Winston, author of the
‘The Big Pivot’
, was speaking to a crowd of more than 100 treasury and finance executives at the event held by the CTC, the executive-level membership of the Association for Financial Professionals (AFP), the parent of gtnews. He focused on how business has essentially reached a tipping point in which companies can no longer simply be reactive to certain megatrends and must be more proactive if they want to keep up with the changing world. If companies make “a profound change in strategy, tactics and philosophy – that will make their organisations more resilient and flexible in a volatile world,” he said.
A recent HSBC study found that there is an annual global investment of about US$250bn in sustainability and the bank expects this to further develop into a US$2.2 trillion market by 2020. Indeed, Winston believes this number is too low. “We’re talking about deep changes in multitrillion dollar industries – buildings, transportation, energy, water systems, consumer products, finance, etc.” he said. “In fact, we’re already invested [US$250bn] globally in building this clean economy.”
The shift in the clean economy has not gone unnoticed by the investment community. Winston noted that Barclays actually downgraded the entire US electric utilities sector to ‘underweight’ in its bond portfolio due to the rise of solar power. Fully 80% to 90% of the energy put on the grid in the US in the first quarter of 2014 was solar and wind.
“Renewables have already won,” Winston said. “They’re just going to take a long time to be the dominant source of power, because we have such a giant system. They’ve already won the economic argument.”
Furthermore, the world is more open and connected than ever before, and public scrutiny on businesses and individuals will continue to increase. “What this means is that companies can’t hide; everything about their operations is open,” Winston said.
Winston touched on the
Rana Plaza factory collapse
in April 2013 in Savar Bangladesh, which claimed the lives of 1,129 people. It was the deadliest apparel factory accident in history. “The headlines around the world, immediately, were about the brands associated with this factory,” he said. “It wasn’t just some distant thing anymore. It was: ‘This is a Wal-Mart or Primark or Benetton related factory,’ even if it was a subcontractor to a subcontractor.”
Also last year, the
New York Times
ran a story titled ‘Worker Deaths Raise Questions at an Apple Contractor in China’. The headline focused on Apple – not any of the companies that actually operate in China. “Apple does not own this company,” Winston said. “But in the court of public opinion, they do. You all do. The value chain now is your ownership.”
Consumers and businesses who make purchases are asking where products are coming from, where they are made, what the companies’ carbon footprints are and other issues. “The financial community is asking more questions,” Winston said. “The Carbon Disclosure Project (CDP) started as a small thing about 10 or 12 years ago. It’s now backed by US$87 trillion in institutional investors. It’s a questionnaire that goes out to all of you – all of the largest companies in the world. And almost all of you are answering these questions about carbon and energy use.”
The world is also becoming more expensive to operate in, Winston said. The rise of the middle classes in China, India and other nations is a great success story for human development, but it also means that people are consuming more.
In 2012, China built 17 billion square feet of new space. To give attendees an idea of how much that is, Winston asked them to picture all of the commercial space in Manhattan and then multiply it by 30. That was just in one year.
“The demand is rising relentlessly,” said Winston. “There are going to be nine billion people, and they want more. That’s good for all of our businesses in a sense; there are new markets. But it also means there’s not enough stuff. The demand for everything going into our society – metals, oil, energy, wheat and food – is rising.”
To compensate, prices are rising across the board. Winston noted that there are more hungry people now than there has been in 50 years because food prices are rising so fast. Nearly every commodity is experiencing the same price inflation. “McKinsey pulled together some numbers on commodity prices, and over the course of the 20th century, those prices went down,” he said. “And in this century, the slope changed dramatically. In 10 years, we’ve wiped out all the productivity gains of the previous hundred. We need to get leaner as companies, as countries, and use less stuff, or we’re not going to be competitive.”
Companies are waking up to this, although not as quickly as one would hope. PwC recently did a survey of chief executives (CEOs) on whether they are concerned about these issues. Nearly half were worried about commodity prices, energy and other basic resources. “I think these numbers should be at 100%, given the data,” Winston said. “These numbers are not future projections; they are what has already happened over the past 10 to 12 years.”
This is being reflected in company bottom lines. “Coca-Cola announced a few years ago that they would spend over US$800m more that year on commodities, which meant corn,” Winston said. “Cotton went up 300% just a few years ago, forcing apparel makers to make a hard choice. You either have to pass along those costs and effectively take a hit to revenues, or you have to take a hit to margins.”
A hotter world
In addition to the world becoming more expensive, it is also becoming hotter. Extreme weather and extreme heat are becoming the norm. “Last year in Australia, they had to add two colours to their meteorological maps because they were seeing consistent temperatures between 50°C and 54°C, which is almost 130°F,” he said.
This leads to carbon and the stranded assets problem, an issue that business really need to know about, Winston said. “There is this very real concern that, if we want to hold temperatures in the world to a certain level, we can only burn so much carbon,” he explained. Unfortunately, oil, gas and coal companies have three to five times that much carbon in reserve. “Think about what that means; if we don’t burn it, half of their value is gone.” Yet if it is burned, then temperatures might rise above levels that are safe.
Winston noted that Exxon and Shell put out statements recently that they do not believe this as a problem. “I think that’s a mistake for anybody investing in this sector,” he said. “I’m not going to tell you that some asset class is going to be worth less or more than another, but the world is starting to come after carbon very aggressively.”
Just last week, president Obama introduced a new rule that would reduce carbon emissions from US power plants by 30% by 2030. “We’re already halfway there actually,” Winston said. “It’s not as aggressive as it sounds. The economics of renewables are already pushing us down this path. But these are serious changes in the asset value of this sector – the most valuable sector in the world – and it’s not going to be worth as much unless they make a very big shift in their business.”
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