Carlo Giugovaz, Supernovae Labs: Innovation, Inspiration, Experience and a Passion for Financial Industry Challenges

[caption id="attachment_23747" align="alignright" width="300"] Supernovae Labs Chief Executive and Founder: Carlo Giugovaz[/caption]

Innovation visionary and industry thought leader, after only six years since founding Supernovae Labs, a consulting boutique specialised in innovation, Carlo Giugovaz led his team in winning the Best Fintech Accelerator Award in 2022, the second one the company received after the 2018 award.

Carlo, a digital banking pioneer with over 35 years of experience in the financial industry, before founding S9L, contributed in leading companies including: PwC (7 years +), McKinsey & Company (7 years +), European Commission in Brussels (1 year +), Intesa Sanpaolo (4 years +), University of Bologna (1 year +) and UniCredit (16 years +).

Today, the thought leader is country manager in Italy and Switzerland for Qorus, with whom he has worked since 2017, and CEO and Founder of Supernovae Group, an entrepreneurial reality formed by Supernovae Labs and Finnovaction.

The first firm is a consulting company with a focus on innovation, targeting financial institutions and fintechs. Founded by Carlo Giugovaz in 2016, thanks to his collaborations with the brightest innovators in the industry, Supernovae Labs is the first Italian accelerator for fintech startups dedicated to banking, insurance and financial services. The company supports financial institutions and fintechs in defining and executing digitalisation strategies, offering a range of open banking and open innovation services and supporting partners at every stage of their path development.

Supernovae Labs credits its success to the value of its team and ecosystem. The company features an international team of experts with years of experience in financial institutions and consulting world. A team of managers who have worked in the most innovative retail, digital, and private banking groups, developing deep knowledge of market needs and the ability to translate the applications of the most innovative technologies into business use cases. Through open innovation, creativity, teamwork, and entrepreneurship, each team member strives to create and share value with their partners, including financial institutions and fintechs.

At the same time, Supernovae Labs is proud to collaborate with industry-leading institutions -including Intesa San Paolo, Gruppo Bancario Iccrea, Widiba, Société Generale, and Qorus - and strategic partners - Including MBS, Kirey, S2E, Startupbootcamp, Swiss Insurtech Hub, and Startup Wise Guys.

With the recent addition of Finnovaction, the new Open Innovation Lab, Carlo and Supernovae Group are broadening their horizons to experiment with new innovative products and services, in order to identify, select and realise new business opportunities. With its Observatory and its Development Sandbox, Finnovaction is constantly monitoring the market to anticipate future trends; and provides an environment designed to "co-create" solutions that are ready to be implemented and to ensure their scalability.

Together, since the first CFI.co Award in 2018, Carlo and his team have expanded S9L's ecosystem, renewed the brand by giving it a new identity and image, developed more than 100 innovation ideas in more than 10 different business areas, until witnessing the entry of new scale-ups and unicorns into their network, giving life to what is now one of the most interesting realities on the Italian and European scene.


Inflation - Beyond the Headlines and Beyond the Borders: Specialised Investment Research and Analysis from PGM Global Inc.

Chinese PPI: A hero of Our Time

Chinese Producer Prices (PPI) are an important indicator for DM equities and, indeed, for global inflation. Since China joined the WTO in 2001 and became the world’s workshop, Chinese PPI has tended to lead U.S. CPI.

It may come as a surprise, but for various reasons, PPI in China’s industrial sector is actually in deflation! Chinese industrial producer prices are strongly linked to Chinese export prices, which then filter into the rest of the world’s CPI. If President Xi relaxes his zero-COVID policy, the resurgence of Chinese exports could help dampen global inflationary pressures and support corporate profit margins. This, in turn, would help the Fed and other DM central banks engineer the elusive soft landings they are all striving for.

Chinese industrial inventory growth has surged as working capital (proxied by undiscounted bankers’ acceptances) grew strongly in 2020. This suggests that the portion of inflation that supply chain disruptions have driven can be mitigated if China were to open up more fully. Low vaccination rates and the poor efficacy of China’s COVID vaccines will delay any re-opening. However, the spectacle of Chinese households refusing to pay mortgages for unbuilt properties is a sign of fatigue, if not protest over the combination of slower growth and COVID restrictions.

Part of the slowdown in Chinese PPI is a function of lower commodity prices as investors fret over demand destruction due to the global economic slowdown. To a certain extent, this seems misplaced, particularly concerning energy prices. Increased backwardation in oil futures suggests looming shortages, despite the decline in front-month prices.

While we think oil prices should be fundamentally higher, this view doesn't necessarily suggest that Chinese PPI will rise and the country’s ability to export disinflation will falter. China benefits from the sharp discount in Russian Urals crude vs. benchmark oil prices. In addition, Chinese refiners—including the two largest, state-owned ones—have fat profit margins due to the discount and can ensure producer prices remain muted.

Relatively cheap energy prices and the broad downturn in industrial commodity prices should continue to weigh on Chinese PPI.

There are two main reasons why investors should care about Chinese PPI. International and especially U.S.-focused equity investors are fretting over the outlook for corporate earnings. Earnings can be decomposed into profit margins and sales growth. Sales growth is now rolling over sharply. Profit margins remain at near four-decade highs; there are good reasons to ask how long this can persist.

Between 1950 and China’s ascent to the WTO in 2001, U.S. profit margins tended to peak before wage gains, and precipitated recessions. This changed—coincidentally or not—when China joined the WTO and became the world’s factory. China exported disinflation, pushing down prices for U.S. consumers and widening the profit margins of U.S. firms. If Chinese lockdowns ease, the country can spur another round of disinflation, which would help both U.S. firms and the Fed.

Perhaps a more interesting reason investors should care about Chinese PPI is the nexus of China’s industrial plans and global competitiveness. China’s desire to become a world leader in high-tech products is hardly news; however, its strategy might be. China has been using its large, tech-hungry domestic market to scale production and boost its global competitiveness. Chinese firms have a dominant market share at home. Lower energy costs and PPI, in general, will help Chinese tech hardware firms compete internationally.

Europe’s tough stance on Russia and impractical energy policies have exacerbated the bloc’s broader economic malaise. This is particularly true of Germany, which is inching ever closer to an energy catastrophe and electricity rationing. As recently as 2020, the UN had ranked German Industry the world’s most competitive, with China in second place. The current macro trajectory suggests China can close that gap.

We have been fairly optimistic about Chinese tech for a few months now. Recently, the internet platform companies, which have a heavy weighting in the KWEB ETF, have done relatively better than the tech-hardware heavy firms (CQQQ). This makes sense given the government has been relaxing, however unevenly, regulation on the platform companies. However, as far as future growth is concerned, we continue to think the hardware-focused firms will do best, as they are of strategic importance to the CCP and continue to benefit from increased investment.

Bottom Line

Chinese producer prices are easing, in what could be a boon for global consumers, profit margins and DM central banks. A lot will depend on President Xi’s commitment to the zero-COVID policy. The PPI trends are also supportive of Chinese equities, and especially Chinese tech hardware firms. This is particularly true when contrasting the outlook for China with that of Germany. i

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This report was prepared for circulation to institutional and sophisticated investors only and without regard to any individual's circumstances. This report is not to be construed as a solicitation, an offer, or an investment recommendation to buy, sell or hold any securities. Any returns discussed represent past performance and are not necessarily representative of future returns, which will vary. The opinions, information, estimates and projections, and any other material presented in this report are provided as of this date and are subject to change without notice. Some of the opinions, information, estimates and projections, and other material presented in this report may have been obtained from numerous sources and while we have made reasonable efforts to ensure that the content is reliable, accurate and complete, we have not independently verified the content nor do we make any representation or warranty, express or implied, in respect thereof. We accept no liability for any errors or omissions which may be contained herein and accept no liability whatsoever for any loss arising from any use of or reliance on this report or its contents.


Nothing Beats Local Knowledge — and WTW I Unity Head Louis "Tito" Ducruet Knows his Territory

Customer-centricity and an eye on climate-change ensure steady evolution of go-ahead insurer with WTW I Unity Head Louis "Tito" Ducruet.

[caption id="attachment_23772" align="aligncenter" width="900"] Managing Director: Louis "Tito" Ducruet[/caption]

Understanding local needs and establishing a customer-centric strategy have typified Louis "Tito" Ducruet's career for over 40 years.

As managing director of WTW I Unity for Central America, he has built a culture focused on reaching the full potential of his teams, understanding the particular challenges of the six countries that make up the Central American operation — and meeting, and anticipating, client needs with tailored insurance programmes.

His cross-industry expertise spans all lines of business, from risk analysis to the implementation of complex individual programmes. One of the main characteristics of Ducruet's leadership is an understanding of geographical needs, recognition of local and regional talent, and innovative thinking: anticipating the risks and challenges of the market.

Ducruet has been involved in complex projects, including the Panama Canal Risk Management Programme. Others include:

Founding partner and director of Capital Bank and Subsidiaries

Director of factoring company Fortesza

Partner and director of Formas Eficientes, a printing company

Partner and director of card personalisation firm Fesa Card

Member of APEDE (Panamanian Association of Business Executives)

Former director of the Ronald McDonald Foundation

Member of the American Chamber of Panama (Amcham).

Ducruet graduated with degrees in Business Administration and participates in various committees in the insurance industry. He chaired the commission that created the law of Insurance and Reinsurance Captives of Panama.

WTW I Unity and Louis "Tito" Ducruet

WTW I Unity prides itself on being the only regional insurance broker in Central America to provide personal service, regional presence, and world-class quality. It identifies new solutions by harmonising its global vision and local understanding with a clear vision of the future. “The use of analytics and risk-transfer tools is indispensable,” he says.

"One of the main characteristics of Ducruet's leadership is an understanding of geographical needs, recognition of local and regional talent, and innovative thinking: anticipating the risks and challenges of the market."

The firm’s deep local knowledge and global support can help to identify upcoming risks for damages for property, people and capital, providing solutions that outline clients’ strategies. It can improve organisational resilience, motivate staff, and maximise performance. WTW I Unity's premise is to work with clients to uncover sustainable opportunities.

“One element of understanding the context that impacts — or will impact — our clients and the world is climate change,” Ducruet says, “and the transformation it demands of business. Today more than ever before, the insurance and brokerage industry is aware of the impacts.”

According to damage claims reports, global losses linked to climate change have increased by around 250 percent in the past 30 years. Natural catastrophes have increased by a factor of 3.6 in insured losses. This is just part of the motivation for insurers and brokers to create new business models under ESG and sustainability criteria.

In terms of natural upheavals, Latin America and the Caribbean is a disaster-prone region. In the last 20 years, some 1,205 events — from floods, hurricanes and earthquakes to droughts, fires and volcanic eruptions — have affected more than 150 million Latin Americans.

“The way to accompany our customers is in the evolution towards resilience,” says Luis "Tito" Ducruet. The short-term actions the firm is considering include:

Development of a climate strategy and transition plan

Integration of a strategy combining life and property and casualty insurance solutions, underwriting, reserving, capital modelling, investment and corporate governance policies

Quantitative risk consulting

Monitoring, reporting and improvement, including climate and ESG criteria in the risk framework.

Combination of risk prevention and risk management

Corporate resilience.

Climate change is one of the main focus areas that make up the ESG strategy at WTW I Unity.

Environmental ESG factors are closely linked to good corporate governance, for which WTW I Unity accompanies its clients. The solutions include climate risk and resilience, zero-emission transition planning, the circular economy and sustainable supply chains.

Social factors are particularly relevant in the Central American region’s challenges in healthcare and wellbeing of client workforces. WTW I Unity fosters an environment of equity and commitment in the workforce. Diversity, equity and inclusion, wellbeing, safety and security, fair and equitable pay and benefits programmes are all considered.

Corporate Governance

Corporate governance is one of the most important elements, because without it, efforts to implement sustainable solutions will be unsuccessful. The company has identified key points:

Board governance

Sustainable investments

Mitigation of risk transfer

Transparency

“An effective ESG strategy needs discipline and focus to address specific requirements,” Ducruet points out. “Understanding the strategic options and the interaction between them is essential to prioritise resources and establish a plan of action and impact.

“There are many ways to continue on the path to ESG in the region. WTW I Unity provides a holistic vision that enables progress towards sustainable growth for its clients. This is the perspective that moves you.”

The company has been operating in Latin America for more than half a century, with 15 regional offices and more than 3,000 employees. It manages more than two million lives with health and benefits insurance.

In Central America, it has been operating for over 40 years, with six regional offices and some 500 employees serving 760,000 policyholders. At WTW I Unity, human talent is seen as essential for sustainable growth.

Employees are the driving force for sustainable growth. “Our commitment to social responsibility through national development initiatives, corporate volunteer programmes in the communities and outreach programmes that promote healthy lifestyles are part of our DNA,” says Tito Ducruet.

“For WTW I Unity, corporate sustainability is vital to ensure the development of a long-term approach based on economic, environmental and above all social pillars, from the inside with our colleagues and outwards with our customers, to improve the quality of life of organisations and their employees.”


Thai Life’s Immodest Aim: To be the Best (and Most Sustainable) Company in the Insurance Sector

Building strength for the firm, and all Thai society.

Thai Life Insurance Public Company keeps its focus where CEO Chai Chaiyawan has put it: on building strength and sustainability.

That aim is not just for the company; it’s something that Chaiyawan wants for broader Thai society. Thai Life was the first in the sector to establish a strategic CSR master plan, back in 2008 in collaboration with Thaipat Institute.

The system has stood the test of time, and will be used to drive CSR operations for the next decade.

Until 2019, Thai Life was the first to establish a sustainable development master plan to adapt and guide the organisation's operations in response to changing circumstances. As well as ensuring that the various departments have a sound framework for development, the plan is strategically linked to social responsibility in the business process (CSR-In Process) and the concept of creating shared value (CSV).

The pandemic affected the Thai lifestyle, and the company adjusted its business processes to be ready for any future changes and challenges. Resilience is a vital strength, and the business has been geared to achieve a purpose: to provide all the answers for life insurance, health insurance, and personal financial planning. This role as a “life solutions provider” includes a commitment to brand purpose: to be loved, trusted, and respected as a brand that inspires people.

In line with operations in the era dubbed the New Normal — and in accordance with the company's future directions — Thai Life Insurance has developed a three-year Sustainability Development Master Plan for 2022 to 2024.

The plan includes the “Three Ps”:

Promise: Upholding promises made to all stakeholders, stakeholders and consumers, while adhering to good corporate governance and managing personnel in a professional and ethical manner.

Protect: A customer-centric approach can fulfil all needs via product development and responsible, personalised service. It focuses on minimising risks and provides appropriate administration to protect customer data and IT systems.

Prosper: generating economic growth while also contributing to the betterment of society. Community and social management are key, as is environmental protection and management.

To ensure sustainability performance meets expectations, the company has defined targets in accordance with ESG principles: environment, risk management, and addressing the impacts of climate change. That could involve the establishment of a risk-management committee, developing business continuity and disaster management plans, and implementing environmental management across various projects. Also incorporated is a reduction of the environmental impact of all the Thai Life's business operations, such as digitalisation to cut waste and the use of resources and energy.

Socially, Thai Life Insurance operates in accordance with humanist ideals and thoughtful human resource management. The most valuable capital has been defined as people, helping workers to become intelligent, moral, and responsible members of society. Human rights, equality, safety, and fair treatment are upheld in company guidelines, rules and laws, as well as the corporate values and culture. Devotion and teamwork are seen as the keys to shared success.

Thai Life Insurance focuses on upskilling and reskilling, adjusting the corporate mood to enhance knowledge, understanding data literacy and the digital mindset. Mental agility is promoted by encouraging agents to take care of customers in every life stage, every life event, and every lifestyle.

Thai Life attaches great importance to customer care through the development of products and services. The aim is for Thai people to have easier access to life insurance by laying out guidelines to create a data-driven organisation. There is constant innovation to meet customer needs.

There is also a corporate focus on community and society management, upgrading quality-of-life and enhancing knowledge by promoting the all-round potential for community enterprises.

Good corporate governance is at the heart of this, with systematic monitoring of performance and personnel behaviour. There is a strict code of conduct aimed to eliminate anti-corruption and ensure compliance with social and economic laws. Market conduct, via the responsible management of customer data, ensures that the presentation of products and services is complete, transparent, and has strong security for all personal data.

Life insurance is a business that involves people and communities. Thai Life Insurance operates a sustainable investment policy in the form of ESG investing, which consider risk, return, and impact on society or environment.

The business’s operation plays an important role in creating value for the company and stakeholders. Driving the company to strong and sustainable growth are six key values:

Creating value for customers

Creating value for people in the organisation

Creating value for partners

Creating value for shareholders

Creating value for society

Creating value for regulators, with an organization that operates business in a strictly ethical manner — for shared sustainable development.


Jusan Bank's Nurdaulet Aidossov: Deep Fintech and Telecom Collaboration

‘We have built a golden digital bridge between business and retail client,’ says Jusan Bank CEO Nurdaulet Aidossov.

[caption id="attachment_23788" align="aligncenter" width="900"] CEO: Nurdaulet Aidossov[/caption]

Banking and financial services came early into every Kazakhstani's life. No wonder, then, that the sector there is advancing by leaps and bounds.

Consumers’ lives have been made easier with newly developed products and services. Just a few years ago, citizens could not even imagine that an app could be used to buy a TV or air tickets in instalments, get into the shares market, or get a mobile service aside from a simple transfer or loan repayment.

CFI.co spoke to the CEO of Jusan Bank, Nurdaulet Aidossov, to get his vision of the present, and the future, of innovative services and products.

“Loving my job is the key point for me,” he says. “Passion greatly energises and motivates me to look for game-changing solutions — and drives business processes. Outstanding results cannot be reached without motivation.”

Over the years, Aidossov has learned to find experienced and talented staff — and differentiate between them. They could be completely different people, he says. “I believe that the experience so expected from the labour market is no longer crucial. An employment history may be long, but in a rapidly changing world, some of that experience may not be relevant. “But skills are of the utmost importance: being able to adapt to new realities, to be open to innovation, and to switch between tasks. All of these things are above simple experience. Skills rock.”

Nurdaulet Aidossov would rather put his faith in skills than experience. “These two drivers, the passion for work and skills, are typically more essential than the experience — and even education. I am by no means undervaluing the education. You need to have ongoing training and upskilling to enhance your competence and forge a successful career.

“To my mind, the classical education approach that you study your major and deepen that is fading. The future is in hybrid occupations.” Being a good accountant is not enough today, he believes. “You need to know IT, financial analytics and so forth for service providers to engineer information systems and gain an insight of what can be refined and fine-tuned.”

A law officer who knows and understands how a financial system works can give more sound and relevant advice, he says. As a specialist engaged in the financial sector, he believes that finances are the most forward-looking economic realm, “constantly masterminding ground-breaking reinventions — with the fintech trends factored-in”.

An open mind and the ability to tinker and produce fresh ideas are needed to understand data-driven decisions. “Our business is no place for emotion-driven or illogical decisions,” Nurdaulet Aidossov says. “Everything should be underpinned by sound analytics. That is the key to success.”

Financial services and banking affect all lives in 2022, and banks should promote welfare, save time for clients, and support endeavours and projects that make dreams come true, he believes. “We influence people's lives, and that is a great responsibility. It’s no coincidence that our motto is: ‘Believing in you and creating opportunities for you’.”

By helping SMEs to digitalise and provide access to products and services can be using a single Jusan application. “We have built a golden digital bridge between business and retail client. I see how efficient the business-bank-client model is, where the bank lends its shoulder to both parties. The process should be as seamless as possible.”

Besides financial services, the bank holds financial awareness courses in-house via the Jusan Academy, where you will gain basic knowledge of the stock market fundamentals and investment methods. You also learn how to diversify your investment correctly, how to choose securities to buy and many other useful skills. “Our mission is to contribute to a better quality of life for our clients.”

“People should take an interest in the bank's health — not just ours, but that of any financial institution. They should ask how promptly services are delivered, and whether there are additional services to be had.

“As we have moved beyond routine banking, they should ask each ecosystem can offer. As well as the normal deposits, cards, transfers, and loans, we offer mobile service — free to our cardholders — insurance, investments, travel, entertainment, education, all accessible through our mobile app. Our clients can reliably cover most of their demands with a single tap while benefiting from the products synergy.”

He intends to expand the Jusan ecosystem to specific products to suit the specific needs. “We should focus on current client demands — not as a bank, but as an ecosystem, making equal space for online and offline services.

“We are shaping a universal banking model that includes classic banking and neo-banking services where our client is the boss. I think that the future lies in an ecosystem-based approach, mainstream fintech, and telecoms and banking permeation. Mobile communications and banking are almost the same — the clients receive banking services through smartphones.

Kazakhstan has good internet and banking services, he is pleased to report. “The future is in a greater collaboration of the fintech and telecoms. We already have the OGO Project, enabling a telecoms service-provider with an client base to provide our services as a ‘white label’: accepting payments, transfers and deposits and granting loans. Banks go for telecoms as MVNOs (mobile virtual network operators). And this collaboration will get stronger.”

Aidossov is “at one” with Kazakhstan’s regulatory authority. It employs the latest approaches to banking legislation. “We do not feel like our sector is over- or under-regulated. I think we are in tune with the times and the proposed legislative innovations and amendments are reasonable, and fairly conservative.

“It is critical to address challenges, adapt, and arrive at solutions under relevant laws. Kazakhstani laws are quite advanced and meet all the current and future market issues. We comply with the international AML standards and are accredited by many international institutions. Some more advanced countries lack such progressive legislation.”

His inspiration comes from other experts and co-workers. “Someone inspired me, another set a task that I worked hard to get done. I admire thought-leaders and successful people from various fields beyond the banking world.”

Nurdaulet Aidossov sees his role as “the 12th man on the football field” — and he doesn’t believe in micromanagement. “I should have all information, be involved in all processes, see the bigger picture, and be able to avoid time-wasting.” His leaderships style is about understanding products and client needs, and encouraging passionate and idea-driven employees. He also values constructive criticism. “A team should always be diversified: that is the way to solid performance.”

He knows that mistakes come with experience, and says he has made some of his own — but “not fatal, show-stopper” errors. “I became a bank CEO at quite a young age, and I have nothing to regret. So far…”

Jusan puts an emphasis on the work-life balance. “It is about the quality, or focus, of time, not its quantity. In my life, my hobby, my passion and my growth are all tied to my occupation. There was no single day that I dragged myself to work. I have always been motivated, and accept all complex and critical moments as a challenge.”


The Long-term Growth of Sustainable Investing

In April 2013, the concrete roof of a dilapidated factory in a densely populated district of Dhaka, Bangladesh, housing thousands of mainly female garment workers, caved in. A total of 1,134 people were killed and more than 2,500 injured.

[caption id="attachment_23706" align="alignright" width="500"] 2013 Savar building collapse. Dhaka, Bangladesh. Photo: Sharat Chowdhury, CC BY 2.5, via Wikimedia Commons[/caption]

The tragedy illustrated the human cost of some aspects of globalisation which had, only a few years earlier, prompted the United Nations to institute its Environmental, Social and Governance (ESG) principles — and the disaster highlighted the urgent need for global business to take the aims seriously. The fact that many of the dead workers had been producing items of clothing for international fashion brands, including Benetton, Primark, Walmart, Prada and Gucci, turned a Third World calamity into a global embarrassment.

The rapid growth of Bangladeshi “sweat-shops” over the previous decade in response to Western needs, had led to overcrowded factories and poor working conditions, coupled with badly maintained buildings. The average wage for garment workers at the time was around $30 a month. In the wake of the tragedy Pope Francis denounced the system as promoting “slave labour”. The shocking incident had another consequence — consumers in the West were suddenly able to contrast the glitzy stores where they purchased their fashionable clothes with the grim reality of the garments’ origins. More importantly, investors who were already questioning the ethical practices of a wide range of business and industry sectors, reacted negatively to the stark images of death and destruction in Bangladesh.

Dr James Gifford, who had been a “shareholder activist” in his native Australia years before, and was among the group of “free thinkers” who had shaped ESG strategies in the early 2000s, was the executive director of the UN’s Principles of Responsible Investment at the time of the Dhaka factory incident. He said, “It is absolutely in the financial interests of leading Western clothing brands to have safe factories and not to have scandals. We’re now seeing all the clothing brands scrambling to sign up to new protocols on building safety. This is the change that the world is seeing. Formerly people thought there must be a trade-off between profits and looking after workers or looking after the environment. Companies need to look after the issues that are going on in their supply chains.”

Transparent supply chains are just one of the issues global business is tackling. Investor and consumer knowledge, together with the power of social media, has put every industry under the ESG spotlight. Indeed, ESG aims are now part of the mainstream of business in Europe and the US. Even the disruption caused to global trade by Covid-19 failed to interrupt the continued adoption of ESG codes. Amy S. Matsuo, Regulatory and ESG Insights Leader at KMPG US, says that the global pandemic, far from provoking an investor flight back from sustainable investing to traditional, has amplified ESG awareness — and not only with investors, but with policy-makers and consumers. She says: “Pressure from investors, employees, customers and the general public has driven companies to commit to and act upon an ESG strategy, focusing primarily on environmental factors. With the advent of Covid-19, stakeholders are turning attention to workplace safety, employee health and well-being, job security, data privacy, customer engagement, supply chain management, community investment, corporate leadership and innovation. ESG has expanded into a “Main Street” issue with significant reputation risk for companies.”

[caption id="attachment_23794" align="alignright" width="500"] Dr James Gifford, head of Impact Advisory and Thought Leadership at Credit Suisse[/caption]

Dr Gifford, who is now head of Impact Advisory and Thought Leadership at Credit Suisse, says, “There’s a recognition that the world is changing faster than ever. Many of the most important changes are within the ESG bucket. Change is opportunity, and ESG issues, being some of the largest, most important megatrends happening in society, simply translate into opportunities for the cutting-edge of investors to outperform their peers.”

The pandemic, followed by Russia’s invasion of Ukraine in February 2022, have undoubtedly rattled investors. Historically, in times of crisis, investors have tended to play safe, seeking out reliable havens for their money — usually gold or long-dated government bonds. But despite some unease, companies with strong ESG polices have generally outperformed less environmentally-minded businesses. A 2020 study of sustainable investments showed that 60 percent achieved positive returns while only eight percent were negative.

The growth of ESG adoption across the business world since the term was coined by the UN in 2004, shows no sign of wilting in the face of harsh economic times. Companies which demonstrate a belief in sustainability and the ethical treatment of workers are judged to be more trustworthy in an increasingly uncertain environment. According to research by Morgan Stanley’s Institute for Sustainable Investing, sustainable funds offer reduced risk, whatever the asset type, compared with traditional funds. Their analysis suggests that non-ESG funds have a greater downside deviation in volatile markets.

Dr Gifford says ESG analysis and involvement by investors is growing in sophistication. It is no longer just about “picking out the bad guys” from an investment portfolio, or simply investing in obviously green companies like wind farms or solar power, but in actively seeking out companies with potential to make the world a better place. He says: “Investors want to focus on what the boards of major corporations are actually doing, what they’re thinking about, what’s keeping them up at night. With this radical transparency, with social media, with the accountability that corporations are feeling, all of these issues are becoming core to business and core to those investing.”

[caption id="attachment_21643" align="alignleft" width="500"] The war in Ukraine has raised questions over the perceived rigidity of ESG principles[/caption]

The war in Ukraine, however, has raised questions over the perceived rigidity of ESG principles — particularly in regard to investment in the defence industry. Arms manufacturers have suffered from a degree of investor flight in recent decades, the sector being seen by many as running counter to ESG aims. In March 2022, a Bank of America report said, in reference to investment in defence industries, that the Ukraine crisis “reminds us that, like most things in investing, ESG is complicated and nuanced”.

The conflict in Ukraine has led some to question whether investing in a strong defence industry should now be considered to be fundamentally “social” in relation to deterring aggressive regimes. An opinion piece in the Financial Times in March 2022 questioned the “blanket approach” of ESG aims, as the effects of war on Europe’s doorstep illustrated the crucial nature of defence. The newspaper argued: “Surely an important component of (Europe’s) ability to provide safety and security to its citizens should qualify for some recognition in the social element of ESG?”

Similarly, in response to the increasing cost of energy, especially in a Europe so dependent on Russian oil and gas, there have been calls to soften climate change priorities. But Adam O. Emmerich, a partner at Wachtell, Lipton, Rosen & Katz, a US law firm, says: “While sustainable investing is fundamentally about generating long-term financial value, the Ukraine conflict has prompted unprecedented support for the liberal international order. The war provides important lessons and underscores the need for a non-disruptive transition to a low carbon world – a view already shared by major investors.

“If unaddressed climate change will trigger a humanitarian crisis on an unprecedented scale and lead to trillions of dollars in losses. From an ESG perspective, a company’s performance is still being measured in returns delivered over decades and not days. Immediate actions necessary to mitigate losses from catastrophic events like the war in Ukraine and the pandemic should be distinguished from the steps that are necessary to preserve a company’s long-term value.”


Meet Nordea Asset Management’s Responsible Investments Team

Nordea Asset Management (NAM) has one of the largest and most experienced responsible investment teams in Europe: 26 dedicated ESG analysts from academia, independent organisations, and investment circles.

To stay at the forefront of responsible investing (RI), Nordea Asset Management’s team — set up in 2009 — continuously refines its ESG approach in keeping with the increasing complexity, depth and scope of the field.

The strength of NAM’s approach is that its investment teams and RI team are fully integrated — ESG analysts sit side-by-side with equities and fixed-income teams. Fund managers are involved throughout the research process, and directly tie results to their investment decisions.

The team is fully integrated with NAM’s investment boutiques managing ESG products, and carries out research, active ownership, and represents NAM in international RI initiatives.

The team is subdivided into five units.

The Active Ownership team is responsible for NAM’s engagement activities, as well as for driving the Responsible Investment Committee agenda and RI policy-development. This group also works with the corporate governance team on proxy voting.

The Climate group maintains focus on climate-change factors and policies, implementation and reporting on TCFD recommendations, and the firm’s membership and obligations under the Net-Zero Asset Managers’ Initiative.

The ESG Private Equity team supports NAM’s private equity collaboration with Trill Impact.

The ESG Products and Research team carries out company-specific research and engagement for NAM’s ESG funds, as well as product development.

The ESG Quant team develops and maintains NAM’s proprietary ESG-scoring model and ESG data platform, as well as advanced applications of ESG data, including the new Principal Adverse Impact module.

The team maintains a broad RI coverage with a particular focus on NAM’s ESG-enhanced strategies, including the ESG STARS and Thematic Sustainable Solutions ranges. It works closely with the respective portfolio management teams. Over 2021 and 2022, these ESG-enhanced strategies have grown with the launch of strategies such as the Green Bond, Global Climate and Social Impact, and Global Climate Engagement.

Members of the RI team are hands-on. In 2021, they led 1,033 engagements and voted in 4,200 AGMs, in collaboration with NAM’s Corporate Governance Team. In 2021, NAM ramped-up its voting activity — over 90 percent of its holdings were voted on, with some 10 percent of votes going against management. Votes related to climate and social issues were prioritised.

The RI team is also active in the global RI community, taking part in the industry-wide discussion around responsible investment and promoting best practices across the investment community. It is active in 36 investor initiatives across several ESG topics, including the Net-Zero Asset Managers’ Indicatives and the Finance for Biodiversity Pledge, as well as in several Sustainable Investment Forums around Europe.


Mortgages Agreed Within Seconds? This Banker Vaults Digital Frontiers

KBC Bank chief executive Johan Thijs has no truck with bureaucracy or time-wasting — but stays upbeat, reports Wim Romeijn.

[caption id="attachment_23823" align="aligncenter" width="900"] CEO: Johan Thijs[/caption]

Meet Kate. She’s your personal digital assistant. Ask her anything and she’ll show you the way. Now, Kate is — of course — a bot, and as such perhaps not everybody’s favourite. However, KBC of Belgium is convinced that its accountholders will come around to Kate.

In fact, they are doing so already — in droves.

“Right now, Kate correctly responds to 53 percent of the questions asked thanks to the judicious application of artificial intelligence and deep learning technologies developed in-house. This improves as Kate gains experience. Mind you, at barely 18 months she’s still a baby. Lovable, for sure, but not yet mature. However, we expect Kate to answer and solve fully 75 percent of the queries she receives before long,” says KBC CEO Johan Thijs.

Thijs stresses that Kate’s role is merely to save accountholders time and effort — and add convenience: “She’s the personal banker in your pocket or the palm of your hand. For the holdouts who’d rather chat with a ‘legacy’ account executive, KBC Live, a customer service department with extended opening hours staffed by over 600 commercial employees — mostly staff formerly employed at the bank’s branch offices. In 2020, KBC Belgium trimmed its network from 382 fully staffed branches to 328.

Whilst Thijs finds it hard to suppress his excitement over the bank’s technological prowess, he also insists that technology is but a means to an end: “KBC remains, and will always remain, a bancassurance company that happens to deploy advanced technology to develop and further its core business.”

Exploring Frontiers

According to Thijs, improved interaction between humans and machines is a field that holds great promise. KBC has been exploring this frontier, and pushing its boundaries, since 2012: “In that year the bank made a strategic decision to invest in and deploy technology to better serve the needs of its customers. KBC is a pioneer of mobile banking as well, shifting its full suite of services onto handheld devices. After all, the most ubiquitous platform is without doubt the smartphone.”

Thijs emphasises that the accountholder remains in charge and free to decide how to interact with the bank. “There is an overabundance of channels available from brick-and-mortar to phone, online, and mobile. But we do note that our approach — prioritising solutions over tech — leads accountholders towards mobile banking.”

Johan Thijs is one of the longest-serving CEOs in the European banking world. He was appointed to KBC’s Belgium executive board in 2006 and became its CEO just three years later, earning a seat on the group board as well. After another three years, in 2012, he became KBC Group CEO. Thijs (57) moves fast. In 2017, 2018, and 2019, Harvard Business Review ranked him among the world’s 10 best CEOs. He’d probably still be on that list had the review not decided to stop publishing the list.

Part of Thijs’s longevity at the top may perhaps be ascribed to his tendency to upset the proverbial apple cart by slashing hierarchies and bureaucracy. In a now-famous and oft-recounted episode, he asked an assembly of some 500 staffers from the bank’s mortgage loan department how long it took, on average, to approve a home loan. The answer that came back was “10 days.”

Thijs wondered out loud why this could not be done in 10 minutes. This caused much head-shaking, and even laughter. Doubling down, the CEO then suggested 10 seconds would probably suffice once the product — mortgages — had been reduced to its very essence. It took about a year of tinkering, but now KBC can — and does — fully process mortgage applications in 10 seconds. Sometimes less.

Speed of the Essence with Johan Thijs

“All that required was a different mindset,” he said. “You cannot expect a customer who buys a washing machine online in the evening and has it installed the next morning to wait 10 full days for a mortgage or any other banking product.

“That’s not how things work today. It’s essentially the same with our insurance products. We now process car claims fully online without human intervention. The sole exception are incidents involving bodily harm.”

Johan Thijs has a soft spot for the insurance vector of his KBC Group. After obtaining twin master’s degrees in Applied Mathematics and Actuarial Science at Leuven Catholic University, he started his career as an actuary at ABB Verzekeringen (Insurances), one the four corporate constituents of the 1998 merger that formed the present-day KBC Group.

As an actuary at ABB, Thijs showed a knack for re-engineering existing products using data analysis. He also managed to bring others over to his novel approach. He can be quite convincing and is a people-person par excellence. “In order for me to do my thing, I need to have people around. Then it becomes ‘doing our thing’ which not only inspires me personally but also increases team productivity and often leads to surprising results.”

For an early adopter of fintech, Thijs is a remarkably cold lover of technology: “Running a big company such as KBC is mostly hard work with some tech thrown in to support operations and accountholders — and for good measure. However, we also need to be able to have some fun, of course.” For Thijs, the important issue is corporate culture: one that emphasises unity, inclusion, and a shared sense of purpose. KBC’s Team Blue is all about creating an ecosphere that allows and enables all members to “do their thing”.

Thijs is a friendly, open, and understanding leader not known to suffer mood swings; he is generally upbeat. “When necessary, I can be quite decisive — but only under exceptional circumstances.”

Sometimes fellow bankers joke that KBC behaves more like an outsized fintech than a bancassurance major. Behind such jest may lurk a degree of envy. A few competitors openly admit to mimicking KBC’s approach, says Thijs. “They have quite a bit of catching up to do while our group continues to expand its leading edge.”

The group employs more than 100 AI-technologists — and is busy hiring more. Johan Thijs muses that his 43,000-strong staff is now IT-enabled too, and, as such, underwrites his approach.

However, he remains adamant that tech has limits. “A bank can digitalise pretty much everything except for trust — and almost nobody trusts a machine. Trust is what allowed KBC to navigate the banking crisis and come out the other end relatively unscathed, albeit a bit more streamlined.

“Our operations are built on, and supported by, the twin pillars of human and tech whereby accountholders have the final say over how they prefer to interact with their bank. In the end, it is the customer who sets out our course.”


Dr Rak Vorrakitpokatorn: Taking the Steps to Sustainability

Until fairly recently, the global community strived for economic gains while ignoring environmental, social and community impacts.

[caption id="attachment_23867" align="aligncenter" width="900"] President of EXIM Thailand: Dr Rak Vorrakitpokatorn[/caption]

Extreme climate change has triggered natural disasters and destroyed live and land, with losses from damage reaching $2.5tn, according to the World Economic Forum.

Dr Rak Vorrakitpokatorn, President of Export-Import Bank of Thailand (EXIM Thailand), a state-owned specialised financial institution tasked as Thailand Development Bank, has long been aware of the challenges. The Bank has synergised with concerned sectors to drive the UN’s Sustainable Development Goals (SDGs) and adhere to the COP26 declaration to achieve net-zero greenhouse gas emissions by 2065.

Vorrakitpokatorn, known to his workmates as “Dr Rak”, launched a three-stage framework:

Policy Stage

The Bank has established policies for the sustainable growth of business sectors, society and community under the Sustainable Banking and Responsible Lending principles. These key policies are to gear Thai businesses towards a Bio-Circular-Green economy, with eco-friendly industries representing a quarter of its loan portfolio. This reaffirms the Bank’s commitment towards sustainability, especially in strengthening SMEs for sustainable growth.

Practical Stage

Dr Rak Vorrakitpokatorn is committed to driving the sustainable development from policy into practice. The sustainable development concept and financial innovations minimise impacts on the environment, community and society. As an example, the Solar Orchestra Programme offers “total solutions” for green businesses. The Bank supports businesses in investing in rooftop solar power generation and links it end-to-end with the carbon market ecosystem. Funds have been raised through green bonds to support clean energy projects. It provides sustainable financial and non-financial support as a one-stop trading facilitator for SMEs. The fully-fledged “Beyond Banking” mission equips entrepreneurs with knowledge, capital enhancement, online trade channels and risk-hedging tools to help ensure sustainable success for SMEs in the global market.

People Stage

Employees are the key to the organisation’s success. Vorrakitpokatorn has laid strong foundation and fostered a sustainable corporate mindset from front to back offices under the ESG framework. Constant upskilling and re-skilling allow the employees to stay up-to-date and practice according to standards set by the Bank. The Bank further encourages volunteering in CSR activities and community engagement to broaden their contributions to sustainability for wider range of stakeholders.

Dr Rak Vorrakitpokatorn is recognised for the way he has paved sustainable growth foundations. EXIM Thailand is well-positioned as a strong government ally in driving Thailand toward a sustainable tomorrow.


Janashakthi Life Reinforces Its Commitment to Delivering Excellence with Exceptional Performance

Sri Lanka’s Janashakthi Life puts its staff and customers front and centre to ensure exceptional performance.

[caption id="attachment_23894" align="aligncenter" width="900"] Director / Chief Executive Officer of Janashakthi Insurance PLC: Ravi Liyanage[/caption]

Janashakthi Life is one of Sri Lanka’s leading insurers, established with the aim of providing protection and financial security to the island nation’s residents.

Founded in 1994, Janashakthi Life has been a pioneer in the sector, becoming a respected brand and a household name. From humble and local roots, the company today stands tall in meeting and exceeding regional and global standards.

Janashakthi Life’s approach to changing the insurance sector has involved revolutionising the industry in several ways. Firstly, it was transforming to become an insurer constantly innovating financial and protection solutions to fulfil all consumer needs — benchmarking best-in-class performance across industries.

Another emphasis is putting greater focus on digital space to improve the consumer experience and make operations in developing business value seamless across the value chain. In doing, the firm has integrated consumer and all customer touchpoints across 72 branches, and all 1200 members of the sales force.

“We also track post-purchase behaviour to understand consumer expectations,” says Director and CEO Ravi Liyanage. Customer onboarding to claims processing is seamless and provides an unmatched consumer experience to ensure our policyholders are content.

“Our sales force are the front runners of our business. The members are trained to identify specific individual needs and augment and tailor-make solutions to match those needs.”

A high-performance ethos defines Janashakthi Life. The drive and passion of the team has constantly raised the bar — and achieved notable success. “I believe our consistent financial performance, achievements, accolades, and recognitions affirm our status and position,” he says.

Janashakthi Life’s most valuable asset is its people. They are the heart of the company that gives energy to Janashakthi Life’s purpose. The firm is committed to their well-being and growth, enriching and rewarding career experiences in a diverse and inclusive environment.

There has been considerable investment in training and ongoing professional development, and these initiatives brought about the financial performance and achievements in the MDRT programme. Productive employees build capacity for collective accountability, Liyanage believes.

“Think larger than life when you are confronted with a challenge,” he adds. “Be accountable for goals set for yourself and resilience to bounce back without comprise.”

Evolving Consumer Behaviours

Post-pandemic, there has been an increasing demand for health-related insurance products. Certain segments in the market are speculative about overseas medical benefits because of foreign currency issues, says Liyanage.

In the medical insurance segment, consumer perception is changing with the growth of medical-related products and services. Awareness of critical illness — and the related expenses — tend to encourage more proactive behaviour. There have been significant behavioural change towards investment-based insurance products, especially with the current interest rate hike.

Consumer behaviour is also changing the ways in which policyholders engage with insurance companies for online onboarding, post-purchase behaviour, and online services and payments.

The future of the local insurance sector has changed, and Janashakthi Life is ahead of the curve. “Forecasting the future is a challenge in every sense,” admits the chief executive.

In the near future, the industry may not reach desired GDP penetration levels — as in the case of neighbouring countries. “But once the macro-economic challenges have been overcome, the industry will be capable of entering into growth momentum as it used to be. As for the immediate future, companies who are capable of adopting change with innovative mindset will be well poised to the next growth trajectory.”

Impacts of Social Media

The benefits of social media include the dissemination of information and engaging consumers in a more profound way than traditional media. Statistics show that 58.4 percent of the global population uses social media — which amounts to 4.62 billion users. Meta (Facebook), YouTube and WhatsApp share the highest popularity. These media are likely to be catalysts for change in years to come.

Sri Lanka is by its nature a resilient country. Political and economic stability benefit from reforms. Changing the economic model towards that of a self-sufficient nation is possible in essential goods and services.


Big Slowdown in Chinese Economy Calls for Tweaks to ‘Rebalancing’

Chinese economic figures released August 1 show a slowdown in growth. New Omicron outbreaks — in the context of the zero-Covid policy — the housing slump and heat waves have been decelerating the nation’s pace.

This is another step in the trend of gradually declining rates that has accompanied the “great rebalancing” since the early 2010s. One major difference is the perception of exhaustion from waves of overinvestment in real estate and infrastructure.

The economy started out strong in January-February, but negative shocks led to a contraction in GDP by an estimated 5.4 percent in the second quarter. Industrial production grew 3.8 percent in July over the previous year, below the expected 4.5 percent (Figure 1). GDP growth estimates by several international banks for the world’s second-largest economy this year have been revised down to levels between 2.5 and 3.3 percent.

A scorching, dry summer is stressing energy supplies and leading to production cuts in some provinces and energy-intensive sectors.

The real estate crisis continues to undermine economic performance. Housing is an important component of fixed investment. It grew by just 5.7 percent in the first seven months of 2022, compared to the same period in 2021. Last year, that number was 10.3 percent higher year-on-year.

Property sales are expected to decline about seven percent, and construction to fall about 30 percent, in the second half of this year. The real estate slowdown was driven by the policy choice to reduce developers’ leverage and achieve a long-term objective “for housing, not for speculation”. Banks, regulators, and local governments will have to stick to this policy — and a general bailout is not on the cards. There is an expectation that adjustments to balance sheets of companies and customers and suppliers in the sector will not result in systemic crises, despite occasional defaults and bankruptcies.

[gallery columns="2" size="medium" link="file" ids="23902,23903,23904,23905,23906,23907,23908,23909,23910,23911"]

Financial stress on highly indebted property developers has increased over recent years. Many were unable to refinance in bond markets in 2021, and several have either negotiated repayment extensions with creditors or defaulted. As shown by Zhang, many creditors have agreed to negotiate repayment extensions ahead of potential defaults to give developers more time. (Figure 2).

The impact of the Omicron wave on China’s economic growth was significant, especially in regions subject to lockdowns. Retail sales in July were up just 2.7 percent year-on-year, far below expectations of five percent. New Covid outbreaks and the risk of confinement affected retail trade and domestic tourism.

Since 2020, household consumption has remained weak, persistently below the 2017-19 trend (Gatley, 2022). The labour market has been very soft, which does not help.

Strictly speaking, only exports maintained a good pace (Figure 3). Trade has recovered faster than domestic activity since the reopening began with streamlined logistics and transport. Production and investment are outpacing consumption and services; factory reopening has been a higher priority than the relaxation of individual mobility restrictions.

Factory activity has rebounded more quickly than expected, with exports posting the highest growth rate in a year this June. In contrast, indicators of the purchasing decisions of households have lagged. Such a pattern runs against the “rebalancing” pursued by Chinese authorities since the beginning of the last decade.

Despite the slowdown, the measures taken by the government can be considered modest. The People’s Bank of China cut two major interest rates in mid-August — the repo interest rates on one-year and seven-day open market operations — by 10 basis points. On August 22, it announced a 15bp cut in the five-year interest rate, lowering it to 4.3 percent, while the one-year rate was reduced by another 5bp to 3.65 percent.

Analysts do not believe such rate reductions, or other newly announced incremental fiscal measures, could significantly boost economic growth. The increases in the monetary base (M2) since last year have not been accompanied by an equivalent expansion of domestic credit (Figure 4), denoting the presence of dampening factors underlying the slowdown in investments – certainly in the real estate area, given the fragile situation of firms in the sector and the demand for its products.

China’s Great Rebalancing

To understand Chinese economic growth, it is necessary to go back to December 2011. At that time, I was one of the vice-presidents of the World Bank, and attended a ceremony in Beijing in which then-president Hu Jintao made one of the first statements on the need for that “rebalancing”.

There would have to be a gradual redirection towards a new pattern of growth, in which domestic consumption should increase in relation to investments and exports. An effort would also be made to consolidate value added in global value chains. Services should also increase their weight in GDP relative to manufacturing. China would no longer have the double-digit GDP growth rates of previous decades (Figure 5), but growth would no longer be, as Premier Wen Jiabao had said in 2007, “unstable, unbalanced, uncoordinated and unsustainable”.

High and sustained growth rates had been based on elevated investment-to-GDP ratios — which were only possible with low shares of wage income and domestic consumption, as well as with cheap and repressed finance.

Another factor was that dynamic markets abroad were willing to absorb an expansion of Chinese exports. The combination of high investment and low domestic consumption (a flipside of high profits relative to wages) was only possible because of current-account surpluses in global trading.

Growing income disparities were the domestic flipside of that, a potential source of social strain along with changes in the external environment.

Three mutually reinforcing paths of transformation were seen ahead in 2011, with a structural growth slowdown on the cards.

First, those gains had, to a large extent, already happened by transferring resources from low-productivity agriculture activities to industry. On the demographic front, the old-age-dependency ratio had started to rise. Gains in economic efficiency and technological progress — based on the absorption of existing, imported technologies — would have to be replaced with local innovation. The set of second-generation policy reforms necessary for that would require time.

As a second path of change, a rebalance in the sector structure and in aggregate-demand-composition was expected. Higher shares of services and consumption, following rising wages, with a decrease in exports, savings, and investment ratios-to-GDP, should accompany the increased reliance on domestic sources of aggregate demand.

The income gap between coastal areas, where special zones were created and extended, and middle and western regions should fall with the shrinking labour pool. Despite lower GDP growth and total factor productivity increases being harder to obtain, the popular perception of rising prosperity would probably be higher than before, with increasing purchasing power by the population.

The third path of structural transformation would be a shift up the value chain in tradable and non-tradable activities. That should underpin the directions of change in the sector structure and components of aggregate demand. A transition to more sophisticated production processes was under way.

While moving in a less spectacular trajectory, China would morph into a mass-consumer market economy, combined with supply capacity increasingly reliant on the growth of “total factor productivity”.

Having a clear roadmap did not mean an easy ride. Given the low level of domestic consumption in GDP and the dependence on investments and trade balances, the transition risked experiencing an abrupt slowdown. Waves of credit-driven over-investment in infrastructure and housing followed in a bid to allay fears of a downturn.

The second round of such over-investments came in 2015–2017, in response to a downturn in real estate and the stock market. These were the expansion policies adopted during the pandemic crisis in 2020.

A decline in GDP growth rates, to six percent in 2019, headed towards levels expected after the pandemic (Figure 5). And the gradual reduction of dependence on investment and trade surpluses can be seen in Figures 6 and 7.

The left-hand panel of Figure 6 depicts how domestic demand started shifting away from investment and towards consumption. The right-hand panel shows services outgrowing manufacturing as the production structure became more complex, integrated, and with higher added value.
That is a challenge, and a transition to a less investment- and export-dependent growth model has been coming from a starting point of exceptionally low consumption-to-GDP ratios. No wonder rebalancing toward a consumption-based growth model was expected to be only gradually pursued — GDP growth rates might collapse. The change in growth pattern would require time-intensive structural reforms.

The left-hand panel of Figure 7 displays the decrease of the role played by current-account surpluses with the rest of the world as part of China’s growth rebalancing. 2020 was a point off the curve. China’s current-account surplus narrowed in Q1, but widened again to 1.5 percent of GDP over four quarters ending in Q3, reflecting a more robust trade balance and a collapse in outbound tourism. The right-hand panel shows how rebalancing towards consumption regressed as public investment drove the 2020 first phase of after-pandemic recovery — and the reopening after the Q1 lockdown favoured industrial activity.

A harder question is how the gradual evolution of GDP growth and changes in composition since 2010 would have performed in the absence of real estate over-investment. It counted only on the rebalancing, an increase in wages and mass domestic consumption, and the transition to greater weights of services and higher technology.

This matters — there is a perception that over-investment, as a growth lever, has declined in importance. Not only because of the debt levels, particularly via local government financing vehicle debt (LGFVs in Figure 8), but also because its returns in terms of GDP growth showed a lower contribution.

Chinese authorities are now choosing to safeguard their economy from financial vulnerabilities, even at the price of GDP growth below official targets.

Growth Challenges Ahead

The domestic consumption-to-GDP level remains low, which is a challenge. In addition to the high proportion of profits concerning wages, low levels of public spending on the social safety net have led to high household savings. As depicted on the left-hand panel of Figure 9, the coverage of the unemployment insurance system is minimal — even thinner in rural areas. Only 10 percent of 23 million unemployed workers received benefits in 2016.

Spending on social assistance and public health care is low. China’s aggregate welfare and health expenditures are only about 3.5 percent of GDP, less than the average of its emerging market peers (Figure 9).

Another challenge will be in climbing the tech and value-added ladder. China has done its homework in terms of investments in education, infrastructure, etc., to absorb this. In priority sectors, firms have continued to increase their capital expenditure. China has now reached the top of the ladder in many sectors, where “tacit and idiosyncratic” technology content must be locally developed. The new normal of the global economy — post-pandemic and with the war in Ukraine — is an environment less friendly for China to delve in overseas technology.

China should resume the rebalancing between public and private companies (SOEs and POEs) in service sectors (Figure 10, right-hand panel).

The rebalance has stalled, and progress in reforming SOEs has seen limited progress. Credit is still preferentially channelled to state businesses, which enjoy implicit guarantees. Competition between private firms and state-owned enterprises remains uneven. While large state-owned banks keep lending to SOEs, infrastructure and real estate investments had been supported by shadow finance.

SOE “deleveraging” has paused, reflecting the pandemic effect. What matters here is to call attention to the fact that the performance indicators on the left-hand panel of Figure 10 suggest that the absence of significant reform of SOE businesses has come at a cost in terms of productivity and real returns. According to the IMF, the average productivity gap between SOEs and private enterprises across sectors is about 20 percent.

China has seen remarkable growth over recent decades, but average sectoral productivity remains at about one-third of the global frontier. Productivity gaps are huge in the services sector. Business services productivity stands at just 17 percent of the frontier level, largely because of high entry barriers. Addressing these gaps would mean opening non-strategic sectors such as services to private firms — domestic and foreign. Removing regional regulatory barriers would help to increase competition and factor allocation by facilitating firm entry and mobility across regions and sectors.

These productivity gaps have significant implications for the level of GDP considering the SOE sector’s dominance in the use of resources. The IMF refers to a staff analysis suggesting that reforms closing productivity gaps between SOEs and POEs across sectors could raise output by around four percent.

It is worth recalling the debt legacy of the three previous waves of over-investment in housing and infrastructure. Safeguarding against financial crashes will mean less use of them to boost growth ahead.

Bottom Line

China’s economic growth will keep sliding. The rest of the world can no longer count on it as an engine of growth. But given the size of its economy and its growth rates at the margin, it will remain a fundamental component of the global economic dynamics. i
First appeared at Policy Centre for the New South.

About the author

Otaviano Canuto, based in Washington, D.C, is a senior fellow at the Policy Center for the New South, a nonresident senior fellow at Brookings Institution, a visiting public policy fellow at ILAS-Columbia, and principal of the Center for Macroeconomics and Development. He is a former vice-president and a former executive director at the World Bank, a former executive director at the International Monetary Fund and a former vice-president at the Inter-American Development Bank. He is also a former deputy minister for international affairs at Brazil’s Ministry of Finance and a former professor of economics at University of São Paulo and University of Campinas, Brazil. Otaviano has been a regular columnist for CFI.co for the past ten years.
Follow him on Twitter: @ocanuto


Many a Titter about Twitter as Musk Bungles his Big Purchase

Dust off your shovels! Elon Musk has bought himself into a $44bn hole, and you’re expected to dig him out of it....

Since Elon Musk’s official takeover of Twitter on October 28, the social media platform has been suspended in a chaotic free-for-all.

None of which is his fault, of course. A 500 percent rise in the use of hate-speech?  It has nothing to do with Musk’s history of using alt-right dog whistles to build a rabid fanbase. It’s just trolls. Advertisers running for the hills, leading to a massive loss in revenue? Only a naive person would think it has anything to do with Musk laying off thousands of employees (in a potentially illegal move), firing a few executives, repeatedly insulting his new customer base, and offering no transition plan. Woke activists are to blame for that. It could be worse, though; it could be aliens trying to sabotage his latest venture.

Really, we should feel lucky we get to witness such incredible business acumen in real time: for example, pricing your new product at $20 and then immediately lowering it to $8 because Stephen King said something mean. Or promising to end the current “lords and peasants” verification system but ensuring users can only access key safety features if they can afford to. After all, it’s a move that has worked incredibly well for Tesla, where car users can access child-culling — sorry, self-driving! — mode for an extra $15k.

Musk tweeted “you get what you pay for” in the meantime, but that’s coming from the man who just paid $44bn for a company that brought in $5bn of revenue last year, and zero dollars in profit.

you get what you pay for

— Elon Musk (@elonmusk) November 2, 2022

The spirit of the whole debacle is best summarised by Twitter itself. Nothing captures it better than this exchange between two anonymous users:

“Hahahahahahaha, imagine thinking you’re supposed to be notified before being laid off! Hahahaha.”

“You actually do in California 😂”

“That’s fucking crazy, had no idea”

Not everyone is so light-hearted about it all. Some commentators have declared Musk the King of Twitter, a title he would probably covet. “There is nothing stopping him from accessing your direct messages or handing them over to a government,” they warn. Which is true.

Governments should also be advised that there are quite a few laws against it. Like the Stored Communications Act in the US, and General Data Protection Regulation is a regulation in the EU. Those fearing what the new takeover means for their data security should find some comfort in the knowledge that it was already at risk a long time before Musk moved to purchase the platform. All across the world.

The difference, Musk assures us, is that we can finally benefit from free speech. Trump ally Marjorie Taylor Greene excitedly proclaimed: “FREEDOM OF SPEECH!!!!” on the day of the takeover.

There’s clearly an appetite for a platform that protects it, and Elon Musk is the first person who has committed to doing it. Aside from, you know, Kanye West (who bought flailing free-speech platform Parler), Donald Trump (former President and businessman behind the equally failed Truth Social experiment), and many others.

The problem with buying a restaurant because the server refused to seat you is… well, now you own a restaurant. And at the end of the day, someone has to wash the dishes.

By Kitty Wenham


Accenture: Metaverse for Enterprise, from Digital to Immersive Experiences

‘People are already spending real money to own virtual assets. They will want to spend their virtual money in the real world…’

eCommerce is “functionally correct” but lacks the human interaction. Digital experience — enhanced virtual spaces, augmented physical places, and human contact, will revolutionise nearly all aspects of life and business in the next decade.

Global business leaders had an opportunity to get a first-hand experience of the Metaverse at Davos during the World Economic Forum meeting in May. Accenture’s Global Collaboration Village at Davos, in partnership with Microsoft, offered an immersive experience on one of the sustainable development goals, highlighting the environmental impact of the Sahara Desert on trees in Africa.

People could be told about this, see pictures, or watch documentaries, but to be “actually standing” in the middle of it, hearing the desert winds, seeing the movement of the trees, and absorbing the scale of it, enables a totally different conversation. Users now have the direct connection. They are focused on each other. They are standing in the data, in the experience, in the context. They can relate to it and talk about it and develop a whole new level of empathy and understanding.

This experience will enable users to understand how decisions made at a macro level can be felt at a micro level — in a specific way. That is exactly the potential and benefit of the Metaverse.

While we are seeing mass adoption of Metaverse in the gaming community, enterprises are experiencing it in different ways. For businesses, it is becoming a place to create and capture value, and ultimately make money. The “creators” are building new products and services and a new category of digitally native products. The “bridgers” connect the physical and virtual worlds, changing the nature of how products are marketed, distributed and experienced. “Performers” are creating real-time content, while “participants” are learning, exploring and enhancing.

The immersive Metaverse experience is not complete without the Web3-enabled digital ecosystem, in which users can own, monetise, and utilise their data for their own benefit. Creators can monetise their content and talent through digital assets issued on a blockchain structure that enables value portability. Smart contracts containing conditional programming code that creates utility by facilitating self-executing applications will offer universal, public, permanent single source of truth.

Bursting from the crypto community, digital assets are now exchanged and valued. In other words, people are already spending real money to own virtual assets. They will want to spend their virtual money in the real world.

Let’s start with banking and finance. The Metaverse’s emerging economy is an untapped source of growth, representing opportunities for banks to insure and lend against cryptocurrency, NFTs and other virtual assets. Banks will need to decide on the role they will play and take advantage of this opportunity to extend their brand. The rules of competition are already being established. The latest filing by the New York Stock Exchange to patent an NFT exchange points to the battle on the horizon: who facilitates payments and owns the payment rails in the Metaverse.

Banks will be able to virtualise familiar customer interactions such as cash withdrawals from virtual ATMs, branch storefronts, and real sponsorships for virtual events. Stretch this to the art of the possible and you could walk out of an appointment with your avatar advisor to an ATM, enter your PIN to get money in your virtual wallet, and walk next door to buy a virtual handbag…

From banks to public services, the Metaverse is capturing the imagination of many governments and cities to create incremental value and provide a higher-quality set of government services. South Korea has announced the five-year Metaverse Seoul Basic Plan. It begins by creating a virtual city hall, plaza and civil-service centre. Dubai’s Virtual Assets Regulatory Authority is the first regulator in the emerging digital space. The Dubai Metaverse strategy estimates the metaverse will add $4bn to its economy and support 42,000 jobs by 2030.

Many government-to-citizen relationships can be captured the form of a “smart contract”. The terms articulated in a driver’s licence between the individual and the issuing authority can be captured in a smart contract governing the regulations of the licence. The same applies to a wider range of government documents/licences such title deeds, resident permits, and tax returns.

Retail felt the technology squeeze and was one of the first industries to be forced to evolve into an omnichannel environment. Strong competitive advantage is now likely to flow to retailers who understand how to use the Metaverse to enhance their stores, build experiences and foster their brand community. Brands can leverage the Metaverse to offer new level of immersive experiences allowing customers to try out products and buy virtual or physical goods. The Metaverse allows retailors to expand their footprint. Instead of having stores in every city, brands can establish a Metaverse presence to serve customers globally.

The Metaverse enables retailers to re-imagine and personalise the store experience for individuals and groups of customers. The possibility of shopping for swimming, golf or ski equipment in a matching virtual environment, for example. Metaverse malls are popping up with storefronts where shoppers can interact with avatars, allowing users to explore digital items and buy NFT vouchers that can be redeemed for an item in the real world. Customers increasingly see their digital shopping experience becoming an ecosystem across multiple online channels — and the Metaverse might be the natural expansion for that.

For the general enterprise structure, the Metaverse will change how businesses interact with clients, develop and distribute products and services, manage the workforce and run the operations. Use-cases beyond gaming are not just in the future: they are already emerging in the enterprise space today.

The Metaverse is seen to enhance remote collaboration from 2D to a 3D immersive space as online meetings enable remote work, and potentially diminish the need for co-location. It is expected to see a continuation of the pandemic-influenced rethinking of how organisations are structured and the dynamics of the workplace of the future.

Accenture is using the Metaverse to re-invent its own business environment. Its enterprise Metaverse, is known as the Nth Floor, referring to the virtual environments created to bring Accenture employees together to meet, collaborate and learn. Whether hosting meetings or socialising, the Metaverse is a versatile, scalable solution for bringing a geographically distributed workforce together.

Accenture has created digital twins of many of its physical offices, from Bangalore to Madrid to San Francisco, to provide familiar environments for its people to meet, collaborate and network.

Learning and human capital development is one of the most obvious use-cases for Metaverse in the Enterprise. Reimagining learning with real-life settings and situations will allow for far more captive learning process, opening possibilities both in onboarding new employees and developing current personnel, which is increasingly important for organizations operating at a global scale.

There is also growing evidence to support the benefits of immersive learning. In a recent Accenture report, it was found that a majority of learners (70 percent) forgot training content within 24 hours — and virtually all (90 percent) forgot after a month. The study also found immersive learning offered a path to achieve 33 percent higher learning retention when compared to video.

Within Accenture’s Nth Floor metaverse, a virtual campus called One Accenture Park is helping new employees to connect with the culture, and plant the seeds of professional relationships. This type of immersive experience enables new hires to experience orientation in a personal way, and meet many more people doing so. This year, 150,000 new hires are working from the metaverse on their first day at Accenture.

Equally important to the focus in use-cases is the role enterprises are required to play in shaping the Responsible Metaverse. To grow and thrive, organisations must have responsibility at their core — from ownership of data to inclusion and diversity, sustainability, security, and personal safety.

Enterprises will find themselves on the front lines of establishing trust and safety and defining the human experience in these new places. Trust will be paramount to adoption of the new experiences, which enterprises are beginning to build. Considerations (and concerns) already held today around privacy, bias, fairness, and human impact are becoming far more acute as the line between people’s physical and digital lives further blurs. Enterprises that wish to lead in this space will shoulder the mantle of building a Responsible Metaverse, and the actions and choices they make will set the standards for all that follow.

Answering this — and acting on it — won’t be easy; it’s a journey riddled with uncertainty well outside the norms of most companies environments. But the chance to shape the next decade of business, to build new worlds, and to explore the brand-new markets that these worlds create, does not come often.

About the Author

[caption id="attachment_23949" align="aligncenter" width="500"] Bashar Kilani[/caption]

Bashar Kilani is Managing Director at Accenture based in Dubai and a member of the Growth Markets leadership team focusing on Digital Economy market making trends that accelerate growth, transform operations, and enable organisations to build their digital core.


Shifting Market Drivers: a Moving Target Requires a Comprehensive Focus

[caption id="attachment_23114" align="alignright" width="359"] Ariel Arazi[/caption]

Bedrock Group’s range of private equity investments includes opportunities across real estate and private technology.

Shifting market drivers and global events have increased our focus on these types of investment opportunities. For example:

The Covid-19 health crisis has left the world deeply in debt. Relative to GDP, the median debt load of developed economies now stands at 120 percent, the highest since World War II.

Central banks’ intervention — essentially through quantitative easing, forward guidance, and subsidised loans to banks to help alleviate the debt load — has inflated the prices of most public assets. The US–China trade war was the first warning of a more fundamental shift in markets. If it intensifies, it may lead China to close the door on growth, negatively impacting forward-looking valuations on companies with interests in the region.

The Ukraine war has cemented that shift into a bipolar world, while at the same time destabilising the global supply chain and fuelling global inflation. This was already showing signs of acceleration at the end of 2021.

The focus on private market investments has also increased as they offer less volatility, have higher historical returns and more control on leverage. Private firms also have different characteristics to listed ones. They are younger, often have significant intangible assets (such as early-stage research not publicly disclosed) and are proliferating in number while listed ones are in decline.

Since 2011 we have witnessed an epic run-in venture capital-backed software-first companies that have gone on to eat so much of the world, penetrating and disrupting one industry after another, with no end in sight — even if there are bouts of market volatility as multiples and valuations adjust.

Interest in private technology investments is also being driven by the accelerated shift to digital because of Covid-19, and the falling cost of computing. This has accelerated developments in various industries, such as Cloud, 5G, and AI. Clean tech is making a comeback as the market matures: carbon capture and emissions reduction, for instance.

The Bedrock Team

The unique strength of our team ensures that we can source, evaluate, and execute on some of the most exciting private tech deals prior to them going public. Our team has identified two strategies that enable us to gain access to the full spectrum of the life of emerging technologies: Best-in-class, early-stage venture capital fund-of-funds selection and direct pre-IPO investments.

Buy and Hold Quality

Bedrock Group’s property portfolio is not just about AUM but also its ability to buy and hold quality for the world’s biggest asset class We take a pure focus on quality and finding pockets of liquidity in illiquid markets.

We work with some of the largest families in Europe, made possible through an alignment of interests. We set up the Opportunistic UK Investment Club to offer investors the chance to leverage the necessary skills, experience, and local knowledge to successfully acquire and take advantage of value-add real estate investment opportunities.

The programme is focused on seizing unforeseen opportunities in the UK real estate market. The aim is to acquire quality, flexible and desirable assets in sustainable locations. Recent acquisitions focused on a small zone in Clerkenwell, London, as it is as up-and-coming area, with excellent communications, connectivity, and character. We also recently acquired core retail assets in a prime New York location.

Going forward we will continue to take a more opportunistic approach as the downturn appears.


Strategy, Structure, Shared Purpose: There are Rules to Protecting Family Wealth

[caption id="attachment_23110" align="alignright" width="359"] Maurice Ephrati[/caption]

Bedrock Group partner Maurice Ephrati outlines his philosophy for family governance and next-generational financial education.

The key ingredients for successful multi-generational wealth management go beyond investment management. We see those keys to wealth protection and successful generational transition as having:

A long-term strategic approach, whereby the family is clear on how they want the assets to evolve over the course of the next 10 or 20 years

A clear shared purpose which defines the family’s commitment as stewards of the wealth. Also, a clear set of values that reflect the family’s identity and behaviours.

A solid governance structure, to ensure good decision-making and the right checks and balances

A next generation that is educated in the family’s wealth and has the right competencies to maintain it, but more importantly to grow it. This can be achieved directly, as managers of the family office or indirectly, as responsible shareholders.

A mindset that fights against complacency and focuses on innovation and new ways of contributing towards the family wealth

There are too many cases still where the next generation is thrust into the management of assets and/or a family business that they don’t understand, don’t want, or feel completely overwhelmed by.

Our purpose is to educate and provide expertise to the next generation: in skill development and a candid understanding of what it means to be part of a wealthy family. We know this helps them to shoulder the responsibility in the right way; not as an imposition or a reason for entitlement, but as something to be proud, grow and protect.

This notion inspired the creation of the Bedrock Community for Future Leaders, which is led by our in-house Family Governance specialist, Maria Villax, and brings together like-minded next gens to connect, learn, and exchange ideas. We host a series of events throughout the year, covering a broad range of topics including investment, family governance, entrepreneurship, leadership, strategic philanthropy, and succession planning.

A Passionate Team

Bedrock Group team members are passionate about their work. It is an innate part of our firm’s culture, and something that is actively encouraged.

Partners create an environment and have a leadership style that allows people to identify opportunities through their own individual lenses and pursue them.

People are attracted to the entrepreneurial spirit that the firm and partners inspire. Having this type of environment enables people to create their own path — but also there is a shared sense of direction that creates passion and enthusiasm amongst the team.

Responsibility

CSR is a core pillar of Bedrock Group’s framework and approach. We support the team by engaging with CSR in a number of ways. We create the opportunity to directly impact the communities local to our offices, by encouraging volunteering. We offer time off to all staff members to give back to society while working on issues they feel passionate about. From supporting hospices to delivering food parcels, our team members continue to create and promote diverse impact in their communities.

Philanthropy

We donate a percentage of annual profits to philanthropic causes. Donations are further enhanced by employees via payroll giving; with the company having a matching scheme, which helps  maximise the impact and helps support causes that individuals are passionate about.

For more information regarding Bedrock’s Community for Future Leaders events, please reach out to our Head of Family Strategy and Governance, Maria Villax

We are always on the search for passionate and enthusiastic individuals. If you would be interested in joining our team, please contact us here


The World is Too Complex to Become Lazy — and Challenges Bring Chances

[caption id="attachment_23516" align="alignright" width="300"] David Joory[/caption]

Bedrock Group partner David Joory focuses on investment management. Here he discusses his daily motivation.

Investment management is a challenge for any company. At Bedrock Group, we always keep a finger on the pulse because the world is too complex and chaotic to become lazy. Challenges breed opportunity, particularly for those with a long-term view who are willing to stomach interim volatility and take calculated risks.

We engage with our large network of clients, banks, managers, and subject experts; monitor incoming economic/market/corporate data and hold frequent investment committee meetings. Bedrock Group has evolved into a consolidated contact for the investment and administrative needs of ultra-high-net-worth individuals, families, endowments, foundations, institutions and investment professionals.

To successfully invest in uncertain times, we make sure we understand what we hold, and take a holistic view of risk-management in our portfolio. It’s important to step back from the noise and consider long-term trends. It’s equally important to act with conviction when opportunities present themselves. We remain humble and open to changing our minds.

Understanding Client Needs

To incorporate the human element in investment management, we take a bespoke approach. Each client is different, and we take time to understand their needs and goals, and provide bespoke solutions and portfolios to suit each client’s unique circumstances.

We take a holistic approach to wealth management, which means including the entirety of our clients’ needs, from external reporting, family governance, and next-generation development.

We pride ourselves on providing accurate, unbiased advice. Our clients receive independent advice, and we act in their best interests without an agenda. We sit on the same side of the table, investing alongside our clients — we have skin in the game. We act as a partner to our clients, through assigning dedicated relationship managers and providing direct access to our founding partners.

Responsible Investment

A notable public milestone in our transition took place on 19 January 2021, when we became signatories of the United Nations PRI.

Principles for responsible investment (PRI) puts the requirement to manage clients’ wealth at the core of the business — in a way that accounts for clients’ personal preferences, interests, needs and objectives. As such, we understand the importance of not taking a one-size-fits all approach when it comes to engaging in sustainable responsible investing (SRI). We signed-up to certain principles: to incorporate elements of ESG into our investment analysis and  decision-making during our selection processes and internal policy making.

Governance

When it comes to managing clients’ wealth, governance is at the core of Bedrock Group’s approach. It’s a priority in our product offering to clients, as we believe that good governance — at both a company and solution level — will drive better risk/reward returns for our clients.

Once the principles (checks & balances) of good Governance are fully met, Environmental and Social are included as supplementary aspects of our product offering. Going forward, our desire is to offer our clients a bespoke sustainable impact portfolio which will cover multi-asset classes — and that will be the result of our broader ESG approach.

We are always on the search for passionate and enthusiastic individuals. If you would be interested in joining our team, please contact us here.