2020 was a watershed year for ESG funds. Investment strategies that take environmental, social and corporate governance factors into account enjoyed record inflows; over the last year, a third of inflows into global funds was invested using ESG strategies, rising to more than half in June and July.
As of September, global inflows into sustainable funds are up again, reaching $80.5bn, and assets in sustainable funds are at an all-time high. Numbers suggest that this was money well invested: 40 percent of ESG and sustainable funds made top-quartile returns in the first half of this year, with the average ESG outperforming its traditional peer, according to Trustnet. The idea that sustainable investment sacrifices returns for morals has been well and truly put to rest.
The COVID-19 pandemic is partially responsible for the spike in inflow, as investors seek sustainable investments that can withstand an unpredictable market. Hortense Bioy, Director of Sustainability Research at Morningstar, told World Finance: “The disruption caused by the pandemic has highlighted the importance of building sustainable and resilient business models based on multi-stakeholder considerations.” The global health crisis has had an impact on all categories of the ESG model: beyond health and safety, the pandemic has resulted in increased interest in employee benefits and “renewed focus on management compensation”, says Bioy, as well as intensifying already increasing concern over the climate crisis. Similarly, the success of ESG funds this year has been widely attributed to favourable sector exposure driven by the pandemic.
Sustainable investment tends to avoid oil and gas, the value of which plummeted earlier this year; despite oil prices stabilising after dipping to sub-zero in the US for the first time in history, energy stocks continue to underperform. On the other end of the market, tech stock is heavily prevalent in ESG strategies: in October, Apple, Amazon, Facebook and Google-owning Alphabet were up 18 percent year on year.
There is a sense that the success of ESG is attributable to special circumstances. But as of July, the ubiquity of tech stock – eight of the 10 best performing large-cap funds using ESG metrics have either Apple, Amazon or Microsoft as their biggest holding – has led to lasting success: almost 60 percent of sustainable funds delivered higher returns than their conventional counterparts over the past decade.
Research conducted by the World Resources Institute suggests that differences in sector exposure accounts for just 0.77 percentage points of current ESG over-performance; a significant 0.65 percentage points were gained by picking better-performing stock within each sector, suggesting that ESG is an effective measure of financially successful investment.
The numbers are impressive. But the vogue for ESG is plagued by accusations of greenwashing, calling the strength of ESG’s claim to sustainability into question. While ESG fund integration considers a company’s ESG profile, financial performance remains the top priority when purchasing stock. This is where ESG differentiates from socially responsible investing (SRI) and impact investing, which respectively screen investments according to specific ethical guidelines and prioritise quantifiable social impact.
What’s more, ESG valuation is conducted independently or using an agency score, the latter of which was recently deemed unable to “facilitate meaningful investment analysis that was not significantly over-inclusive and imprecise” by the chair of the SEC. Varying definitions and methodologies mean one company can attract scores across the spectrum, making it increasingly difficult for investors to identify truly sustainable companies. ESG continues to be dominated by the European market, and, according to PwC, European sustainable investment products could increase threefold by 2025, outnumbering traditional funds.
Proposed regulations developed by the EU, set to commence over the coming years, outline a number of environmental objectives driven by the EU’s pledge to become climate neutral by 2050, including pollution prevention and the transition to a circular economy. Regulating non-financial sustainability-related disclosures aims to enhance the comparability of financial products; the catch-all nature of the disclosure guidelines means they will cover the vast majority of funds that currently claim to use ESG strategies, and the appeal of retaining its marketing advantage will outweigh the administrative burden.
Philipp Woelk, EU policy officer at responsible investment charity ShareAction, told World Finance that the regulation could have more influence on which funds ESG inflows will be directed towards rather than impact its booming growth. “Ideally, the regulation will shift funds to the ‘better’ ESG funds and ultimately push the laggards, who, until now, have benefited from the ESG or sustainable label, to do more ESG integration.” The initiative does not strictly aim to make ESG an exclusive status but rather to direct capital towards more sustainable growth and make broader, non-financial considerations a vital element of mainstream sustainable investing
In September, Sony’s PlayStation 5 was triumphantly listed by retailers as available for pre-order. But for eager gamers looking to grab the latest hardware, the event quickly turned into a disaster. The PlayStation 5 was supposed to be available for pre-order on September 17, but according to videogame news website Polygon, many retailers put their listing up early. Customers who had signed up to receive an official email alert for the start of pre-orders discovered many retailers had already sold out, and those who did get online early experienced crashed websites, unexpectedly empty shopping carts and cancelled orders.
“Let’s be honest: PS5 pre-orders could have been a lot smoother,” Sony glibly tweeted the following day. A positive product launch experience is critical for success, but the unique challenges of 2020 combined with hastily implemented digital infrastructure has seen even the biggest companies struggle to hold a successful pre-order event.
Pre-pay to play
In 2020, almost every retail category has been forced to develop some kind of pre-order system. COVID-19 has left consumers unwilling, or in regions with strict lockdowns, unable to visit stores in person. With international supply chains disrupted and many businesses in tough financial positions, pre-orders are often the only way to guarantee a supply of stock. “This year (2020) it has not only happened to consumer electronics: I have seen it in categories such as bikes, health and fitness items, which have been in such heavy demand,” Miles Clemans, Managing Director of inDemand Online Retail Services, told World Finance. “Some of my clients have really struggled under the weight of pre-orders.”
For companies like Sony, this has been coupled with a massive surge in demand for home-based entertainment. An October report from McKinsey & Company described it as a new ‘homebody economy’, driven by people redirecting the money they would have spent on travel back into their home. If you can’t take your holiday to Spain, adventuring in a video-game might be the next best thing. This has made demand far more difficult to forecast, overwhelming companies’ websites with an unprecedented volume of traffic.
A pre-order event needs to be treated like an old-fashioned, in-person launch, similar to what has been perfected by the likes of Apple over the last decade
Clemans said systems are more often than not the main point of failure. “Pre-orders are a workaround to business as usual. When the usual e-commerce system sees ‘10 in inventory’, as soon as 10 units are sold it will say ‘out of stock’ and the consumer will not be able to purchase. But along comes the pre-ordering system that overwrites it, and you start having exceptions to the rules, and exceptions to exceptions to the rules. That’s when systems start to get tested.”
Besides technology, COVID-19 has placed business communication systems under immense strain. Clemans said communication between internal departments, such as marketing and warehousing, is important, but a lot of companies need to think more about their consumers. “Demand has been so intense and they haven’t really thought through how to communicate at a consumer level to advise them ‘Sorry, we oversold within 30 minutes of opening up the pre-ordering.’
“A very negative experience for a consumer is to get a refund without a very good explanation of why all that energy you expended getting excited has gone to zero.” In a rush to implement pre-order systems, Clemans said the testing of both technologies and systems is often overlooked. “Maybe a cursory test is done between one or two developers, but I don’t think that’s good enough. It needs to be a really comprehensive testing process that has gone through more levels than just the IT department, particularly marketing.”
For the fans
In many ways a pre-order event needs to be treated like an old-fashioned, in-person launch, similar to what has been perfected by the likes of Apple over the last decade. A well-thought-out plan coupled with clear communication between all parties is the core of any successful event, in-person or otherwise.
Some companies are getting it right. Electronics maker Xiaomi releases many of its new products exclusively to the company’s ‘VIP’ fans first, making demand more manageable while engaging with its most devoted customers. Additionally, these VIPs tend to be a little more forgiving of the minor faults or problems new consumer electronics often have.
Although in many ways, simply limiting ambitions a bit might be the best solution. “A lot of these over-sales and issues arise out of greed,” Clemans said. “People get very excited about the amount of dollars that can be taken for nothing in return.
“There have to be some caps right at the start, because it could become 10,000 orders when you actually only have access to 1,000 in stock. That means you potentially have 9,000 emails to send to unhappy customers, if you do get to send them at all.” Depending on how COVID-19 permanently changes the way we live our lives, better systems and more realistic expectations will have to become the new minimum for retailers.
Since the onset of the COVID-19 pandemic, Sweden has stood out from the rest of Europe by resolutely refusing to lock down. In April of this year, as cities around the world turned into ghost towns, Sweden’s urban centres didn’t look too different to normal, with Swedes still able to drop their kids off to school in the morning and enjoy a coffee with friends in the afternoon.
It wasn’t quite business as usual, mind you. Gatherings of more than fifty people were banned, employees were encouraged to work from home, university teaching was moved online and the nation’s elderly were urged to self-isolate. But Sweden’s approach was certainly less stringent than the nationwide lockdowns seen elsewhere across Europe. Rather than enforcing new legal obligations on its citizens, the Nordic nation instead based its strategy on a sense of collective social responsibility – in effect, trusting its people to act sensibly and “do the right thing” to limit the spread of the virus.
Sweden appears to have been able to soften the economic blow to small businesses and avoid the onslaught of job losses
To its critics, this approach was utterly irresponsible, putting the economy ahead of saving lives. To its supporters, meanwhile, it represented a more realistic, long-term strategy – and one that sought to avoid the potentially catastrophic social and economic effects of a national lockdown, including mass unemployment, delayed treatment for non-COVID-related illnesses and months of lost education for children and young people. While the nation’s chief epidemiologist, Anders Tegnell, has insisted that protecting the economy was by no means the main aim of the strategy, by allowing businesses to remain open, Sweden appears to have fared better than many of its European neighbours when it comes to the COVID-19 economic downturn.
Although the nation still experienced an economic contraction in the second quarter of the year, with its GDP shrinking by 8.6 percent, this was significantly less than the estimated average for the European Union as a whole, which saw a decline of approximately 11.9 percent. At the opposite end of the spectrum, meanwhile, those individual European nations that imposed particularly strict lockdowns were hit hard by the COVID-19 crunch, with Spain’s economy contracting by 18.5 percent after implementing arguably the harshest lockdown in the EU. By keeping society open throughout the pandemic – even with spending reduced as Swedes embraced voluntary social distancing – Sweden appears to have been able to soften the economic blow to small businesses and avoid the onslaught of job losses that is currently blighting countries across the EU.
Protection at a critical juncture
So, while the strategy hasn’t worked miracles when it comes to the Swedish economy, with a recession still very much on the cards, its supporters believe it has gone some way to protect livelihoods at this critical time. But the strategy has also attracted fierce criticism from around the globe, prompting the New York Times to label Sweden as ‘the world’s cautionary tale.’ It is undeniable that Sweden has suffered a worse fatality rate than its Nordic neighbours, registering over 6,000 COVID-related deaths since the pandemic began spreading throughout Europe in early March.
While this might seem like a lower figure than the tens of thousands of deaths seen in Spain, Italy, France and the UK, for this small nation of just 10 million citizens, it gives Sweden the fifth-highest death rate per capita in Europe. Despite the widespread criticisms of the strategy that led the country to such an ignominious ranking, Sweden’s experts and health officials have stood by the controversial approach, with Tegnell recently telling the Financial Times that nationwide shutdowns are like “using a hammer to kill a fly.”
With a second wave of COVID-19 sweeping through Europe and entire nations placed back under strict lockdowns, all eyes are once again on Sweden to see whether the nation changes tack. This time around, the nation has tightened up its approach, introducing an eight-person restriction on sitting together at restaurants and cafes. As for other recommendations – avoiding public transport and non-essential shopping – these remain voluntary guidelines, marking a stark contrast to the legally enforced curfews and “stay at home” orders seen elsewhere in mainland Europe. Lockdowns, by their very nature, can only ever be temporary solutions, and as the spiralling cases in Spain, France and the UK seem to show, they appear to offer only temporary respite from the virus.
While governments across the EU have floated the idea of short, sharp, “circuit-breaker” lockdowns, as the months drag on, it’s clear that Europe needs to think about its long-term strategy. Swedish politicians have described the pandemic as “a marathon, not a sprint,” and only time will tell if the nation’s lockdown-free approach can go the distance and pay off in the long run.
The London Stock Exchange isn’t the most rock ‘n’ roll of environments. Or rather, it didn’t used to be. That appears to be changing however, thanks to the arrival to the market in recent years of music royalty investment trusts – funds that own the rights to pieces of music, including by some of the biggest names in pop and rock.
Hipgnosis Songs Fund, a British, Guernsey-registered investment company, floated on the LSE in July 2018, raising £200m for its IPO. Founded by Merck Mercuriadis, former manager to acts such as Elton John, Beyoncé and Guns N’ Roses, the fund’s first acquisition was a catalogue of songs from Terius Youngdell Nash, better known by his stage name, The-Dream. While not a household name himself, The-Dream is an award-winning producer and songwriter, having co-written hits for the likes of Justin Bieber, Beyoncé, Rihanna and Jay-Z.
Hipgnosis has subsequently raised an additional £845m through further share issues, most recently raising £186.4m in 72 hours in September 2020. An aggressive acquisitions policy has seen the fund add 117 catalogues comprising 57,000 songs to its pipeline, which together offer investors a yield of 4.17 percent, according to data by Winterflood. The fund has been part of the FTSE 250 Index since March 2020.
Two can play that game
Hipgnosis had long boasted of being the “first and only” UK investment company offering access to song royalties, but that all changed in November when Round Hill Music Royalty Fund announced that it had raised $282m from its own IPO on the LSE. The company, which is managed by New York City-based Round Hill Music (RHM), a music publisher and owner and operator of music copyrights, hoped to raise $375m, attributing the shortfall to the “global turbulence” caused by the COVID-19 pandemic. The fund is targeting total returns of 9–11 percent per annum, with a dividend yield of 4.5 percent. Since its launch in 2010, RHM has raised $472m in two private equity funding rounds and expects to raise an additional $250m in a third fund due to close soon. This war chest has enabled the company to acquire a portfolio of over 120,000 songs.
The strong market for these funds is driven by an evolution in the way we think about music, Mark Mulligan, managing director of media and technology analysis company MIDiA Research, told World Finance. “You’ve got pension funds and global asset managers looking at music as just another asset class to put within their portfolios of assets with a certain risk and opportunity profile,” he explained. “Institutional investors have looked at music publisher catalogues in particular, at how the value of that asset class has augmented over the last half decade plus.”
The figures are significant. In March 2020, Will Page, a visiting fellow at the London School of Economics and former chief economist for the music streaming service Spotify, published his annual report into the value of the music copyright business with the music industry publication Billboard. He calculated that in 2018 (the most recent year for which data was available) the music copyright business was worth $30.1bn, a 9.3 percent increase year-on-year from 2017. The music business is notoriously complex in terms of how royalties are apportioned and to whom, but the basic premise is that every time a song is purchased or performed, its copyright holders (and in most cases there will be several) earn some income.
Hipgnosis and RHM seek to pack their pipelines with high-earning songs: contemporary hits and classic tracks that receive a lot of radio airplay, are frequently streamed via services such as Spotify, or regularly licensed for use in films and advertising. Out of the many thousands of tracks in the catalogues these funds own, only a few dozen will yield very high returns by themselves. RHM’s portfolio includes the rights to songs recorded by The Beatles and Frank Sinatra, while Hipgnosis owns copyright to songs by Barry Manilow and Dave Stewart of Eurythmics. By acquiring aggressively and widely, these funds increase the likelihood of a good return for investors.
The music copyright business has not escaped the impact of COVID-19. With bars, shops and music venues closed during local and national lockdowns, there have been fewer opportunities for song plays, which means a fall in earnings for copyright holders. The International Confederation of Societies of Authors and Composers (CISAC), whose members operate in 120 countries worldwide, anticipates a fall of $2bn–$3.45bn in royalty collections in 2020.
But Mulligan is hopeful about the sector’s recovery from what he terms this “mini-recession. It’s not a market like travel or movie theatres, which have been completely decimated,” he said. “There’s a very clear path to return because what’s been happening to music publishing income splits over the course of the last five years is a rapid acceleration towards streaming, and streaming is booming. It has a dent at the moment after uninterrupted years of growth; however, compared to the broader economy, its relative value as an asset class actually holds up.”
In September 2020 the giant container vessel Jacques Saadé, owned by French shipping group CMA CGM, set out on a roughly 80-day maiden voyage from Europe to Asia and back.
There’s nothing unusual in that, except that this brand-new 400-metre-long vessel is the first ultra large container ship to be fuelled entirely by liquefied natural gas (LNG), a low-emission fossil fuel that so far has only powered much smaller vessels.
In the next few years the Jacques Saadé will be joined by eight sister ships. But looking further to the future, the engines on these vessels will be able to run on zero-emission fuels – as they become available in the coming decade. This is a race with profound consequences for the planet, and even Big Oil is joining in. ExxonMobil, for example, is working with Synthetic Genomics to develop algae into a viable biofuel for transport. The goal is to produce 10,000 barrels a day – equivalent to 3.65 million barrels a year – by 2025. “With continued breakthroughs on the horizon, the hope is that some day, passengers may fly on algae-fuelled planes and packages will be delivered by algae-fuelled trucks,” the oil giant hopes.
An urgent situation
As the world’s airlines embark on their commitment to a zero-emission strategy by 2050, refiners are trying to plug a yawning gap in sustainable aviation fuel (SAF). In mid-2019 Total fired up a bio-refinery in France with a capacity of 500,000 tonnes a year made from waste and a variety of vegetable oils. And US-based LanzaTech will supply SAF to All Nippon Airways (ANA) from 2021. The situation is urgent, warns LanzaTech’s chief executive Dr Jennifer Holmgren – “bold action is needed.”
On the bright side, Steve Csonka, executive director of American government agency Commercial Aviation Alternative Fuels Initiative (CAAFI), believes costs can come down. “We’re working to reduce the cost of production,” he told World Finance. “I believe SAF can be produced more economically. Biofuel is the only proper way.” So what exactly is biofuel? The criteria require that it be biodegradable, non-toxic, almost carbon neutral, and definitely not derived from a fossil fuel.
There are conventional biofuels refined from organic crops, or biomass, such as corn or sugar, while “second-generation” biofuels are created from waste such as cooking oil, forestry ground waste, household rubbish and even plastic, the scourge of environmentalists.
Hybrid product
Encouragingly, biofuel production is on the rise. In late September, Italian oil and gas group ENI opened a bio-refinery that will turn out 750,000 tonnes a year from used vegetable oils, animal fats, algae and other waste products that will be converted into Enidiesel+, a hybrid product with 15 percent biofuel.
British Airways and Shell are collaborating on a plant in Britain that will convert household and commercial solid waste into 13 million gallons of SAF a year. “The jet fuel coming from the plant could fuel all British Airways’ 787 Dreamliner-operated flights from London to San Jose, California and New Orleans in a year,” says director Robert Jeffery. Production is expected to begin in late 2024.
And in the Netherlands a KLM-led consortium has unveiled plans to build a plant that would produce about 33 million gallons of SAF a year from 2022, using local waste and residues as the basic feedstocks. The airline has contracted to buy 75 percent of the output for 10 years. Meanwhile, the science of SAF is progressing in leaps and bounds. Rotterdam The Hague Airport is examining the feasibility of producing SAF from nothing more than air – or more accurately, from CO2 drawn from the air, using a process known as direct air capture. It would then be refined on-site into renewable kerosene. “If all goes according to plan we expect to have the first flight with our blend take off by 2022,” hopes airport director Ron Louwerse. “The resulting kerosene can be blended to 50 percent and fuelled into planes that are currently in operation.”Because of pressure from authorities, zero-emission fuels cannot come soon enough for airlines. “The only way for the airlines to control their own destiny is to meet their targets,” says CAAFI’s Csonka.
Responsible roadways
On the ground, a front-running alternative to biofuels is hydrogen: particularly in the form of fuel cells that, like batteries, produce electricity through an electro-chemical process. Fuel cells have already been widely adopted in trucks, trains, buses and forklifts. Their only emissions are water vapour and heat. The essential energy source – hydrogen fuel – is stored separately. However, to qualify as ‘green’ hydrogen, it must be produced from solar, wind, hydro-electric, geothermal energy and other renewable sources. Promisingly though, the cost of renewable hydrogen has been falling steadily for years as production is ramped up, notably in giant projects in Europe, Australia and Chile.
Two big Spanish companies believe they have the answer – and it’s called ammonia. In early 2020, fertiliser producer Fertiberia and energy group Iberdrola announced plans to boost the production of ammonia by electrolytic hydrogen to 800 MW by 2027 at a cost of €1.8bn. “Producing ammonia through green hydrogen is the most efficient way for long-term and large-scale storage of energy,” believes Fertiberia chairman Javier Goni.
But why ammonia? It is the source of a clean fuel, especially for shipping. And it is relatively cheap and abundant. According to a report by the Korean Register of Shipping, ammonia works out 32 percent cheaper than hydrogen and 15 percent cheaper than methanol, another long-term alternative. “Hydrogen requires excessive costs for transport, and methanol requires excessive cost for capturing carbon dioxide needed for production,” the study noted.
Most experts believe LNG is only an ‘interim fuel’ that will be replaced by zero-emission alternatives within 15–20 years
Compared to other fuels, ammonia presents a low risk of self-ignition when correctly stored. (The explosion on August 4, 2020 of a large amount of ammonium nitrate stored at the Port of Beirut was reportedly a result of long-term neglect.) However, ammonia is highly toxic and must be carefully handled.
Whatever it’s produced from, hydrogen is gaining ground in all forms of transportation. In a landmark deal in late 2020, Volvo and Daimler Truck agreed to develop, produce and commercialise fuel-cell systems, primarily for heavy-duty trucks. “The hydrogen-based fuel cell is a key technology for enabling CO2-neutral transportation in the future,” believes Daimler Truck chairman Martin Daum. Incidentally, Daimler’s parent company Mercedes-Benz announced earlier this year that it had stopped all development on the internal combustion engine. “In the future the world will be powered by a combination of battery-electric and fuel-cell electric vehicles, along with other renewable fuels to some extent” predicts Martin Lundstedt, president and chief executive of Volvo Group.
Another automotive giant putting its faith in hydrogen fuel cells is Hyundai, which is rolling out heavy-duty trucks – up to 1,600 by 2025 in Europe alone. A pioneer of the technology, the South Korean group has been producing fuel cell-powered passenger vehicles for seven years. Although they are up to twice as expensive, hydrogen-fuelled trucks have several advantages over diesel-juiced ones. They accelerate much faster, are quieter, and require much less maintenance.
Deep green seas
Having seen what fuel cells can do on terra firma, the generally conservative shipping sector is beginning to embrace fuel cells. “Fuel cells will play a key role in helping marine industries address greenhouse gas emissions on the water and in ports,” predicts fuel-cell pioneer, Canada-headquartered Ballard. And prices are falling – the cost of Ballard’s latest module, FCMove, is a third cheaper than its predecessor.
This is long overdue, according to environmentalists. Until the International Maritime Organisation’s tougher regulations against CO2 emissions were introduced in January 2020, the vast majority of ships’ engines ran on low-grade, highly polluting bunker fuel. And even though the LNG-fuelled Jacques Saadé is flying the flag for low-emission fuel, most experts believe LNG is only an ‘interim fuel’ that will be replaced by zero-emission alternatives within 15–20 years.
The pressure is coming from everywhere. The EU wants green hydrogen to replace oil, natural gas and coal as a fuel source for all heavy industry, not just transportation. Switzerland will apply a stiff road tax on diesel trucks. And China has embarked on the biggest clean transportation project in the world – in Shanghai, for instance, some 500 fuel-cell-powered delivery vans are at work. And finally, the cheapest fuel is the wind. As well as powering offshore wind farms that are churning out many times more megawatts than experts predicted a decade ago, it is being harnessed on ships to boost the engines.
A roll-on, roll-off ferry, Ville de Bordeaux, that delivers Airbus parts around Europe, is partly powered by a kite system while another French shipping group will install 4,200sqm of sails on two 136m cargo vessels. When not in use, the four sails simply fold out of the way. Other shipping companies are experimenting with the Flettner Rotor, essentially a tall cylinder that “spins” the wind into propulsion. Estimates of fuel savings range from 10 to 30 percent. While not exactly a superfuel, at least the wind doesn’t have to be manufactured.
In March 2020, the dawn of coronavirus effectively wiped out global travel in the space of a week – on a scale we’ve never seen before. Airline traffic tumbled 96 percent in April 2020 compared with the same period in 2019, according to data from the Transportation Security Administration (TSA), and it has only mildly recovered since, with passenger numbers still down 70 percent year-on-year as of October 2020.
In June 2020, airline industry group IATA projected total carrier losses of nearly €100bn to the end of 2021, and in October, IAG (parent company of British Airways) confirmed losses of €5.6bn in the first nine months of 2020.
Hotels have been just as decimated; a survey by the American Hotel and Lodging Association (AHLA) found that almost two thirds of hotels in the US were at or below 50 percent occupancy – “below the threshold at which most hotels can break even and pay debt,” according to the report. Hugh Taylor, Chief Executive of hotel management and consultancy business Michels and Taylor, said average occupancy levels across the firm’s clients in the UK and Europe had hovered at around 15 percent for the year. “This is my fourth recession in my career, and I have never seen anything like it,” Taylor told World Finance. “Since March, business has essentially collapsed, and perhaps 90 percent of most hotels’ income has just disappeared.”
Slow recovery
Optimists might say this is a passing phase, with a full recovery imminent in the next few years. For leisure travel this might well be the case, with pent-up demand for escaping those same four walls likely to explode as soon as a vaccine makes things safe again.
But the same can’t necessarily be said for corporate travel, with recession-induced budget constraints and continued COVID-19 restrictions leading some analysts to predict a slower recovery for the sector. McKinsey research in August 2020 concluded that “the post-crisis return will take years and that business travel will return at a slower pace than leisure travel.” This is in line with previous trends; in the 2008–2009 recession, leisure travel fully recovered to pre-crisis levels in two years, according to the report, while business travel took five years. That was without the dynamics of a pandemic to contend with.
Taylor believes it will be at least three or four years before things get back to pre-crisis levels – including in the cities whose economies rely on business travellers. “London recovered within about a year amid the 2008 crisis,” he said. “This time our current forecasts suggest it isn’t likely to get back to 2019 levels until at least 2023, 2024 or possibly later.”
The bottom line
The impact of this on the travel industry and wider economies at large is clearly significant.
In 2018, corporate travel spend hit $1.4trn, according to a 2020 trends study by the World Travel and Tourism Council (WTTC), representing 21.4 percent of overall spend in the travel and hospitality sector.
Airlines are reliant on the corporate market for their profits. While business travellers typically only represent around 12 percent of overall airline passengers, they account for as much as 75 percent of passenger revenues, according to a recent report by travel software company the Trondent Development Corporation.
Hotels are likewise hugely dependent on the corporate sector. The AHLA found that corporate travellers represented around 40 percent of all hotel guests in the US, spending $280.2bn in 2014 (compared to $660.3bn spent by leisure guests) and generating $141.5bn in tax revenue. “The majority of the big branded hotels make their money from corporate travel,” said Taylor. “Conferences, events and meetings and so on all generate significant revenues.”
Digital dawn
While it’s easy to see the effects of this in the short term, the longer term is harder to forecast. Some believe business travel will make a full recovery; others predict the advent of the Zoom era may spell the end of overseas business meetings for good. The reality is probably somewhere in the middle. Research suggests there will always be demand for in-person dealings; in a recent survey by travel forecasting agency Globetrender, 60 percent of respondents felt most deals and decisions couldn’t be made virtually. But as businesses across the globe reel from recession, how prepared they will be to fork out on a costly trip for a quick, one-off meeting that could be done online in an hour leaves a very big question mark.
“Even after the emergence of effective therapeutics or a vaccine, don’t imagine a return to pre-pandemic business travel patterns,” wrote Michael Litt, Co-Founder and Chief Executive of video platform Vidyard, in a recent Forbes article. “In-person meetings will be reserved for times when it’s absolutely necessary.” The McKinsey researchers likewise concluded that “some travel for internal purposes will be permanently replaced by virtual meetings and collaboration.” To what extent these forecasts play out in reality remains to be seen, but what is clear is that this is the start of a long, uphill battle – and travel businesses and the economies they serve will likely be bearing the brunt for some years to come.
Last April, amid the COVID-induced panic that engulfed the planet, more shocking news came from China. The People’s Bank of China (PBOC) announced that it would start testing its own central bank digital currency (CBDC), a first for a major economy. Government employees in four cities were paid in digital yuan, while four commercial banks began internal tests. By December, around 50,000 lucky citizens had received 200 e-yuan (£23) in their digital wallets to spend on apps such as the food delivery service Meituan. A new era had started.
A change of heart
It has not always been like that. When Bitcoin, the first cryptocurrency, appeared in 2009, central banks disparaged it as a fad, a dud, or even a fraud. Many banned its use. In 2013, China barred its banks from using it as a currency, citing concerns over financial stability. The same year, Paul Krugman, perhaps the world’s most famous economist, penned an op-ed entitled “Bitcoin is evil.”
Gold-backed sovereign digital currency offers a compelling solution to slowing economic growth and rising inflation that many markets around the world are experiencing
Fast forward to 2021, and the mood music has changed. Central banks around the world set up working groups to discuss the merits of CBDCs. A survey by the Bank for International Settlements (BIS) found that most developed economies are considering the idea. International organisations like the IMF weigh the pros and cons of a novel financial architecture dominated by CBDCs. The Bank of England has released a roadmap leading to a digital pound sterling, a prospect that could help the UK’s COVID-stricken economy benefit from negative interest rates, according to Andy Haldane, the bank’s chief economist.
As for the US, it is grudgingly joining the party, with Treasury department and Fed officials openly discussing the possibility of a digital dollar. One reason for this Damascene conversion is that commercial banks have embraced the blockchain, the technology underpinning cryptocurrencies, with leading banks such as JPMorgan Chase using it for cross-border payments and settlement. “What has spurred interest in CBDC issuance is the realisation that it offers a holistic solution for updating financial infrastructure and enables instantly settled payments at no cost to customers,” said Josiah Hernandez, head of the CBDC Group, a think tank specialising in sovereign digital currencies. One such venture is Project Ubin, a project designed by Singapore’s central bank that aims to provide a global payments platform for central banks.
Elvira Nabiullina, governor of Russia’s central bank
Sovereign digital currencies have also moved up on the agenda of political leaders, with G20 finance ministers contemplating the need for a global regulator to lay down the law in the Wild West of cryptocurrencies. G30, an influential group of central bankers and academics, advises policymakers to take action before rogue players do it first. Countries like Venezuela and North Korea are already using cryptocurrencies to push their agendas. The former has launched its own digital currency, aptly named the Petro, to bypass US sanctions. The Russian government is also considering issuing its own CBDC, backed by gold. Elvira Nabiullina, who heads the country’s central bank, has said that it could be used to settle trade transactions with other countries. In the current climate of debased fiat currencies, stablecoins, namely digital currencies backed by stable assets, are emerging as a safe asset. “A gold-backed CBDC offers a compelling solution to slowing economic growth and rising inflation that many markets around the world are experiencing,” Hernandez said.
Replacing physical cash
Another reason why central bankers are warming up to CBDCs is the slow but steady adoption of cryptocurrencies by the public (see Fig 1). Initial coin offerings (ICOs), once seen as a scam, are becoming a mainstream method for start-ups to raise capital. By late November 2020, the total market capitalisation of crypto assets stood at £476bn. COVID-19 has also boosted the use of digital cash, with digital payments becoming the norm. “The pandemic has led to an increased focus on digital cash to replace contaminable physical cash, in addition to creating more reliable, effective, and optimised mechanisms for the distribution of [COVID-19] relief funds. This led central banks to prioritise CBDCs,” Hernandez said.
Not surprisingly, it was a technology company that kick-started the race. In June 2019, Facebook announced the launch of its own digital currency, Libra. The project’s white paper stated that CBDCs could be integrated into the Libra network, sparking fears among central bankers that a private company would compete with them in their own game.
In a dramatic testimony to Congress last July, Mark Zuckerberg warned US policymakers that if they didn’t endorse Libra, China would move first. Chinese officials took notice, worrying that the yuan would not be included in Libra’s currency basket, amid a trade war with the US. “China’s trials have accelerated as a result of Facebook’s attempt to introduce Libra, even as the PBOC had been conducting research on a CBDC for many years,” said Dylan Loh, a China expert who teaches at the Nanyang Technological University in Singapore.
China first
Many interpreted China’s announcement last spring as a part of its distraction tactics amid the global furore over the pandemic, which allegedly started in Wuhan. However, it was far from a spontaneous move. Xi Jinping, the country’s president, had announced the launch of e-yuan on October 24, 2019, a day the government has named “China Blockchain Day.” Relevant infrastructure was long underway, culminating in the launch of a blockchain-based service network that can support applications in various fields, from healthcare to insurance.
Unlike other digital currencies, the e-yuan is not a cryptocurrency, nor is it based on blockchain technology. As a centralised currency, it will be issued by the central bank and circulated through China’s network of state-owned banks. Although China is gradually becoming a cashless society, it has no plans to ditch banknotes and coins. Users will be able to turn their deposits into tokens stored in digital wallets.
Domestic considerations have played a role. Government officials hope that a digital yuan will reduce transaction costs, facilitate cross-border payments and include China’s 200m unbanked citizens in the financial system. Some also point to a covert plan to rein in the country’s most popular payment services: Alipay (owned by Alibaba) and WeChat Pay. The government is imposing tougher antitrust rules on Chinese tech powerhouses, including the e-commerce giant Alibaba. Merchants will be able to use the digital yuan for free, whereas commercial payment systems charge a fee. “These two companies control 96% of the Chinese mobile payments market, and have been allowed to operate in a lightly regulated fashion thus far. Fiat money in digital form will likely result in a more resilient multiplayer financial ecosystem,” said Professor Michael Sung, Co-director of the Fintech Research Center at Fudan University.
Control via blockchain
In a country where the tight grip of the state rarely loosens up, the launch of a sovereign digital currency has raised concerns over privacy. Many believe that China hopes to stem capital flight, a problem that has worsened over the last decade, despite strict capital controls. A report published last August by the blockchain firm Chainalysis found that Chinese citizens had moved $50bn in cryptocurrency out of the country within just 12 months. The digital yuan could be incorporated into China’s notorious social credit system, which rewards citizens for good deeds such as donating blood or punishes them for defaulting on loans or jaywalking. “Cryptocurrencies demonstrate a new opportunity for states to incorporate their values and ideology into money, whether that’s monitoring people’s behaviour or how they spend their money,” said Olinga Ta’eed, a blockchain expert who teaches at Birmingham City Business School and is a member of China’s e-commerce Blockchain Committee. He added: “China never had any problems about saying this. They openly admit that there is some degree of control.”
Sidestepping sanctions
However, China’s plans could be even more ambitious. A CBDC used beyond China’s borders could consolidate the yuan’s position as a reserve currency, as Yi Gang, governor of the central bank, has implied. As a result, America’s most powerful weapon, the dollar, would lose some of its appeal. “There could be a ‘dollarisation’ effect across Asia for the yuan due to increased access through digital issuance and the strong trade and lending activity the country maintains in the region. This could lead to less dependence on the dollar in the region and other markets with similar ties to China,” Hernandez said. “China seems to be approximately five years ahead,” said Philipp Sandner, head of the Frankfurt School Blockchain Center at the Frankfurt School of Finance & Management.
He added: “If a country successfully launches a CBDC or a private payment system, such as Libra, is used heavily, it can change international capital flows substantially. Therefore, the dollar, as the most prominent reserve currency, could lose its dominance.”
A case in point are US sanctions. In a meeting of the BRICS countries in 2019, policymakers and executives from Brazil, Russia, India, China and South Africa discussed the launch of a common cryptocurrency as an alternative to the dollar. Such a system would help these countries skirt the international payment mechanism SWIFT, through which the US imposes sanctions on rogue states. “Having a CBDC and allowing other regional actors to plug their financial system into this infrastructure will help China reduce its reliance on the SWIFT payment system and thus reduce the costs of US sanctions,” Loh said.
Chinese media have reported that the government has considered the launch of a gold-backed token on the back of the country’s position as a leading gold exporter and its access to gold reserves elsewhere through its Belt and Road Initiative (BRI). China could force participant countries to accept loans in digital yuan to boost its adoption. “I have no doubt that China will eventually roll this [the digital yuan] out nationally. Once this is done, and teething issues are addressed, it can look forward to blending this with its BRI programme,” Loh said.
Europe lagging behind
Europe is watching the latest developments in Asia with consternation. The Eurozone recently came out of an existential crisis, culminating in the Greek referendum, and is now entering a period of uncertainty due to the pandemic. Many think that launching a digital euro would be too risky. For others, it seems inevitable. In November, Christine Lagarde, the head of the ECB, said that an e-euro will appear in two to four years, with a decision being expected by the middle of 2021.
Christine Lagarde, President of the European Central Bank
One reason why Eurocrats are suddenly keen on CBDCs is that they sense an imminent threat to Europe’s hard-won monetary sovereignty. “Libra and the Chinese CBDC were a wake-up call for central banks, including the ECB,” Sandner said. Last October, the ECB published a report mapping out possible iterations of an e-euro. One reason why it could be necessary, the report notes, is to assert the “strategic independence of the EU”, notably “if there is significant potential for foreign CBDCs or private digital payments to become widely used in the euro area.”
The main question is whether the ECB will enable ordinary citizens to open e-euro accounts at the central bank, thus bypassing commercial banks. Although endorsed by blockchain enthusiasts, such an innovation would increase funding costs and possibly raise interest rates on loans. The ECB’s balance sheet would also balloon, forcing the bank to acquire assets held against the digital euro. Fabio Panetta, who chairs the ECB’s CBDC task force, has said that the bank is exploring whether its settlement system could support retail depositors. However, most experts doubt that commercial banks would be left out. “They will put a stop to anything they think could be a threat to their core business, even if they pay some lip service to it. Central banks also don’t want the risks and the politics that go with retail accounts,” Ta’eed said.
The end of a dream
If the pandemic proved that borders still matter, the rise of CBDCs confirms the role of the state as a financial arbitrator. Geopolitical tensions had already slowed down financial globalisation, even before the advent of COVID-19. With the rise of insular trade blocs, the era of borderless financial markets might be coming to an end. “It’s ironic that after so many years of hollowing out the state through privatisation and globalisation, it now roars back through CBDCs,” said James Cooper, Professor of Law and Associate Dean at California Western School of Law. One reason why central banks may be keen on digital currencies, Cooper marked, is taxation. “Getting records of people’s financial transactions so there’s a tax basis is important, because the state relies on tax to generate revenue for state activity.”
Cryptocurrencies demonstrate a new opportunity for states to incorporate their values and ideology into money
For the early pioneers of the blockchain, however, this may be a wild awakening. Cryptocurrencies started as a libertarian dream that would free money from the long arm of the state, namely central banks and tax authorities. They may now empower the very Leviathan that Bitcoin’s inventors were trying to bring down. “A great dream often outlives its dreamer,” Hernandez said, pointing to other technological innovations that deviated from their original purpose. For more cynical analysts, such a development was inevitable. “Data is the new currency,” Ta’eed said. “Why else will the central banks support CBDCs, if not to effect some kind of control?”
When Jane Fraser steps into her role as Citigroup’s CEO this February, she’s set to make history as the first woman at the helm of a major Wall Street bank. That’s big news for the industry, and it’s not the only example of recent female success stories in finance; in November 2019, Alison Rose made a UK first by becoming head of NatWest Group. The same year, Suni Harford became the first female president of UBS Asset Management. In January 2020, Stephanie Cohen stepped up to co-lead a new consumer banking and wealth management division at Goldman Sachs, putting her in line to compete for the CEO crown in the future.
These announcements mark promising progress – but they also highlight the reality that they’re still glaring exceptions to the rule.
The figures speak for themselves; women represent less than one in five positions in the financial services C-suite, according to 2019 data from McKinsey, despite the fact they make up nearly 50 percent of entry-level roles. In the investment sector the image is bleaker still, with women holding just 10 percent of senior roles in venture capital and private equity firms, according to a 2019 study by data firm Preqin. Add that to the fact the gender pay gap continues to reign supreme – with men earning 23.1 percent more than women in financial services on average, according to recent analysis by the BBC – and it’s clear there’s still a way to go. Institutions are under mounting pressure to improve the situation.
In 2018, the UK Treasury select committee published a women in finance report examining how the industry could improve its diversity credentials. More recently, David Swensen – head of Yale’s $31.2bn endowment and one of the US’s most eminent investors – threatened to pull money from businesses not increasing women and minority group representation in the coming years.
The maths gap
It’s clear the issue is at the forefront of the agenda – but what more should the industry be doing, and why are women still being held back from the industry’s top spots? The problem starts with the pipeline, according to Brad Barber, professor of finance at UC Davis’ Graduate School of Management and author of the study ‘Family, Values and Women in Finance.’ His research found that only 30 percent of recent finance majors were women, with fewer girls than boys pursuing maths, leading to a “math gender gap.”
“Across countries there is a correlation between the math gender gap and the representation of women in finance,” he told World Finance. “This suggests cultural attitudes, which vary across countries, may discourage women from pursuing math-oriented careers like finance. It’s also possible (even likely) that the general culture of finance, particularly the stereotype of Wall Street as a male-dominated culture, is not appealing to women.” The UK Treasury’s women in finance report indeed found that “alpha-male culture” continued to be an issue in the industry – especially around bonuses, where the style of negotiation was seen to “result in higher rewards for men and act as a deterrent for women.”
Changing that image, then, is crucial in attracting more women into the field. And that starts with education, according to Amanda Pullinger, chief executive of 100 Women in Finance, a global network working to empower women in the industry. “It’s about saying, how can we change perceptions around finance and inspire young teenage girls to pursue it as a career?” she said. “We know there are negative perceptions, but it’s an industry that can have enormous impact on the world. There are lots of roles out there, and it’s about getting young women inspired to consider them as a career.”
Barriers to progression
Yet even among women who do enter the field, the majority don’t progress to the highest ranks, according to Alexis Krivkovich, senior partner at McKinsey and author of several studies, including ‘Closing the Gap: Leadership Perspectives on Promoting Women in Financial Services.’
“Our 2019 data showed that companies in the finance sector start off with even representation between men and women,” she told World Finance. “But this drops by more than half by the time we get to the C-suite.”
The research found several reasons for this – but perhaps the most glaring barrier was the fact that many entry-level women simply didn’t aspire to the top spots, leading to a divisive “ambition gap.” According to the study, only 26 percent of entry-level women surveyed envisioned themselves in a top executive position, compared to 40 percent of entry-level men. This could be due to several reasons, with issues balancing family and working life the number one hurdle, according to the research.
There are lots of roles out there, and it’s about getting young women inspired to consider them as a career
Yet perhaps the biggest issue is the fact there are still relatively few female role models in the finance industry to aspire to. In a women in banking survey by the Institute of Leadership and Management (ILM), 70 percent of women cited the greater proportion of men in senior financial roles as a barrier to progression, and 41 percent said a lack of female role models was part of the issue. This creates a self-perpetuating circle. “As women go through the ranks, particularly on the investing side, they tend to be the only one in that group or the only one in the room,” said Pullinger. “And that sense of being the only one, particularly if you don’t have other women to look up to – that’s where a lot of women become discouraged, I think, and find it really hard.”
She believes increasing the visibility of women in senior positions, for example by encouraging public speaking and creating peer networks, is an important step in changing cultural stereotypes and encouraging more women to take the leap.
Sponsoring success
Having role models, of course, depends on women getting to these positions in the first place. And for that, the industry needs a bigger emphasis on sponsorship, according to Krivkovich. “Companies should be instituting formal mentorship and sponsorship programmes for younger tenure women,” she said. “They should also be coaching managers and senior leaders on how to encourage women to progress.” McKinsey’s research found that women who received advice on career advancement from managers and senior leaders were more likely to be promoted – but only 34 percent of senior-level women said they had received advice, compared with 44 percent of men.
And it’s not just about women supporting women; given men continue to dominate financial leadership positions, they’re critical in helping bring about change.
The ILM report found that a “lack of understanding between men and women within the industry” was one of the key obstacles to creating a more inclusive culture, concluding that “while it may seem sensible for women to be mentored or coached by other women, this is not necessarily the best solution.”
Pullinger likewise believes getting male peers involved is crucial in the march towards gender parity – especially when it comes to blasting entrenched stereotypes and encouraging women to take up less traditional roles. “In investment, I know so many women who have been pushed or encouraged to go into certain female-dominated areas, like the investor relations side,” she said. “What I want to see is a generation of young women, inspired by other female portfolio managers and analysts, coming into the industry and not being put off by the fact there aren’t many women on that side.”
Good for business
In any case, getting men involved in the fight for parity might well be in their interests. Several studies have shown businesses with greater diversity produce better results; McKinsey found companies in the top quartile for gender diversity on executive teams were 21 percent more likely to have higher profitability.
A 2019 report by Stanford Graduate School found that companies with more women performed better on the stock market, with investors considering these firms more ethical and more likely to think outside of the box. That’s likely to become even more important in the coming years, as Gen Y and Z come to dominate the market; in a survey by public relations firm Weber Shandwick, 67 percent of millennials said they were more likely to work at a company that had a formal, stated goal of improving gender equality in the C-Suite.
There are other arguments in favour of hiring more women in financial leadership. A study by economists Peter Kuhn and Marie Claire Villeval found that women tended to take a more collaborative, team-oriented approach – which could have several benefits when it comes to leading the future workforce.
As Pullinger puts it, “I think the world of work is going more and more to a structure where collaborative leadership is needed. And I think it’s understood that it’s no longer about command and control – that’s not how you create better results.”
Turning point
Institutions are waking up to this, with several recent senior promotions among women – not least Jean Hynes, set to become CEO of Wellington Management in June 2021, Deborah Zurkow, named Global Head of Investors at Allianz Global Investors in January 2020, and Bea Martin, who became Global Treasurer of UBS in December 2020.
“I have seen a lot more conversation between women and their partners around the distribution of what happens in the home as a result of COVID-19 and more people working remotely,” said Pullinger. “For those willing to have that conversation, I’m hearing that this could actually be a blessing in the long term.”
Krivkovich agrees this could be a game-changing era. “This time is a unique moment in our history where the future of representation hangs in the balance,” she said. “We are at a crossroads – if companies are thoughtful about their approach to diversity, equality, and inclusion, they have a lot to gain. But if they don’t address the unique challenges surfaced by COVID-19 – which in many cases has exacerbated the ‘double’ shift mothers usually take on – they could lose a significant portion of women from the workforce.”
Time will tell how institutions respond, but it’s clear that pressure is mounting – and those burying their head in the sand might have some very big questions to answer in the coming years.
At a time when mobilising private capital is more critical than ever, the capacity of the public sector – traditionally the primary source of infrastructure investment – has been put into question by unparalleled fiscal spending in response to the COVID-19 pandemic.
Private investments in middle and low-income countries have provided less attractive risk-adjusted returns
The latest International Monetary Fund October Fiscal Monitor estimates that global public debt will approach 100 percent of GDP in 2020, a record high, while the World Economic Outlook October 2020 states that “there remains tremendous uncertainty around the future with downside and upside risks.” Policy interventions will play a crucial role in amplifying the impact of limited global finance to its maximum potential.
The Global Infrastructure Hub (GI Hub) recently launched Infrastructure Monitor, an analytical report and website that provides data-driven insights into selected G20 infrastructure priorities. The inaugural 2020 annual report focuses on mobilising private capital and establishing infrastructure as an asset class, by highlighting 10-year trends in private infrastructure investment levels and financial performance. The findings have significant implications for investors and regulators and are a building block on the road to infrastructure as an asset class.
Trends over the past decade
One of the key findings of Infrastructure Monitor is that worldwide, private infrastructure investment in primary markets is low and has been slowly declining over the past decade. Primary market transactions (new security offerings in either greenfield or brownfield infrastructure projects, for example) normally represent an incremental investment in infrastructure and are a more important metric for private capital mobilisation. In 2019, it came in at $106bn (0.13 percent of total global GDP), down from $156bn (0.25 percent of global GDP) in 2010. Private investment of $100bn per year is a drop in the ocean compared to the estimated $15trn global infrastructure financing gap. While mobilising private capital is key, Infrastructure Monitor shows a lack of private sector appetite for new infrastructure investment.
Another noteworthy trend is the simultaneous increase in secondary market transactions (the trading of existing infrastructure assets, for example), which comprised 75 percent of private infrastructure investment in 2019, up from 34 percent in 2010. Possible explanations for the declining level of primary market private infrastructure investment could include: a limited pipeline of bankable deal flow available to the private sector as PPPs or privatisations, regulatory impediments, higher perceived risk by the private sector, or lower borrowing costs for the public sector.
Analysis by income groups reveals that 67 percent of private infrastructure investment was in high-income countries over the past decade, calling for renewed emphasis on the United Nations Financing for Development action agenda. Private investments in middle and low-income countries have provided less attractive risk-adjusted returns. In particular, foreign exchange risk is fundamentally higher as the deals are almost entirely denominated in foreign currencies. With capital markets development in the Asia-Pacific and Latin American regions, the local currency component of deals has appreciably increased.
The study also sheds light on the sectoral composition of private infrastructure investment, revealing that transport and power (both renewable and non-renewable) have been the top preferences for investors over the past decade. Despite growing interest in cleaner energy sources, for middle and low-income countries, private investment in more carbon-intensive and less sustainable energy has remained greater than renewables. With emerging and developing countries expected to account for 90 percent of global power demand growth over the next decade, there is a huge opportunity for private investors to tap into this market and for renewables to play a more prominent role.
Meanwhile, we have also seen a notable decline in private investment in social infrastructure, such as schools, hospitals and public housing. Private investment in social infrastructure declined the most from $19bn in 2010 to $3bn in 2019. This is despite Moody’s data showing that social infrastructure typically experiences lower default rates than other infrastructure sectors, in both developed and developing countries.
Desirable risk-adjusted returns
Over the past decade, about three-quarters of private infrastructure investment globally was debt financed, and about a quarter was equity financed. In private investments, equity financing is typically higher than debt financing to compensate for higher intrinsic risk. On a relative basis, equity financing was higher in lower-middle and low-income country groups, the regions of Asia-Pacific and Sub-Saharan Africa, not to mention the transport, water and waste infrastructure sectors. Compared to other investment options, infrastructure equities have been less volatile and provide attractive risk-adjusted returns. Infrastructure debt is higher risk during the construction period, after which the yields are very predictable and stable. There is limited recognition of this distinct performance of infrastructure as an asset class compared to other assets having similar risk levels regardless of time duration.
A public policy challenge is to better understand how public resources can mitigate higher risk during the initial period (the construction phase, as an example) to enable greater private investment in infrastructure projects and enhance overall performance.
Now is the time for the industry to explore other options, with true partnership between the public and private sectors, to help close the infrastructure gap. This has become critical as governments around the world face fiscal challenges as a result of the COVID-19 pandemic. A global discussion on the policy implications of the data-driven insights identified in Infrastructure Monitor could help pave the way for a more resilient, sustainable and inclusive future.
In the early 1970s, NASA engineer Jack Nilles proposed telecommuting as an alternative to centralised office working. His vision was to reduce traffic, air pollution and energy consumption in city centres by establishing satellite offices, spreading the workforce more evenly across the country and heralding a better work-life balance. His book, The Telecommunications-Transportation Tradeoff, sparked widespread forecasts from futurists about the potential death of the office and the utopian birth of remote work. But the predictions didn’t quite come to fruition as envisaged.
Until now, half a century later, when a global pandemic has forced us into our studies, sheds, lounges and bedrooms, and brought about what many are hailing as the most significant workplace revolution of our time. 88 percent of businesses across the world made the switch to home working after COVID-19 was declared a pandemic, according to an international survey by Gartner. And for many it has ended up being more than a passing phase, with both employers and employees waking up to the reality that the office-based 9–5 first brought about in the Industrial Revolution – and maintained for the 200-plus-years since – may have finally passed its sell-by date. Several big-name companies have already announced plans to go remote. Twitter and Square said employees would be allowed to carry on working from home forever if they chose, while Mark Zuckerberg said in a public video in May 2020 that as many as half of Facebook’s employees could be working remotely for the next five to 10 years. On the same day, Shopify CEO Tobi Lutke tweeted that “office centricity is over, the future of the office is to act as an on-ramp to the same digital workplace that you can access from your #WFH setup.”
Long-term shift
These aren’t just one-offs; 74 percent of companies asked by Gartner said they would switch at least some of their employees to permanent remote working after the pandemic. And it’s not just a one-way system, with 77 percent of employees (and 82 percent in the finance industry) expressing a desire to continue working from home more than they did prior to the crisis, according to recent data from McKinsey.
This revolution hasn’t come out of nowhere, of course. Workers have been calling for greater flexibility for years, with millennials fleeing the confines of the office 9–5 en masse to join the ever-growing gig economy – which has been expanding three times faster than the traditional workforce in the US in recent years, according to a 2017 report, Freelancing in America.
Companies who aren’t bound by geography also have a global pool of talent to choose from
Prior to the pandemic, 80 percent of employees wanted to work from home at least some of the time, according to a State of Remote Work 2019 study by Owl Labs – but only 3.4 percent of the US workforce actually did work remotely, according to FlexJobs. Now all that’s changed – and how things play out in the future will be interesting to see.
The plus points
Research showing the potential benefits of remote work isn’t hard to come by; a study by Stanford University found that remote workers were 13 percent more productive than those working in offices, while American Express found that staff working remotely on its Blue Work programme (which lets employees choose from different styles of work) produced 43 percent more than those in the office, according to Global Workplace Analytics.
Additional flexibility
According to the same source, British Telecom, Best Buy and Dow Chemical all noticed a 35 to 40 percent increase in productivity among their teleworkers. And that’s just one of a number of advantages, according to Timothy Golden, Professor at the Lally School of Management. “Research has shown job satisfaction is increased by teleworking,” he told World Finance. “It provides additional flexibility to the worker, and often they’re able to better balance work and family and sort of manage that boundary.”
He also points to another key factor – staff retention. “Remote work is known to decrease turnover among employees,” he said. “That’s because employees have more choice and autonomy in how they conduct their work, and also because there’s more flexibility around location. If someone wants to move city, they can do so without leaving their job.”
Owl Labs’ 2017 State of Remote Work report found that companies supporting remote work had a 25 percent lower employee turnover than those who didn’t. Given the average company spends more than $4,000 on recruiting a new employee (according to the Society for Human Resource Management), improving staff retention rates could save businesses significant sums. It could also make attracting top talent easier in the first place. 35 percent of employees (47 percent of millennials) would be willing to change jobs if it meant they could work remotely full-time, according to a State of the American Workforce report by Gallup. More than a third would take a pay cut if the job allowed them to work remotely at least some of the time, according to Owl Labs’ 2019 findings.
Companies who aren’t bound by geography also have a global pool of talent to choose from. “Remote work widens the availability of talent to companies,” said Golden. “Potential employees could be anywhere in the world – they don’t have to be in the same city; they don’t even have to be in the same time zone.”
Then there are the more tangible cost savings; a State of Telecommuting report in 2015 found that companies saved an average of $11,000 per year for every teleworking employee. Dell has reportedly slashed its real estate spend by around $12m by offering employees the option to work remotely, while health insurance giant Aetna has saved almost $78m in real estate costs on the bank of its remote-working model, according to a report by Reuters. It’s not hard to see why so many are making the shift.
The challenges
Yet remote work doesn’t come without its challenges. Lack of face-to-face contact can take its toll, according to Golden. “One of the most common disadvantages is the sense of isolation,” he said. “There’s also increased difficulty communicating. It takes a bit more proactivity in terms of reaching out to others to ensure that your work relationships stay healthy.” Jeremy Stein, Managing Director of the British Contract Furnishing Association (who commissioned a report on the future of the workplace as a result of the pandemic), agrees. “Research highlighted collaboration and communication as the biggest obstacle to working from home effectively,” he told World Finance. “This was attributed to missing out on important information and a lack of informal communication points. A lack of personal development was also cited as one of the downsides.” McKinsey research meanwhile found that those working from home were more likely to be working “around the clock, and feel the need to be available 24/7,” according to senior partner Alexis Krivkovich, putting employees at risk of burnout. Others have expressed concerns around data privacy and the potential security risks of relying too heavily on video-conferencing technology.
The future workplace
For these reasons, many predict that a successful future workplace is likely to combine the benefits of remote work with the perks of office life. Barclays CEO Jes Staley has already stated intentions for the bank’s staff to return to the City at some point (despite reportedly saying in April 2020 that “the notion of putting 7,000 people in a building may be a thing of the past”). He said on a call announcing half-year results in July 2020: “We do need to get people together physically, I think, to evolve and improve culture and collaboration,” adding the bank would still maintain “a major presence in places like Canary Wharf.”
Stein likewise believes a central meeting point will still have its place. “The office is not dead,” he said. “One of the key themes seen is that the office of the future will act as a hub where teams can get together to build team culture, cohesion, collaborate and integrate new team members. What we are seeing is the demise of the 9–5, five days a week, where people commute in on overcrowded transport systems to sit at their desk for the day.”
But for some, the positives of going fully remote might just tip the balance. A survey by financial services firm Hitachi Capital found that more than one in 10 SMEs in the UK want to make almost all of their staff permanently remote. A third said they envisaged having over 50 percent of their staff working permanently from home. Jeanne Meister, founding partner at Future Workplace and author of The 2020 Workplace, believes we shouldn’t underestimate the change. “The COVID-19 coronavirus is becoming the accelerator for one of the greatest workplace transformations of our lifetime,” she said in a recent Forbes article. “How we work, exercise, shop, learn, communicate, and of course, where we work, will be changed forever.” That might sound dramatic, but we’re living in unprecedented times. Will the office as we know it still exist in a decade? That remains to be seen, but one thing is clear – we’re on the verge of a major shift that’s finally putting flexibility over facetime, and it won’t only be 1970s futurist Jack Nilles smiling at the prospect.
It might not be the most glamorous tale of innovation, but regulatory changes in England in 2018 opened the gate to the promised land of banking data. The open banking revolution, which regulated third-party service providers such as budgeting and investment apps that accessed bank account data, has been a cornucopia of opportunity with developers, investors and customers alike reaping the benefits. Open banking is the catch-all term for a series of reforms passed in 2018 that provide a regulatory framework for how banks deal with customers’ personal financial information. England’s Competition and Markets Authority (CMA) had been calling for it for some time, as a way to decentralise large banks’ power and influence.
Along with the Second Payment Services Directive, passed at the same time, it determined that UK-regulated banks are obligated to share customers’ financial data with authorised providers such as apps and other banks. The only caveat is that the user must give the third party permission. When the CMA started campaigning for these regulatory changes in 2016, the idea was to inject competition into the stale UK banking industry, and in turn drive innovation. In the CMA’s 2016 report on the UK’s retail banking market, they rechecked the scathing conclusion that the large, legacy banking institutions across the UK did not have to compete hard enough for customers’ business, which in turn was crippling the success of smaller challenger banks and financial service providers to access the market.
Progression and development
Their proposed solution was a slew of regulatory changes that would provide regulatory backing, and therefore a measure of security, to small and medium-sized businesses sharing their current account information with other third-party providers. “Open banking in the UK was a world first,” says David Beardmore, Ecosystem Development Director, at Open Banking Implementation Entity (OBIE). “We designed and built the framework like a playing field, and it has been very encouraging to see so many firms come and play on this pitch that we built using that framework.” But perhaps more promising is the breadth and scope of the open banking ecosystem today, he continues: “there are firms creating all sorts of use cases, including some that we never even conceived of.
The breadth and scope of the open banking ecosystem today is extremely promising
This really is innovation in action.” Since the measures were passed in 2018, over two million users – both individuals and small businesses – use open-banking enabled applications across the UK, according to OBIE. These applications range from apps to round up the change after a purchase and invest that cash, to credit building apps, to online mortgage brokers. There are significant benefits for small businesses too, not just consumers.
“There’s some really exciting propositions out there that can help small businesses using open banking to manage their cash better, and it can also help them seek funding,” says Imran Gulamhuseinwala, Implementation Trustie at OBIE. “In these difficult times for small businesses, we think that this is invaluable.”
Competitive arena
Significantly, open banking has allowed challenger banks like Monzo and Starling, which have a combined four million customers, to leverage partnerships with third-party service providers to offer investment, savings, and money transfer without the development cost and regulatory burden. This development represents a significant opportunity for app and service developers who occupy the B2B space, or are weary of launching direct to consumer products.
Though the industry has come a long way in the three years since the CMA ordered banks to share their data, there is still significant work to be done. According to research by Which? seven in 10 people “were unlikely to consider sharing their financial data, even if it meant that financial products and services were more tailored to their needs.” The main reason for this rejection cited by respondents was: ‘I am happy with my current banking arrangements so don’t see a need for an open banking product’ followed by ‘I am concerned about the security of my personal/financial details when shared with a third party.’
These responses suggest that the public at large is still largely unaware of the regulatory framework that would protect their data and their money, as well as of the myriad potential gains many of the apps provide.
Jenny Ross, editor of Which? Money says that “If open banking is to ever be a success, regulators and industry must do more to promote the benefits and demonstrate that customers are properly protected from data breaches and scams in order to boost trust in these services.”
In the latest demonstration of the growing dominance of Asian shipbuilding, three vessels with a combined deadweight of 720,000 tonnes were launched in a single day in November 2020 from shipyards in China. And ominously for rival western shipyards, the vessels – a giant oil tanker and two bulk cargo ships – were built in double-quick time. The construction of the two cargo ships, each weighing 210,000 tonnes, took just 15 months from the signing of the contract to delivery. In a market that has become even more fiercely competitive than usual during the pandemic-triggered downturn, Asian shipbuilders continue to pick up plum contracts from all over the world, with China in the vanguard.
France’s shipping giant CMA CGM has handed China State Shipbuilding Corporation the contract for all nine of its pioneering LNG-powered box ships, capable of transporting 23,000 standard-sized containers. The first of the 400-metre-long vessels, Jacques Saadé, was delivered in September 2020.
Climate-conscious construction
Although Asian shipyards can build the biggest ships more cheaply than their western counterparts, it’s not all about price. They have embraced the latest, low-emission technologies, working with manufacturers of propulsion systems in the west. The LNG-fuelled Jacques Saadé, one of the most technologically advanced container ships, is a prime example. “In a similar way that electric vehicles stand in the spotlight in the auto industry, eco-friendly vessels like LNG-fuelled ships do in the shipbuilding industry,” an official of Hyundai Heavy Industries, one of the world leaders, said.
Although global orders for new ships, known as ‘newbuilds,’ collapsed by about half in the first nine months of 2020 as owners sat out the pandemic, Asian yards are rapidly bouncing back. China’s Yangzijiang Shipbuilding (YZJ) announced in early November 2020 that it had already secured $1.03bn worth of new orders, not counting the value of options (commissions for extra vessels contingent on a favourable market). “Our year-to-date new-order wins of over $1bn are more than we booked for the whole of 2019,” said YZJ executive chairman and chief executive Ren Letian. Orders that would once have gone to European yards have been snapped up by China. In late 2020, state-owned Guangzhou Shipyard International won the blue-ribbon contract for P&O’s two new 230-metre-long ferries that will start plying the English Channel in 2023.
In Seoul, as in Beijing and Tokyo, shipbuilding is seen as a flagship industry employing hundreds of thousands of people
Bristling with advanced technology and design, these double-ended, quick-turnaround ferries promise to become flagships on the 21-mile crossing, one of the busiest waterways in the world.
Meantime South Korea, another shipbuilding giant that prides itself on heavy industry, is also booking a run of lucrative commissions, like the $2.6bn order from United Arab Emirates state-owned oil and gas company, Adnoc, for three eco-friendly super-large crude carriers to be built by Daewoo Shipbuilding & Marine Engineering (DSME). The vessels will embody the latest low-emission technology in the form of a high-pressure, dual-fuel engine that can run on LNG, the first ultra-large crude oil carrier to do so.
A specialist in big ships, DSME has a full order book that includes nine LNG carriers, four container ships, two shuttle tankers, five very large crude carriers, and one very large crude gas carrier. Although orders are now pouring in, Asia shipyards had their difficulties in the downturn. Measured in terms of deadweight tonnes, output in China fell by 3.6 percent compared with 2019, while new orders declined by 6.6 percent, according to the Association of China’s National Shipbuilding Industry. Still, the revenues remain robust, especially for export orders that account for most of China’s contracts. Between them, the country’s 75 major shipyards posted revenues of nearly $38bn, down by just 0.5 percent, in 2020. In the teeth of competition from main rivals China and, to a lesser extent, Japan, the South Korean government also arranged the merger of Hyundai Heavy Industries (HHI) and DSME into an umbrella company called Korea Shipbuilding, giving the country a 20 percent share of the global market for new ships, especially the highly profitable gas carriers.
High demand for high-tech
The money’s no longer in relatively low-tech bulk carriers, having gone to the complex gas carriers that transport LPG, LNG, ethane and other low or zero-polluting fuels around the world. As the Wall Street Journal reported in 2019, LNG ships cost about £175m each on average with a profit margin that is nearly double that of more mundane vessels like bulk carriers that cost about $25m each. This is a business that South Korea is determined to dominate.
In Seoul, as in Beijing and Tokyo, shipbuilding is seen as a flagship industry employing hundreds of thousands of people. That’s why governments are willing to pump in funds by way of subsidies, and if necessary, bail-outs. For instance, the South Korean government provided a $2.25bn liquidity lifeline to the merger of HHI and DSME, plus a further $2.6bn in cash.
Yet South Korea has a fight on its hands. One of the busiest shipbuilders in all of Asia, state-owned Jiangnan Shipyard is also scooping up orders for high-margin gas carriers on top of the nine-ship contract from CMA CGM. In a coup in November 2020, Bermuda-headquartered Petredec, which owns the world’s second biggest fleet of very large gas carriers, signed with Jiangnan for up to six LPG carriers, all scheduled for delivery by 2023 in the kind of rapid project for which Asian shipbuilders are famous.
Simultaneously, the same shipbuilder is also constructing an aircraft carrier, three destroyers, a heavy-lift military hovercraft – all for the Chinese navy – and a sister ship to CMA CGM’s Jacques Saadé. To cap it off, in 2020 the yard signed a spate of orders to construct two giant ethane carriers, technologically advanced vessels that will be at the forefront of global shipping’s push towards decarbonisation as they transport the gas from the US to Europe. And looking ahead, it will be business as usual. At the end of October 2020, Chinese shipyards had booked nearly 57 percent of the global market for newbuilds. Ominously, they are also getting into cruise ships, until now a preserve of European shipbuilders.
Japan, Asia’s other shipbuilding giant, is watching all this government intervention with concern. Citing the mergers of China’s state-owned shipbuilders and of South Korea’s big two, Imabari Shipbuilding president Yukito Higaki sounded a warning to Tokyo recently: “Huge shipbuilding companies are now rising up in the world. I would like fair competition without any governmental support. However if current circumstances continue, it is possible that Japanese shipbuilders will not be able to stand on their own feet any longer.” This is a crucial issue for Japan where 99 percent of trade goes by sea.
The sun also rises
Looking to the future, Japan is relying on innovation in the pursuit of virtuous, emission-free shipping. And the newly delivered car carrier Sakura Leader represents a milestone in that direction. In an all-Japan operation, Sakura Leader is owned by NYK Line, powered by IHI Power Systems’ latest dual-fuel engine, and was built by Shin Kurushima Toyohashi Shipbuilding. For good measure Mitsubishi Shipbuilding provided the complex gas-supply system. Capable of carrying 7,000 units, the vessel is the first large, LNG-fuelled car carrier to be built in Japan and it certainly will not be the last. A sister ship for Sakura Leader is already on the way. Importantly, the engine ticks the International Maritime Organisation’s regulations on emissions without the need for ‘scrubbers,’ exhaust systems that clean up the burnt fuel’s residues.
The Japanese government, which has made zero-emission shipping a high priority, has designated the car carrier as a flagship project. Japan invented the car carrier – the first of these slab-sided vessels, virtually one giant container, was launched there in the 1960s and designers have been improving them ever since. The latest car carriers are built to the next generation ‘Flexie’ specification, that transport not just cars around the world, but trucks, bulldozers, railcars and other odd-sized units, all arranged on six floors of decks that can be raised or lowered according to need. As a bonus, a Flexie car carrier is narrower than previous versions so it can operate in more ports, but it can still carry up to 6,800 cars.
Japanese shipbuilders and suppliers work together in terms of innovation. Among other home-grown innovations, Flexie car carriers feature a spherical, sea-kindly bow and a tear-shaped stern that reduces wind resistance, both jointly designed by Mitsui OSK Lines and Mitsui Zosen Akishima Laboratories.
At the opposite end of the scale, Oshima Shipbuilding, which generally specialises in large ships, has become the hub for another all-Japan project with a big future – a fully automatic, zero-emission, battery-powered ferry. Launched in 2019, the little vessel known as e-Oshima is challenging Norway, the world leader in electric ferries, with its automated ship navigation system that sets the route and speed while simultaneously avoiding collisions.
For Japan, the e-Oshima is not a hobby project. It’s part of a joint, government-led programme to become a world leader in battery-powered transport by sea. “The ferry looks like becoming a symbolic vessel in the new age ahead,” notes the Nippon Foundation, an organisation devoted to green seas.
It is an absolutely huge business market and one that remains crucial in global logistics and seeing how the largest firms continue to compete with each other is certainly going to be riveting.
In 2020, businesses had to adapt swiftly through a precarious situation. We are now in a phase with a new set of requirements centred on resilience and a sustainable recovery. The lessons of this unprecedented period will help banks meet customers’ needs, navigate this turbulent time, and avoid online risks, guiding them through 2021 and beyond.
The heart of banking is still relationships
Even before the pandemic, an off-the-shelf, product-first approach was inadvisable. Now it’s irrelevant. COVID-19 underlined something we already knew: we are all interconnected. Amid the pandemic and economic slowdown, Bank of the West’s relationship management bankers redoubled customer outreach. We needed to know how our customers were, what challenges they faced, and about their short-term liquidity needs. Human relationships in commercial banking aren’t solely for crisis management; they also enable us to be present in an always-evolving business environment.
While corporate treasurers and finance managers are increasingly focused on strategic issues with distant horizons, there are meaningful conversations to be had with companies about longer-term ways they can adapt to opportunities now. Forward-thinking commercial banks are placing renewed value in customer relationships built on trust, good faith, and strategic relationships.
Rebalancing the platforms
As the pandemic’s impact progresses, digital transformation is clearly critical to recovery and business resilience. Banks should support corporate customers with digital channels that are open, flexible, and help companies adapt. However, effective commercial banks carefully balance digital solutions and human connection. Customers shouldn’t face a haphazard mix of traditional and digital platforms – or assume digital-only is sufficient. Banks have increasingly leveraged AI to deepen customer relations, improve anti-money laundering and fraud-prevention processes, and offer customers greater value. AI solutions work best with predictable transactions; the uncertainties of this recent crisis called for human connectivity. Banks that balance digital and human channels will prove essential to business continuity.
Forward-thinking commercial banks are placing renewed value in customer relationships built on trust, good faith, and strategic relationships
An integrated human-and-digital experience can support customers’ digital transformations while helping them navigate an uncertain future and endure. Nevertheless, it’s clear more business activity will become digital. Lockdowns and social distancing accelerated digital transformations. Companies that shifted to remote work swiftly and securely were at a great advantage with cybercrime spiking early in the pandemic crisis. This has been a jarring reminder of how critical cybersecurity and fraud prevention are to a company’s recovery, growth and resilience. Relegating cybersecurity decisions to IT is too risky: cybersecurity is operational security. Savvy commercial banks continue to strengthen fraud prevention while enabling businesses to engage in digital transformations that balance efficiency with resilience. Corporations need commercial banks that understand end-to-end security is central to operational resilience, and it is therefore non-negotiable.
Rethinking credit risk
When the future looks wholly different than the past, relying on backward-looking data models, even when (artificially) intelligent for measuring credit risk, becomes problematic. Financial ratios show a point in time and tell part of the story, but amid extreme uncertainty, commercial bankers must understand their clients’ overall financial wellness. Commercial banks that entered 2020 with a more granular understanding of their clients’ businesses will serve their customers well today and in the future.
Whether their industry is experiencing a boom or drought, CFOs and treasurers will be asking themselves if their bankers understand their needs and business objectives. A more holistic approach to measuring their financial wellness will enable commercial banks to give them a reassuring answer and make informed decisions. Businesses are also facing an evolving global compliance landscape. The regulatory consequences of the pandemic are far-reaching and will affect commercial banks and corporations.
When global lockdowns crippled predictable market dynamics, governments and regulators intervened with guarantees in the supply of services, human protections, and reactions to new barriers. The effects of these new measures will be felt differently across sectors and geographical lines.
Commercial banks are wise to re-engage with the principles of trust and humanity as we navigate this global pandemic and its aftermath. We are not over it yet, but there are silver linings. The majority of finance leaders believe they will be more resilient and agile in the long run. Banks need to ask themselves if they have changed enough to serve their customers now and in better times ahead. If commercial banks rise to the occasion now, the trust and value built during this crisis will pay dividends for years.
Disruptive innovation can attend to a market that is currently badly served. It can also present an outstanding relay to seek alpha in a return environment that has become less inclined to respond to classical financial instruments. The case of CeiROx Life Sciences, currently known as BioTissue, as a disruptive technology platform in the biotechnology industry, is eloquent in that it can be viewed as a standalone asset class. Disruptive technology can also be viewed as an extension of private capital in its quest to leverage the return of a financial portfolio.
Building return and looking for alpha has become an unparalleled challenge in a world characterised with the shattering of classic return metrics. Interest rates have become structurally low and flat in the aftermath of the financial crisis and with the subsequent sovereign European crisis and the current pandemic-related one. This has also led to continuous ‘corrections’ for equity returns. Furthermore, global equity returns enhancements such as correlation and what has become known as ‘decoupling’ has brought with it serious questions. Today’s pandemic only highlights this observation. It is in this context that disruptive technology can be viewed a relevant relay to generate alpha and growth in a sustainable manner. The key challenge becomes how to assess a disruptive innovation that can be pertinent in playing this role of leveraging return. In my opinion, the assessment can be achieved through both a quantitative and qualitative approach. I intend to go through these approaches using the case of CeiROx as well as to analyse the calibration of the associated return metrics.
Market dynamics
Quantitatively, a disruptive technology can be qualified as such in regards to the market it intends to serve. The big market premise is a condition for making an innovation truly disruptive. This condition measures the power of the innovation to alter the dynamics of the market. From this angle, we aim to build a business thesis that is pertinent and that stands out by recognising the fundamental and structural shifts in global demographics. With a world population that is witnessing both a higher life expectancy and a more active life-participation, the direct consequence is the potential tissue damage especially in cartilage in synovial joints. This translates to a multi-billion-dollar orthopedics market that we are intending to serve. In terms of order of magnitude, the current annual incidence rate of cartilage defects across all synovial joints can be estimated at 0.9 percent of the overall population. Males have a lifetime risk of one in six while females reach a risk level of one in four. Bringing together the aggregate patient population across all ages with degenerative or traumatic tissue defects, we get the following distribution of the target market over the next decade (see Fig 1).
The qualitative assessment of a disruptive innovation resides in analysing the characteristics of the market currently served. Indeed, the pathology of cartilage defect in synovial joints (such as the knee and the hip) is not a newly discovered one. Both degenerative and traumatic defects are a well-established problem. However, the solutions that have been brought forward have all fallen short of treating the underlying pathology efficiently. Most are only symptomatic in their effects while others are just delaying total loss of the joint’s functionality. This is the perfect example of a market that is maintaining the status quo. It is not about creating a new market, as is the case with artificial intelligence, for example, which makes its assumptions yet to be validated. CeiROx Life Sciences is addressing a market that is currently badly served, which allows us to serve an unmet medical need. This makes the market size assumption significantly hedged through on-going ill-treated cases because of the complexity of the underlying problem: destroyed cartilage cannot be regenerated through the body’s own healing system. We achieve successful treatment by creating new medicinal paradigms as we are pioneers of tissue engineering and the forerunner of regenerative medicine.
Four domains of innovation
Besides solving the status quo, assessing disruptive innovation is also reached through modelling the impact it accomplishes. A strong impact validates the disruption brought forward. We achieve great impact through the four domains of innovation: technology, product, process, and business model. From a technology perspective, our platform has developed through 20 years of research and developments of tissue regeneration concepts and applications from the skin to the bone. We have also given birth to the two latest generations for cartilage tissue regeneration: the third and today the fourth generation. We observed the limitations of the first-generation solutions that consisted of injecting cultured cells into synovial joints, and the second-generation solutions that consisted of associating to the cells’ membrane gels. We then developed a third-generation solution introducing a three-dimensional matrix as a carrier of the cells. We progressed afterwards to optimise our own solution through the introduction of a smart scaffold that ensures optimal cell distribution along with shape and mechanical stability. These have led to a strong clinical impact by achieving a good-quality regenerated tissue of hyaline type in cartilage, and restoring joint functionality.
The solutions that have been brought forward have all fallen short of efficiently treating the underlying pathology
In terms of product innovation, our fourth-generation chondro-tissue relies on developing a user-friendliness from medical, regulatory, and business perspectives. This has led in turn to a process innovation, which has been cut by half in terms of time. It has eliminated complex procedures with biopsy-taking and clinical treatment, cost-intensive cell-culture, and a burdensome regulatory framework. As in a domino effect, these aspects led to a business process innovation. The reduction in complexity through minimally invasive approaches as well as the possible scaling opportunities offer an innovative business process. While the first innovation domains focus more on the proof of concept in terms of clinical impact, the business process innovation domain focuses on the ‘proof of relevance.’ The latter assesses the economic impact that will condition the adoption of the technology, time-reduction and cost-saving being the cornerstone for successful market adoption.
Purpose and professionalism
The other dimension to assess a disruptive innovation is to study the qualities of return it generates. Both the direction of growth and its rate are important in boosting the quality of returns. This connects with the underlying premise of finance as a force of good: investment must flow to where capital is needed to solve the challenges of the moment. And in the effort to rethink capitalism, there is a need to rethink the ‘direction’ of growth – as opposed to the rate of growth only. Our business propositions evolve around both facets. In light of demographics, the direction can only be around a regenerative medicine solution as opposed to prosthesis replacement or short-lived symptomatic answers. Growth is also built on solutions that fully leverage the body’s own healing system without introducing components of metallic or animal origin. As to the rate of growth, it is strongly correlated with its direction. The demographic trends, along with changing lifestyles, will accelerate such a rate. In addition, disruption presents a perfect platform to express ‘decoupling.’ Almost always coming from an upstart outsider, in the words of Clayton Christensen, disruptive innovation provides great opportunities for effective diversification.
Above all, a disruptive innovation can have a strong foundation only if its components respond to the sustainability assessment. This is achieved through a comprehensive answer to a complex living problem. At CeiROx Life Sciences, we have made every facet of our response relevant in a disciplined and consistent effort. Purpose and professionalism are the building blocks for trust in a technology platform and in an investment thesis. As a sustainable value proposition, we respond to Prince Charles’s call that capital need not be geared towards investment that generates negative externalities. There is nothing more positive than a more able population.
The COVID-19 pandemic has indisputably changed the way we do business at Zenith Bank and our interactions with stakeholders – not the least in the digitisation of our banking services. With the rollout of a digital retail strategy aimed at driving financial inclusion, we embarked on an aggressive retail marketing and digital banking drive. As a result, Zenith Bank – which is well known for its prowess in developing innovative digital banking products and services – ensured that its customers enjoyed convenient, easy and accessible banking services tailor-made to their needs, since the outbreak of the pandemic.
When Ghana recorded its first case of COVID-19, we were well ahead of our peers in ensuring easy access to banking. Products that drive financial inclusion – such as our USSD Code product (*966#) – were enhanced to enable more customers who hitherto did not have bank accounts carry out banking transactions seamlessly.
‘Instant Account Opening’: with *966#, account holders and non-account holders can open instant bank accounts with minimum documentation and without physically visiting any of our branches.
‘Zenith Cash Out’: this service allows for the transfer of cash from any Zenith account holder to any cash recipient. The requirement for this service is a token that can be used to withdraw cash either at the ATM or any of Zenith Bank’s branches nationwide.
‘Merchant Pay’: this service is a collection solution for SMEs and corporate entities to receive real-time payments directly into their bank accounts. Payments are made via USSD or scan to pay – Zenith Bank’s QR code payment platform.
We also ensured that other products such as GlobalPay, ZMobile (our mobile banking app), Zenith corporate internet banking, point of sale terminals and our wide array of cards (Mastercard and Visa, Cruz-Card, Eazypay GH Dual Card, GlobalTravelWallet) were also enhanced to provide consumers with a better experience. Following the COVID-19 health and safety protocols outlined by the World Health Organisation (WHO), and in our quest to maintain our core line of business (an essential service required to run the economy of Ghana), we instituted a staff rotation policy with the aim of achieving social distancing to curb the spread of the virus. With the rotation policy, 50 percent of staff worked from home while the rest worked from the premises of the bank nationwide and vice versa on a weekly basis. With this in place, we also enhanced our teleconferencing tools, which we barely used prior to the onset of the disease. Teleconferencing tools such as Zoom and Teams have become our go-to apps for organising meetings, trainings, staff engagements as well as customer interactions.
A proud contribution
To further adhere to health and safety protocols, we provided all our branches nationwide with thermometer guns to check the temperature of staff and customers before entry to the bank’s premises. Handwashing units fully equipped with soap, alcohol-based sanitisers and paper towels were also provided at all branches of the bank for both customers and staff. Furthermore, per instructions by the government of Ghana, a ‘no mask no entry’ directive was strictly followed by every member of staff who was on duty at the bank’s premises as well as any customer who visited. To this end, the bank has since the COVID-19 outbreak provided disposable masks for its entire staff daily.
Customers are now more inclined, first, to live a healthy lifestyle and, second, to want to bank in an easy and safe way
In line with our mission “to continue to invest in the best people, technology, and environment to underscore our commitment to achieving customer enthusiasm,” we provided substantial financial support towards the nation’s fight against the virus. In April 2020, after the first case of the disease had been recorded in March 2020, we donated GHS 1m ($171,500) to the COVID-19 trust fund established by the government of Ghana as our contribution towards the fight against the spread of the virus, as well as to assist with the welfare of the needy and vulnerable in society.
Additionally, the bank made a contributory donation to the Ghana Association of Bankers (GAB). Proceeds from this, together with funds from other banks, were channelled towards donation to the Ghana Private Sector COVID-19 fund to build the Ghana Infectious Diseases Centre, donation of PPEs, masks and other hygiene products to major hospitals in Ghana and feeding of the less privileged during the peak of the pandemic. During the bank’s 15th anniversary in September 2020, the staff of the bank embarked on a CSR project themed ‘United against COVID-19’ where they donated COVID-19 hygiene products to hospitals and orphanages across the nation.
Increase in lending activities
In line with the central bank’s directive to lighten the economic burden on bank customers during the pandemic, the following measures were undertaken. The bank rolled out credit packages to ease the impact on businesses and our valued retail customers. We implemented a two percent flat downward review of interest rates for all our retail loans. Customers whose businesses had been impacted by COVID-19 directly and indirectly were also granted moratorium on both principal and interest for tenors ranging between three to six months. To encourage the use of the digital channels and also lighten the burden of our customers, the bank waived all fees for transactions via the following channels for a period of three months; 1) Automated Clearing House (ACH) – bulk upload via internet banking; 2) Ghana Interbank Payment and Settlement Systems (GhIPSS) Instant Pay (GIP); and 3) Mobile money interoperability. In partnership with Prudential Life Insurance, we also provided free COVID-19 cover to our customers who were adversely affected by or had to be hospitalised because of the virus.
Innovative digital products
Financial inclusion continues to form a major part of Zenith Bank’s strategy year-on-year. Since its inception, the bank has ensured the continuous rollout of a wide array of innovative digital products and services that are user-friendly and provide total convenience to customers. Digital channels afford the ‘unbanked’ an opportunity to leapfrog barriers to brick-and-mortar banking – such as cost and infrastructure – that historically have excluded them from the financial system to be able to perform simple banking transactions anytime, anywhere. Zenith Bank was among the first banks in Ghana to launch an app-based mobile banking service. Z-Mobile, which is available on both Android and iOS devices, enables customers to make instant interbank transfers, set up beneficiaries, top up investments, pay utility bills and much more right from their mobile phones.
According to a 2019 report by the World Bank, Ghana is one of the fastest-growing mobile money markets on the African continent. It is estimated that about half of the 20 percent of Ghanaian adults who have mobile money accounts do not have a bank account. This proves that mobile money is not just an enabler of cheaper and more convenient financial services for those who already have access but is also spreading the net to reach those who were previously financially excluded. According to GhIPSS, mobile money interoperability increased by 358 percent in the first quarter of 2020. Our strategic partnerships with major telecommunications and fintech companies have also leveraged mobile banking to reach the population’s unbanked citizens. For example, ‘Zenith’s Bank2Wallet’ service enables customers to link their mobile money wallets to their bank in order to make immediate transfers and payments remotely at any time of day.
We have always sought to be the pacesetter in the delivery of superior customer service. To this end, we have put in place strategies that ensure continued enrichment of the customer experience across all touchpoints. Our core service strategy hinges on four key elements: 1) entrenching customer-centricity; 2) consolidating retail and digital banking; 3) empowering staff to live our service tenets; and 4) customer segmentation for enhanced service delivery.
To provide customers with the best experience, we use several analytical tools to measure our performance with regards to how satisfied our customers are with the services rendered. These include the Net Promoter Score (NPS), which measures customer loyalty through the categorisation of customers into three major groups (promoters, passives and detractors), and Customer Satisfaction (CSAT), which defines how happy customers are with the bank’s products and services.
We have also continued to enhance our presence on social media platforms like Facebook, Instagram and, recently, Twitter. With the help of daily, weekly, monthly and yearly analytics, this helps us gather useful demographic information about our customers, and most importantly, maintain a solid relationship with clients via the digital space.
Future plans
The pandemic has ushered in a new, digitally oriented way of life for many people here in Ghana and across the world. Customers are now more inclined, first, to live a healthy lifestyle and, second, to want to bank in an easy and safe way. Always committed to developing cutting-edge technologically driven products and services aimed at making banking easy and on-the-go for its customers, we will continue to invest heavily in products and services that ensure that our banking services remain consistent and easily accessible.
We will continue to adapt to the new normal by keeping abreast of current trends and educating our vast clientele on the need to go digital. Zenith Bank in the next year and beyond will remain steadfast in its quest to becoming the banker of first choice to all our customers. Our focus areas thus remain exceptional customer service, strong financial performance, robust digital banking platforms and retail banking structure. In pursuit of these, we will continue to take advantage of the numerous opportunities in the marketplace
