Science-Based Emissions Targets: A New Foundation for Corporate Climate Action

Corporate emissions-reduction targets have become commonplace. In 2014, 80% of companies that reported their emissions to CDP, an international NGO that holds the largest collection of corporate emissions data, also reported targets for cutting their emissions. These targets vary significantly in scope, structure, and ambition. But at the COP21 climate negotiations in Paris, it was announced that many companies are taking corporate climate commitments much further.

The Science Based Targets initiative announced that 114 major companies committed to set science-based emissions-reduction targets. In other words, they agreed to set targets based on the global emissions cuts scientists say are necessary to prevent the worst impacts of climate change.

“The Science Based Targets initiative announced that 114 major companies committed to set science-based emissions-reduction targets.”

Collectively, these companies have annual emissions of at least 476 million tonnes CO2 – equivalent to the annual emissions of South Africa, or 125 coal-fired power plants. They represent approximately $932 billion in total combined profits – greater than the GDP of Indonesia. Their commitments are unprecedented, as never before has such a large group of companies agreed to set targets with the level of ambition dictated by science. This sets a new standard for corporate climate action.

Science-Based Target Setting

Corporate emissions targets are considered science-based if they are in line with the level of emissions reductions necessary to keep global temperature increase well below 2°C (3.6°F) compared to pre-industrial temperatures.

The international community has considered 2°C to be the threshold for warming before sea rise, drought, wildfires, extreme weather events, and other effects of climate change pose catastrophic consequences for the world’s people and economies. In fact, many researchers believe that 2°C is still too risky, so the Paris Agreement that resulted from the COP21 climate meeting was written to include an aspirational goal to limit warming to 1.5°C.

This threshold implies a carbon budget – a total volume of greenhouse gases that can be emitted while still providing a degree of confidence that the target can be met. Research shows that the world has already used more than half of this budget, and if emissions continue unabated, we’re set to burn through the rest in only thirty years. To stay within budget, global emissions must be cut by as much as 72% by 2050.

The International Energy Agency has modelled how every major emitting industrial sector must cut emissions (see figure). The model poses serious implications for companies. To do their part – and safeguard their future growth – most companies will have to radically transform their business models, energy use, and energy procurement.

A long-term, science-based emissions target can be a guiding light for companies in the transition to the low-carbon economy. To create one, companies can use various existing methodologies that allocate the global carbon budget at the company level, while accounting for specific characteristics such as emissions rate and expected annual growth.

The Science Based Targets initiative, a joint effort of CDP, the World Resources Institute (WRI), World Wildlife Fund (WWF), and the UN Global Compact, works with companies to set science-based emissions targets. All proposed targets are reviewed for conformity with the initiative’s credibility criteria. As of December 2015, ten companies had emissions targets approved by the initiative: Coca-Cola Enterprises, Dell, Enel, General Mills, Kellogg, NRG Energy, Pfizer, Procter & Gamble, Sony, and Thalys. Combined, these companies plan to save 799 million tonnes of CO2, equal to preventing the burning of 1.86 billion barrels of oil.

Why Science-Based Targets?

Warming above 2°C would pose serious physical danger to people, wildlife and crops, as well as pose a serious threat to the economy.

The Institute for Policy Integrity recently surveyed 365 economists with knowledge of climate impacts: 42% of them said that it is “extremely likely” that climate change will have a long-term, negative impact on the growth rate of the global economy, while 36% said it is “likely.”

Many business leaders are starting to see how the consequences of climate change will materialise in their own industry. For example, ten CEOs from major food and beverage brands signed a joint letter in October 2015 to advocate for a strong agreement at the COP21 climate negotiation in Paris. As the letter explained, “climate change is bad for farmers and agriculture. Drought, flooding, and hotter growing conditions threaten the world’s food supply and contribute to food insecurity.”

[caption id="attachment_11072" align="aligncenter" width="688"] Graph 1: Emissions gap between 6DS and 2DS IEA scenarios by sector. Source: IEA ETP 2014.[/caption]

At the same time, a growing amount of research indicates the positive impact that reducing emissions can have on financial performance. CDP analysis shows that companies with published emissions-reduction targets delivered a better return on invested capital over a 12-month period compared to those with no targets. Retail giant Wal-Mart Stores recently announced that it successfully decoupled growth from emissions after exceeding its goal to reduce emissions from its supply chain by twenty metric million tons.

Many companies can enjoy significant cost savings through their low-carbon investments. WWF and CDP’s 3% Solution Report projects that by setting science-based targets, the US corporate sector alone would generate cumulative savings of up to $780 billion by 2020.

In addition, ambitious emissions-reduction targets can open the door to new financial opportunities by driving innovation in products and technologies, creating unique ways to source materials, and expanding into new markets. Today, the global market for low-carbon goods and services is worth more than $5.5 trillion and is growing at 3% per year. The smartest companies are already examining how to shrink the carbon footprint of not just their energy purchases, but also the products in their portfolio, ensuring growth in an increasingly decarbonised market.

The renewable energy industry, for example, has taken root and thrived in response to the need for low-carbon energy. Twenty-five years ago, electricity from renewable sources cost three to four times more than that generated from fossil fuels. Since then, costs have dropped considerably, and most energy sources being developed today are renewable.

The power sector faces similar opportunities. According to a joint report between Accenture and CDP, five low-carbon business models could enable the worldwide electricity sector to significantly reduce greenhouse gas emissions while enjoying €135 to €225 billion cost savings and €110 to €155 billion in new revenue by 2030.

Why Now?

Companies that commit now to meaningful emissions cuts can enjoy significant cost savings and position themselves ahead of their peers in the low-carbon economy. But delaying action would require more aggressive and costly emissions cuts in the future in order to stay within the carbon budget, posing potentially insurmountable financial shocks.

Findings from the 3% Solution report show that in order to meet the carbon budget, US businesses must reduce emissions 3% annually through 2020. If they do so, they can collectively capture cost-savings of up to $190 billion in 2020, and put us on the pathway to curbing climate change. However, if companies wait until 2020 to begin making significant emissions reductions, they’ll need to cut emissions by 9.7% annually on average – requiring costly and highly disruptive operational changes.

For these reasons, investors are increasingly concerned with their exposure to greenhouse gas emissions and many are already working to decarbonize their investments. The Portfolio Decarbonisation Coalition, a group of institutional investors committed to gradually decarbonising their portfolios, announced during COP21 that it had grown to 25 members, including Allianz and ABP, representing $600 billion in assets under management. The initiative explains that to decarbonise their portfolios, investors may withdraw capital from carbon-intensive companies, invest in low-carbon companies, and engage with portfolio companies to motivate emissions reductions.

Also during COP21, the Financial Stability Board, an organisation that works with financial authorities to strengthen global financial systems, announced a new Task Force on Climate-related Financial Disclosures, chaired by former NYC Mayor Michael Bloomberg. The task force aims to improve company disclosure of climate-related risk for lenders, insurers, investors, and other stakeholders.

Examples of Science-Based Emissions Targets

Coca-Cola Enterprises: Coca-Cola Enterprises committed to reduce absolute greenhouse gas emissions from its core business operations 50% below 2007 levels by 2020. The company also pledged to reduce emissions from its drinks 33 percent by 2020, using a 2007 base year.

Dell: Dell committed to reduce greenhouse gas emissions from their facilities and logistics operations 50% below 2010 levels by 2020, as well as decrease the energy intensity of it product portfolio 80% below 2011 levels by 2020.

General Mills: General Mills committed to reduce absolute emissions 28% across its entire value chain – from farm to fork to landfill – by 2025, using a 2010 base year.

Changing regulations and public policy provide additional compelling reasons for business leaders to pursue ambitious emissions cuts now. The Paris Agreement has asserted a global goal to limit warming to no more than 2°C and preferably no more than 1.5°C. This will require near-term peaking of global emissions followed by rapid decarbonisation, achieving carbon neutrality in the second half of the century.

Nearly 200 countries representing over 90% of global greenhouse gas emissions have submitted climate action plans, many entailing significant emission reductions. The Paris Agreement mandates greater transparency of national emissions and renewed, increasingly ambitious national climate plans every five years.

In order to execute the global climate agreement, world governments will employ new regulations and policies to accelerate the transition to the low-carbon economy. Some are considering putting a price on carbon; the Carbon Pricing Leadership Coalition now has 21 national and subnational government members from both the developed and developing world. For companies, planning for ambitious emissions reductions now can mean staying ahead of these future policies and regulations and enjoying a competitive edge over competitors who choose to delay action.

The science is clear: We must reduce our greenhouse gas emissions significantly if we are to spare ourselves, our children, and our economies from the harshest consequences of climate change. The recent momentum around climate action from entities around the world and across sectors demonstrates a great will to decarbonise our world. In order to smoothly transition to the low-carbon economy and gain long-term competitive advantage, companies must set their course now. The methodologies exist for setting an emissions target that aligns with climate science – it’s time for visionary, forward-thinking leaders to act.

By Pedro Faria, CDP; Cynthia Cummis, WRI; and Alberto Carrillo Pineda, World Wildlife Fund for Nature

References

http://sciencebasedtargets.org/2015/12/08/114-companies-commit-to-set-ambitious-science-based-emissions-reduction-targets-surpassing-goal/

http://mindthescience.sciencebasedtargets.org/MindTheScience.pdf

Based on data available from http://www.iea.org/etp/explore/ and IEA (2014) “Energy Technology Perspective 2014 - Harnessing Electricity’s Potential”, OECD/IEA, Paris". Figure published in http://mindthescience.sciencebasedtargets.org/MindTheScience.pdf

http://policyintegrity.org/files/publications/ExpertConsensusReport.pdf pg15

http://www.ceres.org/press/press-releases/global-food-companies-unite-on-climate-action

http://sciencebasedtargets.org/2015/12/08/114-companies-commit-to-set-ambitious-science-based-emissions-reduction-targets-surpassing-goal/

https://www.cdp.net/CDPResults/3-percent-solution-report.pdf

http://2015.newclimateeconomy.report/

http://2014.newclimateeconomy.report/energy/

http://www.bloomberg.com/news/articles/2015-04-14/fossil-fuels-just-lost-the-race-against-renewables

Low Carbon, High stakes - Do you have the power to transform?, https://www.accenture.com/us-en/insight-low-carbon-high-stakes-in-utilities.aspx

http://www.worldwildlife.org/projects/the-3-solution

http://www.unepfi.org/fileadmin/climatechange/PDC2015pressrelease.pdf


Grant Thornton Hong Kong: M&A - Cultural Alignment for Successful Integration

[caption id="attachment_11078" align="alignright" width="300"] Hong Kong[/caption]

Too often companies put together look great on paper but are fraught with management and structural problems that end up turning deals into busts. Acquiring companies often underestimate the problems that different corporate cultures can inflict on a merger. In fact, the difference between success and failure is often not a matter of strategy or money, but of relationships, culture, and politics.

Putting two companies together usually gives the combined entity the resources and capabilities to compete with market giants. It can also create dominant positions in many markets around the world. However, that was not the case of advertising giants Publicis Groupe SA and Omnicom Group Inc. After these companies merged, the two CEOs – Publicis’s Maurice Lévy and Omnicom’s John Wren – agreed to jointly lead to the business for thirty months. While that sounded good, the reality was that they couldn’t agree on a management team; a way of splitting their duties; or even on which firm should be listed as the acquirer from an accounting perspective. The deal was eventually scuttled in 2003.

“Putting two companies together usually gives the combined entity the resources and capabilities to compete with market giants. It can also create dominant positions in many markets around the world.”

The challenge of putting the corporations together can be further exacerbated if the two companies possess vastly different business models and cultures. For example, in Valeant Pharmaceuticals’ long-running hostile takeover campaign of Allergan Inc. – the Botox-maker – the company executives of the latter expressed their disagreement with Valeant’s proposal to slash the amount of money that the company spends on research – a move that would probably lead to layoffs of hundreds or even thousands of its employees. As such, Allergan has disregarded Valeant Pharmaceuticals’ proposal and agreed to be sold instead to generic pharmaceutical manufacturer Actavis plc., a company that shares similar values.

Cultural Issues Affect M&As

Integration can be defined, in general terms, as the process of combining two companies into one entity at every level. Post-merger integration is the most often-cited concern that could significantly impact the success of an M&A deal. It has to be a multi-dimensional exercise with inputs from various perspectives, including strategy, new management, organisation, business, finance and accounting, tax and legislation, information system, and human resources. Yet, studies show that plenty of M&A s fail to yield desired expectations or even erode shareholder value.

The little secret about M&As is that the human dimensions and culture are at least as important, if not critical, as strategy, pricing, and positioning. Cultural incompatibilities are commonly found to have both a direct and indirect linkage to integration failures. Unsuccessful cultural integration can lead to distractions, loss of key talents, and failure to achieve critical milestones or synergies.

Cultural Integration Key

Many studies agree that cultural alignment is critical to a successful merger. Yet, due to the intangible nature of culture, and because of time constraints, management prefers to focus on tangible and measurable aspects, such as financial data and legal matters. Cultural integration is then left unattended or, at best, postponed to the post-deal phase. Nevertheless, culture is not something that can be changed or integrated without a well-defined plan; it requires time, attention, and considerable effort to merge two distinct cultures into a new collaborative and productive environment.

Approaches to Cultural Integration

How can two different cultures be integrated to achieve full value? First of all, we have to understand the term culture. Corporate culture comprises the beliefs and behaviours that determine how a company’s management and its employees interact and handle outside business transactions. Often, corporate culture is implied – and not expressly defined – and develops organically over time from the cumulative traits of the people that the company hires.

A company’s culture can be reflected in its dress code, business hours, office setup, employee benefits, turnover, hiring decisions, client satisfaction, and other operational aspects. No companies are cultural twins and thus careful attention is required in understanding the cultures of both merging companies and managing the integration process.
Having said that, it is highly recommended to start any cultural assessment early and make sure that the human dimension of the combination is incorporated into due diligence and integration planning from the get-go, as opposed to it being relegated to the backburner. Organisations can start with cultural assessment during the due diligence stage, which provides preliminary indications on cultural alignment or misalignment of the two merging companies and determines whether the existing cultures can be aligned with the overall business strategy.

With the cultural and strategic alignment assessments ready, organisations can reach a tailored sale and purchase agreement and formulate integration strategies that facilitate a smoother transition and a more effective integration to capture post-merger synergies. The time spent on cultural assessment need not to be long but should be sufficient to obtain a basic understanding of the cultural and strategic backgrounds of both companies.

Second, more time should be spent on the development and implementation of the action plan. Due to their intangible nature, culture-related issues are likely to be unpredictable. Addressing these issues can be a challenging task. In most M&A transactions, companies focusing on cultural integration tend to achieve post-merger synergies. Apart from an analysis of cultural differences, these companies also evaluate cultural opportunities and roadblocks, which guide their efforts into the right direction. Companies also take initiatives in redesigning their organisational structure, determining leadership assignments, and modifying human resources practices such as compensation and benefits.

This is then transmitted to employees who need to be aware of the company’s new direction and its meaning. Change may create frustration and cause stress amongst employees. Proper communication from management – preferably with a clear vision on the integration process – can reduce scepticism and doubt. With employee retention strategies and other team building activities, companies can establish a new culture and concentrate on post-merger business goals.

Value of Cultural Alignment

“People are valuable assets to an organisation and play an integral part to the success of a business. Effective people management is the key to achieving post-merger synergies so as to maximise the optimal outcome,” says Barry Tong, Transaction Advisory Services Partner of Grant Thornton in Hong Kong. As cultural integration is one of the key factors of a successful merger, it is important to have a dedicated team to manage and oversee the whole integration process.

The causes of merger failure can be complex and may vary – there is no single model that fits all. Nonetheless, cultural misalignment is commonly considered a direct and indirect hurdle to success and its mismanagement can hinder a company from obtaining synergies. Cultural and strategic alignment, active management of cultural integration, as well as proper communication between management and employees, are the suggested measures that ensure smooth cultural integration and contribute to a successful merger.

Conclusion

Cultural compatibility can have a significant impact on the ultimate success of an M&A transaction. It is suggested that a separate cultural integration plan be studied, created, and worked upon in the early stages of a merger. Proper management of cultural issues is the key to realise successful post-merger integration, especially from a people perspective. i

About the Authors

Barry Tong has nearly 20 years of experience in financial due diligence, transaction supports, recovery and reorganisation, forensic investigation, assurance and initial public offerings. With ample experience, Barry has literally helped clients in every stage of a deal cycle – from pre-deal due diligence and SPA support, to purchase price negotiations and post-deal dispute resolution. Over the years, he has been advising clients from almost every industry, including consumable and industrial products, health care, energy, security solutions, logistics, luxury goods, entertainment, education, banking and securities, construction and hotels, telecommunication, airline, information technology, media, food and beverages.

Benjamin Fong has extensive experience in supporting mergers and acquisitions, financial due diligence, forensic accounting, reviewing business valuation and internal control and monitoring financial forecast and cash flows. He has also provided auditing services for listed companies and multi-national corporations in Hong Kong, serving a variety of clients and industries including trading, manufacturing, retailing, construction, engineering, information technology and software solutions, logistics and service providers.

About Grant Thornton Hong Kong

Grant Thornton Hong Kong Limited is the member firm of Grant Thornton International Ltd (GTIL) in Hong Kong. We provide independent assurance, tax and advisory services to clients with a unique ‘one firm, one China’ approach, whereby we are fully integrated with Grant Thornton China with 22 offices and around 3,000 professionals across China. Our firm serves all parts of the China market and has a client base that encompasses more than 140 public companies and over 2,000 state owned enterprises (SOEs) and privately held businesses, as well as foreign-invested enterprises. Together with the wider international network, we help dynamic organisations around the globe unlock their potential for growth by providing meaningful, forward looking and actionable advice every day.


Energy for the Masses: Raiders of the Lost Promise - The Holy Grail of Nuclear Fusion

All You Ever Wanted to Know about Stellarators and Tokamaks

The vast amounts of energy released by splitting the atom has enabled scientists to produce both nuclear power and nuclear weapons, demonstrating that mankind’s amazing technical and creative ingenuity is perhaps matched only by its morbidly mad inclination towards self-destruction.

Just gaze at the stars to watch the nuclear fusion in action. The star at the centre of our own solar system, the sun, produces heat and light by fusing hydrogen atoms to produce helium. In fact, every second our sun – a rather puny star – produces more energy through fusion than humankind has managed to generate since the dawn of time.

Replicating this process – a reaction set in motion by extremely high temperatures – is the holy grail of nuclear physicists. Scientists the world over are searching for a commercially viable way to fuse atoms – getting atomic nuclei to collide and join to form a new nucleus. The energy thus released could be used to generate electricity. For years, research scientists have worked to better understand, control, and replicate nuclear fusion. However, experts within the nuclear industry wryly note that the technology remains elusive as ever and always seems some forty-odd years away from becoming commercially viable.

“Replicating this process – a reaction set in motion by extremely high temperatures – is the holy grail of nuclear physicists. Scientists the world over are searching for a commercially viable way to fuse atoms – getting atomic nuclei to collide and join to form a new nucleus.”

Existing nuclear power generation is based on nuclear fission whereby the nucleus of atoms is burst apart. The technology for splitting heavy atoms to produce nuclear power has been in use since the mid-20th century. The current generation of nuclear reactors work by splitting uranium atoms. This releases energy which is controlled and used as a source of heat to produce the steam that generates electricity. Nuclear fission provides about a tenth of the world’s electricity.

Nuclear fission has a number of disadvantages. For a start, the capital costs are huge: nuclear fuel is highly radioactive which necessitates an expensive safety and security infrastructure. The process also produces nuclear waste which must be somehow kept away from people for hundreds of thousands of years before it will have decayed.

Nuclear fusion could, conceivably, provide the answer to the world’s apparently insatiable demand for affordable power, generated with a negligible environmental impact.

Earthbound Sun

Massive gravitational forces create just the right conditions for fusion in the sun. These are hard to replicate on earth. The fuel, isotopes of hydrogen atoms, must be heated to extreme temperatures of around a 100 million degrees Celsius and then be kept dense enough, and confined long enough, to allow the nuclei to fuse.

The nucleus of an atom contains protons, which carry a positive charge. These nuclei strongly resist being brought close to each other. This electrostatic repulsion can be overcome by accelerating their movement to high speeds, forcing the nuclei close enough to achieve fusion. This process creates a heavier nucleus and generally releases more energy than it takes to force them to fuse.

The energy–releasing process can set in motion a self-sustaining reaction. This is the very process that has fuelled the sun for over four billion years. It will continue to do so for another four billion years – give or take. The advantages of nuclear fusion are legion: abundant fuel supplies; no carbon emissions; no radioactive waste; and a very high yield.
However, scientific understanding of nuclear fusion is still in its early stages. The most pressing practical problem with nuclear fusion is that extremely high levels of heat are required to fuse the nuclei together. The facilities needed for fusion are prohibitively expensive. Materials are yet to be developed that can withstand the extremely high heat necessary for a fusion reaction to take place. Large scale production would become much more feasible if cold fusion could be developed. This, however, has progressed no further than a theoretical possibility.

Stellarators and Tokamaks

Research into fusion is focused on the reaction between the nuclei of the two heavy forms of hydrogen – deuterium (D) and tritium (T) – in a hot gas plasma. Deuterium is found in seawater while tritium occurs only in trace quantities in the wild. However, it can be produced in a conventional nuclear reactor or bred in a fusion system from lithium. It is radioactive, but has a half-life of only around twelve years.

One of the main experimental approaches entails the use of strong magnetic fields to contain the hot D-T plasma at a few atmospheres of pressure while it is heated to fusion temperature. The most effective magnetic configuration is doughnut-shaped with the magnetic field forming a closed loop. Current systems include tokamaks and stellarators, experimental devices used to confine hot plasma in order to sustain a nuclear fusion reaction.

Soviet physicists designed the first tokamak in 1951. Since then, over 200 have been built, with more than 35 currently in operation. Research is continuing around the world, including at the Joint European Torus (JET) at Culham in the UK and the tokamak fusion test reactor (TFTR) at Princeton in the USA.

The cost and complexity of the work has fostered international collaboration. Project partners China, India, Japan, Russia, South Korea, the US, and the European Union are jointly working on the ITER (International Thermonuclear Experimental Reactor) – a $20 billion machine currently under construction in Cadarache, France. When finished, it will be the world’s largest tokamak. Nuclear projects are notorious for bursting through both budgets and timelines. Predictably, the cost for the ITER (Latin for journey) has already spiralled while the completion date has slipped back several years.

The aim of the 35-year project is to prove that fusion can produce useful energy to the point where a full-scale demo fusion reactor can be designed. If successful, the achievement will be comparable to the moment, over seventy years ago, when the first critical nuclear fission reactions were sustained in a Chicago laboratory that was part of the top secret Manhattan Project.

Stellarators are notoriously difficult to build. There have been a handful of attempts, but their completion rate is low. In the plasma community, stellarators are known as the black horse amongst nuclear fusion reactors. Originally designed by a researcher at Princeton University in 1951, the stellarator was too complex to build with the then-available materials which explains why the much more viable tokamak design became the standard for fusion research. The calculations required to ensure ultimate plasma containment and control in a stellarator have only become feasible with the advent of the computer age.

In 2014, the Max Planck Institute for Plasma Physics in Griefswald, Germany, completed the world’s first large-scale optimised stellarator at a cost of over $1 billion. The Wendelstein 7-X nuclear fusion machine was more than 15 years in the making. German engineers subjected the device to a full year of tests, before they were ready fire up the machine for its maiden trip.

The W7-X is claimed to be so efficient that its enormous magnetic field is able to contain the super-heated plasma for up to thirty minutes at a time. The stellarator is a massively complex structure: the containment vessel is twisted into a shape that forces the plasma into the centre of the reactor as it continuously encounters opposing magnetic fields along its entire path. The design aims to provide a more stable environment for plasma and thus offer a more promising route for nuclear fusion research.

Like ITER, the W7-X is a but stepping stone in the journey towards nuclear fusion. However, at present, sustainable, self-powering nuclear fusion still remains a distant prospect.

Fusion Alternatives

One of the main drawback of current fission reactor designs is their uranium fuel is enriched by the same technology that produces nuclear weapons. This leads to concerns about the proliferation of nuclear weapons. Scientists have been looking for ways to break this disconcerting link.

Thorium, an element named after the Norse god of thunder, may offer a fuel alternative for fission reactors. China and India are both keen to develop this technology as it may offer a number of advantages that are much easier to reap than nuclear fusion.

Although thorium is not fissile – i.e. it cannot be split – bombardment by neutrons can turn it into an isotope of uranium. This can then be burned in a conventional reactor along with enriched uranium or plutonium to supply the necessary neutrons. An attractive alternative is to turn the element into its fluoride and mix that with fluorides of beryllium and lithium.

This concoction brings the melting-point down from over 1,000 degrees C to 360 degrees C, making the mechanics of the fission process more manageable.

A seed of uranium or plutonium is needed to prod the neutrons to start the reaction, but once this is underway the process becomes entirely self-sustaining. At this stage, the seed material becomes superfluous and can be flushed out of the reactor while additional liquid thorium fluoride can be fed in as needed. Unlike light-water reactors which must be shut down for refuelling every 18 months, thorium reactors can run uninterrupted for years on end.

A major advantage of a liquid fluoride thorium reactor is that it works at atmospheric pressure. Unlike conventional reactors, that use cooling water under extremely high pressure, a thorium reactor does not need these elaborate systems in order to function. As a result, the reactor can do without steel pressure vessels and does not require a large concrete containment dome that protects the environment in case the cooling system fails leading to a release of radioactive steam.

Thorium reactors also produce significantly less nuclear waste. The amount is does produce is much less hazardous than the refuse light-water reactors. It also decays faster with radioactivity decreasing to safe levels in centuries rather than millennia.

In nature, thorium is about three to four times as abundant as uranium. India, which relies on imported uranium and fossil fuel, is endowed with abundant thorium reserves and plans to use these to fuel a new generation of nuclear reactors. Currently, a small thorium research reactor is already up and running.

China has put a large team of scientists and engineers to work on the development of thorium reactors. A first prototype thorium reactor is due for completion soon. The Indian and Chinese experimental thorium reactors use solid fuel but are set up to eventually process molten thorium fluoride. It is not yet clear how long it will take to develop commercial thorium reactors. However, most experts expect the first ones to become operational in the next decade – years, if not eons, before nuclear fusion reaches that stage.

Small Modular Reactors

In the early twenty-first century, the nuclear industry was looking forward to a nuclear renaissance: growing concerns about climate change was expected to turn the anti-nuclear tide and present a compelling case for revisiting the nuclear option. The trend in reactor design had been to develop ever bigger reactors, intended to supply large populations with base load electricity through a national high voltage transmission system. New Generation III reactors with a capacity of at least a gigawatt came onto the market. These designs featured passive safety mechanisms which are triggered without human intervention.

However, the nuclear renaissance failed to materialise. The global economic downturn that started in 2008 reduced demand for power and high capital deterred investors. The tsunami that flooded Japan’s Fukushima-Daiichi nuclear plant in 2011 led to major safety reviews across the nuclear estate. Germany, Switzerland, Belgium, and Spain decided to phase out nuclear altogether. However, China, Russia, India, and the United Arab Emirates remain firmly committed to nuclear new build programmes. Potential newcomers to nuclear energy include Turkey, Jordan, Kazakhstan, Egypt, and Vietnam.

Interestingly, the interest in small modular reactors (SMRs) – compact and relatively simple systems – has taken off. These mini-reactors have been used in nuclear submarines for decades. SMRs are now being adapted for terrestrial use by a desire to reduce capital costs and provide power away from large grid systems.

SMRs have compact architecture and use passive safety concepts. Their modular design means they can be series-produced in factories for ready onsite installation. SMRs require less fuel and produce less radioactive waste. They can be easily removed for decommissioning and need less cooling water and less transmission capacity than their giant counterparts. If designs can be standardised, cost benefits will accrue and SMRs could find applications around the globe.

In 1954, at the dawn of the nuclear era, Lewis Strauss, chairman of the US Atomic Energy Commission, famously said: “It is not too much to expect that our children will enjoy in their homes nuclear generated electrical energy too cheap to meter.”

Sadly, this prophesy was wildly off the mark. However, the development of nuclear fusion could eventually lead to readily available, clean, and low-cost electricity for all. Atomic power generation could yet live up to its promise.

By Penny Hitchin


CFI.co Meets the CEO of enso GmbH: Dr Georg Kühhas

[caption id="attachment_17747" align="alignright" width="226"] CEO of enso GmbH: Dr Georg Kühhas[/caption]

Dr Kühhas, can you tell us about the development of the economic environment for investors in hydropower?

For quite some time now, we have been faced with rather low prices on the electricity market. As a result, short-term operative yields of a hydropower plant are not particularly high and investors should focus on a long-term investment horizon. At the same time, we have seen quite positive developments as well. Electricity demand will continue to rise. Just think of the increase of electro-mobility. There will also be a shift in energy sources with renewable energy particularly profiting from that shift.

Is this a reference to the significance of the outcome of the un climate change conference in Paris?

Yes, at the Climate Change Conference participating countries agreed to further reduce greenhouse gas emissions in order to keep global warming well below two degrees compared to pre-industrial levels. In practice, this means a reduction of the use of fossil fuels and a continuous increase of the significance of renewable energy sources. We therefore expect an improvement of the legal framework and an increasing appeal to invest in hydropower.

What could be the role of hydropower?

Hydropower is the only renewable energy source with a technology matured over decades. To date, renewable energy sources only amount to 17% of the overall energy production with hydropower generating 15% thereof. Electricity is continuously becoming more important within the energy mix. The further development of hydropower capacities is essential in the reduction of greenhouse gas emissions.

Who is currently investing in hydropower?

At present, sustainability and a clean environment are matters of major concern for people who invest in hydropower. Economic parameters such as rather low electricity prices only allow for higher yields in the medium term. However, the market situation offers very interesting acquisition opportunities at the moment. Investors should profit from these chances.

You have developed a hydropower portfolio of 25 power plants for enso hydro over the past few years. The power plants are located in Norway, Albania, Turkey and Austria. Why have you chosen this specific country mix?

At first sight, these countries share few common characteristics. The decisive factors for our choice of location are topographic conditions as well as hydrology. That is, we choose mountain regions abundant with rain where we can make use of the head to generate energy. All these countries have regions with ideal conditions for the generation of electricity by hydropower. However, the implementation of these projects varies tremendously. Each project has to be evaluated carefully in the preliminary stages to avoid any unpleasant surprises.

What are some of the difficulties involved?

There are significant differences in the legal and regulatory framework. Water rights are usually owned by public authorities which then grant licences for the use of such rights. Hence, the term of a licence already constitutes an essential criterion for the evaluation of a project. The terms of off-take and sold quantities also play a key role. Is off-take/consumption ensured? Are there guaranteed or pegged prices? Some countries have renewable energy certificates that are traded on separate markets.

The biggest obstacles surely have to be overcome when implementing a power plant. Vast knowhow has to be put into the planning and dimensioning the facility. Investing a lot of energy and time at this stage will pay off in the long run. Quite often a lot can be achieved with relatively small changes.

Due to local conditions and the way the water flows, the construction of every power plant is unique. Therefore, every power plant is tailor-made. Rock composition cannot always be determined exactly in advance. So sometimes there are surprises in one way or another when constructing a tunnel. But that’s our daily business. We are used to solving such problems with our expertise.

So enso has a team covering all stages of a hydropower plant project?

Yes, that’s our strength, our USP if you like. We have experts covering all areas of expertise involved. Our team looks for and chooses suitable projects and covers the whole range from planning and construction to operative management of a hydropower plant.

On a legal and financial level, we have experts in the fields of financing and financial engineering of investments. For years we have been cooperating closely with international institutions such as the IFC [International Finance Corporation, part of the World Bank Group] and the Green for Growth Fund and we therefore arrange suitable financing options for every project.

That’s how we were able to develop a portfolio of 20 country-diversified power plants within only three years for the investors of DWS funds.

Can you give us an outline of what lies ahead in the new year?

We have just finished one of our core projects in Albania and put it into operation. The start has been very successful and now we will focus on fine-tuning to achieve optimum performance.

Then, we are consistently working on the implementation of several other projects in various stages.

This year, our market entry in Chile will be an exceptional challenge for us. We decided to enter this incredibly interesting market because there are ideal conditions for hydropower in Chile. However, there are few projects implemented, yet. That is why we want to contribute our expertise there. The company has already been founded and the means for the first fund secured. So we can get started. We are looking forward to it.


enso GmbH: Investing in Hydro Power

[caption id="attachment_17750" align="alignright" width="462"] Powerhouse of a Norwegian hydropower plant.[/caption]

Alternative Investment Fund Manager enso manages hydropower, the most efficient form of renewable energy. Investing in hydropower signifies investing in a sustainable, environmentally friendly, and social manner.

Hydropower is a well-tried, sophisticated, and economically competitive technology. While the average life span of the facilities amounts to between 60 and 90 years, many of the plants exceed this statistical lifetime with a regular professional service and to some extent replacement of electromechanical parts. Hydropower achieves an impressive efficiency rate of between 65% and 88% dwarfing all other technologies such as wind, solar, or thermal power plants showing efficiency ratios between 30% and 40% only.

For power plants up to 30 MW, the impact on the environment can be kept to a minimum. Enso mainly builds high pressure facilities with electricity being predominantly generated by a head and the difference in altitude between intake and powerhouse where the turbines are located.

These facilities are usually located at small waterways and carefully embedded within their natural surroundings. Substantial components of the plant are buried below ground level. Therefore, these parts of the construction are barely visible after renaturation. Enso places special emphasis on fitting the plants carefully into the environment. Powerhouses, for example, are built in a common architectural style of the region.

This type of power plant differs significantly from run-of-river power plants requiring vast dams along streams with a strong natural flow forming large reservoirs and thus, involving extensive changes of the river landscape and its habitat.

“Enso places special emphasis on fitting the plants carefully into the environment. Powerhouses, for example, are built in a common architectural style of the region.”

In countries such as Albania and Turkey, investing in hydropower plants causes a significant improvement of living conditions. People in rural areas often suffer from line losses, grid instabilities, or even blackouts caused by poorly developed electric infrastructure. This situation can be improved by building decentralised hydropower plants.

Feed-in in remote areas contributes to grid stability and consequently to an improvement of local security of supply. Negative impacts such as relocation of local residents do not occur in the case of small hydropower as neither massive dams nor reservoirs are necessary. A further socially positive effect of hydropower stems from employing local companies for the construction and operation of the power plants.

Making Hydropower Investments A Reality

enso is the ideal partner for investors in this relatively new asset class. A team of specialists, that closely cooperates with all groups of interest linked to hydropower projects such as investors, banks, public authorities, and grid operators is able to offer tailor-made service packages covering the complete range of tasks relating to hydropower. Depending on the client’s requirements, enso either takes on individual consulting functions or the entire range of project related activities from project selection to implementation.

Investment In Design And Planning Pays Off

Despite the currently low level of electricity prices, building hydropower plants is still a reliable and – if done the right way – profitable investment. As a prerequisite, facilities need to be well designed, i.e. they have to be tailored corresponding to the expected hydrological parameters. Enso commissions comprehensive hydrological studies during preliminary stages which are consequently evaluated in terms of energy efficiency and provide the basis for a proper design of the power plant.

In order to dimension the size of the power plant, at first, the flow rate is determined at which the facility achieves maximum output at the highest level of efficiency. This is always a compromise between the maximum achievable annual production and the building costs. In due consideration of possibly all even future factors of influence enso always look for the optimal solution.

In some cases, possible additional output is waived in favour of operational safety or a robust dimensioning of a power plant. In return, the risk of malfunctioning or breakdown can be reduced or avoided. This focus on the right concept is the key factor of success for an efficient long-term operation.

Every hydropower plant is unique. Despite the best preparations, unexpected events may happen in the course of construction. The subsoil risk, for example, is not always calculable exactly in advance. Therefore, a tightly organised construction process, operated by an experienced team, is essential to the success of a project.

To ensure safety and quality, enso employs mostly international external experts who guarantee compliance with building standards as well as project specific ESAM-guidelines.

Enso Undertakes M&A Activities

Enso is a specialist in acquiring and selling individual hydropower plants or entire hydropower portfolios. If requested, enso manages the complete process from start to finish. Enso analyses all data available and prepares reports in order to enable all stakeholders involved to get a clear picture and subsequently to make informed decisions.

To ensure that the data basis for a buy or sell decision is reliable, enso cooperates with international experts in the fields of hydrology, geology, electro-mechanics, water management, taxation, finance, and contract design.

Asset Management for Portfolios

Since 2009, enso has focussed on asset management of hydropower portfolios. For enso hydro the team of enso GmbH developed an internationally, risk-diversified portfolio. As a qualified alternative investment fund manager, enso delivers the entire range of hydropower related activities.

As a first step, countries and ideal regions are selected. Then, after a detailed due diligence, the most interesting projects are acquired, some of them still in the planning stage, some under construction, and others already completed. All projects undergo a detailed analysis. In some cases, enso drafts new concepts before starting construction.

During construction, the experts of enso supervise the project in technical, organisational, and financial matters. Efficiency and safety of already operating power plants are analysed and subsequently optimised.

Besides water management and technical questions enso also clarifies all financial matters. For every individual project, enso arranges suitable financing options, obtains all official authorisations, and handles all administrative procedures.

With €80 million of equity, a portfolio of 25 hydropower plants in four countries was implemented.

enso Helps to Get More Out of Running Power Plants

Hydropower plants have a very long life span and barely require major investments in maintenance for day-to-day operations. But, in the course of a general overhaul, productivity of a power plant can be increased considerably with relatively low financial expenses by, for instance, renewing the electro-mechanics.

Frequently, the key to success of such an optimisation lies in the concept. Hence, enso provides new or improves existing concepts for its clients and ensures their implementation. Another important instrument for the efficient running of a plant is the definition of ideal maintenance intervals for each facility. So expensive unplanned shutdowns may often be avoided.

Additional Services

For smooth performance in all phases of asset management, enso follows a well-defined process breakdown structure which enables it to manage projects in an economically efficient and at the same time risk-minimising way.

In addition to project selection, M&A activities, and operational management of the facilities, enso offers characteristic asset management activities such as

Reporting and controlling

Investor relations

Contacts with government authorities and financing institutions

Risk management

Performance of advisory board and supervisory roles

Accompanying measures to ensure smooth operation of a power plant

Sale of electricity

Assisting exit process

Key Factor Financing

Often financing problems are the reason why projects don’t become reality. Enso has been cooperating for years with international banks and institutions and is able to arrange suitable financing of hydropower plant projects or whole portfolios. In a first step, enso calculates the ideal mix of private equity and debt financing and prepares the necessary bankable documents.

Equipped with these professional documents, tailored to the respective contact person, enso assists its clients in the search of private equity investors and external finance partners and connects them with international partners such as development banks or funds financed by them.

Covering the whole range of activities related to hydropower, enso bundles up a unique package for any client, who is engaged in the hydropower business or is willing to become part of it.


Building Stronger Governance and Compliance Foundations in Sub-Saharan Africa

[caption id="attachment_11101" align="alignright" width="279"] Angola: Luanda[/caption]

Analysts, politicians, economists and media pundits have kicked off 2016 with a largely pessimistic outlook for the global economy. Clearly none of us can predict where the economy will be in twelve months but we do know that we are looking at a ‘new normal’ of very low oil prices and a reduced demand for commodities. It is also clear that the world will continue to suffer from an increasingly potent and widespread form of terrorism that is extremely well-funded and sophisticated. It is in this particularly worrisome context that policymakers here in Africa have to address the pervasive issue of money laundering and fraud in our financial systems. Doing so is, however, easier said than done.

The harsh reality is that Africa has faced a challenging environment when confronting these types of issues. It is also a region of multiple languages, currencies and financial systems. This means that in the past it was easy for criminals to carry out cross-border money-laundering.  African governments therefore need to be serious about the fight against terrorism and money laundering. Firstly, each nation has to get its own house in order from a governance and compliance perspective. Then the continent needs to build a regional consensus to work together, share information and adopt international anti-money laundering policies, which is critical for success in building stronger governance and compliance foundations across Africa.

"The harsh reality is that Africa has faced a challenging environment when confronting these types of issues."

In Angola, the journey towards good governance and compliance has been ongoing since peacetime in 2002. The country has experienced huge inflows of cash and a booming economy, which has utterly transformed the country. The banking sector has been liberalised during the past decade, the market has opened its doors to global trade and a lot of people have done extremely well. We have to be honest – when we learn that the world’s global banks have uncovered money-laundering on a global scale in the developed world in recent years – we have to accept that our growth is unlikely to have happened in a squeaky clean environment. Acknowledging the truth is crucial.

This is why, in Angola, the war against money-laundering has gathered pace over the past few years. New laws were introduced in 2010 and 2011, which mandated that a very wide range of organisations and professionals adhere to new obligations, including obligations of refusal, record-keeping, cooperation, secrecy and training. The law applies to credit institutions, financial companies, insurance companies, pension fund managers, accountants, lawyers, public notaries and many others.

National banks in Angola are now legally mandated to inform the banks that they transact with, of their own global regulatory requirements – it is simply unacceptable for any banking institution to plead ignorance that their banking partners were not in compliance. In 2015 the BNA issued a new guide towards compliance that reflects the standards issued by the Basel Committee on banking supervision. All banks in Angola are mandated by law to submit an independently audited report laying out their actions on implementing FATF and Basel standards. These audits will be verified within the first half of 2016.

Building on these foundations, in 2016 we will focus on reviewing the audit report from BNA regulated institutions. These audits will be verified within the first half of 2016 by the BNA. The Bank will also announce a new policy framework on any additional recommendations from the FATF. In addition, other bodies such as the Capital Markets Commission, Insurance Companies Regulatory Associations, Customs and the Gambling and Casino Institute will continue to monitor their respective industries.

It is here that all African nations face another challenge – cultural and behavioural change. A modern economy must accept the need for stronger governance and compliance foundations. So, in 2016, the BNA will also place emphasis on its on-going financial literacy-training program (launched in December 2015) for several target groups. We are also launching training schemes for bank managers and young graduates in order to increase cooperation with other institutions. The objective is to raise awareness around AML/FT measures, thus ensuring stability within the Angolan Financial System (AFS) and greater customer protection. Cultural change towards honesty and transparency will not happen overnight but every African nation has a moral responsibility to make this change happen.

The adoption of FATF regulations and policy recommendations is critical for the banking sector in Angola and for the region’s reputation. We need to do the right thing and be seen to do so – this is important internationally to build trust as Angola looks to adopt event more stringent standards of transparency and governance. We know that the Angolan economy will continue to grow if global banking organizations, central banks and investors maintain trust in our systems and processes. But we cannot make the kind of progress we need if we do not work as one continent. Shell companies, cross border transactions and the movement of goods need to be regulated with transparent cooperation between governments. Online activities, airport customs and ports and border controls can benefit from regional cooperation. Each of our domestic economies will benefit and the region will be much better equipped to prosper during difficult economic times.

The ‘new normal’ of low oil prices brings the issue of money laundering sharply in to focus.  Our economies can no longer rely on extractives and we need to diversify our economies. This is not lost on Angolan policy makers. We need to stimulate domestic innovation, support entrepreneurs and create an enterprise economy. We cannot do that without mature and responsible capital markets. To meet this objective, the Angolan government has introduced many initiatives – such as state-backed VC funds – and the BNA is doing its part by using the economic levers we have at our disposal to provide support for businesses, including SME’s in high-growth sectors. Stable rates of inflation and competitive interest rates are crucial for growth and economic stability.

So, the BNA fully understands the national importance of the adoption of international regulations in relation to the nation’s financial sector and wider economy – not to mention the obvious moral dimension. As a Central Bank, our job is to continue to meet internationally accepted standards and to create a well-governed financial system that provides access to capital for businesses. Achieving this goes hand-in-hand with the fight against the world’s most insidious crimes and this has to be the responsibility of every Central Bank on the continent.

By Valter Filipe da Silva, Governor of Banco Nacional de Angola (BNA)


<br>UBS: Best Green Bank Switzerland

An increasing number of businesses, including banks, are adapting their corporate structures and processes to incorporate sustainability principles and reduce their CO2 footprint. Taking the lead, and setting an example, UBS has rewritten its entire long-term corporate strategy to fully adjust its business to the changing landscape.

The UBS and Society initiative was unveiled in 2015 and aims to make the bank a global leader in sustainability within the financial services industry. UBS wants to move beyond the commitment of causing no harm to a more proactive approach where harm is fully stamped out. The bank has already requested that 44% of suppliers of newly-sourced goods and services that carry a potentially high environmental impact, adhere to UBS’ Responsible Supply Chain Management standards.

UBS and Society covers all of the bank’s activities and capabilities in sustainable investing. It seeks to reduce the bank’s own environmental footprint, as well as strengthen its human rights policies. The strategies used by the firm have not just resulted in a staggering reduction in non-sustainable investments, but also brought significant reductions in GHG emissions, waste production, water usage, and paper consumption. In 2015, UBS outperformed its energy and water consumption targets a year ahead of time with a 13% and 16% reduction, respectively.

As a member of the RE100 – a collaborative global initiative of large businesses to fully meet their electricity requirements with renewable energy – UBS strives to source all of its electricity from renewables by 2020. Last year, an impressive 54% of UBS’s worldwide electricity consumption was sourced from renewables.

The CFI.co judging panel commends UBS on both its achievements to date and its commitment to sustainability. The bank’s umbrella approach, and its strong corporate culture, ensure that targets will be met. For the second year running, the judges decide to recognise these sustained efforts by naming UBS Best Green Bank Switzerland.


Ann Low, US Department of State: Good Corporate Governance is Good Business

OECD Guidelines on Corporate Governance of State-Owned Enterprises.

Over the past decade, cross-border trade and investment by state-owned enterprises (SOEs) has surged. According to the OECD, whereas in 2005, there were only three SOEs in the Fortune Global 50 list of the largest companies in the world, in 2013, there were 11 [1]. This came about mostly from the growth of emerging market economies, where SOEs are often dominant economic actors and are now seeking to expand abroad.

For example, in 2001, China launched its Go Global Strategy, which significantly increased foreign investment by its SOEs [2]. However, increased international activities by SOEs have raised questions about government influence, potential trade distortions, and unfair competition. In their home countries, SOEs are often exempt from laws and regulations that govern private enterprises, and may have advantageous access to land, government procurement opportunities, or borrowing.

“According to the OECD, whereas in 2005, there were only three SOEs in the Fortune Global 50 list of the largest companies in the world, in 2013, there were 11.”

Such advantages, especially preferential access to financing, may be perceived as conferring a competitive advantage to SOEs in their international operations [3]. The newly updated OECD Guidelines on Corporate Governance of State-Owned Enterprises provide a reference point to address a number of challenges associated with SOEs competing in the marketplace.
SOEs are frequently in the news - and too often, the news is bad. From allegations of graft against Petrobras in Brazil, to concerns about lack of transparent reporting by Indian state-owned banks, to reports of asset misallocation and irregular practices by a number of European electricity companies, some intrinsic problems within the sector seem evident. SOEs pose distinct corporate governance challenges because their management may be protected from two disciplining factors that are considered essential for policing management in private sector corporations, i.e. the possibility of takeover and the possibility of bankruptcy [4].

Complex Chain of Agents

More fundamentally, corporate governance difficulties derive from the fact that the accountability for the performance of SOEs involves a complex chain of agents (management, board, ownership entities, ministries, the government), without clearly and easily identifiable principals [5]. On the one hand, SOEs may suffer from undue hands-on and politically motivated ownership interference, leading to unclear lines of responsibility, a lack of accountability, and efficiency losses in the corporate operations.

[caption id="attachment_11113" align="aligncenter" width="684"] Figure 1: Developing economies - FDI outflows and their share in total world outflows, 2000-2014 (Billions of US dollars and per cent).
Note: Excluding Caribbean offshore financial centres. Source: UNCTAD, Global Investment Trends Monitor, No. 19, May 2015.[/caption]

On the other hand, a lack of oversight due to totally passive or distant ownership by the state can weaken the incentives of SOEs and their staff to perform in the best interest of the enterprise and the general public who constitute its ultimate shareholders. This can raise the likelihood of self-serving behaviour by corporate insiders [6]. As a result, SOEs may be more likely than private corporations to fall prey to corruption and mismanagement.

This can change. In 2015, the Organization for Economic Cooperation and Development (OECD) Working Party on State Ownership and Privatization Practices – which comprises the 34 members of the OECD, 13 non-members, including G20 countries such as Argentina, Brazil, China and South Africa, and an observer from the World Bank – completed a two-year long negotiation to update the 2005 OECD Guidelines on Corporate Governance of State-Owned Enterprises. The revision process, initiated in 2013, involved extensive consultations with governments, business and labour representatives, and civil societies from across the world.

The revised guidelines are recognised globally as the principal guidance for corporate governance of SOEs. The guidelines are compatible with the OECD Principles of Corporate Governance on which they are based. They bring to the SOE sector a high level of corporate governance for commercially-oriented SOEs similar to that required of publicly-traded companies.

The guidelines provide recommendations to encourage efficiency, transparency and accountability in the SOE sector. They call on SOEs to be leaders in responsible business conduct, and they empower citizens to ask their governments for clear statements explaining the purpose, costs and benefits of state-ownership. The guidelines are addressed to government ownership entities, which exercise the shareholder function, but they also should be read by board members and managers of SOEs, as well as advocacy groups promoting good governance.

SOE Reforms

In the recent past a number of OECD countries and Asian economies, including China, have sought to reform their SOE sectors, or are in the processes of doing so. Many cite the guidelines as a point of inspiration. Notably, the government of the Republic of Korea has recently mandated that the revised guidelines be implemented on a whole-of-government basis. A number of OECD members are further in the process of publicizing the guidelines widely to encourage adherence globally, and several countries are translating them into local languages.

[caption id="attachment_11114" align="aligncenter" width="564"] Figure 2: SOEs in the Fortune Global 50. Note: SOEs defined as having 50% or more government ownership.
Source: Pwc, “State-owned enterprises: Catalysts for public value creation?” April 2015.[/caption]

Implementation of the 2015 guidelines can help ensure that cross-border investments by SOEs do not distort markets, and that SOEs effectively contribute to their own country’s economic growth. Where implemented, the guidelines will help level the playing field between SOEs and private enterprises by increasing transparency and accountability. They may reduce market volatility caused by inadequate corporate governance and insufficient disclosure. Finally, they will empower stakeholders, giving them more information to hold their governments accountable and judge whether state-ownership of a particular enterprise is an efficient allocation of resources and whether it achieves other desirable social goals.

The new OECD guidelines bring four fundamental changes to the original 2005 guidelines:

There is a new introductory section on Applicability and Definitions, which includes a broad definition of SOEs. For the purpose of the guidelines, an SOE is any corporate entity recognised by national laws as an enterprise and in which the state exercises ownership. The guidelines distinguish between ownership and control. They apply to SOEs where the government exercises control, which can be the case even when the State is a minority shareholder. The guidelines are generally not intended to apply to entities or activities whose primary purpose is to carry out a public policy function, even if the entities concerned have the legal form of an enterprise.

There is a new chapter about defining and communicating the rationales for state-ownership of enterprises. The guidelines recommend that states “carefully evaluate and disclose the objectives that justify state ownership and subject these to a recurrent review.” Governments should “consider whether a more efficient allocation of resources to benefit the public could be achieved through an alternative ownership or taxation structure [7].” Governments should use the goal of maximising value for society through an efficient allocation of resources as the yard stick for measuring an SOE’s effectiveness. Any public policy objectives that SOEs are required to achieve should be clearly mandated and disclosed.

The previous Chapter 1 of the 2005 guidelines became a broader chapter on SOEs in the marketplace to address competition in greater detail. Addressing the situation where SOEs compete with other firms in the marketplace, it includes practical guidance on the cost and conditions of SOE financing, rate-of-return requirements, and public procurement procedures.

Finally, the OECD Working Party on State Ownership and Privatization Practices brought responsible business conduct into the guidelines and recommended SOEs adhere to international standards and best practices, such as the OECD Guidelines for Multinational Enterprises, and the UN Guiding Principles on Business and Human Rights. New features include a recommendation to eliminate political donations by SOEs, clearer language on disclosure standards and board practices, strengthened text on public-private partnerships and the management and disclosure of related risks, and stronger text on corporate ethics and anti-corruption.

The revised OECD Guidelines on Corporate Governance of SOEs, along with other OECD instruments, present key points on efficient allocation of resources, fair competition in the marketplace, and responsible business conduct that governments are encouraged to incorporate in their SOE reform efforts.

Adherence to the OECD guidelines is important since they provide the underpinning for open markets and fair competition, where all well-run businesses can succeed. The United States, the OECD Working Party on State Ownership and Privatization Practices, the OECD, the Business and Industry Advisory Committee to the OECD (BIAC), and the Trade Union Advisory Committee to the OECD (TUAC) join together to encourage all governments, SOE board members, and managers of SOEs to read the guidelines and apply them. Good corporate governance is good business. i

To read the guidelines, visit: www.oecd.org/daf/ca/soemarket.htm

About the Author

Ann Low is Deputy Director of the Office of Investment Affairs at the U.S. Department of State, and Vice Chair of the OECD Working Party on State-Ownership and Privatization Practices. She led the U.S. team negotiating the OECD Guidelines on Corporate Governance of State-Owned Enterprises.

References

[1] http://fortune.com/global500/  and OECD Corporate Governance Working Papers, No. 14: http://www.oecd-ilibrary.org/governance/oecd-corporate-governance-working-papers_22230939.

[2] http://en.people.cn/200401/07/eng20040107_132003.shtml  and CSIS Freeman Briefing 5/27/2008, “Issue in focus: China’s Going Out Investment Policy.  http://csis.org/files/publication/080527_freeman_briefing.pdf

[3] OECD Corporate Governance Working Papers, No. 14: http://www.oecd-ilibrary.org/governance/oecd-corporate-governance-working-papers_22230939, p. 13-14

[4] OECD GUIDELINES ON CORPORATE GOVERNANCE OF STATE-OWNED ENTERPRISES: 2015 EDITION, p.12, http://goo.gl/TQpmUp

[5] OECD GUIDELINES ON CORPORATE GOVERNANCE OF STATE-OWNED ENTERPRISES: 2015 EDITION, p.12

[6] OECD GUIDELINES ON CORPORATE GOVERNANCE OF STATE-OWNED ENTERPRISES: 2015 EDITION, p.12

[7] OECD GUIDELINES ON CORPORATE GOVERNANCE OF STATE-OWNED ENTERPRISES: 2015 EDITION, p.30


Ann Makosinski: A Beautiful Mind

Inventors don’t always make the best entrepreneurs. The skills and attitudes needed to develop new ideas are not the same as those required to turn new ideas into self-sustaining, commercially successful enterprises. However, one young Canadian is set on combining the two skill sets to make her mark on the world.

Ann Makosinski’s invention, the award-winning Hollow Flashlight uses body heat to provide light. She came up with the idea as a teenager after discovering that a friend in the Philippines was failing in school because she didn’t have any electricity or light to study at home during the night.

The Hollow Flashlight converts excess body heat into electricity to power an LED bulb without the need for batteries, solar, or kinetic energy. The gadget uses Peltier tiles, which produce electricity when one side of the tiles is heated, and the other cooled. By heating one side of the tiles with the palm of one’s hand, and cooling the other side with a hollow aluminium tube, energy is produced. Ms Makosinski devised the gizmo and then added a transformer and a circuit so that it can supply five volts of alternating current.

The flashlights work on a temperature differential basis, therefore the colder it is outside, the brighter the light will be. However, even in warmer environments the hollowed flashlight can sustain a strong beam of light for more than twenty minutes. Ms Makosinski made her prototype in her basement at home in British Columbia. The materials employed cost $26. Ms Makosinski has filed a patent for the Hollow Flashlight and is collaborating with professionals to increase the device’s brightness and further improve its efficiency.

Another of her inventions is the eDrink, a phone-charging travel mug that harvests the excess heat of your hot drink while you’re waiting for it to cool down and converts it into electricity for your mobile device. This December her inventions won her a £24,000 grant from Shell Canada and Canadian Geographic.

Born in October 1997, Ms Makosinski is half-Polish and half-Filipina. Both her parents are ham radio amateurs and imbued their daughter with a taste for experimenting. “I was always taking garbage from around the house, taking things apart and putting them back together again. I just wanted to make things better.”

Her inventions have led to global recognition. Ms Makosinski was named one of Time Magazine’s Thirty Under Thirty: World Changers in 2013 and also won the 2013 Google Science Fair for her age group. She was invited to talk at TedxTeen in London in January 2016, and is a Global Ambassador for The AAT Project.

She is also a global ambassador for Uniqlo’s Heattech fleece product line that takes body heat and stores it within the fibre to keep the wearer warm. It harvests thermal energy in the same way as the Hollow Flashlight, enabling garments as thin as 0.55mm to heat the wearer.

Ms Makosinski is currently a first year general arts student at the University of British Columbia in Vancouver. Talking on college radio she describes herself as “the weird inventor kid.” She is always inventing things: “It comes naturally to me. My parents didn’t give me a lot of toys. They were, like, go and make your own playthings.”

Ms Makosinski says she has always had an interest in both talking and tinkering and enjoys fixing problems she identifies around her. As a kid she did not have a phone, game console, or other tech gadget but found plenty ways of inventing her own. While she credits this as a factor in fostering an interest in technology, she admits it made her someone who didn’t fit in all the time with other teenagers.

The impressive Ms Makosinki clearly has an inquisitive mind and a keen sense for problem-solving. She will now apply that beautiful mind to running a business, working on new inventions, writing books and developing a TV show.


Abu Dhabi Securities Exchange (ADX): At the Heart of Vision 2030

The Abu Dhabi Securities Exchange (ADX) was established in 2000 as a legal entity with autonomous status, independent finance, and management. ADX is also provided with the necessary supervisory and executive powers to exercise its functions. ADX began operations on November 15, 2000. The function legally attributed to the Abu Dhabi Stock Exchange are:

Provide opportunities to invest savings and funds in securities in order to benefit the national economy;

Ensure the soundness and accuracy of transactions and ensure the interaction between demand and supply in order to determine prices;

Protect investors through the establishment of fair and proper dealing principles between various investors;

Impose stringent controls over securities transactions to ensure sound and conduct procedure;

Develop investment awareness by conducting studies and issuing recommendations in order to ensure that savings are invested in productive sectors;

Ensure financial and economic stability and develop trading methods in order to ensure liquidity and stability of prices of securities listed on the market.

ADX is at the centre of the Abu Dhabi government’s Economic Vision 2030. The vision, released in 2007, is a road map for the economic and social development of Abu Dhabi. The 2030 economic plan plays a vital role in ADX strategy since it places the financial market in the context of economic and social development. The development would be through diverting savings towards investment in the various economic sectors and developing the financial infrastructure of Abu Dhabi to transform the emirate into one of the leading finance and services centres of the region.

“The 2030 economic plan plays a vital role in ADX strategy since it places the financial market in the context of economic and social development.”

At the end of 2015, ADX had 71 listed securities. Those securities include 66 public joint stock companies, 2 private joint stock companies, 1 Exchange Traded Fund (ETF), 1 convertible bond, and 1 Abu Dhabi government bond. The ADX had a total market capitalization of AED 447 billion ($122 billion) as at the end of 2015.

ADX allows for investors to trade through any of the registered brokerages at the exchange through advanced electronic automated services. The Exchange has signed a number of agreements with major financial institutions to provide custody services, including the National Bank of Abu Dhabi (NBAD), HSBC, Standard Chartered, Deutsche Bank, and Citi Bank.

In 2009, ADX was upgraded to emerging market status by FTSE, and in 2011, Russell Investments and S&P upgraded ADX to emerging market status as well.

In 2010, the ADX became the first market in the region to introduce an Exchange Traded Funds (ETFs) trading platform by listing NBAD OneShare MSCI UAE ETF, under the ticker symbol 1UAE, and established the necessary infrastructure for diversified investment vehicles.

ADX was voted a full member of the World Federation of Exchanges (WFE) in October of 2012. WFE membership is considered by many governments and national asset management associations to be an important prerequisite for their recognition and support.

In 2013, ADX was upgraded to emerging market status by both MSCI index (Morgan Stanley Capital International) and S&P Dow Jones, thus greatly increasing the likelihood of inward global investment flows.

ADX Most Notable Achievements:

Launch of Smart Kiosk (SAHMI). The kiosk offers an array of electronic services that include the issuance of new investor numbers, the modification of existing investors’ details, access to financial reports and investment statements, etc. (first in MENA).

Adoption of XBRL – the global standard for exchanging business information (first in GCC).

Implementation of an automatic monitoring system (smart system) which automatically monitors and records transactions and other trading activities on the exchange (first in GCC).

The disclosure, on the ADX website, of the names of shareholders owning 5% or more of the share capital of any listed company (first in GCC).

The listing of shares of private joint stock companies (first in GCC).

The listing of ETFs (first in GCC).
Upgrade to emerging market status by MSCI (first, with Qatar, in the world since emerging market status was established by MSCI in 2007).


Otaviano Canuto, IMF: What Happened to World Trade?

World trade suffered another disappointing year in 2015, experiencing a contraction in merchandise trade volumes during the first half and only a low recovery during the second half (Figure 1). While last year’s trade performance can be associated to the ongoing growth transition in China and its reflections on other non-advanced economies, the fact is that last year’s performance came after a period since the 2000s in which world trade volumes have lagged behind GDP growth, a trend accentuated since the onset of the global financial crisis and in sharp contrast to global trade increases at a higher pace than world GDP prior to the new millennium.

Economists have indicated some circumstantial factors to explain this post-GFC pattern. For instance, world GDP and trade figures would be reflecting the fact that the highly open-trade countries of the Eurozone have had a sub-par growth performance relative to the rest of the world. Furthermore, the weak recovery of fixed investments in advanced economies has suppressed an important source of trade volume, given the higher-than-average cross-border exchanges that characterise such goods.

“Since 2008, world trade has been rising slower than GDP at around 0.8:1, leading to a fall in the share of exports in global GDP.”

More disputed hypotheses have also been argued. More stringent capital requirements and financial regulations might be curbing the availability of trade finance. Additionally, rising “murky” trade-restrictive tax-cum-subsidy policy measures adopted in some key sectors by some countries may also have become more significant than usually perceived.

While those post-crisis factors have certainly played a role, some structural trends also seem to be at play. As suggested by Figure 2, after steadily increasing between the mid-1980s and the mid-2000s, the trade elasticity to GDP has lost steam – though it remained above one, thus implying that trade was still rising faster than GDP.

[caption id="attachment_11168" align="aligncenter" width="600"] Figure 1: World Merchandise Trade Volume. Source: Netherlands Bureau of Economic Policy, World Trade Monitor, December 2015.[/caption]

After jumping in previous decades, the world’s exports-to-GDP ratio seems to have started to approach some plateau (or a peak trade). Since 2008, world trade has been rising slower than GDP at around 0.8:1, leading to a fall in the share of exports in global GDP. However, even if post-GFC factors were partially reversed, the presence of a long-term trajectory of trade elasticity displaying a slowdown already prior to the recent pattern would suggest no automatic return to the heydays.

Relevant Processes

Hoekman (2015) brings a thorough examination of both cyclical (post-GFC) and structural hypotheses about the global trade slowdown. Regardless of the weight attributed to these factors in explaining recent developments, three processes stand out as relevant for the purpose of analysing what lies ahead in terms of the link between global trade and development. Two of them were transitional – in the sense that they were one shot – the unfolding of which underpinned the extraordinary ascent of the global export-GDP ratio. The third one has evolved more gradually and will likely carry a significant transformative role ahead.

[caption id="attachment_11169" align="aligncenter" width="600"] Figure 2: Trade-income elasticity and Exports-GDP ratio – global economy. Source: Escaith and Miroudot, ch. 7 in Hoekman (2015).[/caption]

The period from the mid-1980s to the mid-2000s was peculiar in several aspects. For one, these decades featured a process of economic reforms that aimed to remove barriers to trade, a multilateral trading system that reduced uncertainty for traders, and technological advances that reduced trade and communications costs. Combined, these trends ushered in years of sustained trade expansion. Average tariffs moved to well below ten percent, and in many countries a significant share of trade became duty-free.

Advances in transport (such as containerised shipping) and information and communications technologies greatly reduced the cost of shipping goods and of managing complex production networks. Together these developments led to two major changes in the structure of global trade: (a) the vertical and spatial cross-border fragmentation of manufacturing into highly integrated global production networks or global value chains (GVCs); and (b) to a lesser extent, the rise of services trade.

The full establishment of cross-border GVCs intrinsically raises trade measured as gross flows of exports and imports relative to GDP, a value-added measure, because of double counting of the former – although the ratio of trade to GDP still increases even when trade is measured on a value-added basis. Given the then-prevailing technological state of arts in production processes, the policy and enabling-technology breakthroughs above mentioned sparked a powerful cycle of fragmentation, especially in manufacturing, with a corresponding cross-border spread of GVCs.

Reshaped Economic Geography

The reshaping of the economic geography might have kept the pace with global trade impacts via further dislocation of fragments of GVCs, depending on the evolution of country locational attributes. Technological changes might also have altered optimal spatial configurations of the various manufacturing activities, as well as extended fragmentation to other sectors. This may well be the case ahead, as technologies and country policies keep evolving – some analysts point to a greater reliance on regional production networks, while others refer even to a potential reversal of GVCs because of 3D printing (additive manufacturing).

[caption id="attachment_11170" align="aligncenter" width="600"] Figure 3: Ratio of Foreign Value Added to Domestic Value Added in World Gross Exports (%). Source: Constantinescu et al (2015).[/caption]

However, the wave of cross-border manufacturing fragmentation of the mid-1980s through the mid-2000s was particularly intense and time-concentrated. Figure 3 shows that the ratio of foreign value added to domestic value added in world gross exports increased by 2.5 percentage points from 2005 to 2012, after having risen by 8.4 percentage points from 1995 to 2005.

The wave of fragmentation of manufacturing activity benefited from the incorporation of large swaths of lower-wage workers from Asia and Eastern Europe into the global market economy. Conversely, the former facilitated a process of growth-cum-structural-transformation with substantial total factor productivity increases in these countries via transfer of population from low-value, low-productivity activities to the production of modern tradable goods, for which foreign trade was instrumental – with China as a special case both in terms of speed and magnitude.

The transitional nature of such a lift of world trade relative to world real GDP, even as the latter grew substantially, stemmed from the inevitable tendency of both starting to rise more in line once the intense transformation approached completion. Its extraordinary intensity also reflected a peculiar – and transitory – combination of ultra-high investments-to-GDP and trade-surplus-to-GDP ratios in China with large current-account deficits of the US.

New Chinese Growth Pattern

More recently, China has initiated a rebalancing toward a new growth pattern, one in which domestic consumption is to rise relative to investments and exports, while a drive toward consolidating local insertion in GVCs to move up the ladder of value added is also to take place. That rebalancing has been pointed out as one of the factors behind the recent global trade slowdown, given China’s weight in the world economy and a recent trend of import substitution as illustrated in Figure 4.

[caption id="attachment_11171" align="aligncenter" width="600"] Figure 4: China’s Share of Imports of Parts and Components in Exports of Merchandise. Source: (Constantinescu et al, ch. 2 in Hoekman (2015).[/caption]

While both the GVCs’ rise and growth-cum-structural-transformation – especially in China – were taking place, with corresponding impacts on the landscape of foreign trade, advanced – or mature market - economies maintained a steady evolution toward becoming service economies – a trend maintained after the GFC. Lower GDP shares of the value added in manufacturing have accompanied rising shares of employment in services (Figures 5 and 6).

Both supply and demand factors explain such trends in advanced economies. On the supply side, beyond the higher pace of increases of productivity in manufacturing than in services (with correspondingly different rhythms of reduction in labour requisites), not only did the relative prices of manufactured goods fall, but a substantial part of local production was also off-shored as a result of GVCs and the incorporation of cheaper labour from areas previously out of the market economy world.

[caption id="attachment_11172" align="aligncenter" width="600"] Figure 5: Global Manufacturing. Source: Institute of International Finance, “The rise of services – what it means for the global economy”, December 15, 2015.[/caption]

On the demand side, one may point out both a higher income-elasticity of demand for services – reinforced by aging of the population – and to technology trends favouring software vis-à-vis hardware – or intangible relative to tangible assets – as leading to an increasing weight of services in GDP and employment.

Those evolutionary features of supply and demand would also be valid for emerging market and developing countries – even if, as suggested in the upper half of Figure 5, they were partially mitigated in China and other Asia/Pacific countries by sucking manufacturing activities from other emerging market and developing economies. In any case, given the state of current technological trajectories, rising shares of services throughout would imply an anti-trade bias, given a still higher trade-propensity of manufacturing.

Declining Trade Elasticity

IIF (2015) goes as far as to argue that this has already brought consequences for the global business cycle, rendering it less influenced by swings in manufacturing output, with shock transmission from advanced economies increasingly taking place via trade of services among themselves and more weakly to manufacturing-dependent emerging market and developing economies. This would be one of the factors behind the abrupt decline of the world trade elasticity and of the recent decoupling of growth between recovering advanced and decelerating emerging economies.

World trade may well live through a new era of rise relative to GDP: ongoing technological trajectories may deepen the fragmentation and increase the tradability of services; new vintage trade agreements – including possible TPP and TTIP – are giving special attention to restrictions on trade of services. In fact, the content of services in current foreign trade transactions has already been higher than what gross trade figures display.

[caption id="attachment_11173" align="aligncenter" width="600"] Figure 6: Employment in Services. Source: Institute of International Finance, “The rise of services – what it means for the global economy”, December 15, 2015.[/caption]

Another question is what lies ahead in terms of growth opportunities for non-advanced economies through foreign trade given the evolution of the latter along the lines here described, one in which the factors that led to the peak trade seem to have exhausted, at least in the near future ahead. Trade has been a key driver of global growth, income convergence, and poverty reduction. Both developing countries and emerging market economies have benefited from opportunities to transfer technology from abroad and to undergo domestic structural transformation via trade integration in the last decades. One may thus understand why there has been some concern over whether the current pace and direction of world trade lead towards a lesser development-boosting potential.

The nature and height of domestic policy challenges have changed substantially in a three-fold way:

First, China is in a league of its own and its rebalancing-cum-upgrading will condition other emerging market and developing economies. If it lets low-skill labour-intensive manufacturing activities go, a new wave of further GVC dislocations may open opportunities for countries currently endowed with cheap and abundant labour. On the other hand, its densification of local parts of GVCs will represent a competitive challenge to medium-range manufactures produced in other middle-income countries. The net result will also depend on the leakages outward of its domestic demand as it rebalances toward a more consumption- and service-oriented economy.

Second, the directions taken by technological trajectories and aggregate demand in advanced economies seem to point toward a broad alteration of the balance of locational advantages for production fragments, decreasing the weight of labour costs and augmenting the relevance of local availability of other complementary intangible assets. A double whammy on production and exports of non-advanced economies may take place: a partial reversal of off-shoring and a slower growth of outlets for their typical exports.

Third, the bar, in terms of what it takes to countervail that double whammy – improvements of the local business environment and transaction costs, quality of economic governance and other conditions favourable to accumulation of intangible assets – has been raised. Nonetheless, provided that such bar is reached, the local provision of – embodied or disembodied - services complementary to those produced or used in advanced economies may flourish. This will be the case, e.g. of natural resource-rich countries that manage to develop related intangible assets in terms of applied-science capabilities.

The run-up to peak trade was one of primarily exploring complementarities within GVCs to substitute for existing producers. The post-peak trade era may well be one of building complementarities.

About the Author

Otaviano Canuto is the executive director at the board of the International Monetary Fund (IMF) for Brazil, Cabo Verde, Dominican Republic, Ecuador, Guyana, Haiti, Nicaragua, Panama, Suriname, Timor Leste, and Trinidad and Tobago. The views expressed here are his own and do not necessarily reflect those of the IMF or any of the governments he represents.

Dr Canuto has previously served as vice president, executive director and senior adviser on BRICS economies at the World Bank, as well as vice president at the Inter-American Development Bank. He has also served at the government of Brazil where he was state secretary for international affairs at the ministry of finance. He has an extensive academic background, serving as professor of economics at the University of São Paulo and University of Campinas (UNICAMP) in Brazil.