Leaders At Davos Face $12 Trillion Imminent Economic Disruption
Leaders at Davos this week planning for the upcoming decade, heard that they face economic disruption of $12 trillion a year from industries that prioritize Sustainability, Trust and Inclusion. However, questions continue to be asked whether this disruption is happening swiftly enough, given the rise in global risks particularly environmental risks.
In a week when the IMF warned of slowing global growth, a climate crisis, breakdown of corporate trust and slowing social mobility, increasing investments into these sectors could double global growth rates over the next ten years.
This is the equivalent of adding 12 Apples, Microsofts or Googles to the world every year throughout the 2020s.
The question is, who will be the winners and losers in this new ‘Green Gold Rush.’
Living within our Planetary Boundaries
As the planet’s population is forecast to stabilize around 10 billion, with 3 billion additional middle-class households over the next decade, there is a need to keep consumption within our planetary boundaries – carbon emissions being only one metric.
Radical transformation is needed to address other environmental challenges such as global biodiversity loss, overuse of chemicals from fertilizers and pesticides, freshwater scarcity.
It will entail an unprecedented and radical transformation of 60% of our global economy over the next decade and the biggest sectors for disruption identified in the report include:
• Food and agriculture
• Energy and materials
• Cities and urban growth
• Health and well-being
A younger generation – more united across international boundaries – are already showing vastly different value systems from previous generations. 73% of millennials are willing to pay more for sustainable products, they are more vegan, advocate for lower packaging waste, and are more aware of their carbon footprint.
As this cohort rises and increases purchasing power around the world, this will drive big shifts in consumption patterns, and create new winners who can cater for this new economy.
UBS estimates that through inheritance, over $24 trillion of financial assets will be controlled by millennials over the next decade, and will become increasingly allocated toward companies producing more social, environmental and ethical services and products, given the strong ESG preferences of millennial and a more diverse profile of investors.
‘House still on fire’
This transition still has some uphill battles. 17 year old climate activist Greta Thunberg once again chastised leaders this week by saying not enough action has been taken to stop the harm, particularly on climate change as the planet races toward an 8 year deadline on our planet’s global carbon budget.
For example, Governments around the world continue to support fossil fuels through subsidies of $370 billion a year, compared with the $100 billion a year needed to transition to a low carbon economy. Of the 8 Oil Majors, less than 5% of capital budgets were spent on renewable energy projects to reflect the new economic and climate realities, compared with 90% of capital expenditures on existing oil and gas wells.
In the face of growing social, political and financial pressure, it is increasingly clear that many of these carbon-intensive incumbents could become the Blockbusters or Kodaks of the 2020s, by failing to proactively react to the underlying trends.
Regardless, the winners of the new economy may lie elsewhere.
Climate Risk is Investment Risk
$7 trillion asset owner, Blackrock’s CEO Larry Fink, issued his Annual Letter to CEOs ahead of Davos, with a clear statement that Climate Risk represented Investment Risk and that bolder action is needed by the finance community and long term holders of capital such as Pension Funds, Sovereign Wealth Funds and Insurance Firms to accelerate the transition needed.
Former Governor of England and climate advocate, Mark Carney, was announced in a new role advising UK Prime Minister Boris Johnson on Climate Finance in the run up to the Glasgow Climate Summit in December, and this could yield stronger action to accelerate this transition toward a greener financial system.
Particularly given that it is now being shown that the transition to low carbon economy will result in relatively low price transitions to customers in most sectors – 1% on food packaging, 3% on new housing construction, and 10-20% for air transport.
Trust is another big theme at Davos this year, as software and artificial intelligence become more connected than ever before to manufacturing.
In 2019, software issues led to the multi-billion dollar grounding of Boeing’s Max 737 fleet, eventually costing Boeing’s CEO his job. As software and AI continue to impact manufacturing and new products are introduced such as Autonomous Vehicles and Connected Devices, new measures of Digital Trust and a ‘Trust Dividend’ will increasingly distinguish certain ‘for purpose’ products from those lagging behind.
Similarly, these efforts on Ethics or Trust Certification cannot be defined by individual companies alone as Alphabet CEO Sundar Pichai has argued, and require external validation, transparency and scrutiny as more regulators around the world follow the model set by Europe with GDPR.
Efforts around a more holistic ESG framework were announced by the major accountancy firms at Davos this week, that should create greater transparency than ever before on the manufacturing footprint of various companies and sectors. Although it remains to be seen whether some companies will go as far as linking C-Suite Executive Pay to these ESG indicators, as has been proposed.
Indeed, it will only be a matter of time before such traceability efforts are automated using many existing technologies. Overall, this effort should create radical transparency and encourage trust over the next decade as Social and Environmental indicators become more important for investors and address growing concerns around greenwashing (making exaggerated claims on environmental and social credentials).
As protests against the slowdown in social mobility, rising inequality, and demands for a new form of capitalism continue to rise, the new economic paradigm will need to be inclusive of those who are being left behind. This is not just within a company’s workforce, but also across the entire supply chain in advanced and emerging markets too. It will take a new form of ‘systems thinking’ and economic model.
If the $12 trillion of new opportunity is captured only by existing incumbents with access to deep capital markets financing, there will be social dissent. More thoughtful business models around trusted partnerships may need to be created to ensure a greater role of Small and Medium Businesses, startups, trade margins along the global supply chain, as well as ensuring a wider group of the population is included and can partner with such firms more easily.
Underemployment and unemployment remain high in many regions of the world, and the economic system of the next decade will need to work equally well for them as well as for the planet. Otherwise, geopolitical risk could rise again.
Innovation as the new hope
Whilst several of the new products that are needed for this economic transition have yet to be invented or scaled, this is rapidly changing.
Some leaders have proactively moved forward to position their regions to incubate such firms and capture this new $12 trillion a year opportunity. For example, China announced its big ban on single-use plastics this week, and California’s Governor announced an innovative $1 billion Climate Catalytic Innovation Loan system to stimulate and invest in new green technologies that could support companies like Microsoft with their bold $1 billion negative carbon initiative.
Over the past few years, there has also been a rapid growth of new Venture Capital Firms investing in such for-purpose products in all sectors varying from Circular Economy, Urban Mobility, Ocean Health, new Education and Healthcare ventures.
So it may be from such higher risk capital, a new form of purpose-led entrepreneur and influencers like Greta Thunberg, where the real $12 trillion economic transition over the next decade is driven from.