2019 alone, according to financial documents, while rival platform Roblox was valued at $68bn in December.

Fashion brands have also been quick to jump on the bandwagon; last year, John Lewis opened a digital shop on Fortnite, while Nike has launched its own metaverse within the Roblox platform (Nikeland). The company also bought virtual shoe company RTFKT, and has already made $3m from selling virtual NFT trainers (see Fig 1). Dolce & Gabbana has meanwhile made $6m from its own collection on NFTs, and Ralph Lauren, Gucci, Balenciaga, Dior and Burberry have all created NFT products too. Even Walmart is planning on selling virtual goods, according to reports.

As well as allowing brands to sell “the same product twice – one in the real world and one in the metaverse,” in Jaswal’s words, there are clear promotional benefits for these brands. If you see a Nike store while you’re tuned in to Roblox, you might just find yourself popping to the physical store too.

Rocking the music industry
It’s not just gaming and marketing that stand to gain, though. Recent metaverse performances by the avatar versions of Ariana Grande, Justin Bieber and Ed Sheeran among others, point to one thing – the metaverse could be about to rock the music industry too.

The metaverse, when it comes to fruition, is going to change our lives much like the internet has completely changed our lives

That could bring several benefits for artists as well as consumers, according to Jaswal. “You could have a one-to-one concert with your favourite pop star sitting in their home,” he said. “You could come into their metaverse mansion, meet their drummer and watch a live performance. That would cost more than a real-life concert because it would be personalised, and the artist could obviously fluctuate the price whichever way they want. So there are huge opportunities for artists to monetise this.” This isn’t empty talk; Travis Scott’s Fortnite virtual concert in 2020 generated $20m in merchandise sales, according to Forbes, and Ariana Grande’s virtual Fortnite performance was expected to pull in a similar figure. Zara Larsson meanwhile told the BBC last year she’d made more than $1m by selling virtual hats, backpacks and sunglasses on Roblox in the space of six months. Take away the costs and venue limitations of physical concerts, and it’s easy to see the potential gains for performers going virtual.

Opportunities for creators
But it’s not only musical artists that stand to benefit from producing virtual versions of their work. If a visual artist or content creator makes an NFT, the creator or company gets paid a royalty every time it’s resold. That’s the case whether it’s a digital artwork (like the set of NFT Bored Ape images that sold at Sotheby’s for $24.4m last September), a plot of real estate or a virtual shoe. That could mean big business for creators and brands, as well as for those investing in the tokens.

That’s one reason many are betting on NFTs as the next big thing in crypto. But there are other advantages to these tokens too – not least the fact they can’t be deleted, copied or destroyed. And while traditional currencies and cryptocurrencies such as bitcoin are ‘fungible’ (meaning one bitcoin can be replaced by another), every NFT is unique.

“Owning an NFT is just like owning an original, one-of-a-kind physical item,” said Eric Anziana, Chief Operating Office of crypto.com. “An NFT is verified on the blockchain – you know who the creator is, where it comes from, and there is no way you can counterfeit it. NFT digital assets are unique in the way they build communities, connect people globally and create long-term value.” With popularity in crypto growing by the day more generally – the number of crypto owners globally grew from around 100 million to 300 million through 2021, according to Anziani – it’s not totally out there to imagine NFTs entering the mainstream in the coming years.

From real estate to virtual estate
That could bring substantial opportunities for investors, and some are already capitalising. One of the biggest areas many are pegging hopes on is the virtual real estate market, with metaverse platforms such as Decentraland, the Sandbox, Somnium Space and Cryptovoxels offering buyers the opportunity to purchase and develop plots of digital land in the hope demand rises and value of land increases.

On their ‘land,’ owners can host (and monetise) events, rent out space to brands wanting to advertise and open shops to sell virtual products.
Some might be sceptical, but prices have already been rising; the average cost of a virtual land parcel across the four main metaverses doubled from $6,000 to $12,000 in the period from June to December 2021, according to JP Morgan, and in January 2022 alone, real estate sales in the metaverse reached more than $85m, according to MetaMetric Solutions.

The cyrptocurrencies being used to purchase these plots are on the rise too; in the days following Facebook’s rebrand to Meta, the value of mana – the digital currency used in Decentraland – soared from less than $1 to a high of $5.79. Several companies are already investing; in November, Tokens.com put $2.4m on a 116-parcel estate in Decentraland (which is divided into 90,000 parcels). The crypto investment firm aims to create a virtual Fifth Avenue in the platform’s Fashion Street district. The same month, virtual property fund Everyrealm – formerly Republic Realm – broke all records by buying a $4.3m plot in the Sandbox that it plans to develop in partnership with games company Atari.

Jaswal believes traditional real estate investors will be quick to jump on the bandwagon. “There will be a lot of investors,” he said. “We’ll likely see a few big players, realtors and real estate agents, followed by a huge tidal wave of smaller players.”

But transitioning from physical to virtual real estate might not be as simple as some are hoping, with several hurdles to overcome.

Janine Yorio, Co-Founder & CEO of Everyrealm, says the value will come from the experiences buyers create on the land they own, rather than just having the land itself. “Virtual real estate is the first step in building the metaverse,” she said. “The value comes from the experiences you create on top of that virtual real estate and the community you bring in through those virtual experiences.”

That means investors will likely need 3D designers and other specialists on board if they’re to profit from the opportunities, meaning some might be left out in the cold. What this virtual realm could enable, however, is a democratisation of the marketplace, increasing access for non-traditional funds and individuals keen to capitalise on the next big trend in a decentralised economy where anyone can own.

A hotbed for the ‘dark web’
But while there are clearly significant opportunities within the sector, many have pointed to the risks – especially while the metaverse remains largely unregulated.

Take away the costs and venue limitations of physical concerts, and it’s easy to see the potential gains for performers going virtual

Among them is Jaswal, who believes the metaverse could be a hotbed for illegal activity. “The metaverse allows the dark web to surface on another platform,” he said. “You could have arms dealers trading via the metaverse, and there’s also potential for scammers to flourish.

“There’s nothing to stop people creating fake personas, either. Someone might create a fake Kim Kardashian stripper in a metaverse club. Who’s going to stop it and how? The company that formed her is going to be based in a city you cannot trace, being paid in a currency you cannot touch. Sue all you want, but who are you suing? Where is the police force in the metaverse? Where is the copyright law, and where are the enforcement authorities? There’s nothing.”

The industry is already facing issues. On Decentraland’s Marketplace, for example, several NFTs contain slurs that haven’t yet been banned (at the time of writing, the name AdolphHitler was currently on sale for 6m ether, or just under $2,000). With the platform running on a ‘decentralised autonomous organisation’ (DAO), the only way for offensive NFTs to be taken down is if enough community members vote (the higher the financial stake they own, the more voting prowess they have).

Charlie Bell, Executive Vice President of Security, Compliance, Identity and Management for Microsoft, made the risks around the metaverse clear in a recent blog post. “In the metaverse, fraud and phishing attacks targeting your identity could come from a familiar face – literally – like an avatar who impersonates your co-worker,” he wrote. “These types of threats could be deal breakers for enterprises if we don’t act now.”

Calls for regulation
Governments are aware of the challenges; EU digital chief Margrethe Vestager has already called for more scrutiny around the metaverse, pointing to new challenges for antitrust regulators in an interview with POLITICO, and cautioning on the need to keep a close eye on NFTs. Others are taking action; in China, Beijing recently implemented new rules on the way companies can operate algorithms, with draft regulations on ‘deep synthesis’ technologies – used to generate or modify voices, videos and virtual settings – that could help prevent deepfakes. The EU is also looking into regulations under its proposed AI Act.

But Jaswal believes more needs to be done. “International governments are being very complacent about how, when and if they are going to impose any form of regulation in the metaverse,” he said. “As a result, the public are going to be exposed to a variety of unethical illegal activities. The metaverse is going to be the ultimate test of how nations cooperate with each other.”

Silicon Valley ‘boosterism’
Of course, all of this relies on the assumption that the metaverse is actually going to take off – an assumption some believe is over-hyped. Among them is Andrew Curry, Director of Futures at the School of International Futures (SOIF), which helps leaders make strategic decisions. He believes the metaverse is more about “Silicon Valley boosterism” than anything else, with tech giants using the ‘metaverse’ term for headlines first and foremost. “The business advantages of talking up the metaverse to investors outweigh the risks,” he told World Finance.

International governments are being very complacent about how, when and if they are going to impose any form of regulation in the metaverse

His scepticism is down to a combination of factors – not least the fact there’s still a long way for technology to catch up with the plans. “The internet isn’t that stable even now in handling video calls, even in the richer parts of the world,” he said. “Whether it will cope with the data requirements of the metaverse seems an open question – at least without substantial further investment in infrastructure. This may not be a priority in the face of investing in other areas, such as climate adaptation infrastructure.”

Curry argues that even if tech does catch up, we’re yet to see what consumer uptake will be like. Bulky headsets – and associated issues such as motion sickness – may well be a potential barrier unless improvements to the current interfaces are made, along with the fact many might not be ready to switch physical interaction for the virtual realm. There’s also the rather large question as to whether rival companies would be willing to cooperate in order to build a unified, inter-operable metaverse, where users could hop from one world (and competing company) to another.

A hybrid future
But many are working on overcoming these barriers – not least improving the interfaces that we would use to access the metaverse. Apple is rumoured to be releasing its AR wearable this year, while Google, Snap and Microsoft are all working on headsets that might just be the golden ticket to a smoother VR and AR experience. Enhancements to blockchain technology are also underway to encourage greater adoption of cryptocurrencies, according to Everyrealm’s Yorio.

Of course, in the same way emails never entirely replaced phone calls, the metaverse is unlikely to ever just entirely replace physical interaction. The most likely scenario will be a combination of digital and real-world meetings, interactions and events – in the same way we are seeing a mix of Zoom calls and in-person meet-ups post-Covid.

Anziani believes that will seep into a combination of physical and digital currencies too. “We will continue to see a steady evolution into a more digital economy,” he said. “This may combine elements of physical transacting and digital transacting into one experience – paying for something in person via a crypto wallet, or going to an NFT gallery in person and seeing digital art, for example.”

Embracing the metaverse
Whether this comes to fruition as many are forecasting – and whether the metaverse ends up transforming our lives altogether or remaining a niche area with just a handful of uses – remains to be seen.

But with more and more organisations embracing the metaverse concept it’s clear this is already having an impact. How organisations shift their business models, how financial institutions adapt to a new crypto-climate and how governments act to regulate the metaverse might be some of the biggest questions we face in the coming years.

Only time will tell how the answers pan out – but if the forecasts ring true, we could just be edging towards a world closer to Snow Crash than we might once have imagined.

Geo-political turbulence

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Major financial firms have always been reluctant to talk about geo-political risks, at least publicly. They have been comfortable in a globalised world where the growth of international trade and cross-border investment made the deep political fissures of the Cold War seem like a distant memory. This has left them ill-prepared for a new era of sustained geo-political turbulence.

Many did not even analyse the potential risks to their business thoroughly because they did not view some of the more cataclysmic risks – such as a war in Europe – possible, or because the issues raised are just too sensitive – such as with China and the threat it poses to Taiwan. The disruption caused to global trade and the international financial services sector by the Global Financial Crisis of 2008–09 seems like a bump in the road when compared to the huge craters being caused by the Russian invasion of Ukraine.

The immediate consequences with the massive spike in energy prices and the draconian sanctions are hard enough for many economies and businesses to swallow, but the effects are going to stretch far and deep beyond that. Resilience has become a popular concept for financial institutions to talk about but, all too often, it has been resilience to those risks that are more predictable and the impact of which can be quantified with a reasonable degree of certainty.

Those critical uncertainties, only visible in the far distance of horizon scanning exercises, were often passed over. Brexit provided a jolt to that complacency for firms with well-established cross-border business between the European Union and the UK but it was the COVID-19 pandemic that made boardrooms think harder about those risks it had previously pushed into the background as unthinkable.

Failure to prepare
Pandemics had long been on the list of major threats to society, economies and financial institutions but, if they are being honest, few western governments and businesses seriously explored the possible impacts and put in place robust contingency plans for a pandemic.

The huge public relations disaster of the way the insurance industry – especially in the UK – responded to business interruption insurance claims from businesses forced to close by lockdown measures, amply demonstrates how unprepared major business sectors were for a pandemic. That was one wake-up call. It may have had the bosses of the world’s financial institutions looking harder at what might be looming on the far horizons of business risks but it still did not elevate geo-political threats to the top of many boardroom agendas. It would be unfair to characterise all firms as blinkered when it comes to geo-political risks, says Oksana Antonenko, a Director at the Global Political Risk team at Control Risks. She told World Finance that regulators must also share some of the blame for overlooking these threats, by forcing firms to focus their risk management expertise elsewhere: “Financial regulation has not developed a sound, consistent, coherent and rigorous approach similar to that which firms were required to adopt after the global financial crisis. That introduced stress testing for financial risks but did not do the same for geo-political risks.”

Antonenko continued: “Unless there is a regulatory requirement to undertake this and regulators in the west require financial institutions to publish geo-political risks analysis they will not do so. They won’t get visibility and financial institutions will not talk. There were some requirements, especially in the US, to look at emerging risks but there has never been a clear definition of what these risks are.”

She also points to the perils of talking openly about geo-political risks, highlighting the loss of licences by some firms in Turkey when they voiced concerns about the reckless economic policies of Viktor Orbán’s government. Similarly, the silence from major financial institutions on the risks China poses is deafening. No one will talk about them. The fear of upsetting crucial client relationships is all pervading, and many firms cite genuine concerns for the safety of their staff in China or the families of London-based Chinese staff if they are seen to venture opinions that might be interpreted as hostile in Beijing.

Monitoring exposure
Russia’s assault on Ukraine has potentially changed much of this reticence. Now, financial firms are looking at their exposures to a wide range of geo-political hazards and, in particular, the risks of getting caught by suddenly imposed sanctions or enmeshed in social unrest ignited by growing internal tensions and economic pressures. The response of western liberal democracies to Russia’s invasion of Ukraine has surprised many in its strength and unity and has added to the volatility across the world’s financial markets.

Measuring, predicting and protecting against the consequences of that volatility is now a priority. “Many firms do now have teams embedded at a senior level and are now looking at these risks in a more rigorous fashion,” says Antonenko. There are many ways of looking at these threats and trying to make sense of them using the various scenario planning tools that academics have developed.

Plotting the risks on a matrix that maps both the critical certainties and critical uncertainties is one favoured tool for bringing out the threats – and the opportunities (see Fig 1). Those that are placed on the far left of the certainties matrix are the issues that should already be part of day-to-day business planning, strategy and delivery. Moving across the matrix are the issues surrounded by a higher degree of uncertainty. It is those that migrate to the top right hand corner – extreme uncertainty but with potentially high impact – that should attract the most attention but which are often put in the ‘too hard’ tray.

Potential for escalation
Other tools embody the notion of horizon scanning to draw out the major disruptive threats to their business. “Horizon scanning is vital in this area. In many ways the Ukraine crisis has been one of the key risks to watch since late last year. We certainly saw the potential for escalation,” says former BBC journalist and anchor Susannah Streeter, now senior investment and market analyst at financial firm Hargreaves Lansdowne.

Streeter adding: “Because the horizons are often further away it tends to be the current risks that concentrate minds and are pushed to the top of the agenda. We saw this with the pandemic. The risks to Europe were downplayed, even when it took hold in Italy. Countries didn’t move up to that emergency gear until it arrived in their own countries.”

Pro-democracy protesters are arrested by police in Hong Kong

Many scenario planning tools categorise each risk as is plotted on their matrix or across their horizon. This helps highlight the sort of knowledge and expertise needed to understand the issues. The most common categorisation is PESTEL (Political, Economic, Socio-demographic, Technological, Environmental and Legislative). This also makes it easier to see the potential connections, how one event can act as a trigger for another, something highlighted in a recent Informed Insurance report from leading corporate law firm DAC Beachcroft.

Looming large
In the context of Ukraine, this immediately connects energy conflicts, trade disputes and sanctions, terrorism and cyber-attacks with social unrest also looming large in this complex risk scenario. It also shows how dramatic geo-political events can quickly cut across other priorities, such as the fight against climate change and the development of broad environmental, social and governance (ESG) strategies, says Helen Faulkner, head of insurance at DAC Beachcroft: “Up until the Russian invasion of Ukraine the emphasis in insurer ESG strategies was firmly on the environmental aspects. Ukraine has not so much diminished that focus but brought the social and governance issues to the fore as well.”

Financial firms are looking at their exposures to a wide range of geo-political hazards

Faulkner explained: “Energy strategies are at the heart of the European response to the invasion as we all rush to disconnect our reliance on Russian gas and oil. This could either set back the shift away from fossil fuels, or accelerate it as nuclear energy and renewables enjoy increased government investment.”

Global supply chains have been sensitive to concerns about environmental sustainability and have been very focused on reducing their carbon footprints, especially following the COP26 Summit in Glasgow last November, which imposed new net zero targets on international transport by road, sea and air.

The war in Ukraine has forced firms to change priorities says Oliver Chapman, CEO of supply chain specialist OCI: “Everyone was trying to do their best on sustainability and reducing their carbon footprint. But their number one priority is to make sure their supply chain is secure and this means sustainability has taken a bit of a lower priority. It still matters, but if a business has to put more trucks on the road to keep its business going then that is what it will do.” The ‘S’ and ‘G’ parts of ESG will also come into sharper focus, according to Faulkner: “The social part of ESG is also important. How businesses treat refugees will be judged as much as how governments treat them.

From how easy financial institutions make it for refugees to get insurance cover and banking services, to offering them employment opportunities, will all come under the microscope of public opinion. Governance is also crucial as sanctions are extended and enforced. Most insurers and brokers have withdrawn from Russia but the complexity of international sanctions requires constant review and monitoring.”

Serious questions to be asked
Sanctions are one of the major hazards and have myriad consequences for financial institutions and the economies of the western liberal democracies that have implemented them. “It was a surprise to see such unity of purpose, especially how quickly the Europeans adopted sanctions that have damaged their own economies, especially in relation to energy costs,” says Antonenko. Further adding: “There is a serious question around how sustainable this will be over time. This could go on for months, if not years, and the price will be quite high for Europe.”

The price could be high for businesses that get it wrong too, warns Streeter: “It is the reputational risk that really worries firms. Even when governments haven’t necessarily imposed specific sanctions there is the court of public opinion holding firms to account. Some took longer than others to withdraw from Russia but the power of social media gradually impacted some major global brands and forced them to act.”

Climate change protesters

Nuanced positions are hard to sustain in the face of strong, often sharply polarised, public opinion, Streeter continues: “HSBC’s standpoint on the Hong Kong protests in calling for stability seemed to many to be supporting the authorities. It shows just how difficult it is to walk that tightrope.” Wherever you look, sanctions compliance is an issue, says Chapman. Many of his clients have complex international supply chains and feel very exposed to the potential risk of making a mistake by inadvertently dealing with a sanctioned entity.

“There has been a huge focus on due diligence. It is now important to look beyond your own suppliers and look at their suppliers and their suppliers’ suppliers. What we don’t know is how these will be implemented and enforced over time and what sort of fines and penalties could be issued for breaching them in some way,” said Chapman.

Antonenko agrees: “Compliance is very difficult. There are just hundreds and hundreds of people and firms on the sanctions lists. We are seeing over-compliance at the moment with banks being very cautious. One consequence could be that sanctions will encourage the rise of cryptocurrencies. They are certainly going to benefit from this.”

The crypto markets
At the moment, the price of bitcoin and other leading cryptocurrencies does not show much impact from the Ukraine conflict. Since the heavy build-up of Russian forces on Ukraine’s border started last November, the price of bitcoin has fallen by 50 percent with trading levels relatively low. The cryptocurrency markets are not exhibiting the sort of volatility you might expect if firms were switching to them, either to facilitate legitimate payments or find a way of getting round sanctions. Many of the key sanctions are financial, including the effective freezing of assets held abroad by Russia’s central bank and selected Russian commercial banks, and the exclusion of most Russian intermediaries from the SWIFT messaging system used to facilitate cross-border transactions among banks.

The tough sanctions imposed on the large foreign currency reserves Russia has built up caused many a sharp intake of breath across the international money markets, but perhaps were only to be expected once the major western economies and Japan started to move to isolate Russia financially. The freezing of the reserves is directly linked to the desire to limit Russia’s ability to finance its war against Ukraine. The Bank of Russia had accumulated more than $600bn of international reserves, including gold (see Fig 2).

This was a 50 percent uplift over five years and, in retrospect, is being seen as laying the ground for financing the expansionist policies of the Russian regime. This will be an area where sanctions could develop quickly. Economists Richard Berner, Stephen Cecchetti and Kim Schoenholtz, writing for the VoxEU research and analysis website, warn: “Sanctions trigger an arms race. Once in place, the target looks for paths to evade them, while those imposing sanctions work to increase their effectiveness. Put differently, sanctions are a game in which one party looks for leaks to exploit while the other works to plug the holes. Furthermore, an essential aspect of the arms race is that the two parties seek to demonstrate their resolve in an effort to convince the other side to concede.

Consequently, the most important aspect of effective sanctions arguably is a credible commitment to modify and update them as needed – that is, to do whatever it takes.” It is the ripples that are already spreading out further that will cause the most concern, as they bear all the signs of a financial contagion that could be hard to contain.

A problem exacerbated
One part of the international financial markets that has already felt the impact is the sovereign debt market. On April 12, Sri Lanka announced that it would suspend payments on the $35bn it owes the world. This is not solely a consequence of the Ukraine conflict. Its impact on energy and commodity prices quickly exacerbated an already shaky economy and a country beset with social unrest. Less than a month later, on May 9, the government fell.

This is where the shifting sands of geo-political power games start to have a serious impact on financial stability. During this century, many emerging economies have become heavily indebted to China. According to the World Bank, 60 percent of the poorest economies are in debt distress or at high risk of it and with interest rates rising across the world this could turn out to be a conservative figure. The problem here is that the prospects of co-operation between western lenders and China on debt restructuring is being diminished by the strains of the Ukraine conflict.

Egyptian farmers harvest wheat

So nervous eyes are being cast towards South America, where serial defaulter Argentina is already sending up distress signals and the political instability already very visible in Venezuela, Chile and Colombia is already nurturing economic and financial crises. Colombia has been gripped by political unrest for over a year, when an unpopular attempt to reform taxation was a trigger for popular anger. Sri Lanka shows how social unrest can quickly escalate in major political and economic upheaval. Social unrest often leads to a chain-reaction with political authorities implementing tough, sometimes brutal, responses.

The issue is how much you are prepared to put at risk in terms of your balance sheet and shareholder funds

These, in turn, lead to calls for sanctions and for businesses to withdraw from countries. Antonenko said: “Social unrest will become more frequent in the second half of this year and into 2023, especially as the knock-on effects of the lack of harvests from Russia and Ukraine are felt. The potential for a crisis in the food chain is very high and it will be sustained. Commodity price pressures coming on the back of over-stretched public finances in the wake of the Covid pandemic mean that even developed economies will suffer, especially with higher inflation.”

With Ukraine being one of the world’s largest producers of wheat and cereal products and its last major port not in Russian hands, Odesa, blockaded, the prospect of a major crisis in the food chain is looming, says Streeter: “The big issue we have here is the commodity impacts which are adding to the inflationary concerns around the world. Emerging economies, such as Egypt that imports so much wheat, will come under severe pressure. Around the world we will see rising social unrest as prices rise.”

A wake-up call
Europe and the US will not be immune from the impacts of this, says Antonenko: “This could rekindle the populist movements we saw rise in the last decade. The signs are already there. It is really shocking that Le Pen got 42 percent of the vote in France. It is a wake-up call for all of Europe and the US.” All the while, China simmers in the background. Western concerns about its treatment of the Uyghur minority in Xinjiang and the suppression of democracy of Hong Kong may not be in the headlines now but they have not gone away as issues that have increased western antipathy to the current Chinese Communist party leadership.

Sri Lanka unrest

It is the prospects of escalating tensions in the South China Sea and a Chinese invasion of Taiwan – the “reunification of the renegade province” as Chinese leader Xi Jinping calls it – that should cause the most concern. Predicting anything with China is notoriously hard, says economist George Magnus, an associate at the China Centre, Oxford University and author of Red Flags: Why Xi’s China is in Jeopardy. “The idea you can articulate exactly what might happen in five to 10 years is almost impossible. People will take a view and say the likelihood of a shooting war in the South China Sea is less than five percent and so I’ll back my 95 percent judgement that it will be okay. Good luck with that. It might turn out that way but nobody can be certain. The issue is how much you are prepared to put at risk in terms of your balance sheet and shareholder funds.”

Magnus continues: “They should be on the defensive if they say that because there is a strategically adversarial relationship between China and the rest of the world, the liberal democracies. You have to be pretty brave to say that it doesn’t matter.” It does matter, says Antonenko. China might be distracted as it struggles with the implications of its zero-tolerance policy toward Covid but it is a major player in the world’s response to the Russian invasion of Ukraine: “China has stayed neutral and has so far provided an avenue for Russia to bypass western sanctions. This will see China becoming increasingly dominant in the Russian economy.” Antonenko adds: “China is unlikely to change its own strategy and plans for Taiwan. It will continue to view Taiwan strategically, not opportunistically, although it will try to measure the likely western response. It sees the US distracted and committing resources to defend and later rebuild Ukraine.”

Major implications
The pictures of the destruction in major cities in Ukraine give an idea of what that rebuilding might entail. Estimates of the cost are very speculative at this stage but are already north of $700bn: by comparison the post-WW2 Marshall Plan cost $160bn at today’s prices. Financing this will have major implications for government debt, bond markets and infrastructure capacity and investments for decades to come. There are few causes for optimism that this might be a short-lived disruptive phase in the evolution of a globalised world, says Antonenko: “We need to acknowledge that the rest of the world beyond the G7 and EU are largely sitting on the fence in this conflict. This is not going to change so we are entering a new Cold War era with the world divided.”

Clearly, there is now a well-entrenched understanding that we are in an era of geo-political turbulence. There is no clarity on when or how we might arrive at a new system and a global settlement. This could take many years.

End of the line?

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In 2019, Kenya’s President Uhuru Kenyatta was at pains trying to defend accusations that the country had built a standard gauge railway (SGR) to ‘nowhere.’ This was during the commissioning of phase 2A of the SGR project that abruptly terminates in the thorny shrubs of Naivasha, some 120km from the capital Nairobi. To the Kenyan leader, those critical to the project were ‘visionless.’

Four years after its commissioning, the 140km line from Nairobi to Suswa that cost $1.2bn has remained largely idle. In fact, infrastructure along the 20km stretch from Suswa to Duka Moja (One Shop) where it ends, is fast rotting away because both the freight and passenger service trains terminate their journey at Suswa. Kenya’s railway to ‘nowhere’ was built by Chinese loans. It forms part of the SGR from Mombasa to Nairobi, constructed at a cost of $2.7bn. The total cost of the entire project from Mombasa to Naivasha was a staggering $3.9bn.

Today, Kenya is struggling to service the loan for a project that is far from breaking even and continues to return massive losses. High operational costs and dwindling revenues saw the SGR post a loss of $205.4m in the 2020–21 financial year. Notably, China refused to grant Kenya an additional loan of $3.8bn for phase 2B to extend the line from Naivasha to Kisumu. This is despite the fact that for the entire project to be economically viable, it needs to extend to Kisumu, and further to Malaba and connect with the Ugandan SGR.

Track laying machine at the construction site of the standard gauge railway in Kenya

In many ways, Kenya’s SGR is a depiction of China’s adventures in Africa. The Asian giant has had a roller-coaster ride in the continent over the past two decades. Over the period, the overriding theme of China’s engagements and partnership with Africa has been infrastructure financing through debt. World Bank data show that in the period from 2010 to 2020, China’s lending to Sub-Saharan Africa more than quadrupled from $40bn to $170bn. The result has been China’s imprints being engraved not just in railways but across highways, ports, airports, energy and ICT projects in all corners of the continent.

“Africa has benefited immensely from the strategic partnership with China,” says Prof David Monyae, Director of Centre for Africa-China Studies (CACS) at the University of Johannesburg, South Africa. He adds that by adopting a ‘non-interference policy’ in its engagements with Africa, China has helped the continent achieve exponential socio-economic transformation. “Bretton Woods institutions lending came with conditions and caused havoc in the 1980s and 1990s. The continent got a befitting partner in China,” he avers.

Strategic shift
Apart from China slashing its commitments, the first time it is happening since 2006, China is also changing its modus operandi. Most notably, the country intends to stop government-to-government lending. This has been the hallmark of China’s engagements in Africa and has endeared it to the continent’s heads of states, particularly autocratic regimes.

Chinese loans are tied to natural resources as collateral in at least eight countries

By cutting the cord with governments, Beijing wants to end the culture of opaqueness that has traditionally characterised its deals with African governments. No doubt the secrecy in the agreements, specifically in mega and cash-intensive infrastructure projects, has fuelled corruption and lack of transparency in the continent. “In most of its interactions, China lacks transparency,” states David Shinn, former US ambassador to Ethiopia and Burkina Faso and a lecturer at the Elliott School of International Affairs at George Washington University. He adds that secrecy is one of the most significant flaws in China’s system of governance.

While outlining the new path of financial commitments in December last year, China’s President Xi Jinping was clear where Beijing’s money will go over the next three years. First, the Asian dragon will encourage its businesses to invest $10bn in the continent. China will also provide credit facilities of $10bn to Africa lenders to support small and medium enterprises. Another $10bn will be directed towards trade finance to support African exports. Lastly, $10bn would be channeled to Africa via China’s share of the International Monetary Fund’s (IMF) special drawing rights.

Chinese Ambassador to Kenya, Wu Peng, at the official launch of the standard gauge railway

Of critical importance, and something that is going to reverberate loudly and uneasily in Africa, is the fact that henceforth, China is going to discontinue ‘handouts’ in terms of grants and interest-free loans. Worse still, no money has been allotted for development financing. This is tragic for Africa considering about 65 percent of China’s lending was going to infrastructure. The significant shift from China’s traditional lending practices comes at the worst moment for Africa. The continent is grappling with a mammoth $100bn annual infrastructure financing gap according to the African Development Bank (AfDB). The amount could hit $170bn by 2025. With economies of most countries ravaged by the impacts of the COVID-19 pandemic, and government coffers squeezed by debt, the window for mobilising development funds has become thinner.

The need for China to rethink its strategic focus on Africa has been inevitable. Apart from global geopolitics, the dynamics in Africa have significantly changed. Top on the list of the changing dynamics is the alarming level of debt that Africa is shouldering, a problem largely caused by Beijing. According to the World Bank International Debt Statistics 2022 report, Sub-Saharan Africa total external debt stood at $702bn in 2020. This is a staggering increase from $305bn in 2010. China accounts for about 20 percent of the continent’s total external debt.

Unbearable debt
Across the continent, the burden of debt is colossal. It is even more unbearable for individual countries (see Fig 1). Though Africa’s top economies like Nigeria and South Africa that have seen their external debt stock balloon from $18.8bn to $70.3bn and $108.4bn to $170.7bn in a span of a decade respectively are relatively able to service their obligations, the situation is tougher for other countries. Kenya and Ethiopia whose stock has increased from $8.8bn to $38.1bn and $7.2bn to $30.3bn respectively are among nations pleading for debt relief, waiver and restructuring.

 

Ethiopia has borrowed $13.7bn from China in about two decades while Kenya currently owes Beijing $6.9bn. Zambia, whose stock has swelled to $30bn from $4.2bn in a decade, has defaulted on its sovereign debts. The country owes China $5bn. “As Africa’s largest bilateral creditor, risks of defaults are posing major challenges to Chinese lending,” notes Abhijit Mukhopadhyay, a Senior Fellow at the India-based Observer Research Foundation. He adds that with Zambia’s default, and the rising chorus of debt waiver and restructuring, Beijing is feeling it is time to count its losses and reduce its exposure. In essence, China acknowledges the serious debt issues in some African countries is not just forcing rescheduling but is also raising the possibility of non-payment.

This is a reality that is unravelling horribly for China. For the better part of the past two decades, Africa has witnessed a prolonged period of political stability. The result has been impressive socio-economic growth to a point where the continent was seen as the last frontier for growth. Over the period from 2000 to 2016, Africa was the world’s second fastest-growing region, experiencing average annual gross domestic product (GDP) growth of 4.6 percent. Growth accelerated to 4.8 percent between 2017 to 2019 before plunging and contracting by 2.1 percent in 2020 due to the pandemic. Recovery is projected to be modest at around 3.4 percent.

Africa might not record a return of stellar growth in the coming years. While many factors are conspiring against the continent, an old ghost is again rearing its head. The continent is witnessing a resurgence of contagious waves of conflicts and coups, which are a major concern for China. Due to its ‘non-interference policy,’ China continues to act aloof amid the rising instability. Irrespective of the strategy, Beijing is alert to the fact that every eruption has a direct impact on its strategic interests in the continent. “Chinese financing will continue to flow into Africa, the question is the scale,” reckons Yun Sun, Director of the China Programme at the US-based Stimson Centre.

Angola’s President Joao Lourenco (L) shakes hands with China’s President Xi Jinping

 

A case in point is Ethiopia, a big Chinese debtor. Until the outbreak of conflict in 2020, Ethiopia was among Africa’s shining stars, not only in terms of political stability but also in socio-economic transformation, posting an average growth of 10 percent for a decade. Conflict in the northern region of Tigray has set the country on a path of uncertainty.

For China, this does not augur well first in terms of debt servicing and second in terms of Beijing’s massive interests in the country. Currently, there are about 400 Chinese construction and manufacturing projects, valued at over $4bn, in Ethiopia. China has also helped Ethiopia invest in numerous industrial parks that are at the heart of the country’s blossoming manufacturing and agricultural sectors. Government data show that in 2020, Ethiopia raked in $610m from the 13 operational parks that have created job opportunities for more than 89,000 Ethiopians.

Importance of bauxite
In West Africa and the Sahel region, the hotspot for coups, China has reasons to be anxious. Cumulatively, the West Africa region received $18.2bn in Chinese loans from 2000 to 2017 according to the Organisation for Economic Co-operation and Development data. Since 2019, the region has witnessed six coups. Four in Guinea, Burkina Faso and Mali, of which two were successful, plus two more in Guinea-Bissau and Niger that failed. Though Chinese interests in a country like Burkina Faso are marginal due to the latter’s dalliance with Taiwan, the situation is different in Guinea. Guinea is home to the world’s largest reserves of bauxite, with China as the main export market. In 2020, the Asian giant imported 53 million tons of bauxite from the country, accounting for 47 percent of all its bauxite imports. This earned Guinea $2.5bn. Notably, the coup in Guinea has had material impacts on bauxite prices and supplies.

Bauxite factory of Guinea’s largest mining firm, CBG

Being a shrewd negotiator, and always privy to the fact that Africa is a volatile and unpredictable continent, China has often ensured it safeguards its investments. This explains why Beijing has been brutal in adopting a resource-secured lending model. In essence, Chinese loans are tied to natural resources as collateral in at least eight countries. These are Angola, Equatorial Guinea, Republic of Congo, Guinea, Ghana, Sudan, Democratic Republic of Congo (DRC) and Zimbabwe. Resource-tied lending might pass as insignificant as it accounts for only eight percent of all Chinese loans in Africa. However, it has direct impacts on sovereignty.

Angola is the most notable case. The country, Africa’s second biggest oil producer and whose public debt stands at $67.5bn, is China’s largest borrower on the continent. It owes more than $20bn to various Chinese entities. To service the massive debts, Angola entered into deals with China to repay the loans by shipping its main natural resource, oil, to China at market rates at the time of shipment.

The era of easy Chinese money for big infrastructure projects in Africa is certainly over, and perhaps for good

The arrangement worked well for Angola when oil prices were high. However, the collapse of crude prices from 2015 through 2020 saw the country struggle to repay the loans. Today, the country is on its knees pleading with China for payment relief and is also exploring refinancing alternatives through multilateral and commercial lenders. “In these countries, a portion of earnings from some natural resource exports are committed to repayment of designated loans,” explains Deborah Brautigam, Director of the China Africa Research Initiative (CARI) at Johns Hopkins University’s School of Advanced International Studies (SAIS). She adds that under the arrangement, China gets paid before anyone else. “Other lenders might rightly hesitate to lend into a situation where much of the foreign exchange is already pre-committed to earlier lenders,” she avers.

Seizing assets?
The strategy of tying loans to resources is one key reason why Beijing is often accused of debt trap diplomacy in Africa. The other major reason is China’s lending with hopes of seizing a strategic national asset in case of a default. This has been the popular consensus in countries like Kenya and Uganda, among others. In Kenya, the belief has been that China has the right to seize the Mombasa Port if the country defaults on the SGR loan. The same can be said in Uganda where China Eximbank provided the $200m loan for the Entebbe International Airport upgrading and expansion project. “I do believe that Chinese debt trap diplomacy is real because China doesn’t want to take the risk of defaults,” reckons Robert Atkinson, President of the US-based Information Technology and Innovation Foundation.

An oil tanker berthed at Kipevu oil terminal, Kenya

In Kenya, CARI has moved to debunk the myth that Mombasa Port was used as collateral for the SGR loan. In April, the think tank released a working paper that shows the port was actually not used for the SGR loan. The paper contends that although Kenya’s government has not released the actual loan documents, evidence points to the fact that Mombasa Port was not used as collateral. “Further, there is no question of the port ever being ‘seized’ by China Eximbank should Kenya default on the SGR loans,” states the CARI report.

Beijing wants to end the culture of opaqueness that has traditionally characterised its deals with African governments

In Uganda, US-based research group AidData also established that Entebbe Airport is not a source of collateral. However, the terms of the loan are stringent and mainly favour Eximbank. “The idea that Chinese banks deliberately lend for loss-making projects so that they can seize collateral is widespread. Yet every time a serious researcher investigates these cases, they fail to find evidence to support these fears,” observes Brautigam.
The era of easy Chinese money for big infrastructure projects in Africa is certainly over, and perhaps for good. Joshua Meservey, a Research Fellow for Africa at the US-based Heritage Foundation thinks that while China will still fund some projects, it will be more judicious in ensuring viability. “There could be a silver lining to China pulling back on its lending,” he says, adding that this will encourage the building of only necessary infrastructures that have been rigorously vetted. “It will also avoid the building of some of the Chinese infrastructure that are of dubious economic value or which were built at inflated costs or using opaque tendering,” he notes.

Spending priorities
Under the current realities, China has no options but to be judicious. Apart from the developments in Africa, China is also grappling with internal upheavals back home. The Asian dragon’s spectacular GDP growth of yesteryears is no more, with the country entering a path of slow growth.
The situation is being exacerbated by COVID-19, with every new wave taking a toll on the economy. According to the IMF, the Chinese economy is forecast to grow at 4.4 percent this year, down from 8.1 percent last year. The slowing economy, coupled with President Xi’s agenda for China’s ‘Common Prosperity’ that demands more domestic expenditure, means that Beijing has to be more inward-looking in terms of its spending priorities. “China is at a point where it can no longer afford to spend as much money in Africa,” notes Atkinson.

Significant influence
Cutting infrastructure spending in Africa, however, does not mean China is willing or ready to loosen its tight grip of cooperation with the continent. Beijing is still determined to exert significant influence through China-Africa trade, Chinese investments and military cooperation, among many other areas. China-Africa trade, for instance, is roaring. Last year, China not only maintained its position as Africa’s largest trading partner (see Fig 2) but also saw trade relations hit an all-time high. China customs agency data show the value of trade between China and Africa in 2021 stood at $254bn compared to $208.7bn in 2020, representing a 35 percent increase. South Africa, Nigeria, Angola, Egypt and DRC were China’s top five largest trading partners, accounting for more than half of all China-Africa trade in 2021.

 

Africa’s share of trade with China is quite minimal at 3.8 percent, compared to other regions like Asia at 46.9 percent, Europe at 18.1 percent and North America at 12.9 percent. However, the fact that the balance of trade is in favour of Beijing makes the Asia giant want to maintain its grip on the continent. Last year, China exported goods worth $148bn to Africa, up 29.9 percent from 2020. During the year, the value of Africa’s exports stood at $106bn, a 43.7 percent increase. “China understands that Africa is an important market for its exports and a source for raw materials,” explains Prof Monyae. He adds that for this reason, China feels obligated to safeguard its interests in the continent.

Kenyan President Uhuru Kenyatta

On this, China has no guarantee. Beijing’s decision to cut financial commitments for Africa is bound to accelerate the geopolitical shifts that are already happening as other countries target to increase their strategic presence in the continent. In recent years, countries like the US, UK, France, Germany, Japan, Russia, South Korea, India and Turkey have all enhanced their overtures to Africa. For most of the new suitors, loading Africa with more debt is not their intention. Rather, they see opportunities in increasing trade and foreign direct investments. “A few countries may step up their engagement modestly but I don’t see Africa today as the new battlefront for geopolitical supremacy,” says Shinn.

Private capital
China’s cut is also certain to instigate an influx of private capital into Africa. Currently, a majority of development financial institutions and global multi-lenders including the IMF, the World Bank and AfDB already have deep exposure. This opens doors for private capital to come and fill the void in infrastructure financing. The IMF, in a paper titled Private Finance for Development, reckons the private sector has the ability to inject an additional annual financing equivalent to three percent of Africa’s GDP for physical and social infrastructure by the end of the decade. This represents about $50bn per year. While this is an achievable goal, African governments have a big role to play in terms of policies and identifying priority and bankable projects.

“There is a lot of private capital in the world looking for infrastructure investments. What Africa needs is some truly credit-worthy projects that produce economic benefits in excess of their costs,” states Atkinson.

In retrospect, Africa must accept the days of Chinese-financed megaprojects are over. By cutting financial commitments to the continent, China has already acknowledged this new reality.

Hollywood vs. Streaming

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However, recent subscriber losses at Netflix suggest that streaming’s golden era may be coming to an end already. As the battle for our attention and our views rumbles on, who will come out on top, cinema or streaming?

While the 2022 Oscars will forever be defined by a certain headline-grabbing slap, it was far from the only significant story of the night. Away from the on-stage celebrity drama, history was quietly being made at the 94th Academy Awards. When it came to the coveted ‘Best Picture’ award, feel-good family drama CODA beat off stiff competition from established auteurs to scoop the top prize. With this momentous win, Apple became the first streaming service to achieve a Best Picture Academy Award.

In many ways, it was a moment that felt somewhat inevitable. It is certainly no secret that the streaming giants – Netflix, Apple TV+ and Amazon – have had their sights firmly set on awards success for some years now, eager to prove that their content has as much artistic merit as anything produced by Hollywood’s traditional movie studios. Having now won over the Academy, it appears that we are witnessing the seemingly unstoppable rise of streaming platforms. And while the golden age of streaming is good news for big tech, it could spell big trouble for tinseltown. With their high ambitions and deep pockets, do the streaming giants threaten to bring about the end of Hollywood as we know it?

When the curtains closed
The idea that streaming might kill cinema seems steeped in moral panic. After all, new technologies have always been treated with some suspicion. In fact, technophobia stretches back to the advent of the written word, with Greek philosopher Socrates suggesting that transcribed texts might lessen the importance of oral tradition and verbal communication.

Since then, all technological advances have been subject to some scrutiny, with each new invention purported to be ‘killing off’ whatever had come before. Just as the radio was supposed to kill off books and television was meant to kill off the radio, now streaming will be the demise of cinema. In the past, this tech-related panic may have seemed hyperbolic. But in today’s world, questioning the scope and influence of big tech is far from a fringe idea.

In March 2020, as countries around the world found themselves placed into government-mandated lockdowns, life very suddenly moved online. Overnight, almost all human interactions – both work-related and social – began to take place virtually, and one by one, entertainment venues shut their doors, their owners unsure as to when they would open to the public again. A few weeks in lockdown then turned into months, and technology provided some much needed entertainment and escapism for the millions who found themselves largely confined to their own homes.

From the safety of the sofa, the quarantined masses could lose themselves in an endless stream of content courtesy of their trusty streaming providers. And as cinema doors remained firmly closed, blockbuster releases such as Wonder Woman 1984 and Disney’s live action Mulan found themselves punted to the small screen, eagerly consumed by lockdown audiences. In 2020 alone, Netflix gained more than 36 million subscribers, while its rival Amazon Prime saw its subscriber base grow by more than 50 million over the course of the pandemic.

The lockdowns saw the streaming giants post record profits

Launching somewhat fortuitously mere months before the onset of the pandemic, Disney+ hit 73 million subscribers in its very first year of operation, boosting the US streaming market to record growth in 2020. Just as remote working and virtual meetings quickly became the ‘new normal’ in our working lives, the pandemic dramatically reshaped our behaviour when it comes to entertainment and socialising. Even as successful vaccination drives enabled the world to cautiously open back up again, our old habits and pastimes did not immediately revert to their pre-pandemic norm. While global box office revenue picked up in 2021, it was still down by 50 percent when compared with 2019 figures – perhaps unsurprising given ongoing pandemic restrictions and widespread trepidation over emerging Covid variants.

But as cinemas started to open their doors again, it soon became apparent that the audiences they were welcoming back had changed. Granted, the average age was now skewing younger, with older movie-goers hesitant to return to cinemas, but the real difference was one of habits and expectations. If streaming is the ‘new normal’ when it comes to how we consume entertainment, then where does that leave cinema?

The shut-in economy
The pandemic may have seen streaming services flourish while the traditional box office floundered, but the pandemic can’t be given all the credit for the rapid rise of streaming platforms. Long before COVID-19, streaming services were disrupting the global movie industry, as customers began to show an increased appetite for ‘on demand’ services. In the post-financial crisis era, the so-called ‘shut-in’ economy has thrived.

In a recession-ridden world, staying in has become the new going out, with a whole host of new apps specifically engineered to ensure that you never need to leave your house again. Need a food delivery? Getir promises to get your groceries to your front door in 10 minutes. Need to hire a handyman?
Taskrabbit will have somebody on your doorstep that very same day. Need a responsible animal-lover to walk your dog for you? Just download Rover – you’ll even receive a GPS map of your dog’s walk, complete with toilet break alerts. With just a couple of taps on a smartphone screen, almost any demand can be fulfilled within minutes, while routinely low wages for gig workers keeps costs down for consumers.

Simply put, the rise of the shut-in economy shows that we have been self-isolating long before COVID-19. Studies have shown that younger millennials and those belonging to Generation Z are less interested in going out socially than previous generations, preferring to ‘Netflix and chill’ than head out for a hedonistic night on the tiles.

Whether the proliferation of ‘on demand’ apps prompted a change in our collective behaviour or vice versa, by March 2020, our social habits were already shifting – we were going out less and streaming more. The pandemic only served to accelerate this trend, firmly establishing streaming as the default way to watch new releases.

Already growing at an astonishing rate, the lockdowns saw the streaming giants post record profits, growing their deep pockets and extending their influence over the global film industry. As the world began to cautiously reopen and cinemas welcomed back audiences, streaming companies found themselves in a very powerful position. Well-funded, and with a steady stream of subscriber income flowing in, Netflix, Amazon and Apple have been able to acquire a broad array of films over the course of the past two years, releasing them directly to consumers through their online platforms and limiting the pool of films available for bricks-and-mortar cinemas to screen. So for those who prefer the cinematic experience to the at-home alternative, there are simply fewer new releases to enjoy when they do venture out to their local multiplex – they have been gobbled up by streaming.

Even as the world moves towards something of a post-pandemic reality in 2022, the shut-in economy is here to stay, and so too are the big tech companies that allow this home-based consumerism to flourish (see Fig 1).

The Big Tech boom
In April 1976, the Apple Computer Company was founded, debuting its first computer device a few months later. In the summer of 1994, Jeff Bezos launched his online bookselling service, Amazon, from his garage in Bellevue, Washington. Three years later, Netflix started life as a mail-based DVD rental firm, eager to replicate Amazon’s online success.

Fast forward to 2022, and it’s hard to fathom just how colossal these three firms have become. From humble beginnings as computer builders, booksellers and DVD dealers, Apple, Amazon and Netflix have far outgrown their origins. Today, the three companies make up half of the ‘big six’ tech firms, and are worth a combined total of just shy of $5trn. At this size, these far-reaching tech behemoths exert an almost unimaginable influence over the global economic and cultural landscape.

Wielding enormous financial power, these six tech companies have the ability to influence politics and public opinion – spending a collective $64m on political lobbying in 2019 alone. And it doesn’t stop at politics. As Apple’s recent Academy Awards success has shown, the big tech giants are beginning to dominate the cultural conversation too, beating the traditional entertainment industry at its own game.

While the lockdown streaming boom certainly helped to propel big tech to a new level of cultural dominance, the reality is that streaming platforms have been boosting their position within the film industry for many years now, through a series of ambitious acquisitions.

The modern wave of consolidation in the media landscape arguably began in 2009, when Disney purchased Marvel Entertainment for $4bn – a bargain deal given the box-office revenue Disney has earned from Marvel movies over the course of the last decade. In 2012, Disney further solidified its status as a pop culture juggernaut with the purchase of Lucasfilm for a further $4bn, giving the company the rights to the ever-popular Star Wars empire.

Then, in 2018, Disney achieved the seemingly impossible – purchasing rival Hollywood studio 21st Century Fox for an eye-watering $71bn. The deal ushered in a new era for the global film industry, instantly bringing the number of Hollywood movie studios down to five – Warner Bros., Sony, Universal, Paramount and Disney. The era of the ‘big six’ studios was now over, with Disney taking one of its biggest rivals out of the picture.
The record-breaking acquisition gave Disney a staggering 35 percent share of the movie market, adding a vast array of film and television material to its already impressive arsenal of content.

The content race
The Fox acquisition also signified a substantial shift in Disney’s priorities. While its previous acquisitions had been focused on blockbuster big hits, Disney’s takeover of 21st Century Fox was motivated by streaming. In order to compete with industry pioneer Netflix, Disney was looking to beef up its catalogue of content ahead of launching its subscription service Disney+, and Fox’s vast library of TV series helped to successfully pad out Disney’s streaming offering. Bringing fan-favourite Fox shows such as The Simpsons, The Walking Dead and It’s Always Sunny in Philadelphia into the Disney domain, the company was betting big on streaming. So far, the controversial move appears to have paid off – with Disney+ gaining 10 million subscribers on its very first day of operation.

But Disney isn’t the only firm looking to beef up its streaming arsenal. Amazon has also been playing the streaming long-game, and in March of this year, purchased historic Hollywood studio MGM for $8.45bn. The deal gave Amazon control over MGM’s vault of over 4,000 movies and countless hours of TV, including the entire James Bond catalogue and the Rocky series, in a huge boost to the firm’s Prime Video streaming business.

As outgoing CEO Jeff Bezos explained during the company’s 2021 annual shareholder meeting, the acquisition was so attractive to Amazon because of MGM’s “vast deep catalogue of much-loved intellectual property.”

His comments echoed those of Mike Hopkins, Senior Vice President of Prime Video and Amazon Studios, who said that “the real financial value behind this deal is the treasure trove of IP in the deep catalogue that we plan to reimagine and develop together with MGM’s talented team.”

After a blockbuster two years of record subscriber growth, the first cracks have begun to show in the streaming landscape

As the streaming wars continue and firms compete for audience attention, intellectual property is the hottest commodity around. Just as Disney has produced a wealth of new content featuring beloved characters and locations from Star Wars and the Marvel universe, Amazon is keen to follow suit, prioritising spin-offs and reboots as it looks to bolster the position of Prime Video in what is an increasingly competitive environment.

Despite its deep pockets, Apple is taking a slightly different approach to streaming. Granted, the firm is spending big on Apple TV+ – reportedly splashing out $6bn on content in order to launch the service back in 2019 – but instead of snapping up established Hollywood studios with their immense libraries of historic titles, Apple is prioritising investments in original features. And it isn’t following the Netflix approach to original content either, which tends to favour quantity over quality. Last year, Apple TV+ released just six original feature films, compared with 69 Netflix original movies released in the US. But with annual revenues of approximately $366bn, far outstripping Netflix’s $30bn, Apple can easily afford to pursue the prestige angle and aim for awards show glory. With one Best Picture award already under its belt, Apple might just prove that slow and steady will win the streaming race.

No more worlds to conquer
After a blockbuster two years of record subscriber growth, the first cracks have begun to show in the streaming landscape. For the first time in its history, Netflix announced that it had actually lost subscribers – with 200,000 users cancelling their accounts in the first three months of 2022. While this may seem like a fairly insignificant drop given the company’s 222 million-strong subscriber base, it is indicative of a worsening trend.

Netflix’s subscriber growth has been slowing for some months now, as the effects of increased competition and the escalating cost-of-living crisis begin to make themselves known. The company warned that it expects to lose a further two million subscribers by July, with executives considering introducing advertising along with a crack-down on password sharing in order to get the firm back on track. The shock news wiped over $50bn from Netflix’s value in just one day, with investors left asking – has the streaming bubble burst?

In a note to investors, Netflix explained that its “high household penetration” made sustained growth more challenging. It is certainly true that the company is reaching something of a saturation point in its US and European markets – 52 percent of UK households have a Netflix subscription, which, when taking into consideration password sharing among families, leaves relatively little room for growth. Quite simply, Netflix is dependent on subscriber growth for revenue, and with 222 million people already signed up, there is nowhere else for it to go. What remains to be seen, however, is whether Netflix’s subscribers are abandoning the platform in search of better content elsewhere. While streaming providers are increasingly competitive with one another, consumers don’t feel forced to choose between them – in fact, they like to have their cake and stream it too. In the US, 46 percent of homes have four or more subscription streaming services, while in the UK, a recent study showed that 65 percent of homes subscribe to two or more streaming providers.

But as the cost-of-living crisis starts to have a real impact on consumer spending habits, squeezed customers may find themselves forced to cut back on ‘unnecessary’ expenditure. Multiple streaming subscriptions may become hard to justify as bills begin to soar, and if consumers do find themselves reviewing their subscription packages, Netflix can’t count on its reputation as the pioneer of streaming to save itself from being axed from the monthly budget. For the company’s rivals, Netflix’s recent turmoil should be taken as something of a warning sign. Amazon, Apple and Disney have spent considerable time and money trying to emulate Netflix’s groundbreaking streaming model – a model that may well already be broken. Granted, each of the three firms is much more diversified and has far deeper pockets, but they have all been convinced that streaming is the future of entertainment.

Among cinema owners and industry professionals, there is a sense of cautious optimism over the future for cinema

Indeed, Disney has completely restructured its operations to prioritise streaming over traditional cinema releases, while Amazon is set to spend $464m on just one season of its upcoming The Lord of the Rings series. Apple is estimated to have spent more than $10m on the Oscar campaign for CODA alone, demonstrating its dedication to its newly-established streaming arm. Streaming has been a big investment and a big commitment for each of the three firms, and while subscriber sign-ups look healthy for now, they too could be heading towards the Netflix cliff edge. The next challenge won’t be subscriber growth but subscriber retention. In an age when everything is ‘on demand’ and we are spoiled for choice, convenience is no longer a selling point – it’s quality that really matters in the end.

A new hope?
As the streaming giants continue to compete for our attention and affection, cinemas are welcoming a steady flow of customers through their doors. Already, blockbuster hits such as The Batman and Spider-Man: No Way Home have seen ticket sales bounce back from the historic lows seen in 2020 and 2021, while UK box office sales are set to double this year to £1.1bn – just below pre-pandemic levels. Among cinema owners and industry professionals, there is a sense of cautious optimism over the future for cinema.

Of course, in order for there to be a wide and enticing array of movies to attract film-lovers to bricks-and-mortar theatres, these movies need to be made and produced in the first place. According to entertainment analyst Matthew Ball, go back 15 years and the ‘big six’ studios would each release around 20 to 25 films every year. Now reduced to a ‘big five,’ the stalwart Hollywood studios might release as few as nine new films in today’s competitive climate. In 2022, we can expect to see 71 major studio films released in cinemas – significantly below the pre-pandemic figure – reflecting a generalised push to prioritise streaming for smaller, less ‘showy’ movies.

But as the cracks begin to show in the growth-obsessed streaming model, the traditional methods of film production, distribution and consumption are suddenly not looking quite so passé. Box office sales are slowly bouncing back, and there is something still to be said for the magic of the big screen. Hollywood and Silicon Valley may be uneasy bedfellows, but they can coexist – if the tech giants’ studio acquisition spree is kept under control, that is. Watching a film in 4DX, the immersive experience created in South Korea, proves that cinema is evolving, not dying. And if it wants to stay relevant, streaming will need to evolve right alongside it

Why more institutional investors are joining DeFi

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Decentralised finance (DeFi), an entire ecosystem built on blockchain technology and that doesn’t rely on a central authority, is booming. The total value locked – the overall value of assets deposited in DeFi transactions – grew from $601m at the beginning of 2020 to $239bn in 2022, according to blockchain data provider Amberdata. However, unlike what we have seen before, this rise hasn’t been driven mainly by professional and retail investors, but instead has been led by institutional investors who have either recently joined or are strengthening their presence in DeFi.

Indeed, according to blockchain data platform Chainanalysis, large institutional transactions – those above $10m – accounted for over 60 percent of all DeFi transactions in Q2 2021, up from around 10 percent in Q3 2020.

Additionally, a September 2021 survey, carried out by Nickel Digital Asset Management (Nickel), of institutional investors and wealth managers who don’t currently have exposure to cryptocurrencies and digital assets found that 62 percent expect to invest in these for the first time within the next year. The speed at which institutional investors have joined DeFi in the last year hasn’t gone unnoticed, so many people are wondering; what is driving this trend?

A popular answer has been that institutional investors have recently realised the opportunities available in DeFi. While this response explains the reasons for joining crypto, investors’ success stories in DeFi and crypto have been making headlines for around 10 years. Instead, I would argue that, in recent years, DeFi has become more accessible, transparent and secure. This has not only made the decentralised markets more appealing to institutional investors, but has enabled them to meet the internal and regulatory requirements necessary for these organisations to enter DeFi.

Just a few taps away
DeFi started as an intimidating sector, the domain of the tech-savvy. However, much has changed since then and we are now seeing many platforms that allow investors to easily connect their digital wallets, exchange their fiat, such as US dollars and euros, into cryptocurrency and access the yields available in DeFi with just a few taps.

Although these platforms initially focused on retail investors, in the last year, new solutions aimed at institutional investors have been developed to enable them to maintain close oversight over their investments, as well as to meet asset custody and ‘Know Your Client’ requirements, to name a few. Asset custody, for instance, is not only a legal requirement for large funds and financial institutions, but according to a 2022 survey carried out by Nickel, asset security was cited by 79 percent of investors surveyed as their main consideration.

So, before these tools became available, many institutional investors – even those keen about entering DeFi – were unable to do so because they couldn’t secure the necessary internal buy-in as they didn’t meet key internal and regulatory requirements. Most companies in DeFi are small businesses that, while they may be very good at what they do, don’t have the credentials needed to reassure investors that they are legitimate. Consequently, many institutional investors have been unwilling to trust them with their assets. Fortunately, some DeFi-focused companies have been leading the shift towards more transparency in the DeFi sector by becoming publicly listed companies. As listed companies, these organisations are providing regular information on their activities and their expertise, reassuring investors that their money is in trusted hands.

Bank grade security
The media’s coverage on DeFi has led many people to mistakenly believe that, if they invest in the decentralised markets, their money will fall into the hands of hackers. While nobody’s money is ever completely safe (in a bank or in DeFi), the risks in DeFi have been greatly exaggerated.

Nonetheless, to provide reassurance to investors that their money is safe, many DeFi companies are learning from traditional finance and implementing solutions that banks use. For example, AQRU.io uses multi signature wallets, which require two or more private keys to sign and send a transaction, and next generation protocols to ensure the safety of the assets in the platform. While DeFi still has a long way to go before investors feel completely safe, these efforts have already started helping secure the buy-in from many large investors and they will continue doing so in the coming years.

Since it started, DeFi has proven to be an innovative sector that has sought to appeal both to institutional and retail investors by becoming more secure, accessible and transparent. We shouldn’t be surprised if DeFi continues innovating to attract new investors and keeps growing until it becomes a true competitor to traditional finance.

Has entrepreneurial spirit turned sour?

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We are living in the golden age of the entrepreneur. Thanks to our collective fascination with billionaire business leaders, start-up moguls are the hottest celebrities of the 21st century. When they aren’t being photographed at red carpet events, they can be found making television cameos or dominating the cultural conversation on Twitter. Long gone are the days when tech founders and start-up moguls lived quietly in the background, making millions yet rarely making headlines. Today, tech entrepreneurs are household names, achieving rockstar status the likes of which was traditionally reserved for – well, rockstars.

The only thing that interests us more than a business success story, however, is one of fraud and failure. Take a look at the biggest pop culture hits from the past few years and you will notice an interesting trend – many of our most-watched television dramas, binge-worthy streaming series and must-listen podcasts have chronicled the rapid rise and fall of would-be entrepreneurs. From the Fyre Festival fiasco to the spectacular fall from grace of WeWork’s Adam Neumann and Theranos’ Elizabeth Holmes, these stories continue to captivate audiences around the world. But does the recent proliferation of these tales – of fraud, deception and wrongdoing – suggest that something has turned sour in the entrepreneurial world?

Rather than being the work of a few ‘bad apples,’ these cases may be reflective of a more pervasive cultural problem in Silicon Valley. It appears that Wall Street is no longer the epicentre of white-collar crime, with California’s tech bubble birthing a new generation of fraudsters and tricksters. As new stories of start-up chicanery continue to emerge, has the ‘fake it till you make it’ mantra corrupted entrepreneurial culture as we know it? The life of a successful entrepreneur is certainly seductive to many a young business founder. Fame and fortune awaits those who land on that ‘needle in a haystack’ billion-dollar idea, with today’s zeitgeist venerating start-up moguls to an almost unhealthy extreme. And for those plucky go-getters set on making a name for themselves, the start-up landscape has never been so alluring, and the rewards never so great. With just an internet connection and an idea, anyone can launch their own business, while investors remain spend-happy and hungry for the ‘next big thing.’ Last year, investors poured a record $330bn into US-based start-ups – an approximate four-fold increase in the amount of money being invested in start-ups when compared with five years ago.

Just as popular culture turns business moguls into celebrities, investors can find themselves seduced by ‘visionary’ leaders. Modern-day entrepreneurship celebrates audaciousness, self-belief and a disregard for the rule book. We are drawn to those bold risk-takers who have an unwavering belief in their idea. While traditional companies relied on a strong brand name and an instantly recognisable logo, 21st-century technology firms almost always have their founder as the face of their business. The Facebook empire is fronted by Mark Zuckerberg, Tesla is synonymous with Elon Musk, and Amazon will forever be associated with Jeff Bezos – despite its founder having stepped down as CEO last year. Elevated to celebrity status, these tech moguls have convinced investors and consumers alike of the validity of their products and services – achieving spectacular success and working their way onto world rich lists in the meantime.

The cult of personality
It’s not hard to see why many would be keen to emulate the success of the early 21st century tech elite. Elizabeth Holmes, founder and CEO of ill-fated blood testing company Theranos, was even said to have modelled herself on the late Apple co-founder, Steve Jobs. In business, and particularly the start-up world, the cult of personality is strong, at times blinding potential investors to possible red flags and early warning signs.

Such was the case with Holmes’ Theranos. In 2003, aged 19, Holmes founded the health tech firm Theranos, with the aim of revolutionising diagnostics through a simple finger prick blood test. Just one year later, Holmes had raised $6.9m in early funding, giving Theranos a $30m valuation.

Over the course of the next 10 years, Holmes succeeded in ramping up investor interest in the firm, with US Treasury Secretary George Schultz and media mogul Rupert Murdoch among her high-profile backers. By 2014, the firm was valued at $9bn – making Holmes the youngest self-made female billionaire.

Just one year later, however, and the cracks were beginning to show. After a whistleblower sounded the alarm over the validity of Theranos’ blood testing equipment, the Wall Street Journal published a series of shocking exposés on the company, casting significant doubt over the firm and ultimately leading to its collapse. The question everyone found themselves asking was: just how did Holmes get away with it? To investors, she was a captivating leader with a good story. And for some, it seems, that was enough to part with millions.

The power of personality and story-selling is also evident in Adam Neumann’s controversial leadership of co-working company WeWork. While Neumann favoured a more gregarious, outlandish leadership approach than that of the more reserved, composed Theranos boss, both won over investors with their charismatic style and unfaltering belief in their ideas.

Co-founding WeWork from a single office space in SoHo in 2008, Neumann was messianic about the benefits of flexible, multi-use co-working spaces, convincing investors that his ‘physical social network’ of office buildings was the ‘future of work.’ His optimism proved infectious, and by 2018, he had turned WeWork into the largest private occupier of office space in Manhattan.

But it wasn’t to last – reports of Neumann’s erratic management style tainted the company’s planned IPO with the firm slashing its valuation and ultimately abandoning its efforts to go public at the last hour. Its value tanking, the troubled firm was forced to lay off 2,400 employees (see also Fig.1). Much like Holmes, Neumann was able to successfully acquire billions of dollars in venture capital from investors, his enthusiasm and self-belief enough to make up for what was ultimately a flawed business plan. And while there is an important lesson for investors to learn from these scandals, there is little evidence that these high-profile cases have dampened VC enthusiasm for finding the next tech ‘unicorn.’ Investors are continuing to pour money into start-ups at record rates, seemingly undeterred by the lofty valuations of the Silicon Valley start-up bubble.

A cultural crisis in Silicon Valley
While it would be perhaps more palatable to dismiss cases such as WeWork and Theranos as one-off scandals, we may find that these cases are actually the canary in the coalmine, indicative of a wider, more entrenched cultural problem within Silicon Valley. Just as the uncovering of the Bernie Madoff Ponzi scheme scandal prompted a profound reassessment of the investment industry in 2008, these cases should, at the very least, cause us to question the modern entrepreneurial landscape.

Nobel Prize-winning Holocaust survivor Elie Wiesel, who lost $15m to Bernie Madoff’s swindling, said of the financier: “We thought he was God. We trusted everything in his hands”. Similarly, the current culture within Silicon Valley seems intent on making messianic leaders out of start-up founders, creating a climate where the authority and judgement of these perceived visionaries is unshakable and unquestionable.

The current culture within Silicon Valley seems intent on making messianic leaders out of start-up founders

In 2014, entrepreneur and Paypal co-founder Peter Thiel penned an article for Wired magazine, entitled: ‘You Should Run Your Start-up Like a Cult. Here’s How.’ In the article, Thiel claimed that “the best start-ups might be considered slightly less extreme versions of cults,” and admitted that “cultures of total dedication look crazy from the outside.” It appears that many budding young business minds took note of this advice, with Silicon Valley fast earning a reputation for a pervasive ‘cult-like’ culture. Indeed, Thiel theorised that every tech start-up should be made up of “a tribe of like-minded people fiercely devoted to the company’s mission.” Looking at Silicon Valley today, many start-ups seem to have succumbed to this cult-like mentality. And when founders are elevated to near mythical, ‘cult leader’ status, then mistakes, misjudgements and even malpractice can be overlooked. While innovation and vision should be rightly celebrated, Silicon Valley must be careful not to turn a blind eye to wrongdoing – even when it is disguised as industry ‘disruption.’

If this recent wave of Silicon Valley scandals have exposed the dangers of the ‘fake it till you make it’ mindset, they may also remind investors that impossibly high valuations for young, trendy start-ups may be just that – impossible. Tech unicorns are no longer the mythically rare creatures that they used to be. As of March 2022, there are 607 active unicorn companies in the US, with 75 reaching that coveted $1bn valuation since the start of the new year. With valuations continuing to soar and venture capitalists betting big on start-ups, investors need to make sure that they aren’t taken in by a charismatic leader and a good story alone – or they could end up chasing a unicorn that simply doesn’t exist.

Plan ahead by investing early in young employees

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Recruitment is expensive. Not only do hiring managers have to find the time to prepare the role profile and manage workloads during a vacancy, but the interview process is especially resource intensive. This is exacerbated when, at the point of salary discussions, it becomes apparent that the candidate and the organisation have two alarmingly different ideas when it comes to pay.

University graduates and young people entering their first real employment this year are finding a brave new world – one where some employers are desperate to live by old rules, but others believe the rule book has been torn in two. A starting salary has the potential to affect your income for the rest of your life and can have a significant impact on later choices available to you, including the size of your pension pot, your lifestyle and of course your career prospects. It is important, therefore, for young people to enter the workplace equipped not only with the skills and knowledge that their education has provided them, but also with the empowerment that skills in negotiation can bring.

Art of negotiation
The UK curriculum for schoolchildren is finally including basic financial literacy as part of the curriculum, meaning that tomorrow’s school leavers won’t be as helpless around money as yesterday’s. But there is scope to take things further. If university students and school leavers were given the opportunity to attend salary workshops and were practised at the art and science of negotiation, then by the time they sit down for their first job interview, questions about salary expectations wouldn’t get palms sweating in quite the same way. This could make millions of dollars of difference over the course of a long career. This is not automatically bad news for business owners, either; indeed, the end goal of a successful negotiation is a win-win for both parties.

Staff and employers all know that valuing workers goes beyond a pay cheque

Gravity Payments in Seattle in the US made headlines around the world in 2015 when its CEO Dan Price took some stark feedback from a colleague about the enormity of his own pay cheque compared to the salary offered to his lowest paid staff. Price decided to take a million-dollar reduction in his own pay in order to give every member of staff in the company a minimum salary of $70,000 – the amount that research via a Gallup World Poll shows is the ‘ceiling’ past which money can’t buy you happiness. An income of $70,000 allows you to live in a decent house in a nice area, have certain lifestyle expenses like a reliable vehicle and be able to save for children’s education while still having a couple of holidays a year and so on.

Gravity’s theory was that if employees didn’t have to use mental bandwidth on financial issues, they would feel more satisfied at work, loyalty and productivity would increase, and staff turnover would reduce. Price later stated that staff turnover had indeed reduced by half, which increased and improved employees’ knowledge and ability to help their clients. It’s certainly a fascinating concept, if slightly alarming, for the modern CEO who understands the need to value employees highly but also watch the bottom line. What to do if you wish to attract and retain good staff but you don’t happen to be a multi-millionaire tech CEO?

Know your value
In the post-Covid world it’s about transparency, trust, and clarity at work as well as the amount of take-home pay. Job hunters faced with hundreds of vacancies (and make no mistake, the market is inundated because of the Great Resignation) want to see at a glance how much a company thinks their role is worth. ‘Competitive’ is vague and subjective. Putting a number on it means employers are putting their money where their mouth is and letting candidates judge for themselves how ‘competitive’ that is. Staff and employers all know that valuing workers goes beyond a pay cheque, so flexible working, generous benefits and emotionally intelligent recruitment all allow potential staff to look under the bonnet of the employer beyond the starting salary and really get a feel for the company.

That is the ultimate purpose of an interview, and the subsequent salary negotiation. It isn’t about paying what you can get away with; it’s about attracting the right candidate for the role and for your company culture. With an eye firmly fixed on the horizon, smart employers can offer the whole package, and young people skilled in flexible working and financial knowledge will be more than worth the offer. Pay them well from the get-go and you could earn their loyalty for years.

Investors shown to be actively pursuing passive funds

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Passive funds, which track indices such as the S&P 500, are gaining market share worldwide as investors become more reluctant to pay the higher fees demanded by active fund providers. The perspective of the private investor best illustrates the appeal of low-cost funds. A fund’s charges are often a barrier for those with not much to spend. For example, an investor putting $10,000 in an equity fund may suffer a loss if the companies perform poorly. But if he has to pay a fee of one percent, this will reduce his wealth by a further $100.

Active funds pay a fee to help cover the salary of managers, in some cases high-profile figures, for the benefit of their skill in picking the right investments, such as stocks. This may involve researching companies, which can be costly. Passive funds, also known as trackers because they track an index, incur no such expense. BlackRock, Vanguard and a host of other asset managers have been offering low-cost trackers for decades. However, in recent years, the competition to lower fees has become even more intense, due to a combination of regulatory pressures and more products coming onstream. The Ongoing Charges Figures (OCF) for some of the major trackers is just 0.07 percent, and in some cases even lower.

Actives underperform
Performance data is also boosting the case for passives. It shows that the vast majority of active funds are repeatedly failing to outperform their benchmarks. The Standard & Poor’s Index Versus Active (SPIVA) scorecard spells out the statistics. It looks at thousands of active funds and how they have performed compared with their benchmark. In 2021, large-cap funds continued their underperformance for the 12th consecutive calendar year, as 85 percent of active large-cap funds trailed the S&P 500.

Fund managers often respond to evidence of active underperformance by claiming to offer better returns after adjusting for volatility, reports SPIVA, but add: “This would be an appropriate counterargument, if only it were true.”

Hundreds of passive funds are available covering specific sectors or themes

SPIVA said the vast majority of actively managed funds underperformed over the long term even after allowing for risk. SPIVA cited data based on the S&P Composite 1500, which covers approximately 90 percent of US market capitalisation. Among domestic equity funds, while 90 percent have underperformed the S&P Composite 1500 over the past 20 years, an even greater 95 percent did so on a risk-adjusted basis. For most investors, such as pension funds, the long-term investment picture is more important.

Fans of active management have frequently put forward the argument that passive funds have benefited from a strong run in recent years for world stock markets. The S&P 500 regularly hit new highs in 2021. The rising tide that has lifted nearly all ships makes it more difficult for active funds to demonstrate their value and how they cope better with downturns, say active proponents.

However, the temporary downturn and the volatility brought on by the pandemic should have provided the perfect opportunity to show actives in a better light. The evidence says actives failed the test. Proponents of active funds may argue that a deeper, more prolonged downturn will help their case. This theory could soon face a fresh test, with the S&P 500’s sharp downturn in the spring of 2022.

SPIVA’s data is slightly more encouraging for active bond funds. Bond prices have fallen sharply with central banks around the world signalling the end of quantitative easing, and raising interest rates. Many benchmark bond indices were in negative territory for 2021.

The most notable success for actives was in funds of US government bonds with longer maturities: about 82 percent outperformed their benchmark, the Barclays US Government Long index. For short and intermediate maturities, the proportions outperforming were 26 percent and 52 percent respectively. On the face of it, this might give some hope for the active case. But the outperformance was short-lived.

For example, with the Barclays US Government Long index more than 95 percent of actives underperformed over three, five, 10 and 15 years. This is also a familiar pattern for some equity funds, which outperform in the short term, but fail to sustain this performance over longer periods.

The cautionary tales of high-profile fund managers falling from grace also boost the case for passives. For many years, London-based fund manager Neil Woodford was highly regarded for the returns he achieved at Invesco. However, when he left to set up his operation, Woodford Investment Management, disaster ensued. He had to close down the company after investing heavily in unlisted, illiquid companies. Investors suffered heavy losses.

Short-term outperformance is, to some extent, part of the laws of statistics. If thousands of players throw a dice twice, you can expect one in 36 of them to throw two sixes. Extend the exercise to three throws, and only one in 216 will throw a six every time. Go to six throws, and it’s one in 46,656. Active proponents will argue that a fund manager is engaged in skill, not a game of chance. But most don’t seem to have the skill to outperform.

Efficient markets hypothesis
What makes outperformance difficult, in some ways, is the phenomenon known as the Efficient Markets Hypothesis (EMH). This is the theory that the prices of shares, and anything else widely traded such as bonds and currencies, already have all relevant information, such as profitability and economic risk, priced into them. If a company’s shares are trading at $10, they are probably worth about $10, says EMH. If they were worth $15, investors would have snapped them up and forced the price up to $15. EMH is unlikely to apply to all tradeable financial assets all of the time, but may apply sufficiently to make prolonged outperformance difficult.

Even Warren Buffett, one of the world’s best-known active investors, has also helped the case for passives. The Sage of Omaha oversees more than $800bn in investments through his Berkshire Hathaway insurance company but has recommended that investors should put a large proportion of their money into an S&P 500 tracker, citing the low cost.

Investors seem to agree. Assets under management (AUM) in index funds accounted for 40 percent of the total AUM in the US, at the end of 2020, compared with just 19 percent 10 years earlier. This data, from Statista, also showed that Exchange Traded Funds (ETFs) had grown most rapidly and now accounted for the majority of US passive equity funds. Bloomberg Intelligence, meanwhile, says that in domestic US equity funds, passives have already overtaken active.

It forecasts that passives will have more than 50 percent of the total US market by 2026, possibly earlier.

For the providers, there remains a conflict. Companies such as Vanguard and BlackRock still have a sizeable active business and have no interest in seeing it disappear. The fees they earn from active products are much higher than from a passive fund of the same size.

That said, some of the biggest passive funds are very lucrative for the providers if they can achieve sufficient scale. State Street’s S&P 500 ETF has some $400bn in AUM. Even with fees as low as 0.07 percent, the revenue generated is in the hundreds of millions for the bigger funds. For institutional investors, investing is usually a combination of active and passive. As a spokesman for abrdn, an almost entirely active house, told World Finance: “There is a place for both active and passive investment approaches in a well-diversified portfolio and a combination of both can be beneficial in different market conditions.”

Investors can use passive funds to obtain basic market exposure. For example, they buy S&P 500 tracker products to gain exposure to US equities. To execute more nuanced stances on the market, they might then buy some active funds, or individual stocks, bonds and other instruments.

However, passives are increasingly making inroads at the more granular level. Hundreds of passive funds are available covering specific sectors or themes. This includes sectors such as mining, energy and information technology.

The theme of inflation
Trends and developments in the market might seem to offer active funds a chance to show their value. A major theme in 2022 is inflation. Some active funds argue they can better pick stocks that can navigate the dynamics by selecting certain shares. For example, they might buy into supermarkets on the premise that they are better able to pass on increased costs to customers, as they are selling essential items. Deborah Fuhr, founder of ETF data provider and consultancy ETFGI, told World Finance: “I don’t buy it. Every time something happens, they say this is the time for active management. Consistently, hedge funds and active mutual funds don’t deliver the alpha they tell people they’re going to do – why would I pay high fees when I could get better performance with a low-cost ETF?”

In any event, the raft of passives available to address the issue include ETFs of inflation-linked bonds, as well as ETFs of equities selected for pricing power. Fuhr also cited the recent popularity of products tracking the gold price, which some investors see as a hedge against inflation.

Trackers are now also addressing environmental, social and governance (ESG) issues, a massive theme on the investment landscape. Index compilers such as FTSE and MSCI are covering a vast range of issues: climate change, controversial weapons and labour practices, to name but a few. They have come up with an array of indices that are now being tracked by hundreds of low-cost products. Some products cover specific themes; others aim to cover the whole ESG spectrum.

Smart beta
Passive funds also include products based on smart beta. Smart beta strategies are those that have been shown to beat the market over a period of time by investing in companies with certain characteristics. This might include companies that pay higher dividends or have lower market volatility. Indices for such companies are compiled. However, unlike mainstream trackers, the index is based on the relevant theme rather than market capitalisation.

These strategies sometimes outperform, but sometimes disappoint. The dividend strategy struggled when many companies cut payouts during the pandemic. Sceptics will argue that if EMH really applies, they shouldn’t work at all.

The big picture is that passives have it covered. This includes emerging markets, where actives might appear to have an opportunity to discover hidden value. But SPIVA data shows that in emerging markets, as with other areas, short-term outperformance is simply not maintained.

We need partnership and innovation to achieve a more sustainable future

Posted on by itsupport

How is the packaging industry stepping up to the sustainability challenge?
We saw from the COP26 climate change summit that if the world is to limit global warming to 1.5°C or less by the end of the century, we all have to really increase our efforts.

The packaging industry is taking climate change challenge very seriously. Sidel’s customers, which include well-known global brands and companies, are setting ambitious targets to reduce greenhouse gas emissions, not only for themselves but also their whole supply chain.

We all recognise that progress on sustainability relies on cooperation, especially if you consider that analysts expect to see a 2.6% rise in sales of packaged consumer goods by 2025 – that’s another 423 billion units.

 

How are you going about it at Sidel?
We’ve really stepped up our commitments. Having agreed only a year ago to reduce greenhouse gas emissions at our own sites and facilities by 30 percent by 2030, we have now moved those targets up a gear, pledging to halve our emissions in that timeframe. So, we are now committed to being on the 1.5°C pathway and being part of the best efforts to limit global warming.

All our sites will be 100% green energy-powered by the end of this year. Our new site in Santa Maria da Feira, Portugal (pictured) is a good example, featuring intelligent lighting control and electric car charging stations.

 

All of Sidel’s sites such as this one in Portugal, will be 100% green energy-powered by the end of this year.

As an equipment manufacturer, what can you do to influence the supply chain?
Sidel is fully embracing this challenge. We want to be at our customers’ side and to lead our suppliers towards a more sustainable future: it is only through working with partners that we can make a difference. We make sure we understand their sustainability goals and we’ve let them know they’re not alone! It takes continuous dialogue and we will use all our technical knowledge and smart data analytics to help them.

We’ve already reduced the energy consumption of our machines – our blowers now use 45% less energy. We also halved the water consumption of our bottle washers and have developed a digital suite that can help customers monitor and adjust their production line energy consumption. We’ve upgraded existing lines, so they are more energy-efficient and sustainable, which last year saved more than 1,500 tonnes of CO2. As an example, helping our UAE-based customer Zulal move to a new integrated packaging line configuration brought them energy savings of 56%.

Our designers can optimise product design to make packaging that uses less material and fewer resources when it is blown and transported. Our moulding technology allows bottles weight reduction, cutting down on material use as well as energy consumption and transport emissions.

We help customers deal with regulatory changes – for example, the move to tethered caps which will become mandatory on all bottles in Europe and the UK from 2024 to minimise litter.

We’re committed to reducing emissions on everything we buy and sell by 25% by 2030, against a 2019 baseline. We recently started a supply chain initiative to support our suppliers to start their own commitment and track progress against our common goal.

Our efforts have been recognised as we have been given an A- rating for our supplier engagement by CDP (Carbon Disclosure Project), a global environmental non-profit organisation.

Sidel helps its customers’ lines to be more energy efficient, last year saving 1,500 tonnes of CO2

Where are the regulatory and government pressures on the packaging industry?
There is now a general request for manufacturers to take on more responsibility for waste management, with the intent of making a drastic shift from a linear to a circular economy model. Currently 63 nations have enacted Extended Producer Responsibility measures to encourage schemes such as product takeback, deposit-refund, and waste collection guarantees. More governments are open to funding and creating better recycling infrastructures.

 

Plastic packaging is often seen as the enemy of the environment. How can you make a positive case for it?
It’s hard to change perceptions, but the truth is that lifecycle analysis shows that plastic, and PET in particular, has the best carbon footprint among materials currently available. If it is properly collected and recycled, PET can offer the best answer to the current sustainability challenge.

We need to see packaging as a resource, not a waste. If we can prevent it from ending up in the environment by keeping it in a circular economy loop, PET plastic packaging can play a pivotal role in protecting and distributing our most precious products.

Since 2019 we’ve been a signatory of the New Plastics Economy Global Commitment, launched by the Ellen MacArthur Foundation and UN Environment Programme to accelerate the transition to a circular economy.

Like it or not, plastic packaging is going to be with us in the near term and indeed is expected to rise, especially in Asia Pacific, the Middle East, Africa and India. So, we have to make this growth more sustainable, and for that we all need to engage all the 5Rs levers: Reduce, Recycle, Reuse, Replace and Reinvent (see diagram).

Reduce is the first and most important action, and it needs to start from the actual design of the packaging. Reuse will come to the fore, with more refill options for the consumers, both at home and on the go. Increasing Recycling is of pivotal importance, both in quantity and in quality: return schemes such as reverse vending machines that incentivise consumers are proving to be a great tool to achieve both. Easier-to-recycle solutions by using one single mono-material layer instead of many layers of multiple materials are on the rise.

PET is already the most recycled type of plastic, thanks also to its ability to achieve food grade quality even when recycled. It will become more prevalent in line with the ambitious targets the big brand owners have set for themselves in terms of percentages of recycled PET, known as r-PET, in their packaging.

We’re also actively seeking to Replace with new bio-sourced or bio-based materials and looking at ways to completely Reinvent the way packaging is conceived.

 

What is preventing the widespread adoption of recycled PET?
The amount of recycled PET in packaging is increasing but progress is slow, with an estimated global average of 8% compared to 5% in 2018. In Europe, the average is already 15% and is projected to be around 35% in 2030.

Sidel offers a testing and validation service to help customers deal with r-PET’s inherent variability and we have set up our own pilot-scale PET recycling line near Le Havre in France. Sidel has also signed up to R-Cycle, the open tracing standard for sustainable plastic packaging. It provides a digital product passport, and is a big step towards the implementation of a genuine circular economy and highly efficient process chains. Partners from around the world can record and retrieve all the relevant properties of the packaging to improve their product sustainability, quality, and manufacturing process.

It takes time to put recycling facilities in place, but we are seeing a lot more investment in recycling facilities in Europe. Materials and chemicals companies such as Eastman, Indorama and Carbios have recently announced major recycling initiatives in France and another, Suez, is creating new recycling capacities in Belgium.

 

Overall, are you optimistic or pessimistic about the role the packaging industry will play in sustainability?
I am optimistic because I believe in the resourcefulness of our engineers and a growing collective determination to set and meet tough targets. In the end, it will be a combination of innovation, ingenuity, and collective will from regulators, industry and consumers to make the best use of our precious resources.

Sidel’s latest sustainability report is available at sidel.com