Just when it seems as if the trading relationship between the US and China is normalising, it breaks down all over again. In August, the US Treasury officially declared China a currency manipulator. Then, just a few weeks later, President Donald Trump claimed to have had a number of “very, very good” phone calls with top officials from Beijing keen to secure a trade deal. China claims no such talks took place; speculation has grown that Trump simply made them up.
So far, the US-China trade war has impacted as many as 1.9 million Chinese jobs and cost the US economy $7.8bn in 2018 alone, according to a paper published by a team of US economists. The lack of certainty surrounding future trading conditions continues to cause chaos for several industries in both countries. In the US, one industry in particular is in danger of missing a huge opportunity for growth.
In normal trading circumstances, US pig farmers would be more than willing to send their ribs, bellies and loins to China to pick up the slack – but these are not normal trading circumstances
China’s pork market, by far the world’s biggest, is in trouble: since August 2018, African swine fever (ASF) has devastated domestic supply. This will inevitably lead to price rises and necessitate the procurement of new suppliers. In normal trading circumstances, US pig farmers would be more than willing to send their ribs, bellies and loins to China to pick up the slack – but these are not normal trading circumstances.
Pigging out
The first outbreak of the ASF virus is believed to have occurred in Kenya during the first decade of the 20th century. It has remained endemic to Africa ever since, greatly hindering the development of the continent’s pig-farming industry. The virus, which is highly contagious, results in blotchy patches on the skin of the animal, diarrhoea and respiratory difficulties. Death usually occurs after a period of seven to 10 days.
Although contained to Africa for many years, the virus has subsequently proven itself to be a keen traveller, after a case of ASF was reported in Lisbon, Portugal, in 1957. Since then, instances of the virus have been found in France, Belgium, Eastern Europe, the Caribbean and now Asia. The current crisis is believed to have started in Georgia in 2007, before migrating to Russia and then China – probably as a result of pig farmers feeding contaminated food scraps to their animals. The impact in China has been staggering.
“There is little doubt that China will face a pork shortage; the more difficult question is when it will materialise,” Joe Schuele, Vice President of Communications at the US Meat Export Federation, explained to World Finance. “Hog liquidation put large volumes of pork into cold storage in late 2018 and early 2019, and China now appears to be working through those inventories.”
According to Rabobank estimates, China’s pig population could fall by a third in 2019 as a result of ASF, with approximately 130 million swine set to die either as a direct result of ASF or due to culling. Consequently, the price of pork in the country has climbed significantly – a year-on-year rise of 20 percent was recorded in April 2019 – with further increases expected.
Went to market
China is the world’s largest producer and consumer of pork. According to the OECD, Chinese households purchase 55 million tonnes of the meat every year, fuelled by a domestic swine population in excess of 430 million. This market has always held huge potential for US farmers, but given the challenges presented by ASF, it is beginning to look like a once-in-a-generation opportunity.
But said opportunity is fast going to waste as trade tensions between the US and China rumble on. Tariffs on US pork products have risen substantially this year, limiting the competitiveness of American farms even at a time when Chinese consumers are getting used to paying more for their meat. If these barriers were not in place, it’s likely that US farms would have already ramped up their exports considerably.
“It’s actually very hard to say what ‘normal’ trading circumstances would look like for the Chinese market, because China’s pork imports fluctuate based on its domestic production,” Schuele said. “China’s pork industry is so massive that even a relatively small decline in production can create significant opportunities for pork-exporting countries. It is difficult to project how much pork the US would have exported to China in 2018 had retaliatory duties not been imposed, but in 2017 (prior to the tariff hikes), US exports to China exceeded 300,000 tonnes, valued at $663m. In 2018, volume declined to 220,000 tonnes, valued at $571m.”
How the market reacts to the ASF outbreak will, in part, determine what happens next. For example, China’s carnivores could switch to other varieties of meat such as chicken or beef, but these too are likely to witness some form of price increase in response to the value of pork going up. Alternatively, they could decide that the increased price of pork is worth paying. In that instance, China would need to maintain a constant supply from international sources to make up for domestic shortfalls.
“Were it not for China’s trade retaliation, US pork producers would be in a strong position to capitalise on an unprecedented sales opportunity in China, where domestic production is down significantly as ASF has ravaged the country’s swine herd,” Rachel Gantz, Communications Director at the National Pork Producers Council, told World Finance. “US pork producers face retaliatory tariffs of 60 percent on exports to China, in addition to the existing 12 percent duties on US pork, for a total annualised rate of 72 percent. According to Iowa State University economist Dermot Hayes, US pork producers have lost $8 per hog, or $1bn industry-wide on an annualised basis, because of China’s punitive tariffs.”
Tariffs represent a reasonable way of protecting vulnerable industries from outside competition, particularly when faced with rival businesses that can offer much cheaper products and services. The drawback, of course, is that retaliatory tariffs are often subsequently imposed. US pig farmers know this better than most: in addition to the trade barriers imposed by China, the American pork industry has faced tariffs from Mexico. A relatively competitive product that would normally help reduce the US’ trade deficit is therefore being prevented from doing so.
With ractopamine banned in China, each US pig farmer will have to weigh up the costs and economic drawbacks of removing the feed additive from their own herds
Chop and change
The lifting of trade barriers would certainly help US farmers, but it would not necessarily open up the Chinese market completely. Many US farms give their pigs ractopamine, a feed additive that promotes the growth of lean meat. Despite its presence in American pork, ractopamine is currently banned in 160 countries, including China. If US producers wanted to target Chinese consumers, they would have to either raise pigs without using ractopamine or hope that China relaxes its regulations. The latter seems unlikely: earlier this year, Beijing banned three Canadian exporters from selling to China after ractopamine was found in a pork shipment.
“Ractopamine has been determined to be safe by the US Food and Drug Administration, the UN’s Food and Agriculture Organisation and the World Health Organisation,” Gantz said. “It is approved for use in pork production in 26 countries, with 75 additional countries allowing the import of pork from ractopamine-fed hogs, even though it is not fed [to] their domestic herds. Pork producers have a right to choose how to raise their animals and ractopamine is a scientifically proven safe product.”
Despite being approved for use in the US since 1999, some farmers, at least, are reconsidering their use of the drug. Ultimately, though, each farmer will have to weigh up the costs and economic drawbacks of removing ractopamine from their own herds. Currently, around 60 to 80 percent of all US pigs are fed the drug, and some of the country’s top export markets, including Japan and South Korea, do not ban its use.
Any interest that currently exists in expanding ractopamine-free production would likely be much stronger if US pork had more consistent and reliable access to China, and was on a level playing field in terms of tariff rates. If the US remains priced out of the Chinese market, then pork producers elsewhere stand to profit. According to Chinese customs data, the EU already supplies approximately two thirds of the country’s pork imports, and will no doubt look to increase this figure in the future. However, cases of ASF have recently been found on pig farms in Romania, Poland and Bulgaria. The disease has even been recorded in wild boar as far west as Belgium.
“Thanks to vigilant oversight by the US Department of Agriculture and… US [Customs and Border Protection (CBP)], there have been no reported cases of ASF in the US,” Gantz said. “The agencies and our industry continue to remain on guard, and we have asked the CBP to add 600 agricultural inspectors at our borders and ports to ensure ASF or any other foreign animal disease does not enter our country.”
If ASF continues to prove difficult to purge, then markets where pork is popular will undoubtedly come knocking at the US’ door looking for uncontaminated produce. For now, though, it is unlikely to be Chinese consumers. With the trade dispute between President Trump and China continuing, it is US farmers who are missing out on an opportunity that may not present itself again for a very long time.
Across the globe, growth remains somewhat sluggish. After two years of relatively robust expansion, the global economic upswing has now slowed to a more subdued level, knocked back by financial market volatility and widespread political uncertainty. Trade and technology tensions between the US and China have seen tit-for-tat tariff increases on the nations’ respective imports, escalating an ongoing dispute between the world’s two largest economies. Over in Europe, meanwhile, prolonged Brexit-related uncertainty continues to weigh heavily on the eurozone’s economy. The pound hit a two-year low in July, and the UK economy has contracted for the first time since 2012 as the possibility of a no-deal Brexit looms large ahead of the planned October 31 exit date.
Elsewhere, growth in emerging markets and developing economies has also disappointed, with weaker-than-expected results across Asia and Latin America. While global growth is projected to pick up once again in 2020, this is decidedly precarious, hinging on favourable geopolitical outcomes and the successful resolution of current trade disputes.
Against this unpredictable economic backdrop, the investment management industry faces myriad challenges. In order to remain prosperous and ensure profitability for their clients, investment managers must successfully navigate this ongoing economic uncertainty, using their extensive knowledge and expertise to overcome ever-changing market conditions and capitalise on emerging opportunities. The winners of this year’s World Finance Investment Management Awards have shown themselves to be resilient, adaptable and innovative in such challenging conditions, establishing themselves as industry leaders that can be counted on to provide stability and security when it is needed most.
Playing by the rules
Last year, the investment management industry was largely concerned with exhaustive changes to establish regulatory frameworks. This year, the issue remains just as pertinent, as increased regulatory scrutiny continues to carve out a new landscape for the sector. From risk management to cybersecurity, there is increased pressure for investment managers to meet regulator demands in all aspects of their business, and to effectively and expeditiously apply any required regulatory changes to their operations. Time is certainly of the essence, and those who fail to make the necessary changes can expect significant damage to both their wallets and their reputations.
The fine for failing to comply with the EU’s sweeping General Data Protection Regulation (GDPR), for example, is four percent of the previous year’s annual global turnover, or €20m ($22.1m) – whichever is higher. Investment managers must also take care to comply with the EU’s MiFID II legislation, which, when introduced in early 2018, was hailed as a key milestone in creating the new, more transparent financial landscape that legislators have been promising since the global financial crisis a decade ago.
From risk management to cybersecurity, there is increased pressure for investment managers to meet regulator demands in all aspects of their business
The introduction of these frameworks last year reflects an ongoing trend within the financial sector towards greater regulatory oversight. According to a PwC report entitled Asset Management 2020 – A Brave New World, this flurry of regulatory activity is only set to increase over the upcoming months. As soon as 2020, PwC predicts “full transparency over investment activity in products will exist at all levels; there will be nowhere for non-compliant managers to hide as regulatory, tax and other information’s reciprocal rights will extend across the globe”.
However, just as regulatory compliance moves up the global financial agenda, meeting these requirements is also becoming increasingly complex as the investment industry digitalises. With data analysis set to play an indispensable role in the future of investment analysis, companies must stay conscious of both privacy laws and cybersecurity as they further digitalise their operations.
A new dawn
Even as the changing regulatory climate creates new costs for investment managers around the world, technological advances are helping to cut expenses quite dramatically. Traditionally, investment management has been a low-tech industry, but the sector is now in the midst of a comprehensive technological transformation. Robotic process automation has begun to redefine daily operations at investment management companies, taking over repetitive routine tasks such as data transcription – jobs that would otherwise take up a significant portion of an employee’s working day. This not only frees up workers to dedicate their time to more valuable tasks, but also allows companies to create a reliable, 24/7 workforce that can carry out essential data-driven tasks at any time of the day or night.
Machine learning and artificial intelligence (AI) are also set to transform the investment management industry, giving managers access to an extraordinary range of practical data, which will help them to better understand both their existing customers and potential clients. AI advisors and social media chatbots are particular areas of interest, as these can provide managers with a wealth of data on what customers are repeatedly searching for, allowing them to respond with suitable products and services. At the same time, customers themselves have grown to expect a streamlined digital experience when it comes to keeping track of their investments.
In order to meet this demand, investment managers must provide a range of innovative digital solutions that suitably satisfy their customers’ evolving needs – whether that be through round-the-clock personalised financial advice delivered by state-of-the-art chatbots or remote, on-demand access to their investment portfolios. As the financial services sector becomes increasingly digitalised, investment management firms cannot afford to fall behind the curve. If they wish to stay profitable and relevant in the years to come, now is the time to place technological innovation and investment at the very core of their businesses.
Appetite for change
Each year brings with it new opportunities and areas of interest, and 2019 could well be the year that environmental, social and governance (ESG) investments hit the mainstream. As climate change and environmental concerns continue to rise up the international sociopolitical agenda, investment managers would do well to consider their clients’ ESG preferences when moving forward. There is certainly a growing appetite for sustainable investments, with Moody’s predicting that green bond issuances will break $200bn in 2019 alone. This trend shows no signs of slowing down in 2020 and beyond, as the public consciousness shifts towards creating a greener, more sustainable future.
As we look to the months and years ahead, we can expect to see investment managers around the globe working to fully integrate ESG factors into their operations, using pertinent data analysis to assist clients in creating investment portfolios that truly reflect their own personal values. What’s more, as the ESG sector continues to grow, sustainable investments are set to create some substantial returns, making them increasingly attractive from both a financial and ethical standpoint.
In the rapidly evolving industry of investment management, only the most adaptable and forward-thinking firms can expect to enjoy continued success. The winners of this year’s World Finance Investment Management Awards have proved themselves in the most testing and turbulent times, finding opportunity where others have found adversity, and overcoming complex industry hurdles with ease. For an insight into the very brightest names in the world of investment management, take a look at our winners for 2019.
World Finance Investment Management Awards 2019
Antigua and Barbuda Global Bank of Commerce
Argentina Puente
Austria Erste Group
Bahrain SICO
Belgium
ING
Chile – Equities and Fixed Income
BCI Asset Management
International financial centres like the Bahamas play an increasingly important role in the global economy. The country is tax-neutral, which means it can avoid the distortions and the corresponding losses that occur when price changes cause fluctuations in supply and demand.
Tax neutrality can also ensure that the tax system can raise revenue and minimise the consequences of economic choices. This aids the notion that the same principles of taxation should apply to all forms of business, which further reduces the likelihood of biases influencing economic decisions.
Transparent environment
Wealth management accounts for a large part of the country’s financial sector. For many high-net-worth individuals, banking and wealth management outside one’s home country simply makes good business sense and represents a wise avenue for investment. There are several reasons for this.
The Bahamas has a government ministry dedicated solely to financial services, while a shared commitment exists between the public and private sectors to develop the industry
For example, multinational and multigenerational families can preserve their wealth for the long term and transfer it to younger generations with relative ease when they place assets in a territory with trust laws. Their home country might be subject to civil unrest, or a history of political and financial instability. It is therefore prudent for high-net-worth individuals to offset these risks by protecting some of their assets. They can do this by keeping them in a jurisdiction that does not suffer from these problems. Furthermore, international banking and wealth management centres offer financial products that are usually more rewarding and secure than those found in their home countries.
The Bahamas also requires businesses and other entities to disclose information to the government about the ways in which they generate their income and the amount of tax they pay. This can be argued to be transparent taxation, as the Bahamas adheres to the doctrine that nations ought to exchange information with one another about the tax affairs of individuals and other entities.
New commitments
After tourism, financial services is the most important industry in the Bahamas. Governments have repeatedly recognised the importance of the industry to the country’s continual economic and social development. The financial sector’s viability for success is therefore a priority for both the public and private sectors.
This level of importance is indicated by the responsiveness of the legislature and regulators to the needs and demands of the market, as well as the swiftness with which these processes can take place. It is also demonstrated by the balance that regulators strike between ensuring the financial services industry keeps its integrity while still encouraging lively competition. What’s more, the Bahamas has a government ministry dedicated solely to financial services, while a shared commitment exists between the public and private sectors to help promote and develop the industry.
In order to highlight the Bahamas’ strengths as an international financial centre, the Bahamas Financial Services Board was established in April 1998. It is funded both by private enterprise and the government, and continues to promote greater awareness across the globe.
Fiscal and economic stability
Representatives of the IMF visited the Bahamas at the end of last year, with a report from the organisation’s visit noting: “The Bahamian economy continues to recover, with real GDP growth projected to reach 2.3 percent in 2018 and 2.1 percent in 2019… The Fiscal Responsibility Bill will support the government’s efforts to secure fiscal sustainability and put debt on a downward path.” With the Bahamas’ GDP already having risen by more than $4bn between 2000 and 2017, this projection seems highly plausible.
Indeed, the legal system in the Bahamas has been very successful in helping the country respond effectively to the changing needs and demands of the market. It is based on English common law, which is (by and large) clear and simple for its citizens to understand. As an independent nation with a financial services industry bolstered by a strong public-private sector partnership, the Bahamas responds to shifts in the market swiftly and efficiently.
Less than a decade ago, Kuwait’s banking sector was stagnant, hindered by a slew of changing governments and crippled by political instability. Between 2011 and 2014, infrastructure projects were few and far between, public spending was at a low point and banks were suffering on the back of it. In 2015, the government announced its first budget deficit for more than a decade.
Over the past few years, though, that has all changed, with the government making efforts to diversify the economy through a series of measures – from allowing 100 percent foreign ownership in certain sectors to providing tax breaks to investors and relaxing the regulatory environment. The latter has been particularly beneficial to the financial industry, which is now one of the country’s biggest sectors and is propping up the economy at a time when volatile oil prices (see Fig 1) and OPEC production cuts continue to have a significant impact on the Gulf Cooperation Council (GCC) region.
According to the IMF’s 2019 Kuwait: Financial System Stability Assessment report, financial system assets represented 252 percent of the country’s GDP at the end of 2017, with the majority being held within the banking sector. KPMG’s 2019 GCC Listed Banks’ Results: Embracing Digital report, meanwhile, concluded that the nation’s banks had “witnessed one of the best years in the recent past”, with overall net profits in the segment rising 19.3 percent year on year and total banking assets in the country growing by five percent.
In the coming years, a raft of mega-scale infrastructure projects – including the construction of new cities, bridges and highways under the ambitious Kuwait Vision 2035 development plan – is set to bolster the sector even further. As a result, Kuwait is now a finance leader in the GCC – a fact that is reflected in its continued position as one of the wealthiest nations in the world per capita (see Fig 2) – and it doesn’t look set to slow down any time soon.
Leading the market
While conventional banks are playing their part in propping up Kuwait’s financial industry, it’s the Islamic finance sector that’s witnessing the strongest growth: according to the Central Bank of Kuwait (CBK), Islamic banking groups recorded a 22.5 percent growth in their net income in 2018, compared with 15.9 percent among conventional institutions. Sharia-compliant assets now account for 40 percent of the country’s banking sector, according to the IMF.
Such progress has been facilitated by various developments, not least the government’s decision to start issuing Sharia-compliant instruments in 2016, which gave Islamic institutions easier access to high-quality liquid assets. Various digital innovations in the sector have helped spur growth further, with the likes of electronic payment systems, teller machines and biometric security all being utilised, and partnerships with fintech firms gradually being established.
A successful business isn’t simply defined by the actions it takes to improve its profit
Together, these changes are putting Kuwait on the map at a time when the Islamic finance industry is growing as a whole – according to Thomson Reuters’ Islamic Finance Development Report 2018, global Sharia-compliant assets were worth $2.4trn in 2017 (up 11 percent from the previous year) and are expected to reach $3.8trn by 2023.
Among those benefitting the most from this growth is Kuwait International Bank (KIB). The Sharia-compliant lender stepped into the limelight recently when it was listed on Boursa Kuwait’s Premier Market – one of three new divisions introduced by the stock exchange in 2018 for companies excelling in terms of financial performance, share liquidity, corporate governance and other policies. It marks a new era for the former real estate specialist that became a fully fledged, full-service Islamic bank in 2007, boosting its investor profile within the region and beyond.
“KIB’s listing on the Premier Market reflects improvements in the bank’s operations and financial performance as part of its new strategic direction,” the bank’s CEO, Raed Jawad Bukhamseen, told World Finance. The new strategy involves a series of forward-thinking, client-centric digital innovations, an ambitious expansion plan and a focus on corporate social responsibility that puts company culture, the local community and the development of Kuwait’s wider economy at its heart.
Sukuk success
At the core of the global Islamic banking sector is the sukuk. Equivalent to a bond, a sukuk is compliant with Sharia law and gives the holder a portion of the earnings generated by the asset without the need to pay interest. “Sukuk are important financial instruments for the Islamic banking sector – not only in Kuwait, but all over the world,” Bukhamseen said. “These specialised financial instruments can boost the funding and capital position of financial institutions.”
Banks are catching on to this fact: according to the IMF, global sukuk issuances multiplied 20-fold between 2003 and 2013 to reach $120bn, as institutions recognised the importance of diversifying their funding. One such institution was KIB, which struck gold earlier this year when it successfully priced a $300m AT1 perpetual sukuk at an annual profit rate of 5.625 percent. Listed on Euronext Dublin, it was the first AT1 sukuk to have been issued in Kuwait since 2017 and became the best performer in the secondary market this year. A weeklong road show helped the bank generate interest from investors across 26 countries, with the order book reaching a peak of $4.6bn – a more than 15-fold oversubscription. Further, 51 percent of the final distribution went to international investors.
Bukhamseen believes the successful issuance represents another turning point for the bank: “With this important financing instrument, KIB will be able to carry out its local expansion strategy, build its capital base as per Basel III guidelines and add a new source of capital. It also enhances the bank’s capital adequacy ratios and diversifies its funding sources.” KIB’s expansion plan includes opening several new retail branches in the country over the coming years, with the bank considering the strongest growth opportunities to be present in the market where it already boasts a substantial customer base. “Every organisation seeks growth and expansion as a long-term goal, as this allows you to gain an advantage in a relentlessly competitive environment,” Bukhamseen added. “As well as presenting new opportunities for everyone in the bank and enhancing profitability, expansion is a crucial strategy for survival.”
According to Bukhamseen, it’s not just the bank that will feel the benefits, as sukuk like this are essential to the development of the wider economy: “In addition to supporting the bank’s accelerated growth plans, the sukuk is a strong testament to the region’s capabilities in driving greater economic development by enabling the exchange of expertise and pro-active collaboration. A more diversified, efficient and stable financial system is necessary for the development of the banking sector. The financial system’s ability to allocate resources effectively and efficiently is crucial to supporting Kuwait’s transformation into a high value-added, high-income economy.”
Banking on digitalisation
But the health of the financial system (and, indeed, Kuwait’s wider economy) does not just rest on the development of sukuk: it also depends on how such financial instruments are presented to the public. This is where technology – and the sector’s uptake of it – comes into play. “Now, clients across every industry want to be constantly connected in all aspects of their lives,” Bukhamseen told World Finance. “The banking industry must meet these demands by offering new services that deliver an enhanced client banking experience – one that is armed with innovative technology. Today, the banking world is being disrupted by new technology and digitally sophisticated clients, driving banks to innovate in order to maintain customer loyalty. By embracing technology, banks can continue to stay relevant and set themselves apart in an increasingly digital world.”
Put simply, technology is essential in a market dominated by young, digitally savvy consumers – according to the UN, over 70 percent of Kuwait’s population is under the age of 35. Technology is also a way of reaching the underserved, with access to payments, transfers and other transactions made easier through the introduction of digital systems. Such transactions tend to involve lower costs for both the provider and the customer.
With the help of the CBK, which introduced new regulations to promote innovation in electric payment operations last year, Kuwait’s financial industry has already taken several steps to implement digital solutions. Further, according to KPMG’s GCC Listed Banks’ Results: Embracing Digital report, this trend is set to continue in the near future: “The digital agenda for banks in Kuwait is expected to increase as Kuwaiti banks continue to invest in digital banking channels, infrastructure and solutions. This will involve investments in new-age technologies, such as intelligent automation, blockchain and artificial intelligence. It is anticipated that Kuwaiti banks will see an increased acquisition of customers through digital channels across most product offerings.”
But, as Bukhamseen told World Finance, banks can’t do it alone: “KIB believes that collaboration between fintech firms and banks is essential in order to advance processes and banking offerings. These collaborations have already paved the way for improved service and technological innovations.”
A client-centric strategy
In order to keep up with this changing landscape, KIB has made significant changes to the way it utilises technology: at the beginning of 2018, the bank implemented a new, client-focused digital strategy, introducing several new services to its online and mobile banking platforms. Among the most significant updates was KIB’s new multichannel contact centre – the first of its kind in Kuwait. The centre provides a centralised system for monitoring, queuing, routing and reporting transactions, improving services and revolutionising the customer experience.
KIB’s youth empowerment project encourages, supports and sponsors young entrepreneurs’ business ideas, providing financing solutions that meet the needs of SMEs
The bank has also introduced a new ‘cardless’ ATM withdrawal system that enables users (including non-customers) to withdraw cash using their mobile phone number or civil ID. Other developments include an interactive voice response system and a live chat service, which provide clients with access to most of KIB’s services via a visual interface rather than just a voice-activated, self-service one. More recently, the bank launched a video call tool, enabling clients to complete a number of transactions face to face with a service representative, without having to go into a branch.
Of course, it’s how these services are accessed that is of the essence. With the aim of making its interface more convenient and user-friendly, KIB undertook an ambitious overhaul of its website. The new design features various advanced aspects to increase accessibility and meet the banking needs of all of its customers. For example, a special text-to-speech function has been introduced for those with reading difficulties.
Mobile compatibility is also an important consideration for any company making the move into the digital sphere. As such, KIB has used Unstructured Supplementary Service Data to ensure all of its clients can access the website, regardless of how new or old their phone is. The updated mobile website allows for all of the essential banking functions to be carried out on even the most basic of devices, from viewing account balances to paying credit facilities and transferring money between accounts.
“By incorporating more digital solutions, we want to deploy services across all channels and become a necessary extension to clients’ everyday lives,” Bukhamseen said. “We are putting the customer at the heart of everything we do, as clients continue to seek exceptional, personalised experiences.”
Digitalisation also comes with challenges, though – not least concerns around cybersecurity. Fortunately, the Kuwaiti banking sector is working hard to minimise risk, and KIB is no exception, having made data protection its priority through a series of new measures. This includes the introduction of a 3D secure authentication service, which is designed to offer an additional layer of protection against fraud during payments, and other software elements to pre-emptively combat and deter potential threats.
The bank has also established a dedicated information security steering committee – chaired by the CEO – to constantly monitor information security across the company and keep an eye on any security breaches in the wider industry to help protect KIB from similar threats. Further, the bank has implemented the internationally recognised ISO 27001 standard to ensure it is up to date with best practices. KIB has received several accolades in recognition of these security measures, including Cybersecurity Professional of the Year, Middle East, and Cybersecurity Team of the Year, Middle East, at the Cybersecurity Excellence Awards 2018, reaffirming the company’s commitment to its customers and their privacy.
The Sheikh Jaber Al-Ahmad Al-Sabah Causeway – a bridge megaproject that will cost an estimated $3bn – is scheduled to open next year, connecting Kuwait City to both Doha and the future Silk City
The whole works
A successful business isn’t simply defined by the actions it takes to improve its profit margin. Central to any good business is a commitment to the employees within it – something that KIB has fully embraced. “For continued success in any industry, organisations must invest in their people,” Bukhamseen said. “Investing in the long-term development of human capital helps maintain a competitive edge both locally and regionally, and fosters a strong reputation for the industry as a whole. As one of the most valuable components of any organisation, investment in human capital is a necessary step in ensuring competitiveness in a changing market environment.”
KIB has introduced several policies to support its employees and the wider local workforce, nurturing and developing talent in the banking sector through various training programmes and workshops. These range from leadership skills sessions to classes focusing on specific roles and functions, with the ultimate aim being to develop its employees’ future career prospects. In 2018, more than 700 employees took part in these training programmes; as of September this year, nearly 600 – covering all divisions and levels within the company – have already participated.
“Human capital continues to play an increasingly critical role in the implementation of a bank’s future strategy, and KIB’s human resources department works hand in hand with the bank’s overall objectives to achieve a common goal, anticipating business needs and overall business direction,” Bukhamseen explained to World Finance. “The future will belong to those who pay attention to effective human capital management as an essential criterion for growth.”
It’s not only a case of training existing talent, though: recognising and recruiting the right individuals is just as important to any business wanting to boost its bottom line, create an efficient, cohesive company culture, engage and motivate staff, and provide the highest levels of customer service. “When employees are motivated and engaged, absenteeism and employee turnover are reduced, increasing productivity and efficiency, and improving overall results,” Bukhamseen said. “KIB has set forth clear, all-encompassing strategies with the goal of attracting qualified, talented individuals and matching them with career opportunities that fit with their professional aspirations. This ultimately allows them to grow and develop.”
A pillar of society
In recent years, financial institutions across the globe have been establishing and enhancing their corporate social responsibility programmes to the benefit of the wider community. Bukhamseen believes such an approach is essential to any organisation hoping for long-term success.
“In addition to providing a number of financial services, banks play a key role in community development by empowering youth, spreading fundamental financial and banking knowledge, and serving as a long-term partner in their everyday lives,” he said. “Today’s interconnected world has highlighted the influential role that financial institutions play in their local communities. As a corporate citizen, KIB focuses on addressing a diverse range of social issues, underscoring its integral role as a national financial institution.”
With the aim of supporting and bettering the Kuwaiti community, the bank has implemented a social responsibility programme based on four key pillars: financial literacy, youth empowerment, positive social impact and community development. KIB’s flagship financial literacy programme aims to promote financial and economic education through school visits and other means. By introducing students to the basic principles of saving, spending and money management, the project is designed to ensure younger generations grow up with a heightened awareness of financial products and the banking industry. This empowers pupils to propel the economy forward while improving financial inclusion and banking penetration.
The bank’s youth empowerment project, meanwhile, encourages, supports and sponsors young entrepreneurs’ business ideas, providing financing solutions that meet the needs of SMEs. Beyond that, projects span fields as diverse as arts and culture, health, sports and the environment, with the overarching goal of having a positive social impact and developing communities throughout Kuwait. All of KIB’s projects tie in with the bank’s underlying aim of putting the customer first – of recognising them as an integral part of the business and reaching out to them in innovative ways that set an example for others in the sector.
“We believe this commitment brings benefits to both the organisation and the community,” Bukhamseen said. “Those benefits are manifold – it’s about uniting everyone while reinforcing the bank’s reputation and establishing it as a true partner for its clients. Time and time again, KIB has proven its dedication to meeting both the growing needs of its customers and the social needs of the community in the hope of accelerating Kuwait’s development across all areas.”
Building momentum
KIB’s ultimate goal is to develop Kuwait as a whole, and Bukhamseen believes banks can work together to achieve this aim: “The banking sector has always been the backbone of economic development in any country, providing financing to both the private and public sectors. Acting as intermediaries, banks channel funds from savers to investors in an efficient manner, enabling a more productive allocation of capital and higher income growth.
“Countries with a stable financial industry are generally met with faster, more sustainable economic growth than those in a more precarious position. A thriving banking sector also means a greater availability of capital for investment, presenting the opportunity for organisations to direct resources in a way that stimulates economic growth. Additionally, banks provide specialised financial services, reducing the cost of obtaining investment information, boosting the efficiency of the overall economy and driving GDP-per-capita growth.”
The Kuwaiti Government is working to support the real estate market through a series of ultra-ambitious, mega-scale infrastructure projects
Among the sectors that hold the most potential for both private and public investment is, of course, real estate. As a former specialist in the field, KIB continues to focus a large portion of its efforts in this area. “Kuwait’s real estate market has witnessed outstanding performance in 2019,” Bukhamseen said. “In the absence of other investment opportunities, real estate continues to provide significant profitability and reel in investors. Over the years, the market has found itself in a position of importance with regards to economic change, and has played a pivotal role in transforming the built environment. With megaprojects and new cities at its core, the real estate market will have a profound impact on the national economy moving forward, as many sectors and industries will depend on it.”
The sector isn’t without its challenges: for instance, it still struggles with significant information gaps and insufficient data, which affects the investment decisions of individuals who want to buy real estate. Accessible, timely and accurate reports from independent bodies are also lacking, presenting hurdles to market regulation and slowing the sale and purchase of properties.
To help combat these issues, KIB has a dedicated real estate appraisal division (READ) that brings together a team of qualified specialists to offer a variety of services, including property management, economic feasibility studies, cost estimation and real estate appraisal. Drawing on the bank’s long-standing expertise, READ uses a combination of approaches to determine the real value of a property. It has served as a key source of information for a number of government entities, banking institutions and real estate firms, providing in-depth reports on the local market and offering insight into current trends to help customers make the right property decisions.
A site more
According to Bukhamseen, there are further challenges to potential homeowners, real estate developers and investors in Kuwait – not least a shortage of land. “A lot of land is either unsuitable for construction or in areas that do not appeal to buyers,” he told World Finance. “This means prime spots are sold at a premium.”
Fortunately, the country is working to support the real estate market through a series of ultra-ambitious, mega-scale infrastructure projects that come under the far-reaching Kuwait Vision 2035 development plan. Announced by the government in January 2017, the plan was drawn up with the aim of further diversifying the economy and reducing its dependence on oil production at a time of volatility and instability. Its goal is to transform the country into a leading financial, commercial and cultural hub over the coming years, scaling back public investment and increasing the private sector’s influence.
The Kuwait Vision 2035 plan focuses on the development of seven key pillars: public administration, economy, infrastructure, living environment, healthcare, human capital and global position. Ultimately, though, it aims to create a favourable business climate and prepare the younger generation for more private sector involvement in the future. Currently, its most crucial elements concern infrastructure – notably, the construction of bridges, roads and government buildings, as well as larger-scale projects such as new cities. The latter, in particular, will bring huge opportunities for private investment.
Projects already under construction include: a new rail network; a metro system; a regional highway; a university campus; Kuwait’s largest housing project to date; the biggest hospital in the Middle East; and an extension to Kuwait International Airport. The Sheikh Jaber Al-Ahmad Al-Sabah Causeway – a bridge megaproject that will cost an estimated $3bn – is also scheduled to open next year, connecting Kuwait City to both Doha and the future Silk City. A whopping $100bn has been put aside by the government to support these projects in the next few years, with the aim of quadrupling the government’s total revenues by 2035.
“The real estate market is pivotal to the Kuwait Vision 2035 development plan, offering ample opportunities for private sector participation and providing a boost to related industries,” Bukhamseen said. “Currently, the Kuwaiti Government is focusing on encouraging more private investment in the real estate market, which has started to yield positive changes. In addition to reforming laws, the sheer number of major infrastructure projects currently underway is contributing to market momentum.”
Changing tides
Bukhamseen believes the country’s high per-capita income (see Fig 3) is also supporting this growth, with individual investors flocking towards the real estate market for investment opportunities – particularly the residential sector, where sales are valuable and frequent. With greater investment comes increased profits for the likes of KIB, which, in turn, helps such institutions achieve their individual goals and support Kuwait’s wider economy.
While there are still significant challenges to overcome, these ambitious moves signify a sea change for Kuwait and its private institutions. Combined with an advancing march towards the digital world, they represent a turning point in the history of a country that has depended almost solely on its oil exports for decades.
For banks willing to adapt to such a change, it’s an incredibly exciting time – there are more opportunities in the sector now than ever before. Financial institutions have the power to shape the future of the country by educating members of the younger generation and empowering them to successfully lead Kuwait’s changing economy. How they go about doing so remains to be seen, but KIB is one bank that has fully embraced the new opportunities, leading Kuwait’s financial sector into the future with confident strides.
Global merger and acquisition (M&A) volume stood at $842bn in Q2 2019, representing a 13 percent drop from the previous quarter. According to preliminary data from Refinitiv, this figure would have been significantly lower were it not for a flurry of US mega deals.
Around the world, M&A activity has suffered as a result of escalating geopolitical tensions. Dealmaking in Europe totalled $152bn – down 54 percent from a year ago – while Asia saw M&As decline by 49 percent to $132bn. By comparison, US dealmaking witnessed only a three percent drop, falling to $466bn.
Cross-border M&As have slowed as a result of global trade tensions, with buyers preferring to seek acquisitions in their domestic markets
The US’ relatively strong M&A performance can be attributed to a number of mega deals that took place in the past three months. These included the $121bn merger between United Technologies and the US defence contractor Raytheon, and US drugmaker AbbVie’s agreement to acquire Allergan for $63bn.
However, these mega deals, and the level of sector consolidation they represent, have raised some concerns. The United Technologies-Raytheon merger, for example, would be the biggest in US defence sector history, but President Donald Trump has warned that the deal could ultimately harm competition.
Notably, cross-border M&As have slowed as a result of global trade tensions, with buyers preferring to seek acquisitions in their domestic markets instead. Reuters reported that it has been more than 400 days since a cross-border deal worth over $20bn was announced.
The slowdown in global M&A activity is predominantly a reflection of sinking confidence due to geopolitical risks. It’s possible, though, that US dealmakers have experienced a comparative confidence boost as a result of growing cash reserves and a more relaxed regulatory environment. However, regulators in the US should be careful to ensure that this trend of consolidation does not stifle competition at home.
On June 25, the MSCI announced it would upgrade Kuwait to its main emerging markets index in 2020. The MSCI, the world’s largest index provider, previously classified Kuwait as a frontier market. Its decision to alter the country’s status could attract billions of dollars of investment from passive funds.
The new classification comes after enhancements were made to Kuwait’s equity market, making it more accessible to international institutional investors. In 2017, for instance, Kuwait began its Market Development Project. Since then, it has removed foreign ownership restrictions on listed banks and simplified investor registration requirements. The country also plans to introduce omnibus accounts by November 2019, allowing foreign investors to trade while remaining anonymous. This would grant international investors the same privileges that local Kuwaiti investors have today.
The MSCI’s decision to alter Kuwait’s status could attract billions of dollars of investment from passive funds
Mohammad Al-Osaimi, the acting CEO of Boursa Kuwait, the country’s national stock market, welcomed the MSCI’s decision: “[The] MSCI’s reclassification of Kuwait to emerging markets [status] represents a recognition of the instrumental role Boursa Kuwait played in improving market access and efficiency… and strengthening investor confidence over the last two years.”
The inclusion of the MSCI Kuwait Index will involve nine stocks being added into the MSCI Emerging Markets Index, putting the country’s weight at about 0.5 percent of the index. Kuwait is the only country expected to see an upgrade of this kind and is just the fourth Middle Eastern country to obtain the classification, after the UAE, Qatar and Saudi Arabia.
The MSCI also announced that it would start a consultation on reclassifying the MSCI Iceland Index to frontier market status. Although a subset of emerging markets, frontier markets are considered to be riskier and less liquid. The MSCI has warned that the same consultation could be launched for the MSCI Peru Index, which is also at risk of losing its emerging market status.
On the weekend of June 8-9, finance leaders from around the world gathered for the G20 Finance Ministers and Central Bank Governors Meeting in Fukuoka, Japan. In its final communique, the group stated that trade and geopolitical tensions had “intensified”, but remained noticeably muted on the US-China trade conflict.
“Global growth appears to be stabilising and is generally projected to pick up moderately later this year and into 2020,” the announcement read. “However, growth remains low and risks remain tilted to the downside. Most importantly, trade and geopolitical tensions have intensified. We will continue to address these risks and stand ready to take further action.”
The G20’s suggestion that growth is stabilising comes in spite of the IMF warning that the trade deadlock between China and the US could cut global output by 0.5 percent
The group’s suggestion that growth is stabilising comes in spite of the IMF warning that the deadlock between China and the US could cut global output by 0.5 percent in 2020. In fact, the collective’s response to the superpowers’ trade dispute was conspicuous by its absence, with the group reportedly removing a clause included in an earlier draft of the communique addressing the “pressing need to resolve trade tensions”. Further, there was no direct admission in the final announcement that the US-China trade conflict was hurting global growth. According to G20 sources quoted by Reuters, this came at the insistence of the US.
Another key takeaway from the summit was the promise to crack down on tax loopholes. The leaders present at the summit agreed to compile common rules that would close loopholes that allow global technology firms like Facebook and Google to reduce their corporate tax payments. Such companies provide services across international borders and can therefore book profits in low-tax countries. While the proposal would increase the tax bills of large multinational firms, it could also make it harder for countries like Ireland to attract foreign investment.
Regarding a potential end to the US-China stalemate, the summit in Fukuoka left many questions unanswered. According to US Secretary of the Treasury Steven Mnuchin, the “main progress” is likely to be made when presidents Donald Trump and Xi Jinping meet at the Osaka G20 summit later in June.
More than 200 of the world’s largest companies expect that climate change will cost them a combined total of $1trn, according to a new report by the CDP. The research, which was published on June 4 and analysed data from major corporations, including Apple, Unilever and JPMorgan Chase, revealed that much of this outlay is expected to come in the next five years.
The firms surveyed attributed the cost to extreme weather conditions, the pricing of greenhouse gas emissions and the need to update company infrastructure. For example, Google’s parent company, Alphabet, expects rising temperatures to increase the cost of cooling data centres, while Banco Santander Brasil anticipates that severe droughts could prevent borrowers from repaying their loans.
The CDP has warned that the $1trn cost disclosed in the report may only be the tip of the iceberg
The agency behind the report, the CDP (previously the Carbon Disclosure Project), represents pressure groups, fund managers, central bankers and politicians who believe climate change poses a significant threat to the financial system. In the report, the CDP noted that companies still have a long way to go in terms of evaluating climate risks. The $1trn cost disclosed, it warned, may only be the tip of the iceberg.
Many companies also predict that climate change will present significant opportunities. Across the 215 companies surveyed, an estimated $2.1trn worth of possible opportunities were identified, mainly as a result of increased demand for electric vehicles and investment in renewables.
That said, the CDP warned that some companies could be overstating the potential benefits and underestimating the risks. For example, fossil fuel companies predicted opportunities in the low-carbon economy to be worth $140bn – more than five times the $25bn value of the risks they identified. The CDP advised investors to be wary of such overconfidence, especially considering the fact renewables pose a significant threat to fossil fuel companies’ current business models.
Firms are under more pressure than ever to disclose the cost that climate change could have on their businesses. In October 2018, the Network for Greening the Financial System called on the financial sector to improve its transparency around climate risks. Interestingly, the CDP noted that financial services companies tended to be more forthcoming about the impact of climate change than other industries. Certain sectors, it would seem, are beginning to acknowledge that failure to disclose climate risks to shareholders and regulators could prove even more costly in the long term.
The US has announced the sale of 34 ScanEagle drones to its allies in the South China Sea, in a move that could increase its intelligence gathering capabilities amid growing tensions with China. The drones are unarmed, but are best known for their surveillance capabilities, which will enable US allies to better monitor – and potentially curb – China’s influence in the region. The Pentagon confirmed the drones were sold to Malaysia, Indonesia, the Philippines and Vietnam for a total of $47m on May 31.
At the Shangri-La Dialogue, a regional defence summit in Singapore, acting US Defence Secretary Patrick Shanahan said that Washington would not “tiptoe” around China’s behaviour in Asia. The South China Sea is a region of great strategic and economic importance, with $3trn worth of trade passing through its waters in 2016 alone. China lays claim to almost the entire region, and has built and armed artificial islands in order to reinforce this claim. The US, however, is committed to enforcing a free and open Indo-Pacific.
Under the Trump administration, the US has grown its naval presence in the South China Sea by conducting an increasing number of freedom of navigation exercises
On June 2, China’s Defence Minister, Wei Fenghe, delivered a strong rebuke of the US. Speaking of both the ongoing trade war between the countries and of US interference in the South China Sea, he said that the Chinese Government “would not let others prey on or divide us”.
Under the Trump administration, the US has grown its naval presence in the region by conducting an increasing number of freedom of navigation exercises. One such exercise occurred last month, when two US Navy warships sailed near islands claimed by China in the South China Sea. This particular exercise came at a sensitive time for US-China relations, as the US had just retracted China’s invite to a major US-hosted naval drill. China has since condemned the operation.
The recent drone deal is likely to escalate tensions between the two superpowers. China will almost certainly perceive any reconnaissance missions conducted by ScanEagle drones as a hostile action against its territory and could retaliate in turn. As the number of provocative vessels in the South China Sea increases, so too does the threat to peace in the region. With more opposing aircraft and warships coming into close contact, there is a heightened risk that one day a misunderstanding could develop, igniting a more serious conflict.
Almost 20 years ago, George A Akerlof, winner of the 2001 Nobel Memorial Prize in Economic Sciences, and Rachel E Kranton, Professor of Economics at Duke University, published a paper in the Quarterly Journal of Economics titled ‘Economics and Identity’. The paper outlined an exciting new concept for economic analysis. The theory – one that had too long been missing from the field – explains that people make economic choices based not just on financial incentives, but also on their identity. In doing so, they avoid actions that would conflict with their own concept of self.
People make economic choices based not just on financial incentives, but also on their identity
Identity economics put forward a school of thought wildly different to what was believed at the time. Kranton told World Finance that she believes her academic background in Middle Eastern studies and her husband’s work on political identity in Egypt were significant influences. She noticed a marked difference between how her husband’s field and her own dealt with identity: “The way we define who we are, the way we define who others are, the way that impacts how we make decisions, was not present [in economics].”
This absence resurfaced when Kranton’s former PhD advisor, Akerlof, published a paper that attempted to deal with the issues arising when people from different social groups interact. “He didn’t have this as a central notion of identity,” Kranton told World Finance. “So I then wrote to him and said, ‘Well I really think this is what is needed in such a study’, and that’s how the collaboration started.”
Kranton described what followed as a “very long and torturous process”, due to the complexity of studying identity across so many fields – from history and anthropology to philosophy and the social sciences. “The big difficulty was how to translate this very, very rich intellectual tradition in so many places into something that would work in an economics context and economics model.”
Explaining this complex notion in a simple – but not simplistic – way was a vital part of applying it to economic analysis. “A historian would say we’re too simplistic, for example, but [it needed to be] sufficiently rich so that we did not throw away the richness of the concept, but it was sufficiently tractable so that economists may be able to work with it and understand it,” said Kranton.
Making decisions
To apply the theory to economics, the pair had to create a new utility function – a central concept in economics that measures an individual’s preferences over goods and services. “That’s the workhorse of economics and so we thought we would use that and modify it or add ingredients, and explain these ingredients in a sufficiently precise way so that it could be operationalised,” Kranton explained.
Often in economics, the example of apples and oranges is used to explain utility function. In other words, one’s preference of apples over oranges will be considered, along with price, when making a purchase. For identity economics, the example of meat and vegetables is of greater use, because this choice may not necessarily be confined to one of taste. One’s identity also plays an important role. Namely, if someone is vegetarian, or has an ethnic or religious background associated with vegetarianism, this choice is linked to who they are and how they understand their place in the world.
“You’re moving from preferences, which is ‘I like this’ versus ‘I like that’… to actions that have a social and cultural meaning to them,” Kranton told World Finance. This model works with all kinds of choices we make. In a division of labour context, for example, it’s ‘I wanted to stay home and look after my children’ versus ‘I want to rejoin the workforce after maternity leave’. Essentially, how someone is raised influences what they believe is appropriate or inappropriate. “If I’ve grown up in a particular context then I will think it’s more or less appropriate for a woman to be taking on a leadership role in an organisation,” said Kranton.
This move from preference to what one should do or how they should act is a key tenet of identity economics. “That’s the big leap – your preferences become socially driven,” said Kranton. “So we have arguments over whether it’s appropriate for women to do X, Y and Z. We argue whether it’s appropriate to raise animals for food, and not just on economics grounds, on other grounds – religious grounds, ethical grounds [and] so forth.” As these preferences are socially driven, they can change over time – another departure from the classic utility function in economics.
Gender politics is a great example of the theory in action, particularly regarding how norms have changed over the years. What’s appropriate for a woman today, for example, is very different from what was appropriate just two generations ago. “It’s not that the brains and the bodies of women have changed,” said Kranton. “It’s how we understand gender [that has changed].”
According to the theory, deciding to work hard in school or picking a profession isn’t just about personal taste. Such decisions are invariably linked to how one sees oneself. Kranton told World Finance: “To say ‘how does identity affect decision-making?’, it’s just an ingredient that more or less consciously people have in their minds when they decide whether to buy a product, to pursue a career or to start a family.”
Kranton provides the example of men who work as nurses. Despite requiring stereotypically masculine traits such as physical strength, nursing is broadly viewed as a feminine profession entailing so-called feminine traits, such as being caring and nurturing. Though the demand for skilled jobs in the US persists, the nursing profession remains understaffed due to a common unwillingness of men to enter the field. “Sometimes it’s not necessarily conscious and reasoned in that sense, but there are a lot of men who would feel that [being a nurse] is not something [they] would do.” The problem is, of course, related to how society views masculinity. But, as identity economics teaches us, concepts of masculinity change over time, making it likely that more men will be drawn to the field in the future.
Micro and macro applications
Understanding identity economics can be tremendously beneficial on the micro and macroeconomic level. For instance, assessing how employees identify themselves within a company and how strong corporate culture is can make a marked difference in terms of performance and loyalty. “You want somebody to feel invested in their company, you want people to feel part of it, you want them to see their success as the company’s success,” Kranton explained. The aim, therefore, is to ensure people feel like they play an important role in an organisation, that it is a place they feel proud to work at, and that objectives align throughout. This, again, is a notable difference from traditional economics, in which work incentives fail to acknowledge the vital role that company culture plays. Kranton said: “A lot of management folks will know this and, in fact, we read a lot of management literature, but the economic modelling just didn’t have this as an important variable.”
Akerlof and Kranton use the military to explain how motivational a strong sense of identity can be, even with the flat wage structure and relatively low pay of army roles. The extraordinarily strong sense of identity, work ethic and loyalty found throughout the armed forces cannot be explained by standard economic analysis. The military, as such, provides a number of important lessons. Kranton added: “In the military, you want people to have a very intense loyalty to your squadron, but this fighting unit also has to work in the service of the larger objective.”
This strong intra-unit culture can also lead to problems. For example, mistakes may not be reported to senior officers. “There’s these trade-offs that need to be managed in a particularly skilful way,” said Kranton. “But if you didn’t know that identity is a part of people’s work incentives, then you wouldn’t be aware that there are these trade-offs [that need] to be managed.”
The theory also applies to education. When students strongly identify with their school, they are more likely to work hard and continue their education at that institution. Teachers too are more inclined to help their students reach their full potential if they feel an alignment with their school. Education policy should, therefore, help schools establish an identity, a strategy that will see teachers and students working towards a common purpose, and will ultimately produce better results. On a bigger scale, Kranton noted: “[The] economy is going to be better off because then you’re going to be taking advantage of your human capital.”
Sense of self
According to the theory, our choice of identity may well be the biggest influence on the economic decisions we make. “Everything follows from it,” Kranton explained, referring to her career as an example. “I conceive of myself as an economist. A lot of my life choices follow from that. I could have conceived of myself as a different type of economist. I could have worked in a bank or on Wall Street, but I was more of a publicly minded person. That choice of who I am shapes the rest of my decisions.”
For most people, sadly, boundaries related to their identity impact their economic wellbeing. Kranton explained that all people exist within a social structure; childhood, ethnicity, race and class all feed into this construct. “You grow up in a place with a particular set of parents, a particular set of neighbours, a particular religious environment and socioeconomic strata, and in some sense that is very determinant, not of the opportunities you have, but how you think of yourself.” The social hurdles we encounter throughout life also shape how we think of ourselves and, as a result, the decisions we make.
How someone conceives of themself impacts how they perform at school, the career they pursue, where they live and what they buy. It all starts with identity. Knowing this can bring a greater understanding of what can be done to make improvements to a company, school and even the wider economy. Identity economics doesn’t just help us better comprehend our own economic decisions – it provides a foundation from which we can make the world a better place for one and for all.
As a member state of the European Economic Area, Liechtenstein shares in the regulated framework of the European financial market. In recent years, the country has become a leading area for investment and asset management, due to its high standard of regulation and quality of service. Even the global financial crisis did not affect Liechtenstein as much as it did other small states in Europe, such as Ireland or Iceland.
Contrary to the fears of some, the CRS did not lead to the significant withdrawal of assets or a relocation of asset protection vehicles
As such, Liechtenstein has become known as a tax haven. In fact, over the years, this small nation has accumulated more registered companies than citizens due to its low tax rates. In order to maintain its position as a leading financial market within the global community, Liechtenstein has already undertaken numerous initiatives to fight illegal activity. The Financial Action Task Force and the IMF are among the organisations that had positively evaluated the country’s legislative and administrative practices prior to the introduction of the Common Reporting Standard (CRS) in 2014.
An advantageous milieu
As far back as 2009, Liechtenstein declared it would pursue a ‘white money strategy’ to combat money laundering and tax crimes. Additionally, the nation strived for cooperation in tax issues in accordance with the standards of the OECD.
Following the conclusion of the respective bilateral and multilateral treaties – including the Convention on Mutual Administrative Assistance in Tax Matters, the Multilateral Competent Authority Agreement and the agreement between the EU and Liechtenstein on the automatic exchange of information on financial accounts to promote tax honesty – Liechtenstein enacted national laws for the CRS in 2016. As an early adopter of the standards, the nation began reporting information on its residents’ assets in 2017.
The implementation of the CRS was a logical outcome and foreseeable by all market participants. Contrary to the fears of some, the CRS did not lead to a significant withdrawal of assets or the relocation of typical asset protection vehicles, such as foundations and trusts. Today, many jurisdictions struggle with the CRS because the administrative practice changes frequently and supervisory authorities do not issue guidelines. However, the situation in Liechtenstein is different.
As a financial centre of international importance, Liechtenstein has an interest in complying with its CRS obligations, especially with regards to its reputation within the global community. As a result, the Liechtenstein tax authorities have issued extensive guidelines on the CRS and its application. These guidelines, which are updated on a regular basis, provide assistance with the interpretation of the law, demonstrate the respective reporting obligations with examples of practical relevance, and outline the applicable administrative practices.
Compared with other jurisdictions that follow the CRS and exchange information on tax matters automatically, market participants in Liechtenstein benefit from a high level of legal security and clearly communicated administrative practices.
Opting in
All legal entities, or Rechtsträger, must classify as financial institutions or non-financial entities (NFE), according to the CRS. At the suggestion of market participants, Liechtenstein has created an opt-in measure, which is not provided by the CRS. This allows domestic foreign entities that classify as passive NFEs to voluntarily classify themselves as investment entities. Consequently, they are considered a reporting Liechtenstein financial institution. However, the opt-in may only be granted under the prerequisite that the voluntary classification will not jeopardise correct reporting.
This option may be particularly advantageous when the balance sheets that are drawn up do not expose, with certainty, how the income of the respective entity will actually be composed. Our experience has shown that the opt-in measure is very well received by market participants.
It also allows an entity to voluntarily classify as an investment entity, and therefore a reporting financial institution, irrespective of whether the necessary tests are fulfilled. The opt-in does not, however, provide an opportunity to voluntarily classify as a depository institution, a custodial institution or a specified insurance company.
Taking control
As Liechtenstein is known as a popular foundation destination, the transposition and interpretation of CRS – and the individuals from whom the respective information has to be procured according to national law – are of considerable interest.
There is no doubt that, according to the national due diligence law, as well as the CRS, the founder of a company is deemed a ‘controlling person’. The founder is explicitly addressed in the CRS commentary with regard to controlling persons of foundations.
More interestingly, Liechtenstein law stipulates that members of the foundation board are considered to be controlling persons irrespective of their specific position. At least within the terms of the EU agreement on the automatic exchange of information, it is questionable whether or not foundation board members must be reported, especially as the members of administrative bodies of other legal entities only have to be reported when no other controlling person can be identified.
However, in the majority of cases, other controlling persons, such as beneficiaries, are identifiable. In addition – and depending on the design of a particular foundation – the board only executes the founder’s intention, or Stifterwille, without making its own decisions. In such cases, the equivalence to a trustee or protector is questionable, or at least disputable.
From a purely CRS perspective, we are of the opinion that the responsibility and authority of the foundation board would have to be assessed on a case-by-case basis in order to determine if the founding board must be reported as a controlling person, and if so, which members. In this regard, Liechtenstein may have transposed CRS excessively. The same is true in terms of supervisory bodies.
In Liechtenstein, information on mandatory beneficiaries and discretionary beneficiaries must be procured. However, prospective beneficiaries are not considered to be controlling persons until they become beneficiaries. According to CRS information, discretionary trust beneficiaries must only be procured and reported in the years when contributions are received.
Because the reporting obligation of a foundation’s beneficiaries is based on the equivalence of the respective position to trust beneficiaries, we believe that the respective exemption must be interpreted in a way that does not put foundation beneficiaries in a less favourable position than trust beneficiaries.
The Liechtenstein tax administration also clearly holds this view: its guidelines stipulate that discretionary beneficiaries, whether they are beneficiaries of a trust or foundation or not, only have to be reported in years when they
receive a contribution.
A helping hand
The implementation of the CRS in Liechtenstein has led to an increased need for legal advice regarding the implications of the new regime.
In order to provide a conclusive overview and sufficient information, all different aspects of Liechtenstein corporate law must be taken into consideration. Gasser Partner is a highly qualified and reliable point of contact in this respect. The firm is significantly involved in advising clients on all aspects of the implementation of the CRS.
As an international independent law firm, Gasser Partner primarily focuses on providing classic attorney-at-law services. This also comprises the legal representation of clients before courts and public authorities, as well as providing advice in all areas of the law.
As one of the leading law firms in Liechtenstein, we have built our knowledge and experience over decades, and we will continue to do so, particularly in the field of business law. We advise private clients, especially high-net-worth individuals, and represent companies from both Liechtenstein and abroad. Our institutional clients include banks, asset managers, fiduciary service providers, insurance companies and fund administrators, as well as local and foreign authorities.
Due to the location of our offices in Vaduz, Zurich and Vienna, and our regular close collaboration with foreign law firms, we have excellent global links. Owing to our size and expertise, we have specialists in every area of the law. In particular, this enables us to efficiently solve complex, international cases.
When in late 2018 a New York Times exposé led to the resignation of a leading economist as a result of allegations of sexual harassment, economics experienced its first #MeToo moment. It seemed that economists were finally facing up to gender bias in the profession. During a 2019 panel discussion on gender issues, Janet Yellen even said addressing the issue of sex discrimination “should be the highest priority” for economists. But what is remarkable is that it took so long.
One problem is simply the numbers – there aren’t enough women in economics, especially at the higher levels. For example, in 2011, when the American Economic Review selected the 20 most influential articles from the last 100 years, only one of the 30 authors was a woman. WhenThe Economist chose the 25 most influential economists of 2014, none were women (they excluded active central bankers, so Yellen didn’t make the list).
Between the IMF and World Bank, one of 16 chief economists has been a woman (though Christine Lagarde has been managing director of the IMF since 2011), and of the 81 people to have been awarded the Nobel Memorial Prize in Economic Sciences since 1969, one – Elinor Ostrom, who was a political scientist and not an economist – was a woman.
It is therefore unsurprising that Frances Weetman’s study comparing gender balance in different academic fields concluded: “Economics is an outlier, with a persistent sex gap in promotion that cannot be readily explained by productivity differences.”
In short: economics has too many guys.
Rational economic man
So why is it, in the words of sociologist Elaine Coburn, that “mainstream economics remains remarkably ‘pre-feminist’”? And why did it take so long for people to call it out?
One reason, perhaps, is that economics maintains an illusion of objectivity and rationality, where complex social issues – such as power and gender – are ignored or downplayed. As Yellen said of her male colleagues: “I think they regard themselves as rational and the field as being highly meritocratic.” A related reason, though, is that economics, as traditionally taught, has a pre-feminist view of the world – which is why it attracts few women. This in turn makes its ideas more ‘male’.
Consider, for example, the old canard of ‘rational economic man’, which has long dominated introductory (and other) economics texts. When I wrote a chapter about feminist economics in Economyths back in 2010, I noted: “While feminist thought has reshaped areas of study such as literary criticism and law, I still find it surprising how economics seems to have largely bypassed criticism – what could be less politically correct than rational economic man?”
Indeed, according to the anthropologist Mary Catherine Bateson: “The dangerous idea that lies behind ‘economic man’ is the idea that anyone can be entirely rational or entirely self-interested. One of the corollaries, generally unspoken in economics texts, was that such clarity could not be expected of women who were liable to be distracted by such things as emotions or concern for others.”
As The New York Timesreported in 2016: “Economics remains a stubbornly male-dominated profession, a fact that members of the profession have struggled to understand.” But it’s not that hard – maybe economists should read some of their own books.
The gendered economy
This bias in economics has had real effects not just in academia, but on the economy. For example, it has long been noted that measures of economic activity such as GDP do not account for unpaid work, most of which is done by women. As the economist Cecil Pigou noted in 1920: “If a man marries his housekeeper or his cook, the national dividend is diminished.” In her 1988 book If Women Counted: A New Feminist Economics, Marilyn Waring estimated that unpaid labour of the sort often carried out by women – such as care for the young, old or sick, running the household, and so on – was equivalent to 25 to 40 percent of the economy in industrialised countries and even more in developing ones.
One implication is that economic growth is illusory if it only represents a shift from unpaid to paid work. A paper from the US Bureau of Economic Analysis, for instance, found that unpaid work increased GDP in the US by 39 per cent in 1965, but only by 26 percent in 2010, thus lowering the average annual nominal growth rate from 6.9 percent to 6.7 percent. Biasing policy to favour paid work therefore comes at a measurable cost.
Women are also impacted more by government austerity programmes, such as the benefit cuts that followed the financial crisis. In the UK, for example, they bore an estimated 85 percent of the brunt, while the distribution of bailout payments to male-dominated banks presumably had the opposite skew.
A bully pulpit
More controversial, perhaps, is the idea that mainstream economic thought itself incorporates a male bias in its selection of approaches and techniques. An example is the question of theory versus concrete data, which is related to a broader dichotomy between the abstract and physical reality. “Statistically, men and women are not drawn to the same fields within economics,” wrote economist Miles Kimball and an untenured female economist, who didn’t want to be identified in case it hurt her career. “And even within a field, women are drawn to a different balance between immediate real-world relevance and theoretical elegance.”
Of course, this might be due to cultural conditioning, given that since the time of the ancient Greeks, mathematics has been viewed – according to science writer Margaret Wertheim – as “an inherently masculine task. Mathematics was associated with the gods, and with transcendence from the material world; women, by their nature, were supposedly rooted in this latter, baser realm”.
To encourage more female participation, wrote Kimball and colleague, economics needs to “become open to a wider range of scientific approaches and topics”, and also promote “a better power balance among colleagues”. Or, as Stanford economist Susan Athey put it: “The bullying culture of economics is one of our biggest problems.”
If and when more women go into economics, it will be interesting to see how this changes the profession. This may be the year when it starts to happen – after all, for a field that favours ideas such as competition and disruption, it seems odd to be running itself like a 19th-century gentlemen’s club.
Financial inclusion has gained real ground over the past few years. More than half a billion people got access to financial services for the very first time between 2014 and 2017, according to the World Bank’s Global Findex Database 2017. In 2011, the global ‘unbanked’ population stood at about 2.5 billion, but just six years later that figure has dropped to 1.7 billion.
Cash transactions are more likely to be unsafe, expensive and inconvenient
Over the past decade, more than 55 countries have made commitments to financial inclusion, including Pakistan, which accounts for six percent of the global unbanked population alone (see Fig 1). Nevertheless, while countries like Pakistan are beginning to show exciting prospects for growth, unbanked citizens still cost the global economy $600bn a year.
Those who rely on the unregulated informal sector have difficulty saving money for the future, paying for education and investing in businesses. Cash transactions are more likely to be unsafe, expensive and inconvenient, according to the United Nations’ Better Than Cash Alliance. This “traps the vulnerable segments of society in a cycle of poverty”, Tidhar Wald, the group’s head of government relations and public policy, told World Finance.
The digital edge
The vast majority of unbanked adults live in developing economies. Compared with developed nations, banks in these regions tend to have far fewer branches. For instance, in Pakistan there were fewer than 11 commercial bank branches per 100,000 adults in 2017, compared with 31 in the US, according to the World Bank.
The significance of physical bank branches has begun to diminish, however, due to the rise of the internet and mobile phones. Today, two thirds of the global unbanked population owns a mobile phone. Between 2014 and 2017, growing mobile phone and internet usage boosted the total number of people sending or receiving payments digitally from 67 percent to 76 percent. In the developing world, this upswing was even more pronounced: digital payments made to and from account holders climbed from 57 to 70 percent.
Steve Smith, the CEO of US-based fintech company Finicity, explained to World Finance how technology was erasing traditional blockers to financial access. “As people get a mobile device, they can connect to a financial institution. They can set up a checking account. They can have access to mobile banking. They don’t have to go into a branch; they can get a direct deposit of their income to that checking account.”
This financial flexibility helps families meet unexpected economic setbacks and allows entrepreneurs to invest in their businesses and create jobs, Wald added. “Most importantly, digital financial inclusion allows economies to grow stronger and more inclusive.” For this reason, countries like Pakistan have come up with financial inclusion strategies in recent years. Pakistan’s government adopted a National Financial Inclusion Strategy (NFIS) in 2015 that aims for 50 percent of adults to have bank accounts by 2020 – including 25 percent of women.
Out of Pakistan’s population of around 210 million, only 21 percent of adults had bank accounts in 2017, according to the World Bank. But with high mobile penetration rates, this could soon change: research by Financial Inclusion Insights (Fii) found that 84 percent of men and 71 percent of women in the country have access to a mobile phone.
$600bn
Cost of the unbanked to the global economy each year
201m
Population of Pakistan
21%
of adults in Pakistan had a bank account in 2017
34%
of men in Pakistan had a bank account in 2017
7%
of women in Pakistan had a bank account in 2017
Financing growth
Both Smith and Wald cited India as something of a success story for financial inclusion. Its cash-based economy quickly digitalised over recent years, and the rate of bank accounts opening has been “absolutely extraordinary”, Smith said.
In neighbouring Pakistan, however, many locals are still wary of financial institutions. In a 2015 survey by Gallup Pakistan, 65 percent of respondents said they would rather deal with someone they knew than a bank.
Rehan Akhtar is the chief digital officer of Karandaaz, a non-profit that promotes financial inclusion and access to finance for micro, small and medium-sized enterprises (SMEs) in Pakistan. He told World Finance that convincing Pakistanis to adopt digital financial services over cash would require new policies, including digitalising all government transactions and enabling an environment for e-commerce transactions.
NFIS has prompted a number of new initiatives, including mobile bank account schemes, biometric identity verification and the promotion of fintech services. These policies have already strengthened the country’s microfinance sector.
In Pakistan, Akhtar said SMEs account for over 90 percent of the country’s 3.2 million businesses and 30 percent of GDP. “As a consequence, growth of SMEs can have a direct impact on achieving the targets of poverty alleviation and sustainable growth for Pakistan’s economy.”
Finicity is also working to make the process of obtaining a loan easier for unbanked populations. Its new scoring methodology in the US generates credit scores for those who are unable to provide a standard credit history. Extending that concept to areas of the world where new bank accounts are opening quickly could provide more people with lower-cost access to money. “And when you do that, it just continues to accelerate economic expansion,” Smith said.
The gender divide
Although financial inclusion in Pakistan is improving, doubts remain that it will reach its 50 percent target by 2020. One reason is the continued exclusion of women from the financial system – today, men are about five times more likely than women to have a bank account.
What’s more, Pakistan’s gender gap in financial inclusion has actually widened in recent years. In 2017, 34 percent of men had bank accounts, up from 21 percent in 2014. Just seven percent of women had accounts in 2017, however, up from five percent three years earlier. India, comparatively, has made impressive strides in gender equality: the number of women with accounts rose from 43 percent in 2014 to 77 percent in 2017. Overall, total account ownership is now 80 percent.
Pakistan’s gender gap in financial inclusion has actually widened in recent years
Gender disparities exist in many aspects of life in Pakistan, including education, health and every economic sector. Furthermore, less than a quarter of the female population is involved in the workforce. Fii attributed poor financial inclusion to “the lack of women-owned physical capital, as well as cultural norms that limit women’s economic empowerment”.
Women’s economic empowerment is a key area that must be addressed by government policies if Pakistan’s financial inclusion goals are to be met. CGAP, a global partnership focusing on financial inclusion, said Pakistan was among the countries that should adopt policies addressing barriers to women’s economic inclusion.
Return on investment
Pakistan is home to several innovative fintech companies, including digital financial services firms Easypaisa and JazzCash. But Akhtar said market players must be encouraged to expand, and this will take a significant amount of investment. “[This is a] difficult task to achieve, and financial inclusion as a result lacks political ownership,” he observed.
Recent research by CGAP outlined how vital investment is for digital financial services companies building extensive new networks: “While achieving profitability can take several years, these investments set the foundation for a successful market by solving problems related to use cases, customer education and agent recruitment/training.”
Investors are increasingly realising the opportunity unbanked populations offer. For instance, Chinese payment provider Ant Financial bought a 45 percent stake in Pakistan’s Telenor Microfinance Bank (TMB) for $184.5m in 2018. Ant Financial aims to develop mobile payments and digital financial services at TMB, which owns Easypaisa.
Stephen Rasmussen, who leads CGAP’s work on sustainable digital financial-services ecosystems, argued in a blog post that Ant Financial’s interest in Pakistan could be a game-changer by “spurring other businesses to become more ambitious about increasing mobile wallet uptake and use” and “[establishing] an investment benchmark in the market that could encourage additional investment into other fintech businesses”.
Further investment in Pakistan could be what pushes the country towards greater financial inclusivity, which is intrinsically tied to economic growth and prosperity. “What we need is coherence at the policy level, and for the industry to come together to develop the market for financial services,” Akhtar told World Finance. “This requires a mindset of collaboration and investment in new technologies and business models, which, with the right nudges by the policymakers, will enable the much-needed financial inclusion.”
With technology continuing its swift transformation of the banking sector, it appears to only be a matter of time until the vast majority of the world’s population is included in the financial industry.
Artificial intelligence (AI) is set to revolutionise every industry, and the finance sector is no exception. AI will make businesses faster and cheaper to operate, creating new opportunities and adding an additional estimated $13trn to global economic activity by 2030.
Financial institutions are increasingly looking to AI to aid further operations
Despite the rise of AI, Digital Realty’s latest research has shown that over a third of IT decision makers in the UK’s largest financial services companies are not ready to implement the technology into their business. Elsewhere, the figures are similarly high. For instance, they are calculated at 27 percent in Ireland, 18 percent Germany and 23 percent in the Netherlands.
Processes that are already seen as the norm in the financial services industry, such as fraud detection and stock trading, are made possible by AI, and financial institutions are increasingly looking to AI to aid further operations. These include customer communication, predictive analytics, trade processing, and intelligent investment solutions. Listed below are the top five ways your business can prepare for the surge in AI.
1 – Identify key areas that would benefit from AI Before taking the first step to introduce AI into your business, it is crucial to review and evaluate existing processes to determine which existing processes can and should be automated to free up time for employees to focus on higher-value tasks. It is important to hold discussions with your workforce to identify the processes that are repetitive and tedious, and those that can be carried out with automated methods.
In the financial services industry, tailored customer service, risk model improvements, and day-to-day transactions have been made possible by AI; firms in the sector should continue to iteratively evaluate their processes so that AI can be implemented to maximise process efficiency across the business.
2 – Educate your workforce It is important to involve the workforce in the initial planning stages of AI implementation for the reasons laid out above. However, it is often recognised that automated processes, such as AI, can be seen as a threat by employees with regards to being replaced and losing their job. Whilst this may be true to some extent, this can be mitigated if they are educated on how AI can, and will, be introduced in the near future, and how it should not be seen as their replacement, but rather, should be welcomed as it will free up time to focus on other key activities.
In the case of the finance industry, employers should reiterate the fact that the more mundane tasks, or tasks that require uninterrupted manpower, such as around-the-clock monitoring for security attacks, are not the most valuable use of time. It is equally important to instil a culture that promotes a harmonious relationship between colleagues and AI to ensure that change is accepted.
3 – Upgrade your infrastructure The rise in AI applications will bring about a host of new demands for data. Complex data processing is required to ensure that businesses welcome AI with functioning arms. This shift can be costly if outdated infrastructure must be upgraded to the standard required to facilitate AI operations.
Outsourcing providers, on the other hand, build their infrastructure with the focus on interconnection – they are constantly redesigning their infrastructure to evolve with new technologies, so businesses can benefit from a purpose-built environment without having to worry about costly ongoing updates to their own infrastructure.
Upgrading infrastructure introduces a host of benefits, such as lowered operation costs, scalability, increased security, a centralised integration platform, and improved functionality. These benefits will further assist in streamlining operations, such as analysing large amounts of data, customer support, and real-time data transaction views, to name a few. Companies, especially those in trading or stockbroking, benefit from faster and better service for customers, together with efficient end-to-end data flows.
4 – Set out a clear AI strategy As with anything, financial services firms need a clear AI implementation strategy from the outset to ensure that whilst AI is being developed and incorporated into processes, there is a clear deployment strategy, which includes a rollout plan for key stakeholders, like customers.
A well-planned strategy is vital in ensuring that the incorporation of AI delivers optimum benefits for the business, such as better-tailored and more accurate services for customers at a lower cost, as well as enhanced prevention of criminal activities and improved detection of fraud and money laundering.
5 – Look at other firms’ strategies It is important to determine parallels in the AI-led systems with other companies; and learn from the mistakes of others! In order to ensure that your company is keeping abreast of its competitors, and maintaining their competitive edge, financial services companies should look not only to their direct competitors for learnings, but beyond the industry.
AI is a versatile and powerful technology but is not without its teething problems. With regards to the financial services industry, previous encounters with AI have resulted in biased consumer targeting. When looking to adopt AI, it is wise to look at previous mishaps to ensure that future processes are developed which incorporate best practices.
To fully embrace the benefits of AI, companies will need to meet new processing and interconnectivity demands. The challenge is forcing them to look to cloud and data centre partners for the purpose-built infrastructure, rapid low-cost interconnection, and simple management of these complex data environments that can underpin their AI ambitions.
Sometimes society’s most important advances come from the most counter-intuitive ideas. In the 1970s, marine conservationist Bill Ballantine won a battle to open a protected marine reserve off the coast of New Zealand, overcoming concerns that it would harm the region’s fishing trade. Within a few years, the protected zone witnessed the desired increase in marine life. Yet it was what happened beyond the zone that amazed all concerned: the opportunity for catches outside the protected area increased to levels higher than fishermen had previously enjoyed inside it. Such was the rate of breeding inside the zone that fish had spilled out into the areas beyond in great numbers.
In the battle against global warming, our best hope could well be to use more electricity, not less
In the world of energy, it is high time for a similar piece of counter-intuitive thinking, as the fight against climate change grows more urgent every day. Whole countries are starting to feel the effects of global warming on their economies, while progress on the 1.5 degree warming target set in the Paris Agreement remains too slow. As the world continues to talk about decarbonisation, reducing emissions and increasing energy efficiency, electricity would seem to be a natural enemy. After all, just under 40 percent of it is still generated by burning coal, according to the International Energy Agency (IEA).
And yet, in the battle against global warming, our best hope could well be to use more electricity, not less. By increasing the amount we use, the world can finally kick its fossil fuel habit. This is because our cars have always run on oil-based fuels like petrol and diesel, our homes are still heated by burning gas, oil or coal, and our lives have long been powered by electricity generated in fossil fuel plants.
But this doesn’t need to be the case anymore. Advances in technology mean that by switching our transport and heat to methods powered by electricity and by taking advantage of the reduced price of the renewable energy used to create this electricity, we can make a decisive shift away from polluting fossil fuels. Globally, the IEA says that only 20 percent of energy demand today is met by electricity. Yet the winds of change are blowing.
A case for renewables
The fall in the cost of renewable energy generation has been spectacular. Iberdrola made a decision 18 years ago to invest in this opportunity, and today – with almost 30,000MW of renewable generation capacity to its name – the company is one of the world’s largest clean energy producers. Its UK business, Scottish Power, generates 100 percent of its energy from renewable sources, while the application of blockchain technology in Spain means that customers can track how their energy is generated and be assured that it is from renewable sources.
20%
of energy demand is met by electricity
37.4%
of electricity is still generated by burning coal
73%
Drop in the cost of solar energy since 2010
Today, others are following suit, driving the cost of renewable electricity down further. This revolution has been so effective that in 2017, the UK enjoyed its first ever day of electricity generation without coal. Globally, the closure of coal-fired power plants continues apace, while Bloomberg New Energy Finance has recently predicted that wind and solar will account for half of the world’s energy generation by 2050.
The contribution that wind and solar are making to the global energy system and the transition away from fossil fuels demonstrates that government and bill-payer backing for renewable technologies has been well spent.
Projects can now be built quickly, are reliable, and are proven to both operate at scale and reduce carbon emissions. Today, onshore wind is the cheapest of any new-build energy-generation technology, while the cost of offshore wind has been reduced by over 50 percent in a short space of time, generating affordable power for thousands of households worldwide. The potential is enormous. Iberdrola’s East Anglia ONE offshore wind farm in the North Sea will power 500,000 homes once it is fully operational.
Solar energy, too, is coming of age. Previously a technology that relied on government subsidies, it is now an attractive commercial proposition. A 2018 report by the International Renewable Energy Agency found that the cost of solar energy has fallen by 73 percent since 2010, with further drops expected.
The battle for clean generation over fossil fuels is being won, but there remains much to do. Energy demand is still rising, and increasing the electrification of the economy is the only effective way to cater for rising energy demand while delivering on emissions reduction commitments.
Driving electrification
Today, there are clear areas of the economy that are responsible for high CO2 emissions and are ripe for mass electrification. A prime example is transportation: electric vehicles have taken time to gather momentum, but the pace of adoption is accelerating. Fortunately, advances in motor technology and ambitious government targets to phase out internal combustion engines and reduce air pollution are driving the development of electric vehicles forward.
Barriers remain, though. For instance, building sufficient charging infrastructure for a world where entire societies will shift to electric cars is a huge challenge. Another is how we will design electricity grids to cope with surges in demand when everyone plugs in at the same time.
Collectively, we must solve these challenges in order to ensure that the mass transition to electric vehicles runs smoothly. And crucially, this will require both private sector investment and supportive government policy. Get this right, and other sectors of the economy will quickly open up to the potential of electrification.
Iberdrola is already making great strides. In early 2019, a joint partnership with car manufacturer Nissan was announced to develop chargers for their electric vehicles, drawing on Iberdrola’s network infrastructure. The project will initially begin in Spain and will then be extended to other countries, including the UK and the US.
Heating, which is still driven almost exclusively by burning fuels, is another prime candidate for electrification. Heat pumps offer the most logical solution here, but the technology remains in its infancy and lacks the policy support required for it to fully take root. A successful transition to an electrified transport system could provide the much-needed confidence to help move things forward in other areas as well.
The storage conundrum
We also need a better solution for storing the renewable energy that is produced, which will provide baseload support for when natural resources cannot be relied on. Batteries are the common solution to this problem – however, they are not always the right one.
Current research and development of battery technology is not mature yet, with little consensus as to the best technology for the job. On a domestic level, batteries in homes are unlikely to be the answer for most people, given the size and scale of the installation required to sustain power and the fact that users will still need to be connected to the grid.
It is clear that more development of this technology is required. Happily, an alternative storage solution exists that is cost-effective and proven at scale, with several gigawatts of capacity available. It is called pumped hydro storage, but in many ways it functions like a natural battery.
On days when the wind doesn’t blow or the sun doesn’t shine brightly, water is released from a reservoir and flows downhill to generate power. When a windy, sunny day comes along, the pumps reverse and the opposite happens. Water flows uphill back into the reservoir, acting like a rechargeable battery that is ready to be used again. The potential for this technology is proven, and failure to invest in it at scale would be a huge missed opportunity.
Into the future
In the West, electricity feels central to our lives. Yet, counter-intuitively, the electrification of society has only just begun. And there’s one more ingredient missing: improved regulation.
The right regulatory framework is one that incentivises innovation and the necessary upgrades to power networks to cope with an electrified economy. It is one that takes a progressive approach to financing the development of new electric technologies, and it is a system that accelerates decarbonisation by employing a strong ‘polluter pays’ principle to ensure the costs of climate action are shared evenly.
It has been 270 years since Benjamin Franklin first experimented with electricity and introduced the concept to the world. As the effects of climate change continue to intensify, we cannot wait any longer to complete the journey he started us on.
