Green protectionism

Standing in the middle of Verkor’s headquarters in Grenoble, Olivier Dufour, the firm’s co-founder, delineates his vision for the future of Europe’s green economy. “Batteries replace oil – it is important not to move from one dependence to another,” he exclaims. Founded just three years ago, Verkor has quickly become one of Europe’s leading low-carbon battery producers. The firm recently partnered with Renault to supply the equivalent of 12 GWh of batteries annually. Through its ‘Ecole de la Batterie’ it will train up to 8,000 employees to meet the sector’s ever-growing needs.

Several EU regulatory initiatives aim to turn the bloc into a battery production leader, yet Europe needs to do much more to rediscover its industrial mojo, Dufour says: “The EU needs to reinforce its regulation to enable rapid scaling up all along the battery supply chain, from mining to recycling. It needs to use all the catalysts in its hands: financing, trade mechanisms, training, permitting and energy prices.”

Showing them the money
The race for battery supremacy is part of a broader industrial realignment, fuelled by a mix of environmental, geopolitical and trade interests. Covid brought to the spotlight the vulnerability of global just-in-time supply chains. Trade tensions have slowed globalisation down. Climate change, an emergency that requires global collaboration but local action, is increasingly seen as an opportunity for developed economies to ‘onshore’ industry.

The first shot was fired last summer when the Biden administration passed the Inflation Reduction Act (IRA), pledging to provide $369bn in tax credits, grants, subsidies and loans to boost US clean-tech manufacturing. The plan has sparked a manufacturing boom, says Jonas Nahm, an energy expert at the Johns Hopkins School of Advanced International Studies: “There are an impressive number of plant announcements, particularly in the battery and electric vehicle sector. It’s also accelerating investments in domestic solar manufacturing and other technologies supported by the bill’s tax provisions and local content requirements.”

Widely believed to be a part of the US strategy to weaken China’s dominance in the green economy, the IRA includes over $60bn dedicated to onshoring incentives (see Fig 1). Currently, around 90 percent of clean-tech manufacturing is located in Asia, with China alone accounting for 85 percent of global solar cell production. However, the bill’s domestic production requirements have irked US allies. Only firms that source parts and materials from the US or its trade partners can benefit, excluding the EU and Japan, which do not have a free trade agreement with the US. The Belgian Prime Minister Alexander De Croo has accused the US of trying to poach European investment: “They are calling firms, in a very aggressive way, to say ‘don’t invest in Europe, we have something better.’”

The makeup of the bill has been the product of a polarised political environment. Many Republicans perceive the energy transition as a nuisance that renders competition with China harder. The Biden administration passed the IRA as a ‘reconciliation bill,’ which only deals with spending and revenue, to frame decarbonisation as an economic issue. The bill has also been criticised by industrial groups, such as the National Association of Manufacturers, because of its 15 percent minimum corporate book-tax, aiming to raise revenue for subsidies and tax breaks. Many of the planned facilities are in Republican states, which could boost support for an energetic climate policy, says Nahm. But political division has affected the bill’s remit, he told World Finance. “It doesn’t include investments in many institutions, like vocational training, that would also be helpful in allowing businesses to respond to these incentives and build up a clean-tech manufacturing sector in the US.”

Many experts question whether the IRA goes far enough to tackle climate change. One flaw is that incentives are carbon intensity-based, with a focus on future clean energy and no accountability for existing emissions, says Sanjay Purswani, a senior knowledge analyst specialising in energy at the Boston Consulting Group, adding that they may not be sufficient to achieve cost parity with fossil fuels.

US President Joe Biden

Delays in the bill’s implementation may also dampen its immediate benefits. “The IRA gives the industry a long-term horizon to point to with tax credits, but is also introducing uncertainty with the delays in guidance,” says Cassidy DeLine, CEO of Linea Energy, a US power producer, adding: “You have manufacturers who are planning to build domestic manufacturing facilities, but we don’t have the guidance on what will enable equipment to actually qualify. The more stringent the requirements are, the more likely it is that fewer of the announced domestic factories actually get built.”

Potential costs have also raised concerns, given that its open-ended budget could increase demand for green subsidies. Goldman Sachs estimates that the bill could cost up to $1.2trn, but also spur over $3trn in private investments. However, researchers at the US think-tank Brookings Institution estimate that IRA incentives will be less costly than climate-related damages, while helping the US achieve emissions reductions of up to 42 percent by 2030, up to 11 percent lower than without the bill. US solar and wind power could be the cheapest in the world by 2030, courtesy of the IRA, according to Credit Suisse.

French Prime Minister Emmanuel Macron and ProLogium CEO Vincent Yang

Europe fights back
In a truly European fashion, the EU has taken its time to respond. Its post-Covid recovery fund made available €724bn to member states, a third dedicated to green projects. The French president Emmanuel Macron has been touting his vision for a ‘sovereign’ Europe leading the fourth industrial revolution.

The war in Ukraine highlighted the dangers of dependence on a single energy provider, argues Eleonore Soubeyran, an energy policy analyst at LSE. But it was the IRA that stressed the need for a new industrial policy. This March, the European Commission presented its proposal for the Net Zero Industry Act (NZIA), delineating a plan that will mobilise the bloc’s full firepower to kick-start a European clean-tech revolution. The scheme will enable member states to loosen regulatory constraints to green investment, in some cases even overriding environmental concerns.

Permits for large plants producing net-zero technologies will be granted within just one year. An example of the potential gains came this May when the Swedish start-up Northvolt announced that it will build its third battery factory in Germany instead of the US, after Berlin pledged generous state support. The plan’s goal is to raise domestic clean-tech production to 40 percent by 2030, a major increase from present levels; currently, just 10 percent of solar panels used in Europe are produced locally. “The 40 percent target lacks clarity over what more the EU could do if current measures do not deliver. This is a possible risk, given the ambitious nature of the target,” says Danae Kyriakopoulou, policy fellow at the LSE’s Grantham Research Institute on Climate Change and the Environment.

Growing anxiety in Brussels over the IRA’s impact on European industry has been the main driver behind the plan. According to one insider, it was drafted in less than a month. “It hasn’t gone through the full political cycle and the usual refining necessary to reach consensus in the EU. It’s a rushed, improvised response to the IRA, so it doesn’t amount to anything similar to it,” says Ignacio Velasco, a researcher at 3EG, a climate change think tank. To alleviate tensions, the EU and the US have a taskforce to discuss the thorniest subjects. Negotiations have already borne fruit, including US concessions on electric vehicles (EVs) and critical minerals.

Several European firms have criticised the NZIA, warning that it does not match IRA investment incentives. However, the EU’s approach is constrained by the bloc’s institutional setup. “The EU has limited fiscal capacity, because it doesn’t have a large federal budget. It can’t throw money at the problem, which is what the US has done. Only member states can do that,” says Velasco. The Commission also had to strike a balance between large and smaller economies, with the latter fearing that lax subsidy rules would allow rich countries to favour their companies. In 2022, German and French firms received nearly 80 percent of EU state aid. Forthcoming negotiations about the bloc’s Stability and Growth Pact could change that mindset. Margrethe Vestager, the well-respected competition commissioner, has suggested establishing a ‘collective European fund,’ financed with joint debt, to turbo charge green investment. However, a move towards fiscal federalism will take time, says a source that has been following EU negotiations: “That’s bigger than climate change – it’s about the nature of the EU. It will not happen overnight as a response to US policy.”

Critics also point to a protectionist focus that marks a return to the EU’s Keynesian roots, notably industrial planning. Some warn that the plan could set the green transition back by making it more expensive. “While excessively depending on one exporter is not sustainable, as we saw with Russia and gas, it does not excuse incentivising across-the-board inefficient import substitution,” says the LSE’s Kyriakopoulou.

The first carbon tariff system
Carbon taxes are also becoming a top priority of the global green agenda. Partly pushed by rising carbon prices, the European Commission laid out last December its Carbon Border Adjustment Mechanism (CBAM), effectively the world’s first carbon tariff system, to be put on trial this October. The scheme will replace the ‘free allocation’ component of the EU’s domestic emissions trading system (ETS), which helps producers bid for emission allowances. The CBAM will enable member states to tax carbon-intensive imports, including steel, iron, cement and fertilisers, with importers having to obtain emissions certificates based on EU carbon prices.

Bread and batteries

No other industry is more emblematic of the scramble for green profits than electric vehicle batteries. China currently holds 78 percent of the world’s EV battery manufacturing capacity, with Chinese battery makers CATL and BYD alone accounting for half of the global market. Both the IRA and the NZIA aim to change that.

The IRA requires at least 50 percent of battery components to be manufactured or assembled in North America, increasing to 100 percent by 2029. The plan has delivered results, with Michigan emerging as a new battery powerhouse, courtesy of Ford’s $3.5bn planned battery plant using technology from CATL and another $2.4bn battery plant being built by a subsidiary of Gotion, a Chinese firm. Tesla, Volkswagen and Norway’s Freyr Battery have also recently picked US locations to build battery factories.

In Europe, the NZIA offers regulatory incentives aiming to mitigate energy disruption and improve investment costs for battery projects. Taiwanese battery maker ProLogium has highlighted this shift in European policy as a reason for choosing France to build a €5.2bn plant.

However, many analysts are pessimistic that the programme will make a difference. “It will be very hard, probably impossible, to build something akin to the enormous, synergetic industrial ecosystem China has spent more than a decade building in the battery and EV sectors, at least when it comes to scale, and thus price,” says Nis Grünberg, a Chinese energy policy expert from the think tank MERICS.

Verkor’s Dufour, whose firm has a €1bn gigafactory in Dunkirk in the pipeline, confesses that US states have tried to lure his firm to invest in the country, offering a mix of IRA and local benefits. The EU has set a goal of achieving 90 percent battery self-supply by 2030, based on projected needs of 550 GWh, but this pales compared to US and Chinese plans, he says: “This goal is not ambitious for batteries. The industry foresees a need for 1,000 GWh by 2030, meaning that half of the batteries will have to be imported if the EU target is reached. It should be 100 percent or more, which is achievable if the EU creates the right conditions.”

Through the new system, EU policymakers hope to tackle ‘carbon leakage’ – when manufacturers relocate their production outside Europe to avoid domestic carbon taxes. Another goal is to push third countries to improve their environmental standards, creating a level playing field for European manufacturers. Critics, however, point to a lack of ambition, given that the Commission’s initial proposal was watered down by member states. “The phase-out is so slow and long that it will practically not be effective this decade, and after that it could be too late for the climate,” says Agnese Ruggiero from Carbon Market Watch, a Brussels-based environmental group.

Complexity is another challenge. The EU will need to make tough choices on which goods and sectors the CBAM will cover and grapple with technical challenges around the price adjustment methodology, taking into account other carbon pricing systems, such as that of South Korea. “Theoretically, CBAM is a better solution because it offers better environmental efficiency incentives, if designed correctly.

That’s why it hadn’t been implemented in the first place, because it is way more complex,” says Patrick Peichert from Frontier Economics, a consultancy. Loopholes may persist, notably ‘resource shuffling,’ which allows producers to shift products based on the level of each country’s environmental standards. “The result would be that countries implementing a CBAM would lose domestic market share, while global emissions would not change,” says Roberta Pierfederici, a policy analyst at the LSE’s Grantham Research Institute.
EU manufacturers have criticised the scheme for failing to cover exports, leaving them to battle global competition without any support.

One reason for this omission is to make the scheme compliant with WTO rules, which effectively require carbon tariffs to exclude export rebates and have a clear environmental focus. For many developing countries, however, the CBAM constitutes a protectionist measure that will disadvantage their exporters; many have no carbon-measuring systems in place. India is planning to challenge the system at the WTO, while other countries have begun negotiations with Brussels, requesting potential waivers. To alleviate these fears, the EU has committed to provide climate finance to developing countries.

The CBAM is even less popular with Chinese and US policymakers, who have argued that it penalises their producers. The EU has retorted that the scheme just extends rules that already apply within the bloc. “Europe is entitled to its own import rules, just like with food safety standards,” says Carbon Market Watch’s Ruggiero. One way it might gain some acceptance is the adoption of similar policies by other economic superpowers. China is expected to incorporate carbon pricing into its emission trade system, possibly even tracking the full-lifecycle carbon footprint for all traded goods, while politicians and economists have also lobbied the Biden administration to establish a US carbon tariff system.

Lithium battery Industrial Park in China

A WTO crisis
The increasing role of climate concerns in trade disputes has prompted suggestions that, like many other international organisations, the World Trade Organisation (WTO) should have a climate-orientated mandate. “There is a general recognition that WTO rules are not up to the challenge of climate change,” says Soubeyran from LSE. But the overlap of climate and national security makes that more difficult, especially after the US lost a string of cases where it tried to justify erecting trade barriers by invoking national security concerns. Disputes between the US and China on a number of issues, as well as sporadic friction with the EU, have diminished the organisation into a shadow of its former self. Its main dispute settlement mechanism has been paralysed, with the US refusing to appoint new members to the relevant appellate body.

A case in point is the IRA’s clash with WTO trade rules, notably its domestic content provisions. “From an environmental perspective, you can’t justify excluding some members and not others. That is very hard to defend at the WTO,” says a source familiar with the operation of the body. China’s commerce ministry has said that the bill possibly violates WTO rules concerning discriminatory subsidies, while South Korea is considering filing a complaint on the grounds that the law even breaches a bilateral free trade deal. For the US though, that horse has bolted, says the source: “The IRA falls into a wider pattern of US behaviour: it doesn’t care about the WTO anymore. In their internal political and legislative dialogue, it isn’t relevant anymore.”

The emergence of green industrial policies has raised concerns that the global economy is entering a phase of protectionism. Canada has warned that a subsidy race would hurt everybody. In the UK, the Labour party, which is expected to win the general election next year, has made an IRA-like £28bn green investment programme its flagship policy. Emerging economies would pay the price of a global race to the bottom, warns the LSE’s Pierfederici: “US and EU subsidies could decrease green foreign direct investment in developing economies that do not have the same capacity to subsidise their green sectors, exacerbating the North-South divide and resulting in a significant increase in demand for critical minerals, many of which are geographically concentrated in developing countries.”

All eyes are on China, the country accused of starting the protectionist race. Given its green tech lead, the Chinese government is expected to deploy a carrot-and-stick strategy to ensure its producers stay competitive. Ironically, China is getting a taste of its own medicine, but it will not back down, says Alex Wang, an expert on Chinese energy regulation who teaches at UCLA: “It may double-down on support for green industries to maintain the global supply chain dominance it has built over the last two decades. China looks to expand its clean technology business in the global South, as Chinese companies face increased resistance in the US and Europe.”

So far, its response has been meek. One reason, argues Nis Grünberg, an expert on Chinese energy policy from the think tank Mercator Institute for China Studies (MERICS), is that it already has IRA-like state aid measures in place. But a more aggressive stance should be expected, he says, as China could weaponise green tech in its disputes with the US and adopt offensive and defensive trade policy instruments such as export restrictions, localisation requirements, and foreign direct investment screening to retaliate. A first warning was given last February when Chinese authorities published a draft law suggesting that the country could impose strict export controls on solar manufacturing technology.

In search of a new balance
In April 2022, a report co-authored by the WTO, the OECD, the IMF and the World Bank warned about the dangers of climate subsidies. But with climate change already serving as a fig leaf for protectionism, the knives are out. Multilateralism is dead when it’s most needed to tackle a global emergency, while state support – ‘green’ Keynesianism – is becoming the new norm. Subsidies incentivising a switch to less efficient producers may be counterproductive, but are also reducing our addiction to fossil fuels, says the LSE’s Kyriakopoulou: “Such measures are partly correcting market failures and implicit inefficient fossil fuel subsidies that already come at a huge cost to taxpayers. The IMF has estimated that fossil fuel subsidies cost almost $6trn in 2020.”

The EU has committed to provide climate finance to developing countries

The original sin, according to Andre Sapir, an economist at the Brussels-based think tank Bruegel, may lie in the Paris Agreement: “It only defined the objectives and left the instruments to reach them unclear, letting countries choose their own policies. It was inevitable that this could create friction in industrial policy.” Currently, no forum exists to ensure international collaboration on the crucial overlap of climate and industrial policy.

Optimists argue that tensions highlight the increasing importance of the green economy, which has finally become a legitimate growth strategy. Oddly enough, protectionism might be bad for the world economy, but good for the planet, says Pierfederici: “In the long-term, competition could lead to a reduction in the cost of green tech, thus contributing to the climate goals.” For the time being, pessimism prevails. “It will get worse before it gets better. Eventually they will realise that protectionism is costly for everyone,” Sapir says. “But it will take time.”

Rise of activist investors

In many ways, 2023 has been a bombshell year for activist investing. In January, US activist short-seller Hindenburg Research sent shockwaves through the business world when it accused India’s Adani Group of a “brazen stock manipulation and accounting fraud scheme” which it labelled the “biggest con in corporate history.” Hindenburg’s campaign against Adani resulted in a whopping $108bn being wiped off the company’s market value in a matter of days. Gautam Adani, the billionaire industrialist who founded the company, denies the allegations, but that didn’t stop him from plunging down Forbes’s real-time billionaires list from the world’s third-richest person to 24th, as of the time of writing.

Campaigns by activist investors, who purchase minority stakes in companies to drive strategic changes, have been on the rise since around 2017. While Adani’s fall grabbed the most headlines so far this year, plenty of other activist campaigns have rocked corporate boardrooms, from HSBC, where activist Ken Lui is calling for a break-up of the bank, to Bayer, where investor Jeff Ubben is reportedly pressuring the business to oust the CEO, to BP, where climate activists filed a resolution urging the company to set tougher emissions targets. In fact, 2022 was a record-breaking year for shareholder activism, and 2023 is expected to see similar levels of boardroom battles.

The activist landscape
The impact of activist shareholders is growing around the world. A tidal wave of campaigns, which began in the US in the age of ‘corporate raiders,’ has gained mainstream attraction in Europe and Asia. On a mission to pursue strong financial returns and strategic accountability, investors are increasingly butting up against company executives they see as underperforming.

It’s Europe that is seeing the lion’s share of new activist campaigns this year

In the first quarter of 2023, 69 new activist campaigns were started globally, which represents the second-highest quarter of activity since 2019, according to data from Lazard’s Capital Markets Advisory team. The increase in activity can be traced back to a new trend in activist investing: ‘swarming.’ This tactic is used when new campaigns are held at companies that had already been targeted by activists recently, and has affected the likes of Salesforce, Disney, Bayer and Japan’s Seven & i. In fact, 36 percent of the campaigns in the first quarter of 2023 were linked to the ‘swarming’ phenomenon, and 13 percent of targets were subject to multiple new campaigns in this quarter alone.

In 2022, activists were buoyed by tumbling markets that gave them clear sights on how companies could be pushed to improve their margins. According to the Shareholder Activism Annual Review by Insightia, 929 companies were publicly targeted by new campaigns in 2022, up six percent from 2021 and mostly driven by the US, Korea and Japan. “The outlook for activism in the US is perhaps the best in years, despite an extended run of defeats in 2022’s marquee campaigns,” the report said.

But despite this, it’s Europe that is seeing the lion’s share of new campaigns this year. According to Lazard’s data, there was a 34 percent decline in campaign activity in the US in the first quarter of the year, breaking an eight-year trend. At the same time, 21 new campaigns were started in Europe, making the first quarter of 2023 the busiest first quarter on record. European campaigns accounted for 30 percent of all global activity, though they were heavily concentrated in the UK and Germany. “What that tells us is that activist funds are looking at Europe as a new frontier,” said George Casey, global managing partner at law firm Shearman & Sterling.

In the US, Be Your Own Activist, a report by Deloitte, highlights that US activist investors have in recent years been looking toward Europe as a more attractive market. Specifically, activists have their sights set on larger companies that offer greater potential for growth and returns. What’s more, Insightia’s annual review noted that “an assertive local activism scene” in Europe was “every bit as exciting as in North America.” While Europe is expected to continue moving towards the US model of activism, which will only make it a more attractive market, there is still a difference in approach. In the US, it is common for new board seats to be won by activists through settlements, whereas in Europe, proxy contests are still popular.

“In the US, the view of both corporates and advisors has evolved over the last 15 years,” Casey said. “Very often in the past, the advice would have been to take a strong stand and fight through a proxy contest, but in the US that has evolved, and the advice now is to listen to shareholders and understand their views. If they would like to advance nominees to the board who are experienced and reputable, these days the advice is to engage and consider.”

Casey continued: “I suspect that in Europe, the trend is a little bit behind. There is still a desire to put on a strong stand. So, I would not be surprised if it arrives towards more engagement and settlements over time.”

Asia-Pacific (APAC) is another growing market for activist investing. Companies based in APAC targeted by activists accounted for 19 percent of campaigns in the first quarter of 2023. Typically, these campaigns have been “overwhelmingly concentrated” in Japan, Lazard’s report noted, but this year has seen a wider range affected, including South Korean and Australian targets. The broadening interest followed a “bumper” year for campaigns in Asia in 2022, Insightia’s report said.

The landscape for activist investors is evolving, but there is another shift taking place in the world of shareholder activism that is just as significant. While many activist campaigns are focused on improving a business from a financial standpoint, another area under increasing scrutiny is a business’s environmental, social and governance (ESG) strategy.

Bringing ESG issues to the boardroom
Broadly, there are two types of activism shareholders are pursuing: operational financial activism and ESG-related activism. The former is made up of activists targeting companies for financial returns by asking for specific operational changes, be that looking at a company’s financial performance and driving change in the way they operate or pushing the company to sell one of its lines of business.

On the other side is a trend for ESG and anti-ESG related activism that has been growing since around 2020 (see Fig 1). “While ESG as such has been increasingly important to investors, corporations and activists for over a decade, in the last four or five years in particular, many corporations have become much more socially active while others have found themselves under pressure to take public positions on environmental and social issues that they would not have previously spoken publicly about,” explained Lara Aryani, partner at Shearman & Sterling.

Indeed, issues like climate change and diversity have seen increasing public pressure, and regulatory changes that have required companies to consider them more fully. “A lot of companies felt that they needed to take a position on these issues of public importance. And so I think companies are more vocal about issues that are social or environmental in nature,” Aryani said.

While boardrooms debate where to declare their position on social and environmental issues, campaigners see shareholder activism as a new option for driving change. “The recent success of a number of ESG activist campaigns coincided with these shifting investor and corporate priorities, and this energised shareholder activism on a range of ESG issues,” Aryani said. “This was particularly the case on climate change activism, which seemed to be seeing some success in corporate action even while congressional reform on these issues seemed to have stalled.” BP faced activist demands in April to set tougher climate targets. Although the resolution was rejected by shareholders, it received more support than it had in 2022.

As ESG demands grow, anti-ESG backlash is also finding its way to the boardroom. With social and environmental issues gaining prominence, there are a growing number of individuals who believe the corporate boardroom is not the place for these discussions. Because of their ties to political issues, many of these campaigns have hit headlines despite the trend still being in its infancy.

“There has been a reaction to the growing popularity of ESG, in the form of ‘anti-ESG’ activism that is comprised of both shareholder activists and certain politicians,” Aryani said. “Though anti-ESG has received a lot of press, it is still somewhat nascent, and so people are watching to see the extent to which those efforts will impact corporate and regulatory action in a meaningful way.”
While businesses may need to take a wait-and-see approach on the anti-ESG trend, it’s important that they consider both sides of the debate when planning their approach to handling activist investors.

In the sight lines
With these two forms of shareholder activism in mind, zeroing in on the trends in both the companies being targeted and the demands being made tells us more about the state of shareholder activism today and what we can expect to see in the years to come.
In 2020, activist campaigns that were focused on mergers and acquisitions (M&A) were the most common, making up 41 percent of the total new campaigns at large companies during the period, according to Lazard’s data, which was in line with levels seen in the previous years.

However, with financial markets having taken a nosedive, Insightia’s report found that activists have “been forced to be more judicious about calls to sell the company in recent years.” Few experts believe that dealmaking will be a prominent trend this year or until markets even out. The decline of the M&A market is to blame for a decrease in the number of campaigns focused on M&A and on capital allocation, the team at law firm White & Case said in a recent report. Instead, established activists and new funds alike are pursuing more campaigns focused on ESG and corporate strategies.

While Lazard’s data backed up the trend of fewer activists calling for industry consolidation or full company sales, M&A-related demands remained popular in Europe, emerging in 57 percent of all campaigns, which was above the historical average. This was driven by a surge in calls for divestitures, the asset management firm said.

With ESG-related campaigns picking up speed, there’s a particular focus on those centred on environmental issues. The rumblings were there in 2020, with new London-based hedge fund Bluebell Capital Partners announcing a ‘One Share ESG Campaign,’ through which it would buy one share of a company in order to challenge its ESG practices. In 2022, the small activist investor took on BlackRock, the world’s largest asset manager, accusing it of greenwashing in its ESG strategy. ESG-focused activist investor Engine No.1 also found success electing three directors to the board of ExxonMobil, which received significant support from institutional investors.

Board representation remains a goal of many activist campaigns

In 2022, there was a “significant increase” in the number of environmental and social (E&S) proposals that were put to a vote, a report by Shearman & Sterling said, but this was likely influenced by a new regulation from the Securities and Exchange Commission (SEC) which made it harder for companies to exclude E&S proposals from proxy statements. While the number of proposals increased year-on-year, the number of approved E&S proposals actually fell from 38 in 2021 to 32 in 2022.

“While the decline in the number of successful E&S proposals seems incongruent with the increasing support by both activists and institutional investors for E&S initiatives, this is likely due to the fact that a significant number of proposals, particularly those relating to climate change, prescribed specific actions to be taken by the company, in contrast with the historically more successful types of proposals – E&S and otherwise – that contained more general recommendations or enhanced disclosure,” the report said.

White & Case also identified greater scrutiny of ESG campaigns as a trend to watch this year. Large institutional shareholders, including BlackRock, began to scrutinise campaigns more carefully, and their success depended largely on whether there was an economic case for them.

Beyond the ESG debate, another trend taking shape is campaigns that target large businesses. “Due in large part to activist campaigns, such as Engine No.1’s successful proxy contest against ExxonMobil in 2021 and Third Point’s successful campaign against Walt Disney in 2022, there will likely be a surge of activist campaigns targeting S&P 500 companies,” White & Case said in their report. “These campaigns have demonstrated that size alone is not a defence to a well-funded, thoughtful activist attack.” Indeed, Lazard’s data shows that this trend is well underway, with global targets with market capitalisations greater than $50bn representing 16 percent of unique companies targeted in the first quarter, the highest share on record. This trend was identified in both the US, which logged its third consecutive quarter of elevated levels of mega-cap focus, and Europe, which also saw a spike.

These strategic trends aside, which sectors are in the firing lines? Technology firms continue to be one of the most frequently targeted sectors by activists, according to White & Case, with software, services and the internet likely to be the targeted subsectors. Industrials will also be in focus, with engineering and construction machinery expected to be in activists’ sight lines.

A changing regulatory environment
Board representation remains a goal of many activist campaigns, but the majority of board seats obtained are now through settlement agreements rather than proxy contests. One reason behind this change is new regulations that are reshaping the shareholder activism landscape. In the US, activist campaigns are facing new universal proxy rules, which are expected to have a significant impact on the industry. Universal proxy rules adopted by the SEC in November 2021 will, experts predict, make it easier for activists to get one or two nominees elected to boards, though it could make it harder to elect a majority. The new rules are also expected to make proxy contests easier and more affordable, which will encourage smaller activists with fewer resources.

These changes, Insightia’s report said, “sent a jolt through the industry as advisers try to model how the greater choice available to investors will influence voting decisions.” According to data from Insightia’s Activism module, settlements have risen compared with last year since the rules came into effect in September. Lazard’s early look at the effects of the universal proxy rule found that activists have demonstrated the same apparent appetite for board changes at US companies, but there has been a “significant shift” to smaller activist slates nominated at US companies. Activists secured 43 board seats in the period from September 2022 to March 2023, 98 percent of which were through settlements.

Technology firms continue to be one of the most frequently targeted sectors by activists

As activist investing spreads around the world, flashy headlines of boardroom battles abound. But the most common advice for executives dealing with shareholder activism is to hear them out. “What often happens, which in the past people did not necessarily pay attention to, is that the activist may be raising the kind of issues that institutional shareholders may be thinking about as well,” Casey warned. “And so if the activist strikes a chord on a particular issue with the concerns that institutional shareholders have, then in a proxy contest, institutions will support the activist.”

“The number one recommendation would be to engage, to listen, understand the positions, see if there is something in what the activist is saying that actually may be useful for the company. And discuss. If you disagree, then it’s better to explain it in a way where you are engaged, as opposed to just rejecting a particular position but without explaining your own point of view,” Casey said.

As shareholder activism campaigns are seen more as an eventuality and investors are open to supporting them, it seems the new era of activism will be less about standing against activists and more about unexpected partnerships.

Cracks in the system

As the evidence has shown in the months since, they are not as safe as we all thought. In the bigger picture the global financial system is under stress and in some regions is in turmoil, partly because of post-Covid inflation.

“Financial stability risks have increased rapidly as the resilience of the global financial system has been tested by higher inflation and fragmentation risks,” warned the International Monetary Fund in its latest Global Financial Stability Report issued in April 2023.

Some of the most vulnerable banks are in the smaller emerging economies where debt is high and the ability to repay is in decline. But overall the IMF sees a more desperate banking environment triggered by rising geo-political risks, unsustainable levels of debt, rising inflation and interest rates, and tighter money. Meantime it was a close-run thing, far closer than anybody was prepared to admit in those fraught few days of March. As Swiss Finance Minister Karin Keller-Sutter conceded in Washington in April, the lightning-quick, forced takeover of Credit Suisse by rival UBS “had helped to avoid a national crisis.”

And that’s just in Switzerland. The president of Switzerland’s central bank, Thomas Jordan, said the takeover had prevented Credit Suisse from becoming “the first domino in a systemic crisis.”

A systemic crisis! The immediate aftermath of the collapse of Credit Suisse and SVB revealed cracks in the system that must be rapidly repaired. As the news of the problems with the two banks broke, tremors ran through the entire finance sectors of Europe, the UK and the US. There were signs of distress through much of the financial sector in America, where two others banks collapsed in a classic example of contagion.

It’s not so much the failure of one bank that worries regulators; it’s the risk of contagion. It may seem unlikely that the failure of a second-tier bank like SVB on the other side of the world would further destabilise Credit Suisse, but that’s exactly what happened. Spooked by events in Silicon Valley, more depositors pulled their funds from the Swiss giant and accelerated its demise.

Although the Swiss authorities get full marks for moving quickly and decisively, their observations are not exactly reassuring given the enormous time and effort invested in the supposed avoidance of another banking crisis like 2008. In the US ordinary depositors were so jittery that the US Fed was clearly worried about other runs. “It appeared that contagion from SVB’s failure could be far-reaching and cause damage to the broader banking system,” the Fed’s Michael Barr, vice-chairman of supervision, told the House of Representatives. “The prospect of uninsured depositors not being able to access their funds could prompt depositors to question the overall safety and soundness of US commercial banks.”

Reckless behaviour?
As we shall see, both banks somehow slipped the leash of responsible risk-averse management that regulators imposed on them in the wake of 2008 but in the meantime the inevitable question is: have the global giants returned to the reckless behaviour that precipitated the financial crisis?

Shortly after the Credit Suisse panic, French and German authorities reportedly raided five giant banks over potential money laundering and tax evasion on behalf of wealthy clients, highly illegal activities that had brought down the wrath of regulators following the post-2008 revelations of egregious behaviour.

The question has special significance because the reforms put in place over the last 15 years were supposed to render banking shocks a thing of the past. With the Bank of International Settlements in Basle drawing up the principles and details of the reforms, national regulators had ordered a whole swathe of measures that among others separated investment from deposit banking, boosted capital ratios and liquidity, sheeted home responsibility onto specific senior executives, eliminated sky-high undeserved bonuses and, above all, ensured a tottering institution could collapse without triggering a house of cards, as happened in 2008. In short, no bank could be allowed to become ‘too big to fail.’

Simultaneously, regulators subjected the giant institutions – the systemically important institutions (G-Sibs) to much closer scrutiny that was, it should be said, often resented by the bankers themselves.

Yet in spite of all this regulation 49-year-old Silicon Valley Bank failed in just 24 hours after what the US Federal Reserve described as “a devastating and unexpected run by its uninsured depositors” while once-mighty Credit Suisse was bundled into USB, its supposed rival, with indecent haste before it failed. It turned out Swiss regulators had been worried about the viability of Credit Suisse for a while. Of these failures, Credit Suisse was by far the most disturbing.

Founded in 1856 to finance Swiss railroads, it could claim 2022 revenues of nearly $17bn and assets of $592bn. It was Switzerland’s second-biggest bank and until about a year ago it had been considered impregnable. Troublesome, but still impregnable. The Swiss banking system has always prided itself on its robustness, reliability and high reputation. The main regulator FINMA is one of the most respected anywhere. Yet the Swiss government had to stump up $122bn in a hurry to underpin the rescue of Credit Suisse. That’s also against the new rules because the failure of even a G-Sib is not supposed to cost taxpayers anything.

Meantime in the US there was no question of a takeover of SVB, even at the point of a gun. The Federal Deposit Insurance Corporation, which is charged with maintaining stability and confidence in the financial system, followed the book or, as central bankers say, the ‘hierarchy.’ The FDIC quickly guaranteed all the insured deposits of SVB and Signature Bank, another federally supervised institution that went under because of a run on deposits in the wake of the general nervousness. Senior management was cleared out overnight, something the US Fed has no compunction about doing, and troubleshooting regulators moved in to sort out the mess.

Most importantly, the Fed headed off the nightmare of further runs on other banks by guaranteeing as much liquidity as they might need for up to a year. Meantime equity and other liability holders in SVB lost their investments, as the post-2008 hierarchy requires.

Speculation and repercussions
The repercussions from these failures, different though they are, are many. In the case of a genuinely global institution like Credit Suisse with activities in the US, Europe, Middle-East and elsewhere, they are of course much greater. In fact, they will run on for years. Already there is speculation about the ability of UBS, with total assets of $1.1trn and revenues of $34.6bn, to absorb its rival, partly because of the dubious nature of the latter’s assets. In theory the takeover creates an institution with $5trn in assets, but nobody is yet sure how much the assets of Credit Suisse will have to be written down.

Vice Chair of the Fed Reserve Michael Barr

The red ink is already spilling. The investments of Credit Suisse shareholders have taken a hit and FINMA will value its tier-one bonds at exactly nothing. Stockholders have taken a bath, also following the post-2008 rules to the letter. UBS will pay $3.3bn for Credit Suisse, a pittance compared with its pre-failure value.

So what happened that wasn’t supposed to happen? To take the US first, reading between the lines the US Fed was surprised by the collapse of Silicon Valley Bank. Called before the House of Representatives’ Committee on Financial Services, Supervisor Barr explained that the bank was fatally wounded because of management’s failure to handle liquidity risk, which is incidentally its biggest responsibility, and that the run did the rest. Subsequent media reports say that management was focused too much on growth rather than stability and that, when internal stress tests revealed problems, they were ignored.

But why the run and why its immediate effect? It’s clear that the Fed is confused and a little shame-faced about it all. “SVB’s failure demands a thorough review of what happened including the Federal Reserve’s oversight of the bank,” said Barr. That review should become compulsory reading in the banking world because it will be a salutary lesson.

But it is already known that SVB had a concentrated business model and that its customers were mainly involved in the technology and venture capital sector, which is potentially immensely profitable but high-risk. Although the bank had been around for more than four decades, it had grown quickly in the last few years, tripling its assets in the three years up to 2022 at a time when the tech sector was booming. That should have triggered concerns. Some of the biggest failures on both sides of the Atlantic before 2008 were institutions that had grown rapidly, like Royal Bank of Scotland.

FINMA Chair Marlene Amstad

And then the pandemic intervened. To boost yield and profits, explains the Fed, SVB invested the proceeds of fast-growing deposits in longer-term securities with better rates, but it did so without having the essential expertise: “The bank did not effectively manage the interest rate risk of those securities or develop effective interest rate risk measurement tools, models, and metrics.”

Nor did the bank manage the risks inherent in its liabilities, the other side of the coin. Here senior executives fell into the classic trap – overseeing a mismatch of liabilities and assets. Or rather, some of them did. Subsequent media reports show there were serious misgivings among some staff about their boss’s decisions. The nub of SVB’s problems was that the technology sector which it served cannot normally rely on robust operating revenues and has to keep cash deposits in the bank to meet payroll and operational expenses. But those cash deposits can also be withdrawn at will and, in fact, often are.

Belatedly SVB realised it wasn’t sufficiently liquid and, on March 8, was forced to announce that it had realised a $1.8bn loss in a sale of securities but that it planned to raise capital the following week. That was a red alert to its clients and some of the smartest people in America took a close look at their bank’s balance sheet. “They did not like what they saw,” said Barr in the kind of candid assessment that is standard practice in the US.

In an alarming example of how precarious the position of a seemingly well-funded bank can be, the clients pulled more than $40bn from SVB in just one day, on March 9. Other depositors immediately followed suit and the very next day SVB failed. Within three days SVB had gone under because of the nightmare of every regulator and banker, an unstoppable run by depositors that recalled the events of the Great Crash of the 1930s when people lined up outside the doors of thousands of institutions to withdraw their cash.

Steady deterioration
While the demise of SVB is a case of incompetent management and, as the US Fed admits in so many words, supervisory failures, the story of Credit Suisse looks very much like an inept management aided and abetted by a regulator hamstrung by politicians. FINMA issued more than 100 red flags to the bank about its various failings during its steady deterioration, although the public knew nothing about them because the regulator is not permitted to release them, unlike in the US and UK.

In a textbook example of how a munificently rewarded C-suite made one blunder after another, Credit Suisse was on the way down as early as 2021, largely because of $10bn in losses of client funds that had been invested in the massively indebted British supply chain financer, Greensill Capital, and $5.5bn invested in US hedge fund Archegos Capital Management.

Both failed in 2021 in an illustration of how interconnected the global finance sector is. Although several other lenders lost heavily in these collapses, Credit Suisse had taken the biggest plunge and suffered the most. These mistakes were “unacceptable,” confessed the bank’s former CEO Thomas Gottstein at the time. At the time of writing it was considered unlikely that Credit Suisse would recover much of its capital in Greensill and probably none in Archegos.

These catastrophes followed several years in which Credit Suisse plunged recklessly into investment banking, a notoriously fickle activity that had brought down US institutions in 2008 such as Lehman Brothers. Wealthy clients took fright at these huge write-downs and fled with their money, the share price declined and the bank’s credibility, surely any institution’s prime asset, collapsed. “The finger of blame points to the bank’s leadership,” concludes an analysis in Swiss Info, a publication of the Swiss Broadcasting Corporation.

Events rapidly took a turn for the worse. Swiss authorities moved in a new management team in October 2022 and tried to steady the ship, principally by tidying up the troublesome investment bank business. “The bank will build on its leading wealth management and Swiss Bank franchises,” it promised in a return to its roots. FINMA approved of this spring clean – “a step in the right direction towards risk reduction,” said the chairwoman of the board, Marlene Amstead, at the time.

But it was too little much too late. In the same month the bank experienced a run on client funds of unprecedented proportions even by world standards. In the fourth quarter outflows hit the gigantic sum of nearly $155bn and, although Credit Suisse managed to scrape through once again, the writing was on the wall (see Fig 1).

Going or gone
The two events have brought to the fore the issue of ‘too big to fail’ that concerns systemically important institutions. One of the most important consequences of the reforms following the financial crisis, it’s an international standard with two parts. Either the bank is a ‘going concern’ and can be somehow rescued or it’s a ‘gone concern’ and is heading for a decent burial. Adopted around the world, the standard defines a ‘going’ bank as one that has sufficient capital to cover losses from current business while a ‘gone’ bank requires it to have sufficient capital that allows it to be restructured or liquidated.

In terms of the viability of the giant, global institutions the takeover of Credit Suisse is the first real-life test of the ‘gone’ part of ‘too big to fail.’ It is a case study that has aroused intense interest around the world and there is not a single banking authority anywhere that is not following it. So far FINMA’s Amstead believes Switzerland did the right thing in what was a collective solution involving taxpayer’s money, government, regulators and central bank, and the acquiescence of UBS.

Having helped Credit Suisse ride through earlier crises, FINMA was now faced with the even more difficult issue of how to shut it down. There were four options, she explained. The bank could be allowed to fail in what is known as ‘resolution,’ a declaration of bankruptcy with what would have been interminable legal and other issues, a temporary takeover by the state that would hopefully lead to reforms and an eventual buyer, and the forced takeover that was finally adopted.

But ultimately, there’s no escaping from the fact that Credit Suisse was not allowed to fail because of the high risk that it might trigger a financial crisis. So does that mean that the entire architecture of ‘too big to fail’ will have to be rebuilt in the light of the debacle?

Regulatory failures
Regulators always have to share some of the blame in a bank failure and, to be fair, they are usually willing to acknowledge their responsibility. In the run-up to the Great Financial Crisis, for instance, the Bank of England pursued a policy of trust in management dubbed ‘regulation-lite’ that was rapidly abandoned in the ensuing carnage.

In the case of SVB, its supervision had been moved to a new team after the bank was classified as a higher-risk ‘large and foreign banking organisation,’ a category reserved for institutions with assets of $100bn–$250bn. That’s still a few steps below the most heavily supervised category of a G-Sib, but any institution with up to a quarter trillion dollars of assets must be regarded as significant.

Almost immediately the new team became worried about the competence of management and issued a rating of ‘deficient-1’ for its enterprise-wide governance and controls. As late as November 2022, supervisors sat down with the management and warned them about emerging risks, particularly in terms of interest rates and liquidity, in which lurk some of the most recognised dangers for a bank’s overall integrity. They also expressed their concerns about the impact of rising interest rates on the financial condition of SVB as well as other banks.

But the supervisors certainly did not expect it to fail, or so fast. The relationship between banks and regulators can be a tense one. While it is important to remember that most banks abide by the rules and are anxious to comply with supervisors’ recommendations, some have to be brought to judgement. In most instances of recalcitrant banks the regulators get their way because they can unleash their big weapon – enforcement through court procedures. In Switzerland, FINMA conducts an average 40 enforcement proceedings a year, most of which never see the light of day. Apart from actual enforcement, FINMA carries out 600–700 investigations a year, which require its investigators to knock on doors the equivalent of two or three times a day “to clarify possible violations,” as FINMA puts it. Faced with the evidence, in nine out of 10 cases the bank takes corrective measures, but the big problem arises when they refuse to do so, as did Credit Suisse.

As FINMA makes clear, it is rare for institutions to defy, ignore or otherwise fail to respond to investigations and multiple rulings. Thus the case of Credit Suisse has raised an issue which Swiss authorities are debating behind closed doors. Clearly, no country can tolerate an institution that rides roughshod over the regulator and here Switzerland was unusually weak. The Bank of England, US Fed and many other central bankers have more freedom to tell it like it is, for instance by naming names. “As the events surrounding Credit Suisse show, our instruments reach their limits in extreme cases,” explains Amstead, who clearly wants to be handed more powers. “It is therefore worth considering an extension.”

But of course that’s up to the politicians and they have traditionally resisted handing FINMA the authority it needs. The authority cannot even impose a fine, something that happens routinely in France, UK and the US, among other countries. As we see, Switzerland’s politicians have shot themselves in the foot. Astonishingly, even after Credit Suisse had been tied into UBS, the country’s parliament voted after a long debate that, in so many words, it was the wrong thing to do.

Fit for purpose
On the bright side lessons are being learned. The Fed is in the middle of much soul-searching about the effectiveness and power of supervisors. Essentially, in a wide-ranging internal review it is asking whether the regulatory regime is fit for purpose. “Once risks are identified, can supervisors distinguish risks that pose a material threat to a bank’s safety and soundness? Do supervisors have the tools to mitigate threats to safety and soundness?” asks Supervisor Barr, who told the House of Representatives that “the failure of SVB illustrates the need to move forward with our work to improve the resilience of the banking system.”

In short, perhaps supervisors must get tough before it’s too late. Meantime though, the US Fed wants to apply the Basel III reforms to smaller banks like SVB, the idea being they have a bigger cushion for absorbing losses rather like the G-Sibs. And in another move that will be closely watched by the entire financial sector, the Fed plans a whole new panoply of stress tests that capture a much wider range of risks and uncovers channels for contagion. In itself, that is an admission that the current stress-testing technologies just don’t cut it.

The fear about contagion is that it is often irrational – in the modern banking system insured depositors get their money out – but fear spreads without reason. One little-known weakness in the post-2008 global banking system is the rise of fintech, the upstart sector that is determined to eat the big boys’ lunch. Nimbler, cheaper and often more customer-friendly, they have weakened the giants’ hold on the financial landscape. One result is that there are fewer banks in the US, to take just one jurisdiction. As US Fed governor Michelle Bowman explained recently, “de novo [new] bank formation has essentially stagnated for the past decade during a time when financial services have rapidly evolved.”

This matters because new banks are by definition smaller, more conservative and, surprisingly, often safer. The smallest banks often sail through a crisis while their bigger rivals struggle, explains Governor Bowman: “As we have seen over time, they often outperform larger banks during periods of stress like the pandemic and during the 2008 financial crisis.”

Also, they look after their customers better, notably small business, during hard times. If nothing else, that may precipitate a flight by depositors away from the giants. Looking ahead, current levels of bank capital probably won’t be seen as sufficient. They certainly weren’t in the run-up to the Great Financial Crisis, as regulators acknowledge, and the latest scare is prompting a rethink.

The consequences of inadequately capitalised banks run deep. For instance, the 2008 crisis with its banking failures triggered the deepest and longest recession since the Great Depression of the 1930s. In America, the world’s wealthiest – and most banked – country, employment collapsed and took six years to recover; six million individuals and families lost their homes to foreclosures; and over 10 million people fell into poverty. The effects are still being felt today, as the research shows.

Although the return of the much-feared run on deposits is causing central banks concerns, on the bright side nobody is saying that the global banking sector is about to implode. “We’re in a very different place and I really don’t see this as the beginnings of a systemic financial crisis,” Bank of England governor Andrew Bailey said in a post-Credit Suisse debate.

No central banker would of course ever say anything different, but there’s no doubt that the tremors caused by the collapse of SVB and Credit Suisse have exposed cracks in the system that must now be repaired.

China’s great slowdown

Taking to the stage at the Chinese Communist Party Congress in October 2022, President Xi Jinping was met by rapturous applause. The week-long event ushered in a new era for both Xi and for China, handing the veteran politician a further five years as head of the ruling party. With the removal of the two-term limit on presidency, Xi is set to become modern China’s longest-serving leader – and the nation’s most powerful ruler of the post-Mao age.

While Xi has tightened his grip on power, he now faces myriad challenges as he moves into his second decade in charge. After years of almost unfathomable economic growth, China is showing signs of a slowdown. The pandemic has left deep scars on the world’s second-largest economy. Strict ‘zero-Covid’ lockdowns have wreaked havoc on every aspect of business in China over the past three years, and in 2022, the Chinese economy grew at the slowest rate in three decades, falling behind the rest of Asia for the first time since the early 1990s. Despite rallying somewhat following the abrupt end to ‘zero-Covid,’ the nation’s nascent economic recovery remains uneven and uncertain.

Elsewhere, geopolitical tensions with the West, skyrocketing youth unemployment and an ongoing housing market slump all pose a problem for China in the near term. But the nation also faces significant long-term threats to its economic health. Its population is ageing rapidly, with 400 million people expected to be aged over 60 by 2035. What’s more, China is thought to be one of the countries most exposed to climate change, with rising sea levels, extreme flooding and food insecurity among the challenges caused by a warming climate. And, all the while, an increasingly insular political regime threatens to derail the country’s global economic ambitions.

The days of double-digit growth may well be over. It’s clear that the Chinese economy stands at something of a crossroads, with a host of challenges looming large on the horizon. Will Xi’s China be able to adapt and overcome – or is this 21st-century success story now one for the history books?

The great slowdown
Since coming to power in 2013, President Xi has overseen immense economic growth. Average income has doubled since 2012, and GDP has grown by over 100 percent in the same timeframe. For many, living standards have significantly improved, with the President declaring “complete victory” in eradicating absolute poverty among his 1.4 billion Chinese citizens.

Semiconductor prohibitions suggest a significant escalation in the Sino-US tech arms race

Impressive results, certainly. But now China finds itself butting up against that age-old developmental issue – how to sustain growth in the long term. Double-digit growth can’t be maintained forever, and China’s rapid rise is now steadily slowing. Since the turn of the century, the nation’s growth rate has been roughly halving every decade, falling to just three percent in 2022 as ‘zero-Covid’ took its toll on the economy. While by no means catastrophic, this represented the Chinese economy’s weakest performance since 1976 – the last year of President Mao Zedong’s rule.

However, despite some gloomy economic forecasts, the nation managed to defy expectations and show some early signs of recovery in the first quarter of this year. According to China’s National Bureau of Statistics, the economy grew by 4.5 percent in the first three months of 2023, boosted largely by an unexpected rise in retail sales. If it can maintain this momentum, the country may well be on track to exceed its own modest growth target of five percent for 2023. But a rapid recovery is by no means guaranteed. As countries around the globe grapple with their own economic woes, the demand for exports remains subdued – which is bad news for the ‘world’s factory,’ as China is commonly dubbed (see Fig 1).

Output from the nation’s factories continues to miss forecasts, and other Asian nations including Vietnam, Malaysia and Bangladesh are beginning to snap at China’s heels in the manufacturing and export markets.

Elsewhere, the ongoing property market crisis continues to weigh down the Chinese economy. Commentators have called it a ‘slow-motion financial crisis,’ with economists drawing gloomy comparisons with the Lehman Brothers scandal. The once-booming property sector has been hit by a liquidity crisis. An ever-growing number of real estate companies are beginning to struggle with their enormous debt piles and are defaulting on repayments, with property firms putting the brakes on their construction plans as they look to manage their troubled finances. As apartments in China are typically sold ‘off-plan,’ or before completion, property developers are failing to build homes that have already been purchased.

Across China, thousands of unfinished homes sit vacant and unoccupied, while disgruntled homebuyers refuse to pay their mortgages on apartments that were never completed. Despite recent attempts by Beijing to prop up the ailing sector, the housing market remains a weak spot in the Chinese economy, with house prices and sales stuck in a prolonged slump. This is a far-reaching crisis with no quick fix, and without government intervention, threatens to drag the economy down at a time when it needs to be firing up.

Youth discontent
There is little doubt that the impact of China’s ‘zero-Covid’ lockdowns has been disproportionately felt by the nation’s youth. Layoffs, hiring freezes and a widespread jobs drought have combined to create a jobs crisis for young people, with one in five Chinese youths now classed as unemployed.

China has become increasingly isolated on the international stage

While the pandemic has pushed youth unemployment to near record highs, it is certainly not the cause of China’s graduate woes. Before the arrival of Covid-19, joblessness among young Chinese people hovered around 13 percent in urban areas – already high when compared with other international cities. Despite recent shifts towards establishing a consumption and service-driven economy, manufacturing remains essential to Chinese growth. Indeed, the manufacturing sector has the highest shortage of workers of all industries in China – and yet these physically demanding manual jobs are unlikely to appeal to the 10.76 million university graduates that finished their studies last year.

To make matters worse, the job opportunities that Chinese graduates have begun to depend on – in the thriving and well-established tech sector, for example – have been badly hit by a new wave of government scrutiny. In late 2020, the Chinese government launched a regulatory crackdown on big tech, wiping off more than $1trn in value from some of the country’s biggest companies. Concerned that some of the nation’s businesses were simply becoming too powerful, the government looked to rein in private enterprise through a series of stringent regulations – taking aim at the tech giants first and foremost.

Under this enhanced government scrutiny, many of China’s best-known tech companies have undergone a radical restructuring and downsizing since 2020, making mass layoffs along the way. Online retailer Alibaba, social media site Weibo and entertainment giant Tencent were among the tech firms making job cuts in 2022, contributing to a large-scale jobs crisis in one of China’s most promising sectors.

Corporate crackdown
Tech isn’t the only sector haemorrhaging jobs, however. The government’s clampdown on big business has targeted a range of powerful industries, from real estate to the $150bn private tutoring industry. In the summer of 2021, China’s State Council officially banned all for-profit tutoring companies from teaching core curriculum subjects, including Maths, English and Chinese. It also banned all private firms from offering after-school studies, as well as weekend and holiday classes, and demanded that all existing tutoring companies register as non-profits. This sudden, severe curtailing of the private tutoring sector was intended to reduce the financial burden on parents and academic pressures on children – many of whom have been attending additional classes since preschool age.

Whether the measures will succeed in reshaping China’s famously competitive education system remains to be seen – but the impact on jobs is undeniable. Tutoring opportunities began to dry up dramatically in the wake of the crackdown, with education industry job postings dropping 49 percent in Beijing in the month following the move. Up to three million tutoring positions may be affected by the new policy, aggravating the race for jobs among young, educated university leavers.

And it’s a similar story in the beleaguered real estate industry. In an attempt to curb excessive borrowing by property developers, the government has piled on regulatory pressure. New restrictions on debt growth and borrowing have sought to bring the troubled industry back under control – and have toppled a number of struggling property firms along the way.

Evergrande Group, China’s second largest property developer, only narrowly avoided collapse after the government stepped in to help restructure its colossal $300bn debt pile. But others haven’t been quite so lucky. Losses and layoffs have been inevitable as firms grapple with their dire finances. One company, based in the south-western city of Chengdu, was reportedly forced to lay off 90 percent of its workforce in 2021, while the largest property developer in Henan province has also cut 7,000 of its staff. Despite Beijing’s recent efforts to ease the liquidity crisis, these interventions won’t be enough to save every firm from going under. And fewer firms mean fewer opportunities for graduates entering the jobs market – and certainly won’t help to bring down China’s stubborn youth unemployment rate.

Frosty relations
Domestic issues aren’t the only thing holding back China’s economy. Beijing’s relationship with the West has soured in recent years, with human rights concerns, differing approaches to Covid-19 and a growing Sino-Russian alliance all contributing to a widening ideological gap between China and the rest of the world.

Indeed, aside from its partnership with Russia, China has become increasingly isolated on the international stage. Upon his reappointment as head of the Chinese Communist Party, President Xi Jinping took an unambiguous swipe at the West in a speech made to delegates at the ruling party’s annual congress.

“Western countries led by the United States have implemented all-round containment, encirclement and suppression of China, which has brought unprecedented severe challenges to our country’s development,” the Chinese leader is reported to have said. The comments have done little to ease the tensions between Beijing and Washington, which have been steadily worsening since the Trump-era trade war that was launched in 2018.

While President Joe Biden has taken a somewhat softer stance on China than his predecessor, tensions between the two nations remain fraught. Now in its fifth year, the trade war between the US and China shows little sign of abating, with President Biden imposing fresh restrictions on US exports to China – specifically on the sale of US-made semiconductors. Given China’s dependency on foreign microchips – spending more on semiconductor imports each year than it does on oil – the stringent restrictions threaten to throttle China’s thriving microchip sector. Although President Biden has stressed that he seeks “competition, not conflict” with China, the sweeping semiconductor prohibitions suggest a significant escalation in the Sino-US tech arms race.

In Europe, meanwhile, relations remain equally strained. China’s continued support for Russia throughout the ongoing war in Ukraine has undoubtedly damaged its diplomatic ties with the EU. At a recent speech in Brussels, the president of the European Commission, Ursula von der Leyen, stressed that Europe needed to urgently reassess its relations with China, in light of the nation’s “policies of disinformation and economic and trade coercion.”

Despite the decidedly frosty atmosphere between the two sides, however, neither can risk any damage to their trade relationship. Trade between China and the EU is worth an extraordinary $1.9bn per day, with the continent increasingly reliant on China for the critical raw materials it requires for its green transition. As Von der Leyen noted in her speech at Brussels, it is simply not in Europe’s economic interest to “decouple” from China, but it may need to “de-risk” its trade with the superpower in future.

“Our relationship is unbalanced and increasingly affected by distortions created by China’s state capitalist system,” the EU chief said. “We need to rebalance this relationship on the basis of transparency, predictability and reciprocity.”

Diplomatic ties between the two sides are most certainly frayed, with little indication of a rapprochement. Unless it can urgently repair its relations with the EU, Beijing may find itself distinctly isolated on the world stage.

The grey wave
From strained international relations to a looming youth unemployment crisis, China is grappling with a number of threats to its economic health in the near term. But look to the long term, however, and it is clear that the nation faces far greater challenges in the decades to come.

Last year, China’s population fell for the first time since 1961 (see Fig 2). Following many years of slowing birth rates, the historic drop means that China’s population is now in decline – with experts predicting that the trend will continue for many more decades to come. The United Nations anticipates that the nation’s population could reduce by 109 million by 2050, with India recently knocking China off the top spot as the world’s most populous country. While China’s demographic challenges are certainly well-documented, the speed at which the population has seemingly peaked has come as something of a surprise. Despite recent government efforts to increase the birth rate – including introducing a three-child policy in 2021 – the new family planning initiatives have failed to reverse the country’s rapid demographic decline.

Economically speaking, this all spells trouble. An ageing population means that China’s workforce is steadily shrinking, while the growing cohort of retirees is beginning to put increasing pressure on the state. According to official estimates, the working age population is expected to fall by 35 million over the next five years, prompting fears that the labour force will soon be unable to support the needs of the elderly population. The retirement age, meanwhile, remains one of the lowest in the world, at 60 years for men and 55 for women. This places significant strain on China’s pensions system, with the Chinese Academy of Social Sciences predicting that, without significant changes to retirement policy, the country’s main pension fund will be depleted by 2035. However, strong resistance to raising the retirement age – particularly among the young – makes it a hard sell.

As countries around the globe grapple with their own economic woes, the demand for exports remains subdued

Indeed, many young Chinese born during the ‘one-child’ era are already trapped in what is known as the ‘4-2-1’ phenomenon. China’s underdeveloped private pensions industry means that families are often forced to cover the cost of care for their elderly relatives. Only children therefore face the prospect of supporting four grandparents, in addition to their two parents, without the assistance of siblings to help shoulder the costs. Already burdened with multiple caring responsibilities, many young Chinese citizens are already feeling too financially stretched to consider adding children into the mix.

What’s more, the high cost of living in China, rising childcare costs and the growing youth jobs crisis are all contributing to a general reluctance to start a family. The nation’s ‘one-child’ policy continues to cast a long shadow, making small family units the social norm. Despite President Xi’s best efforts to boost the birth rate, these deep-rooted mores will be hard to reverse, and the rapidly-approaching ‘grey wave’ is likely to be China’s defining challenge for the next half century.

A warming world
Just as China’s population is dramatically shifting, so too is its climate. For decades, fossil fuels have powered China’s remarkable economic growth, leaving it in the unenviable position of being the world’s biggest carbon emitter. Despite pledges to peak and subsequently phase out its fossil fuel usage, China continues to consume vast amounts of ‘brown energy,’ with the nation’s coal and gas production both hitting record highs in 2022.

China remains stubbornly dependent on fossil fuels, but the country’s clean energy transformation can’t come soon enough. The nation is highly vulnerable to climate change, and without significant adaptation, is set to suffer the world’s most severe economic losses as a result of rising sea levels and associated extreme flooding. Already, the nation is beginning to feel the impact of a rapidly changing climate, with extreme weather events becoming alarmingly frequent. In June 2022, southern China was hit by a record-breaking heatwave that lasted over 70 days, triggering a far-reaching drought and sparking a series of forest fires that further damaged crops and threatened the August harvest.

The country’s northern and western states, meanwhile, endured a number of devastating and deadly flash flood disasters in 2022, with thousands forced to leave their homes in a mass-evacuation drive from the worst-affected areas. And experts have warned that the nation will need to prepare for similarly devastating events in 2023 and beyond.

As China braces itself for further floods, droughts and heatwaves this summer, the need to decarbonise the economy has never felt quite so urgent. China is already making significant progress in its green transition – and invests more in clean energy than any other country in the world. It is the world’s largest producer of both solar and wind energy, with 2.7 million people employed in the solar energy sector alone. Over half of the world’s supply of electric vehicles are made in China, and renewable energies already account for over 40 percent of the country’s total electricity generation.

The ongoing property market crisis continues to weigh down the Chinese economy

All positive moves, certainly. But China’s carbon emissions are yet to peak. Around the globe, countries are making significant progress in cutting their carbon levels, with the US – the second worst CO2 emitter – having peaked its carbon emissions in 2007. China, meanwhile, continues to increase its production of fossil fuels alongside its investments in clean energy, suggesting that it is in no immediate rush to transition to green. Despite its measured, phased approach to decarbonisation, Beijing is undoubtedly acutely aware of the immense financial potential of the green energy industry – and that it may well prove to be a vital bright spot in an otherwise ailing economy.

China’s boom era might just be over. Years of double-digit growth are impossible to maintain in the long term. But that doesn’t mean that the nation’s days as an economic heavyweight are over – far from it, in fact. Despite the short- and long-term challenges to its economy, the decades ahead will bring opportunities alongside setbacks. Green energy, AI and even a burgeoning healthy ageing industry all represent high-growth possibilities for the Chinese economy. If Beijing can successfully respond to the challenges ahead, its lower-growth ‘new normal’ may prove to be the key to a more sustainable future.

Rise of the robots

In November 2022, artificial intelligence company OpenAI released ChatGPT – a language-processing chatbot that can do everything from coding and creating webpages to writing sonnets, raps and dissertations – in eerily human-like words. Less than two months later, Microsoft had announced plans to invest $10bn in the company. The development sent ripples through almost every industry, becoming the fastest-growing consumer app in history; according to estimates by UBS, it had racked up 100 million monthly active users by late January – an achievement that took nine months for TikTok and over four years for Facebook. It’s now widely conceived as one of the most advanced AI developments to date. “ChatGPT is scary good,” Elon Musk tweeted in December. “We are not far from dangerously strong AI.”

Researchers and analysts have since been investigating the potential impact on jobs in everything from computer programming to writing and marketing, while some have speculated it could be the downfall of search engines; Gmail developer Paul Buchheit tweeted in December that “Google may be only a year or two away from total disruption. AI will eliminate the search engine result page, which is where they make most of their money.” In response, Google released AI chatbot rival Bard – one of at least 20 AI-powered products set to be showcased for its search engine this year (among them an image generation tool and an app-developing assistant). Meta meanwhile established a new generative AI team, as Zuckerberg declared that the company’s “single largest investment was in advancing AI and building it into every one of its products.”

Recent advancements
These developments signify a notable step forward in the march of AI, and a clear advancement on the likes of Siri, Alexa and other tools that have already become part of our everyday lives. They aren’t the only recent advancements, of course. In the past few years, we’ve seen rapid progress in AI-powered machines, from robots working on Tesla’s assembly lines to Sophia the humanoid – the realistic bot by Hong Kong company Hanson Robotics that can have conversations, mimic human facial expressions and adapt to new situations using machine learning.

Last year, Google’s DeepMind technology meanwhile managed to predict the structure of nearly every protein known to biology (200 million in total). AI-powered self-driving cars by General Motors’ Cruise firm and Google-owned Waymo have been tested on the roads of San Francisco and other US cities, while developments in deep learning and computer vision are creating ever more human-like capabilities; AI can now recognise objects and people, and some can even recognise emotions or tell if someone is lying.

Revolutionising the workforce
The advantages of these developments are already being seen, of course; in healthcare, AI algorithms can create personalised treatment plans and diagnose diseases, while in agriculture, the technology can help reduce waste and optimise farming practices. It could have other environmental benefits, too; research by the Boston Consulting Group found AI could cut global emissions by up to 10 percent by 2030. In the finance sector, algorithmic trading, automated investing and AI anti-fraud defences are already common practice.

The likes of ChatGPT, Bard and DALL-E, OpenAI’s image generation tool, are now bringing AI to the creative industries, speeding up tasks previously only accomplishable by humans. The obvious perks of this include boosting efficiency, cutting costs for businesses and enhancing the workforce as a whole (see Fig 1).

A study by MIT economists Shakked Noy and Whitney Zhang, Experimental Evidence on the Productivity Effects of Generative Artificial Intelligence, found using ChatGPT reduced the time for writing assignments by almost half.

Another study, The Impact of AI on Developer Productivity: Evidence from GitHub Copilot, looked at the impact of using AI coding assistant Copilot for programme developers, and found it sped up the job by 55.8 percent.

The tech could also help less experienced developers get a foot in the door, according to Sida Peng, co-author of the study and a PhD student in Computer Science at Zhejiang University. “Developers of all levels are experiencing productivity gains,” he says. “But when we looked at percentage increase in productivity, we saw stronger effects with less experienced developers. We see it as lowering barriers and levelling the playing field. This points to a promising future where AI tools help raise the floor on human performance and help more people transition into careers in software development.”

Robot jobs
But while so far these tools are only being used to assist humans – ChatGPT is known to give wrong answers so needs real people to fact-check, while Copilot needs a human developer to work it – some believe AI could soon start to eat into the jobs market. A World Economic Forum report in 2020 already predicted the loss of 85 million human roles to machines by 2025. Recent advancements might just have sped that up.

Pengcheng Shi, Associate Dean in the Department of Computing and Information Sciences at Rochester Institute of Technology, believes we’ll start to see major changes in the coming years. “Just like those revolutionary technologies of the past, AI will make some job functions obsolete,” he told World Finance.

“Computer programming jobs have already been impacted. In many cases, 80 percent of the code has already been written by Copilot or other AI tools,” he says. “If you’re a programmer for Microsoft or Google or Meta, your job skills will need to be far more than coding. For big tech, I’d foresee that ‘basic programmers’ will play diminishing roles over the next five to seven years.”

Some have linked the wave of tech redundancies (see Fig 2) to firms wanting to invest more in AI. Google CEO Sundar Pichai said the company’s strategy in making its layoffs was to “direct our talent and capital to our highest priorities,” and has since described AI as “the most profound technology in human history.” Zuckerberg’s announcement for Meta’s plans to invest in AI meanwhile came right in the middle of its own wave of redundancies, the same day OpenAI announced the release of GPT-4.

It’s not only programmers likely to feel the impact, of course. A research paper, How will Language Modellers like ChatGPT Affect Occupations and Industries?, looked at which sectors and roles were most likely to be impacted by the new apps; it found that telemarketers and post-secondary school teachers were among the jobs most exposed, with legal services, securities, commodities and investments among the key industries highlighted. It’s not hard to imagine how the likes of journalism and copywriting could be affected, too, while OpenAI’s DALL-E – able to create images from language descriptions, along with similar tools such as Craiyon and Midjourney – could expose those in the design industries.

A new economic sector
Michael Osborne, Professor of Machine Learning at the University of Oxford, believes roles with “a deep understanding of human beings” won’t be going anywhere just yet, though. “As a broad framework, you can expect tasks that involve routine, repetitive labour and revolve on low-level decision making to be automated very quickly,” he said in a UK government hearing on AI in January.

“For tasks that involve a deep understanding of human beings, such as the ones that are involved in all of your jobs – leadership, mentoring, negotiation or persuasion – AI is unlikely to be a competitor to humans for at least some time to come,” he told the committee. “Timelines are difficult, but I am confident in making that assessment for at least the next five years.”

AI regulation would help curb some of these risks, and governments are starting to take action

And rather than spelling the end for the human workforce, optimists say the AI sector will bring about a whole raft of new jobs. The World Economic Forum report predicted it could create 97 million new roles – outweighing the 85 million lost to machines.

“We’re already seeing new specialties like prompt engineering emerge as companies look for people who can effectively engage with AI models,” says Peng. Google’s much-publicised job advert for a prompt engineer, able to initiate the best responses from chatbots for $250,000–$335,000 a year plus equity (no computer science degree required), might just be a sign of things to come.

“I believe imaginative people who can use AI – and other technologies – to solve societal challenges will be in demand,” says Shi. And he believes businesses getting on board now will likely be the ones to win. “I don’t think that every company needs an AI expert, but I do believe that every reasonably-sized business needs to have people who can bridge AI with their core business,” he says. “The fight for such talent will be fierce, but organisations cannot afford not to act quickly. They will need to rethink the strengths and weaknesses of their business models and talent pool, and hire the right people to adopt the technology to maintain competitive advantages.”

Dangers and deepfakes
Of course, as all of this tech develops, so too do the risks – and the need for regulation. Biases and inaccuracies have already been seen in the likes of ChatGPT, while Bard’s reputation was dented by a factual error in its launch demo (Google parent company Alphabet lost $100bn in market value afterwards). It’s easy to imagine the impact if we start to rely too heavily on the new technology.

“One of the key challenges that’s probably the hurdle for AI’s wide adoption in mission-critical applications such as the medical sector and intelligence, is its trustworthiness,” says Shi. Deepfakes, which use AI to synthetically create or alter an image, video or audio recording of someone (often creating fake speech), are already an area of concern. While there are some genuine use cases, including digital effects in films, there are a slew of dangers, too – not least around political propaganda, fake news, video scams and illegally created pornographic videos and images.

After the Russian invasion of Ukraine last year, a deepfake video of Ukrainian president Volodymyr Zelensky telling people to surrender circulated online. A deepfake video of Elon Musk shilling a cryptocurrency scam meanwhile went viral last year. In 2020, fraudsters in the UAE even cloned the voice of a company director asking a Hong Kong bank to make $35m in transfers.

While not all deepfakes are advanced enough to go undetected, some are already convincing – and it’s not hard to comprehend the ramifications if the tech gets more advanced. “What this technology is going to do is, it’s just going to fill our world with imperceptible falsehoods,” Professor Michael Wooldridge, director of foundational AI research at the Turing Institute, told Business Insider. “That makes it very hard to distinguish truth from fiction.”

An existential threat?
It’s not only around deepfakes that AI poses risks, of course. Right now, we’re still in the era of Artificial Narrow Intelligence, or ‘Weak AI’ – where technologies and bots perform pre-defined functions without thinking capabilities. The likes of ChatGPT feel one step closer to ‘Strong AI’, or AGI (Artificial General Intelligence), where machines would be able to think for themselves and make decisions.

It’s easy to foresee the dangers these further developments could present. “I anticipate that AI systems will improve drastically, very fast,” says Shi. “It’s hard to imagine what may happen if, more likely when, the line between human creativity and machine generation is blurred or even indistinguishable,” he says. “We are in the era of AI working for humans, and probably will reasonably soon enter the next era of AI and humans working together. Hopefully humans will never work for AI.”

It isn’t only Shi expressing caution. Elon Musk has notoriously spoken about the dangers of superhuman AI – intelligence that surpasses that of humans – and has called for regulation. “What happens when something vastly smarter than the smartest person comes along in silicon form?” he said in a recent interview with Fox News. “It’s very difficult to predict what will happen in that circumstance,” he said, citing “civilisational destruction. I think we should be cautious with AI and I think there should be some government oversight because it is a danger to the public,” he said.

Back in 2014, Stephen Hawking took it a step further, telling a BBC interviewer that “I think the development of full artificial intelligence could spell the end of the human race. Once humans develop artificial intelligence, it would take off on its own, and re-design itself at an ever-increasing rate. Humans, who are limited by slow biological evolution, couldn’t compete and would be superseded.”

At the UK government hearing in January, University of Oxford researchers voiced a similar warning. “With superhuman AI, there is a particular risk that is of a different sort of class, which is that it could kill everyone,” Michael Cohen, a doctoral candidate in Engineering Science, told the Science and Technology Committee.

Cohen said he believes the appearance of superhuman AI at some point is inevitable “on our current track. There certainly isn’t any reason to think that AI couldn’t get to our level, and there is also no reason to think that we are the pinnacle of intelligence,” he said.

Professor Michael Osborne, also at the hearing, agrees with the bleak, if dramatic, possibility. “AI is attempting to bottle what makes humans special – what has led to humans completely changing the face of the earth,” he said. “If we are able to capture that in a technology, of course it will pose just as much risk to us as we have posed to other species, such as the dodo.”

Proceeding with caution
This might sound hyperbolic, but it’s not just a few voicing concerns; in a recent survey by Stanford University’s Institute for Human-Centred AI, more than a third of researchers asked said they believed decisions made by AI could lead to ‘nuclear-level catastrophe.’

For these reasons, many have highlighted the need to implement regulation before the machines get too advanced. “The global community must agree how and when we use AI,” Sulabh Soral, chief AI officer at Deloitte, said in a recent statement. “Should we ban AI research into certain areas or ban AI in certain weapons? The danger is a little research leads to one thing and then another and before we know it, it’s out of our hands, either with a bad actor, or, worse, in its own hands,” he wrote. “With a clear global consensus and rigorous regulations, we can sidestep the worst-case scenario.”

Cohen likewise believes it’s crucial to develop laws that prevent “dangerous AI” and “certain algorithms” from developing, “while leaving open an enormous set of economically valuable forms of AI.” Osborne even believes we need regulations comparable to those on nuclear weapons. “If we are all able to gain an understanding of advanced AI as being of comparable danger to nuclear weapons, perhaps we could arrive at similar frameworks for governing it,” he said at the government hearing, emphasising the importance of avoiding an ‘arms race’ between different countries and tech companies – something already being seen between the US and China.

“There seems to be this willingness to throw safety and caution out the window and just race as fast as possible to the most performant and advanced AI,” he said. “I think we should absolutely rule those dynamics out as soon as possible, in that we really need to adopt the precautionary principle and try to play for as much time as we can.”

But tech firms don’t appear to be doing that. In January, Google stated publicly that it would recalibrate the level of risk it was prepared to take on so as to speed up AI development, according to a presentation reviewed by The Times. Chief Executive Sundar Pichai reportedly said the company had created a ‘Green Lane’ fast-track review process to accelerate development and get review approvals quicker. “What they are saying is that the big tech firms see AI as something that is very, very valuable, and they are willing to throw away some of the safeguards that they have historically assumed and to take a much more ‘move fast and break things’ perspective on AI, which brings with it enormous risks,” said Osborne.

Global regulatory action
AI regulation would help curb some of these risks, and governments are starting to take action. In March, the UK government published an AI regulatory framework targeting language modellers such as ChatGPT and image-generating tools including Midjourney AI. The EU has outlined an AI strategy but hasn’t yet enacted legislation. In the US, regulation is still nascent.

One country setting a precedent is China; last March, the government introduced a regulation governing how tech companies can use recommendation algorithms. Then in January, the country implemented legislation around deep synthesis technologies, with the aim of combating malicious deepfakes; these include banning deep synthesis services from disseminating fake news. In April, the Cyberspace Administration of China (CAC) meanwhile drew up a draft for managing generative artificial intelligence services like ChatGPT.

These types of regulation could set a precedent for other nations to follow – but there’s a thin line to tread between curbing risks and not restricting innovation, according to Professor Robert Seamans, Director of the Centre for the Future of Management at New York University’s Stern School of Business. “Any regulation needs to balance two things: one, safeguarding against potential harms, and two, not overly limiting advancement of technology,” he says. “Too often, the discourse on this topic buckets people into one camp or the other. I’d like to see more engagement and discussion around the pros and cons of different types of regulation of AI.”

Experts point to other challenges in creating universal standards for AI. “Ethical principles can be hard to implement consistently, since context matters and there are countless potential scenarios at play,” Jessica Brandt, policy director for the Artificial Intelligence and Emerging Technology Initiative at the Brookings Institution, told VOA News.

“They can be hard to enforce, too. Who would take on that role? How? And of course, before you can implement or enforce a set of principles, you need broad agreement on what they are.”

Future challenges
Shi believes it’s not only regulation around the technology itself that governments will need to tackle, though. “The disparities in wealth and power generated by an AI-enabled economy would be something we have never seen, or even imagined,” he says. “Alongside the ethical and legal boundaries of AI and what it can and cannot do, we need policy to tackle this, and to address the cultural shock many people may face – what is the worth of our work now much of it can be done by machines?”

What happens when something vastly smarter than the smartest person comes along in silicon form?

He believes if these areas can be addressed, the huge, positive potential of AI can be harnessed. “As a researcher, I am optimistic by nature, and have great hope that AI will overall make our lives better,” he says. “Even though I do not see that AI will become evil on its own as many people have feared, I do see that human flaws in ourselves may lead us down that path – hence the necessity of these three, ideally universally agreed upon, accords.”

It remains to be seen how exactly things will develop, of course. “We are just at the beginning of the age of AI,” says Seamans. “I suspect there will be some incredibly innovative use cases that emerge that change the way our economy and society work, much in the way that steam engines and electricity changed economies and societies. We are yet to see what those use cases are.”

Indeed, if governments and tech firms can strike the right balance between implementing regulation without stalling innovation, the world stands plenty to gain. If they don’t get it right, only time will tell what the ramifications might be – and whether the scientists’ bleak forecasts ring true. Let’s hope we never get to find out.

Bringing sustainable banking to Islamic finance

In a challenging year that included global inflation threatening to run out of control, post-Covid caution by the business community and client concerns about the near future, Jordan Islamic Bank once again managed to post improving results across all its main activities.

In short, the institution kept faith with its long-term goals of prudent expansion in a difficult environment.

The numbers tell a story of steadfast growth through thick and thin. In the 2022 financial year JIB, as the bank is popularly known, achieved net profits after tax of $86.2m, with a growth rate of 3.5 percent compared, with 2021. Joint investment profits amounted to $316.1m, with a growth rate of 4.5 percent.

Total assets including certain investment accounts and wakala (investment) portfolios increased to $8.73bn, up by $335m for a growth rate of about four percent. And in one of the bank’s primary roles of providing credit to clients, funds granted to customers jumped to $7.33bn, up by a hefty $645m for a growth rate of 9.6 percent, an impressive figure in the middle of a largely shrinking global economy that reflects not only the faith that the bank has in its clients but also in the fundamental strength of Islamic banking.

And mirroring JIB’s focus on building a robust foundation for the future, customers showed their faith in the institution – now in its 45th year – by boosting deposits including wakala accounts by $353m, up by an impressive 4.7 percent in otherwise challenging circumstances. The directors felt more than justified in approving cash dividends to shareholders at a rate of 25 for a total amount of $70.5m.

As chief executive Dr. Hussein Said explains: “This confirms the bank’s maintenance of a strong capital base and a solid financial position. The bank also continued to maintain the quality of its credit portfolio, as non-performing finances (NPFs) reached 2.68 percent.” However in another example of JIB’S policy of prudence, the NPFs were fully covered by contingency financing.

JIB does not stand still, literally. The bank opened two banking offices in 2022, moving one branch to a new location already owned by the bank. It also converted five banking offices into mini branches that are purpose-designed to service customers in a more accessible way, deploying the latest technology.

Overall JIB’s expanding network now stands at 111 branches and offices spread out in strategic locations throughout Jordan. It is an axiom of good banking that the institution goes where it is most needed.

The ‘digital corners’
Reflecting the global trend towards the provision of seamless, client-friendly banking, JIB opened its second ‘digital corner,’ this one being centrally located in the Pavilion Mall office of the Capital Governorate. It is a place where clients can access a wide range of self-banking services. In addition to this latest one, the bank now boasts three digital corners in Amman, in its offices located on Wasfi Al-Tal Street, in Pavilion Mall and in Areefa Mall.

These new digital corners further the bank’s ambition of increasing financial inclusion. Nothing if not comprehensive in terms of the services they provide, these facilities allow clients to open accounts, update personal information, obtain ATM cards immediately, request cheque books, enquire about the details of financing and financial transfers, and manage beneficiaries, among other transactions. And meeting the demand for instant, street-side services, JIB has now built up a 318-strong network of ATMs spread all over Jordan, ranking it first of all the country’s banks in terms of street-side accessibility.

Simultaneously, true to its philosophy, JIB continues to grow its range of Islamic digital banking services such as Islami Mobile, Islami Internet, Islami ATM and banking cards of all kinds. The culmination of these developments was JIB’s winning of the highly prestigious award as the best and safest Islamic bank and financial institution in Jordan for 2022.

It is an axiom of good banking that the institution goes where it is most needed

But banking is not just about money, as JIB has always recognised. It not only continued to provide food support throughout the year for the most needy families, especially during Ramadan, but a number of the bank’s employees also volunteered to distribute monthly food parcels arranged by the bank to families benefiting from the programmes run by Tkiyet Um Ali in the capital Amman.

Originally, JIB was established to practise investment banking business in accordance with the provisions and principles of Islamic Sharia, and the first branch opened in late 1979. True to the original principles, the bank’s transactions and contracts continue to be subject to the supervision of a Sharia board composed of specialised scholars. As JIB grew, it aimed to meet the economic and social needs of citizens in the fields of banking, financing and investment in accordance with the provisions and principles of Islamic Sharia while, in a continually evolving banking environment, keeping pace with modern banking technologies, for instance in the form of the ‘digital corners.’

Other digital products deployed in recent years have included 3D Secure for safe online shopping, bill payments, e-wallets and CLiQ for instant transfer services. And recognising clients’ growing requirement for year-round services, banking services are available during official holidays, Saturdays and evenings.

Honouring founding principles
That original commitment to Islamic financing and Sharia services has never wavered, as measured not only by the number of clients, but by recognition from prestigious publications such as The Banker and EMEA Finance, and by the obtaining of credit and Sharia ratings from several international rating agencies including Standard & Poors and Islamic International Rating.

The bank’s current charitable work also reflects an ongoing commitment to the cultural and social life of the kingdom. It is proud that its credit-lending provides the essential growth finance for professionals, craftsmen and small-to-medium enterprises that are the foundation of Jordan’s economy. The list of endeavours supported by the bank is too long to define in full, but JIB has long backed conferences, education, safety and occupational health, sponsorship of matters related to the Holy Quran, arts, literature, heritage, energy, environment and water integrity.

Not even the founders of Jordan Islamic Bank would have thought in the late 1970s that their creation would grow to the extent that it had by the end of 2022. Now with over 2,440 employees, JIB’s paid-up capital stands at $282.1m. Total assets under management are about $8.73bn. Total deposits including restricted investment accounts reached $7.80bn. Total financing and investment is about $7.33bn. And profits after tax hit $86.2m. As the bank has long recognised, prosperity is based on prudence.

Harnessing fintech for the next gen of Islamic finance

Tech is punching down the walls, floor joists and windows of finance all about us. But in the rebuilding how relevant is artificial and business intelligence to Islamic finance in 2023 – and beyond? Can a population of two billion Muslims meaningfully harness this tech for good? How big a deal is it and what are the risks as well as the benefits? The combination of Islamic fintech and data science has made huge strides, attracting millions of new customers.

Whatever their religious background, banking consumers want speed, efficiency and privacy. In other words, a smarter banking experience. The scope of fintech is widening, as is the market for its own services and products. It’s getting competitive, but credible transactions need to be handled with much care.

So how does Shariah compliance work in this space now? Who are the main beneficiaries – and when will they see the benefits for real? World Finance gets startling, innovative responses from company managing director Robert Hazboun in an exclusive interview on the cutting-edge direction and speed of Islamic finance in 2023 and beyond.

Where are the new boundaries as far as digital change goes for Islamic finance in 2023? How hard are they being pushed – and how much progress is being made?
Overall I would say that new frontiers and boundaries for digital change in Islamic finance are being pushed very hard, and the pandemic accelerated this trend. Much progress has been made, from blockchain to AI and digital, or neo banks. All of which are being adapted into Shariah-compliance for digital touch points and to extend financial inclusion in the more devout segments of the market.

If Islamic fintech offers consumers and business more control and choice, its popularity may – reasonably – rise, from touch points to scalability. Where are the ‘sticking points’?
There are complexities with Shariah compliance that may slow the full potential of the Islamic fintech experience, even when it clearly offers value and control to consumers and especially with the more subtle regulatory distinctions for each Islamic ideology. This could delay its inclusion in these technologies. Another point is a lack of awareness of its value among customers, especially in non-Muslim countries. Addressing these challenges needs meaningful collaboration between industry players, regulators, scholars and experts in Islamic finance to create an environment that is conducive to the growth and scalability of Islamic fintech solutions. The will is there.

Where do improvements in artificial intelligence (AI) and business intelligence (BI) lie? Are these opportunities – and risks – better understood by clients (banks)?
AI and BI can help Islamic banks to comply with Shariah law, by analysing data, identifying patterns, and highlighting areas of possible improvements to different channels and touch points.

This can help reduce the risk of non-compliance and improve the quality of Islamic banking services and enhance business operations, decision-making processes, as well as customer experiences. However, risks from depending on AI and machine learning in Islamic finance also loom, namely in financing cases that have no precedents in Shariah law.

This can cause confusion, complexity, and prolonged processes to find and interpret the relevant religious texts with regulatory bodies. So it’s complicated. Clients have to prioritise their own continuous learning, collaboration and foster a more data-driven decision-making culture within their own organisations to gain the understanding of the opportunities and risks presented by AI and BI. We’re here to support this.

Given so much AI and BI change, how much ‘future-proofing’ concern is there? How should this be planned and anticipated?
Future-proofing concerns for banking systems with the rise of AI and BI are centred around data security, compliance, customer privacy, bias and fairness. Also talent acquisition and change management. It’s a lot. Continuously future-proofing is an ongoing endeavour, not one undertaking. A flexible mindset is needed. So adaptability is a priority for handling and strategising the ever-changing realm of AI and BI, absolutely. We are always exploring possibilities to adapt machine learning and AI to Shariah-compliance.

Many Muslims in the West are young, especially in the under-30 age group. This brings challenges as well as opportunity. How well realised is this by yourself?
It’s absolutely realised. The younger Muslim population, especially in the west, is drawn to banking services offering Islamic financing through digital channels which fits into their tech-savvy, on-the-go lifestyle. They’re dependent on them to help them manage their lives. To support this ICS BANKS Islamic Banking is our own customer-centric platform. It’s built from the ground up with decades of tech evolution poured into it offering digital banking products and services such as mobile banking apps and Islamic digital financing platforms. The latest AI, blockchain and digital wallet tech are fully integrated. This keeps Islamic banks and financial institutions relevant for this vitally important demographic, no question about it.

How do your own technology solutions help customers with data-driven pressures – your own and theirs?
Our banking solutions offer tools for data-driven pressures, ethical considerations and data privacy with its own scalable architecture including several reporting methods such as Omnichannel KYC, spending analysis and regulatory reports. These support banks, financial institutions and customers by analysing massive amounts of financial data, detecting trends and patterns, mitigating risk, such as identifying fraudulent activities. We believe this helps banks and financial institutions learn more about their own risk profile, their own distinct customer base, resulting in more personalised and bespoke products – that’s important. This in turn helps customers make better financial decisions. Our products are totally central to their better decision-making process.

Is more personalisation and bespoke product planning part of the broader Islamic fintech landscape? Or is growth slower because of more manual processes to anticipate and plan for?
While some growth rates for Islamic fintechs may have been slow, digital innovation is making it easier to adapt Shariah-compliant products faster. But as Islamic finance evolves and expands globally, there might be variations in interpretation and implementation of Shariah principles across different jurisdictions. This creates complexities and manual processes in anticipating and planning personalised products that comply with the specific requirements of each market – we’re very well aware of this.

How much demand from Western banking business for an Islamic ‘window’ is there? Is demand up?
It is and there are several reasons why. One reason is the growing Muslim population in Western countries, which has led to more demand for Shariah-compliant products and services. Non-Muslim customers are also showing interest in Islamic banking due to its ethical nature, especially in the aftermath of the global financial crisis, which eroded trust in conventional banking systems. While the demand for Islamic banking windows from Western banking businesses is not yet at the same level as in Muslim-majority countries, it is growing and very likely to continue to do so in future.

Where does ICS Financial Systems sit between cloud-based solutions versus traditional banking and personal interaction? Is this less of a tension than in the past?
We totally recognise the need for balance between cloud-based solutions and personal interaction.

Both approaches offer distinct advantages and both, we say, must be integrated thoughtfully for a seamless experience. The ideal equilibrium? It depends, as we must take into account the specific needs and preferences of our customer base, as well as the strategic objectives and resources available to the bank. It’s always a bespoke approach, fundamentally.

An interconnected Islamic global finance ecosystem is still some way off – what’s the timeline, in your view?
The timeline for such an ecosystem is challenging to predict accurately depending on the pace of tech, the level of regulatory support, and a willingness of financial institutions to collaborate and standardise operations. Nonetheless, more investment in Islamic banking software suites and other tech solutions play an important role in supporting the growth and development of the Islamic finance industry. Watch this space, I say.

Might hybrid-type digital products be worth pursuing longer term, which join the best of both banking ‘worlds’? Is this realistic?
In the long run, it’s well worthwhile to pursue hybrid-type digital products that blend the advantages of traditional banking and digital banking. These aim to provide a comprehensive banking experience by integrating in-person service with digital convenience, harnessing emerging technologies. Although there are obstacles like investing in technology infrastructure and adapting to new processes, numerous financial institutions are actively exploring hybrid models.

Consequently, we feel it is reasonable to anticipate a higher prevalence of these models in the future. We’re very optimistic about achieving the right balance when it comes to this.

The digital transformation of Dominican banking

Dominican multiple banking has made notable progress in innovation and technology in the last two decades by incorporating digital tools and decentralising its services through alternative channels. Banco Popular Dominicano stays at the vanguard of digital transformation with innovative technologies that make life easier for customers, improve process efficiency and expand the reach of its promise of value to society.

The Multiple Bank Association of the Dominican Republic (ABA, according to its acronym in Spanish) recently detailed that the Dominican banking sector registered a total of 5.1 million Internet banking users in 2022, which means an increase of 3.4 million in absolute terms and 302 percent in relative terms since 2015.

Banco Popular Dominicano, the first private capital bank in the Dominican Republic, has been moving forward on improving the efficiency of its operations and consolidating its leadership at the forefront of the digital and technological transformation of Dominican financial services, accelerating the innovation process to expand its transactional capacity and support the bank’s future growth.

Digital adoption
Banco Popular Dominicano was recognised as the most digital and sustainable bank of 2022, and its mobile application, the ‘Popular App,’ is the best in its segment, according to World Finance. In 2022, the bank started the creation of a modern ecosystem of applications that would allow it to penetrate niches of the market with a high potential for banking, such as remittance recipients, SMEs, and the youth segment, thus fostering its efforts to expand financial inclusion to the population.

There has been an increase in users of mobile applications and online banking

Currently, 59 percent of the bank’s customers use ‘Popular App,’ a channel through which more than 45 million transactions were carried out last year, representing an increase of 33 percent compared to 2021.

Of the transactions carried out via Internet banking and the ‘Popular App’, 71 percent were conducted through the application. Overall, 86.9 percent of all Banco Popular’s transactions are carried out through digital channels. Its network of ATMs, which exceed 70 million transactions per year, is advancing in its modernisation with 70 new units, which allow commercial deposits, accept coins and a larger number of bills, and provide greater convenience and speed, especially for its business clients. For these clients, the bank also began the phased launch of a new ‘Popular Empresas App’, which will have a more up-to-date and intelligent approval and product management flow, more advanced functionality for digital check deposits, and more straightforward and intuitive interaction.

On the other hand, to continue promoting responsible control of their finances by the clients themselves, it launched the ‘+Control’ tool on its Internet banking site, which has been widely accepted. It allows users to set consumption limits on their credit cards by hours and days of use, location, types of commerce, and amounts of consumption, online or in-person transactions, among other benefits. Banco Popular completed a vital initiative to transform the commercial management model in its branches, aiming to optimise service and maximise the customer experience, boosting sales and freeing up the operational load.

Thanks to this project, waiting time in the branches was reduced by more than 50 percent, customer satisfaction increased by 60 points, and the productivity of business officers increased by 33 percent. Banco Popular had, at the end of 2022, more than 1.3 million digital customers.

A new way of banking
According to the Superintendence of Banks of the Dominican Republic, the adoption of new technologies has been reflected in the services offered by Financial Intermediation Entities, allowing access to products and services in a wholly digital way during 2022. This advance in digital services has caused branch use to drop from 41.5 percent in 2021 to 35 percent in 2022 in a variety of transactions in different banks. As for mobile applications, these not only strengthen the ties that banks have with their customers but also aid in selling products and services. With these advances already materialising across the banking sector, there has been an increase in users of mobile applications and online banking. The Financial Intermediation Entities have strengthened the rights of these users since more than 50 percent of those surveyed consider claims easy to file through those channels.

Responsible banking
As part of its sustainable vision, last year, the bank expanded the coverage of energy consumption with renewable energy, contracting clean energy for the Torre Popular complex, in addition to the installed capacity of 22,300 solar panels in our branches across the country.

This covers an average of 80 percent of all the energy consumed in the 56 photovoltaic branches and all the buildings that make up the Torre Popular complex and contributes to reducing the emission of 9,258 tons of CO2 into the atmosphere each year.

As an organisation certified internationally as carbon neutral, in 2022, the National Council for Climate Change and Clean Development Mechanism (CNCCMDL) recognised the bank for maintaining carbon neutrality in its operations. This distinction was granted within the framework of Climate Week for Latin America and the Caribbean, which the Dominican Republic hosted in 2022.

The bank’s set of initiatives in favour of environmental sustainability ‘Hazte Eco’ also received international recognition: in Spain, by the Corresponsables Foundation, and in London, by the International Business Awards (IBA), which awarded it a Silver Stevie in the category of Corporate Social Responsibility Programme of the Year in Mexico, the Caribbean, Central, and South America.

This green finance portfolio was expanded in 2022 with three new products to promote sustainability in Dominican society: the ‘Extrahogar Eco’ and ‘ExtraEco’ revolving loans and the ‘HipotEco’ mortgage loan for the purchase of sustainable homes. In addition, as part of its commitments to environmental sustainability, last year, Banco Popular surpassed the milestone of planting more than one million trees in different areas of the country, thus advancing the realisation of a promise the bank had made for 2030.

Regarding financial education and inclusion, Banco Popular continues to expand the offer of digital and face-to-face courses from the ‘Finances with Purpose Academy,’ which has already trained more than 154,000 people. In addition, the ‘Subagente Popular’ network, the largest in the country, has allowed access for 550,000 users to carry out their financial operations, with more than 4.4 million transactions, in the 2,997 affiliated businesses.

Supporting SMEs
For its SME clients, Banco Popular Dominicano created the SME Service Centre, which provides small business owners with detailed assistance, thus prioritising their financial needs. In the same sense of support for SMEs and entrepreneurship, more than 400 clients enrolled in the ‘Impulsa Popular’ online platform and used the tools provided to expand their business plans. At the same time, entrepreneurs took advantage of the benefits of the ‘Emprende Popular’ platform, with specific products, such as the ‘Emprendedores Naranja’ loan, designed for entrepreneurs in cultural and creative industries, which offers, in addition to financial facilities, entrepreneurship workshops for these types of businesses.

As a mechanism to promote the development of the productive sectors and project the country in international markets, our ‘Impulsa Forum’ and the export platform, ‘ProExporta,’ encouraged small, medium, and large-sized Dominican companies to consider export and enjoy the benefits of entering foreign trade. Its ‘Impulsa Popular’ web portal is a pioneering platform in the country, offering free tools to facilitate business management for entrepreneurs. It has over 3,200 articles and videos on finance, marketing, management, and sustainable leadership.

To elevate its digital leadership, the bank signed a strategic alliance with Microsoft to promote the digital transformation of small and medium-sized companies (SMEs) and young entrepreneurs. Through its SME Business Strengthening programme, 1,400 SME entrepreneurs have participated in training and educational opportunities with its allies: the Association of Industrialists of the Northern Region (AIREN), Barna Management School, and the Loyola Specialised Institute of Higher Studies. Additionally, through the ‘Impulsa Popular Franchise’ programme, 61 SMEs have become franchisees.

Tourism sector
The bank continues to lead in the sector as the ‘Bank of Tourism,’ by strengthening its leadership regarding the total volume of loans granted to its hotel clients and the broad value chain that are part of this crucial activity to the Dominican development model. Banco Popular represents almost half of the tourism financing portfolio of all Dominican banks, exceeding $209m in 2022.

To elevate its digital leadership, the bank signed a strategic alliance with Microsoft

Banco Popular’s financial support for tourism is distributed among nearly 800 clients. In 2022, the bank participated again in the International Tourism Fair (FITUR) in Madrid, Spain, of which the Dominican Republic was a partner country that year. This reiterates the bank’s role in supporting tourism, one of the main driving forces for the country’s recovery after the global pandemic.

The bank continues its commitment to the sustainable development of Dominican tourism and the region. It arranged a strategic financing agreement with Grupo Piñero of up to $200m together with BID Invest for the development and growth of tourism in its hotels in the Dominican Republic and Jamaica. This agreement is set to revitalise tourism activity with a sustainable approach in its three aspects: economic, social and environmental, preserving and generating jobs, betting on local suppliers, and reducing the carbon footprint by 60 percent before 2030.

Together with the Ministry of Tourism, it launched the campaign ‘Tourism in every corner’ to promote integration and mobility within the national geography, to diversify Dominican tourism options and to facilitate the creation of new, sustainable projects that allow the inclusion of communities.

Cybersecurity
Within the framework of Cybersecurity Awareness Month, Banco Popular Dominicano held three virtual seminars aimed at companies, young people, and adults over 55 years of age, respectively, with educational content on cybersecurity, part of its permanent education initiative ‘Pistas de Seguridad’ (Security Tips).

In addition, its employees are certified annually in the best and most up-to-date cybersecurity practices. Similarly, the bank reinforces its clients’ cybersecurity thanks to the advanced Security Operations Centre (SOC), which complies with international best practices, intense monitoring, and investigation to curb threats to technological infrastructure. Furthermore, its Network Operations Centre (NOC) constantly monitors its platforms and channels, ensuring the systems’ stability every day of the year.

Making the right investment calls in a turbulent economy

Since 2008, a series of global events has made us question most of our preconceptions about the world we live in: economic and environmental crises; a pandemic that slowed down the whole economy; and, most recently, geopolitical crises and even wars that have altered energy markets as strategic as the European one. All of it came with harsh consequences not just for the global markets, but at a personal level.

Our future offers more questions than answers. However, the only way to improve our reality is to understand how it changes, and from that perspective, make the right decisions that allow us to move forward. After all, we stand where we are today because of the decisions that we all took in the past.

This was the case for BBK Banking Foundation since it started its activity in 2014. It is worth remembering that the Savings Banks and Banking Foundations Act of 26/2013 clearly defined a series of conditions for banking foundations that maintained a shareholding equal to or greater than 50 percent of their respective financial institutions. That is indeed the case of the BBK Banking Foundation, with respect to Kutxabank, as it controls 57 percent of its shares.

All entities in such a situation are required to present a reinforced financial plan that includes its forecasts in terms of investment diversification and risk management. This requirement seeks to minimise the financial dependence of banking foundations on the investor credit institutions they support. Furthermore, those foundations interested in maintaining their majority positions have to set up a reserve fund to meet any future needs that the investor might face that could jeopardise its solvency. The alternative is to sell stakes in the bank until it reaches a threshold below the control position, either through an IPO or with a different transaction.

Making the right call
From the very beginning, BBK was committed to opt for the endowment of the reserve fund, being well aware of both the disincentives to retaining its majority position and the financial dimensions that the fund required; €231m at the end of 2022. And its commitment emerged from its understanding of Kutxabank as a strategic contributor to the Basque economy, its unquestionable institutional relevance, and its need of a stability provider that could manage its growth without a dependence on cyclical factors.

We stand where we are today because of the decisions that we all took in the past

BBK made the right call: this investment is generating a moderate but stable return regardless of the many crises that economies all around the world have been facing. This decision was also essential as it allowed Kutxabank not to become a listed company, which has also been proven as the best fit for the context of the operation. Those savings banks that chose to become publicly traded companies have not performed as well as expected. Meanwhile, a study conducted by Deusto Business School last year concluded that not being a listed company avoided about €2bn in losses.

What could have happened if the company had instead chosen to let go and turn Kutxabank into a listed firm? In our opinion, the bank would have suffered greatly and the successes we have realised would have been that much harder to achieve. BBK recently managed to fill its reserve fund two years earlier than expected. This was despite very complex economic contexts, namely the drastic reduction in income experienced during the pandemic and the uncertainty generated by the health crisis in the absence of dividends.

The milestone of the early endowment of this fund allows the BBK Banking Foundation to strengthen the strategic horizon of our activity, which is none other than to guarantee, reinforce and promote the activity of our social work, the largest per capita in Spain. This is our raison d’être. And to achieve it through a prudent management model that focuses on diversification and minimising risk, as demanded by the law since its enactment. So it’s a model that adapts its course to make it sustainable over time and one that enhances the financial solvency of the entity and energetically defends the roots of its activity in the province of Bizkaia. With this model in place, we can make decisions with the goal of meeting the strategic objectives set.

Although we acknowledge that our approach is not always the fastest, the most striking or the noisiest, we do not know any other way. The measure of our success can be seen in the steps we have taken since we began our journey nine years ago and it proves that as a banking firm, we are without doubt, a success story.

Antigua and Barbuda’s sustainable development

The Antigua and Barbuda Citizenship by Investment Programme (CIP) has experienced transformative changes in recent years, propelling it to the forefront of the investment migration industry. These changes have not only enhanced the programme’s appeal to global investors, but also brought about significant economic and social transformations within the jurisdiction. In this article, we will delve into the key transformative changes in the Antigua and Barbuda CIP and their impact on the country’s future.

Expansion of investment options
The expansion of investment options within the Antigua and Barbuda CIP has been a significant development, offering potential investors a wider range of avenues to choose from. This expansion has not only diversified the programme but has also attracted a broader spectrum of investors, catering to their unique preferences and investment goals. One notable sector that has witnessed substantial growth is real estate.

The CIP has approved a variety of real estate development projects that focus on sustainable development and responsible tourism. By investing in these projects, individuals not only contribute to the country’s economic growth but also actively participate in preserving its natural beauty. These projects adhere to strict criteria, ensuring that they have a positive impact on the environment and promote responsible tourism practices.

The Antigua and Barbuda CIP has opened doors for investors with diverse interests and investment goals

The emphasis on sustainable development aligns with global efforts to mitigate the environmental impact of development projects while creating economic opportunities.

In addition to the real estate sector, the introduction of business investments has played a pivotal role in stimulating entrepreneurial activity within Antigua and Barbuda. The CIP allows investors to invest in businesses that have been approved by the Citizenship by Investment Unit (CIU). This has resulted in job creation and economic diversification, as investors inject capital into new or existing businesses.

By encouraging business investments, the CIP has created an environment conducive to innovation and enterprise, fostering a more vibrant and resilient economy. The entrepreneurial opportunities provided through the CIP contribute to the long-term sustainability and prosperity of Antigua and Barbuda. By expanding investment options beyond real estate and including business investments, contributions to the National Development Fund (NDF), and investments in the University of the West Indies (UWI), the Antigua and Barbuda CIP has opened doors for investors with diverse interests and investment goals.

This flexibility allows individuals to choose the avenue that best aligns with their preferences, risk appetite, and long-term objectives. It enables investors to tailor their investment strategy to their specific needs, promoting a more personalised and beneficial experience.

Strengthening due diligence measures
Recognising the significance of upholding the integrity of the Antigua and Barbuda CIP, the jurisdiction has implemented robust due diligence measures. These measures are designed to ensure that only individuals who genuinely have an interest in the country and possess a clean background are granted citizenship. By partnering with reputable due diligence firms, Antigua and Barbuda has set a high standard for transparency and security, instilling confidence in both investors and the local community.

The CIP has created an environment conducive to innovation and enterprise

The implementation of stringent due diligence measures is crucial in safeguarding the programme against potential risks such as money laundering, fraud, or security threats. By conducting thorough background checks on applicants, including verification of their financial history, criminal records, and political affiliations, Antigua and Barbuda can effectively assess the suitability of individuals for citizenship. This process not only protects the interests of the jurisdiction but also ensures the safety and well-being of its citizens.

It is essential for Antigua and Barbuda to continuously enhance its due diligence practices to address emerging risks and evolving global standards. The landscape of financial crime and security threats is ever-changing, requiring jurisdictions to remain proactive and adaptable. By staying at the forefront of due diligence procedures, Antigua and Barbuda can effectively identify and mitigate potential risks, ensuring the long-term sustainability and reputation of the CIP.

Emphasis on sustainable development
Antigua and Barbuda’s commitment to sustainable development is a noteworthy aspect of the transformative changes in the CIP. The programme actively encourages investments in projects that prioritise environmental stewardship and social responsibility. The country has invested in renewable energy projects, sustainable infrastructure development, and educational initiatives. This emphasis on sustainability not only attracts socially conscious investors but also ensures long-term benefits for the environment and local communities.

To further drive sustainable development, Antigua and Barbuda can explore partnerships with international organisations and experts to identify innovative solutions and best practices in areas such as renewable energy, waste management, and conservation efforts. By leveraging these partnerships, the country can position itself as a global leader in sustainable development.

Focus on economic diversification
The Antigua and Barbuda CIP has played a vital role in promoting economic diversification within the country. By attracting investments across multiple sectors, the programme has reduced dependence on traditional industries such as tourism and created new opportunities for economic growth. Investments in sectors such as technology, agriculture, and healthcare have not only generated employment but have also strengthened the overall resilience of the economy.

To sustain this momentum, the government will continue to support entrepreneurship and innovation, providing incentives and infrastructure for emerging industries. This focus on economic diversification will contribute to the long-term sustainability and stability of the country’s economy.

Social impact and community progress
The transformative changes in the Antigua and Barbuda CIP have extended beyond economic growth to address social needs and community development. The programme has allocated funds for education, healthcare, and infrastructure projects, benefiting both citizens and investors. By prioritising social impact, the programme ensures that the benefits of investment migration are shared equitably and contribute to the overall well-being of the society.

The Antigua and Barbuda CIP has experienced transformative changes that have reshaped the programme’s landscape and propelled the jurisdiction to new heights. To capitalise on these changes and address future challenges, ongoing collaboration between the government, investors, and stakeholders is crucial. By fostering an environment of innovation, transparency, and sustainability, Antigua and Barbuda can continue to thrive as a leading destination for investment migration, creating a brighter future for its citizens and investors alike.

Investment banking for positive impact and sustainability

Since its inception in 2005, Alpen Capital has helped businesses across the GCC region and beyond access finance, grow their long-term value and achieve their strategic objectives. Now the company is expanding and consolidating its place in both established and developing markets while also ensuring its transactions make the right environmental and social impact, particularly in supporting agribusinesses, empowering women, and providing access to finance for small businesses and unbanked populations.

What message would you want to give to our readers who might be unfamiliar with your organisation? What sort of customers are you hoping to attract?
Alpen Capital is an investment banking advisory firm specialising in providing customised solutions in the areas of debt, M&A and equity to institutional and corporate clients. Our deep local know-how and regional expertise has enabled us to execute transactions for leading business conglomerates and financial institutions across the GCC, South Asia, Levant and Africa. With offices in Dubai, Abu Dhabi, Doha, Muscat and New Delhi and an operational footprint in 36 countries, our vast network of international investors and funders gives us the ability to structure unique and innovative solutions for our clients.

We strive to work with clients who want to grow the long-term value of their business across various sectors such as retail, healthcare, insurance, hospitality, education and food. We are committed to partnering with companies that focus on environmental social governance and renewable/green energy. We are especially interested in African countries and developing countries too. We also aim to engage with financial institutions that have a green lending book and support in achieving the Sustainable Development Goals (SDGs) outlined by the United Nations.

What is Alpen Capital’s key focus right now in terms of new business development and areas for growth?
Currently, Alpen Capital’s focus is on consolidating its position in its operating markets and at the same time looking for opportunities to venture into new markets, particularly Africa and Southeast Asia. In recent years we have successfully completed numerous transactions in emerging markets like Kenya, Cameroon, Nigeria, Jordan, Bangladesh and Sri Lanka and we are keen to enhance our presence in these regions. We are particularly interested in advising organisations in Vietnam, Indonesia, Uzbekistan, Egypt and Jordan, given the interest from our funding partners in these countries.

To further strengthen our capabilities, we have recently entered into a strategic partnership with IMAP – International M&A Partners, to become its exclusive partner for M&A activities in the GCC. This collaboration will enable us to leverage IMAP’s vast network of over 450 M&A professionals in more than 40 countries. It will further expand our reach, giving us the platform to source and execute transactions in collaboration with other IMAP partner firms worldwide.

Could you describe some recent deals that were especially interesting?
Over the past few years, we have closed several interesting deals in the M&A space. One such deal involved advising Multi-Specialty Healthcare Partners Holding (MSH), a young organisation, in divesting 60 percent of its stake to Gulf Finance House, a prominent regional investor. The transaction included the acquisition of about 21 specialised healthcare clinics based in Abu Dhabi.

Although MSH had witnessed significant growth in its initial three years, the company faced challenges in terms of standardising its systems and processes, which made it difficult to present a consolidated picture to potential investors.

We strive to make a positive impact on the communities and environment we operate in

Alpen Capital worked closely with the shareholders and management to prepare for a private placement of equity, which included creating proforma consolidated financials, preparation for a detailed diligence exercise and structuring the business and operations under a Holdco structure. As a result, the desired equity value was secured and favourable working terms for the owner with the incoming investor were achieved.

In addition to this, we also concluded our first deal in the fintech space where we advised Monument Bank, a leading neobank focused on the ‘mass-affluent’ segment in the UK, to raise funding for its Series B round. Our network of strong relationships with investors across the region helped the bank secure an anchor investment from Dubai Investments, one of the largest investment companies in the GCC. This deal provided a GCC-based investor with a unique opportunity to enter the digital banking space in one of the most advanced and regulated markets at an early stage.

What is Alpen Capital’s highest priority in terms of sustainability, and how do you progress this when assessing the suitability of a potential new deal?
We strive to make a positive impact on the communities and environment we operate in. Our focus has been on working with emerging market clients that support financial inclusion, women’s empowerment, and agribusiness as well as the food and water segments. We partner with Development Financial Institutions (DFIs) and Impact Investing Funds (IIFs) to raise funding for these clients. This in turn supports the SDGs and makes a socio-economic impact in emerging markets.

How did you approach your landmark CSR report, and did you map this against the UN Sustainable Development Goals?
Our CSR report entitled ‘Sound Impact’ has been segmented into four quadrants – marketplace, workplace, community and environment. The marketplace quadrant showcases around 30 transactions that we have executed with financial institutions, DFIs and IIFs and maps them against the SDGs outlined by the United Nations. The remaining quadrants highlight our CSR activities and initiatives.

Development institutions and impact funds invest in sustainable businesses that create socio-economic impact and support in achieving the SDGs. In our report, we have compiled information about all our sustainable finance transactions to present the impact story behind each deal. We have highlighted the SDGs that were supported by the successful completion of the transaction and through our deals we have supported at least nine different SDGs.

Can you give an example of a deal that is particularly notable in terms of its sustainability and impact in a developing market?
Our transaction with Tata International Limited (TIL) is a great example of creating a notable impact across multiple countries in Africa. TIL, the primary trading arm of the Tata Group, has a significant presence in Africa with operations in more than 19 countries. In addition to the trading business, TIL is also a distributor of automobiles, commercial vehicles and agriculture and farm equipment. Traditionally, Micro, Small and Medium Enterprises (MSMEs), farmers and other unbanked populations face difficulty in securing finance from local banks. TIL supports them by offering direct credit and short-term financing solutions to buy commercial vehicles.

Alpen Capital put together a unique funding structure for TIL for on-lending to MSMEs, first-time users, and unbanked populations across Africa facilitating purchase of commercial vehicles distributed by them. The increased sale of commercial vehicles and farm equipment is expected to support local entrepreneurs, farmers and MSMEs in expanding their business, and create economic development at a local level across the African continent. In addition, this is likely to contribute to the replacement of old vehicles, leading to a reduction in carbon emissions.

Why is it important to Alpen Capital to support agribusiness in the regions where you are most active? What sort of deal showcases the type of transactions you have successfully closed in this area?
The development of the agri sector is crucial for reducing poverty, promoting economic growth, and providing employment opportunities for rural communities in underdeveloped and developing countries.

Alpen Capital acted as a strategic advisor to Sahyadri Farmers Producer Company (Sahyadri FPC) and its subsidiary Sahyadri Farms Post Harvest Care (SFPHCL) for over four years. Sahyadri FPC is a prime example of rural entrepreneurship, providing end-to-end solutions to small and marginal farmers.

In 2010, a group of 10 farmers began collectively producing and exporting fresh grapes to Europe, and this initiative has since grown into a leading fruits and vegetable export and processing company that Sahyadri FPC is today.

We have helped Sahyadri FPC secure financing for constructing collection and distribution centres, expanding their production plant and launching retail stores in urban areas. These infrastructure enhancements are expected to boost the agricultural and food processing operations of Sahyadri FPC.

Furthermore, we assisted their subsidiary SFPHCL in obtaining equity growth capital to expand its processing capacity for fruits and vegetables-based products, establish a biomass plant to generate electricity from process waste, and upgrade its infrastructure.

Financial inclusion and female empowerment are also recognised by Alpen Capital as crucial markets not only ripe for investment, but also for having positive knock-on effects when sustainably supported. Is there a notable deal in this area you would like to highlight?
Providing financial access to women can boost entrepreneurship and broaden the scope of financial inclusion in the unbanked sectors of developing countries. Alpen Capital has played a part in this by helping IndusInd Bank raise funding for its Microfinance Division, which provides loans to small groups of women borrowers working mainly in livestock and small trade sectors. IndusInd Bank has a wide presence across India and offers a range of products and services to individuals and corporates.

The financing raised by Alpen Capital for IndusInd Bank’s Microfinance Division is expected to enable the bank to increase the number of microcredits allocated to women entrepreneurs in severely poor rural areas in India. This is expected to provide access to microcredit for approximately 250,000 women, contributing to the development of women’s entrepreneurship and financial inclusion in some of India’s most vulnerable regions.

Creating a sustainable framework using low-carbon strategies

Fubon Life Insurance – the second biggest insurer in Taiwan – offers a full range of life protection, savings, annuity, accident and health insurance for customers. Authorised to conduct long-term insurance business in Hong Kong in 2016, through our strategic partnership with banks and independent financial advisors, we are committed to helping customers in protection, financial planning and the environment and society through our environmental, social and governance (ESG) initiatives.

In recent years, global investment in ESG has grown exponentially. Threats relating to climate change and ageing populations are real, prompting increased action from financiers and banks around the world. As a leading Asian economic centre, Taiwan is part of this trend. In 2020, socially responsible investment in the country grew 32.6 percent year-on-year to NT$17.6trn ($635bn), with its proportion in total assets under management hitting 37 percent, up from 30.2 percent in 2019, according to a report by National Taipei University. With a March 2023 net profit of NT$4.8bn ($156m) and cumulative net profit of NT$7.2bn ($235m), Fubon Life Insurance is in a strong position to invest in its ESG programme.

Insurance policy for the environment
As part of our ESG framework, we pursue a programme of sustainability using four key low-carbon strategies: green procurement, a friendly workplace, paperless services, and environmental protection charity efforts. All of these are in line with the United Nations’ Sustainable Development Goals (SDGs). We use our influence to promote green concepts and hope to achieve our vision of a low-carbon lifestyle and environmental sustainability through encouraging our customers’ participation.

We led the industry with the first ‘Work for Green’ initiative

Carbon saving and environmental sustainability are no longer just slogans. Fubon Life Insurance takes practical action to promote reforestation and protect water sources, and to bring people closer to Taiwan’s rich ecology. In 2022, we collaborated with the Tse-Xin Organic Agriculture Foundation to select tree planting sites with the goal of restoring the natural ecology. We led the industry with the first ‘Work for Green’ initiative, linking green sustainability to performance by pledging to plant a tree every time a tied agent met their target.

Our green finance strategies have now been adopted by more than 460 sales agencies and 20,000 tied agents across Taiwan and we have planted tens of thousands of trees alongside other ecological conservation and environmental sustainability groups in the country. In response to our parent company’s ‘Run for Green’ initiative, Fubon Life Insurance is promoting coastal windbreak reforestation. In 2022, we called on our employees and the public to plant 85,000 trees in order to make our insurance business a driving force for environmental sustainability.

Tackling river waste
We are also instrumental in promoting river conservation in Taiwan, recognising the crucial role of water resources in our health, safety, biodiversity, and sustainable development. In 2021 we began work with the Society of Wilderness (SOW) to lead Taiwan’s enterprises in launching a three-year continuous quick screening survey of river waste.

Over the past two years, Fubon Life Insurance has helped SOW conduct surveys of important watersheds in Taiwan’s central and northern regions. A watershed is a land area that channels rainfall and snowmelt to creeks, streams and rivers, and eventually to outflow points such as reservoirs, bays and the ocean. Supported by the River Management Office of Water Resource Agency under the Ministry of Economic Affairs, the project has convened a cross-agency coordination platform to discuss waste disposal strategies, demonstrate the value of the surveys, and showcase the benefits of public-private cooperation. The project plans to expand the survey to all major watersheds in Taiwan to increase its impact.

Recently, we collaborated with Taiwan’s Commonwealth magazine to publish the River Conservation White Paper. This includes highlights of the waste screening surveys from important watersheds in Taiwan’s central and northern regions, as well as perspectives from various stakeholders in government, industry, and academia. By turning survey data into sustainable action plans, we hope to raise public awareness about the severity of river waste issues, enhance sustainable consciousness, and connect relevant public agencies, local schools, and communities to work together to help the waterways.

Plastic pollution
According to the SOW survey, disposable plastic products are the most common waste in rivers and streams. In addition to continuing to advocate the core concept of ‘reducing plastic at source and stopping river waste from entering the sea,’ the new edition of the White Paper also introduces the perspective of environmental molecular science for the first time, focusing on the relevance of river waste to the overall environment and human health.

Professor and Director of the Institute of Analytical and Environmental Sciences at Tsinghua University, Chou Hsiu-Tsun, said that the bottom sediment pollutants of river waste will cause water and soil contamination, and these invisible harmful factors will return to the human body through the biological chain. Research data also pointed out that the reduction of male fertility is most likely related to the pollution of the water environment. Human power is national power, and the issue of river waste urgently needs the participation of everyone to improve.

Protecting society
We also acknowledge the societal aspect of ESG – Fubon Life Insurance pays increasing attention to Taiwan’s ageing population. Taiwan is facing serious challenges: while the birth rate has been declining for decades, in 2020 deaths outnumbered births for the first time. It seems inevitable that Taiwan will soon join nations such as Japan, Germany and Italy, where more than one in five of the population is aged 65 or older.

Fubon Life Insurance is in a strong position to invest in its ESG programme

In response, Fubon Life Insurance is proactively helping the public to prepare for a potential ‘dementia tsunami’ by strengthening our protection offering against the risk of disability and long-term care, as advised in the Ministry of Health and Welfare’s Long-term Care 2.0 Plan. This plan was promoted by the government in response to Taiwan’s ageing population and has achieved major breakthroughs with regard to raising budgets, increasing care service locations, and upgrading services.

We recognise that the ‘global dementia clock’ is ticking ever faster: in Taiwan, every 40 minutes one more person is diagnosed with this cruel disease. Our cross-generational exchange platform aims to connect ‘Green and Silver’ – the young and the elderly – creating engagement between generations. And, for seven consecutive years, we have supported the Federation for the Welfare of the Elderly, the largest elderly welfare organisation in Taiwan, by promoting its ‘Love Bracelet’ programme, designed to prevent elderly people from getting lost. Together with over 100 medical institutions in Taiwan, Fubon Life has implemented a service of giving away a free bracelet with any doctor’s diagnosis of dementia.

The bracelet helps wearers contact a helpdesk if they get lost; healthcare professionals have been able to track down 100 percent of people thus far. In addition, Fubon Life Insurance sponsors specialised support groups for families caring for a family member with early signs of dementia. The support consists of sharing experiences, expert knowledge, and breathing and relaxation exercises, as well as raising awareness of the disease among the general public. We also promote corporate-wide guardian angel programmes.

In 2022, Fubon Life Insurance introduced the Social Return on Investment (SROI) assessment to highlight the effectiveness of the Love Bracelet programme and its social contributions.

Tech for society
We are also committed to developing the latest search and rescue equipment and promoting dementia recognition and education. By integrating digital technology, we hope to help reduce the risk of elderly people with dementia wandering off. Furthermore, the company has invited a leading Japanese dementia expert to share unique clinical perspectives, creating a platform for cross-border dementia prevention and care experiences, and leading Taiwan towards becoming a dementia-friendly and inclusive society.

For Fubon Life Insurance, the United Nations’ Sustainable Development Goals and ESG are not just popular buzzwords, but policies that require action and real effort. Fubon Life advocates for environmental sustainability and care for the elderly with dementia. We work with industry, government, academia, and related organisations to expand care efforts and uphold our brand spirit of positive influence. We will continuously strive for societal balance in economic development, environment and culture, and create more possibilities through our actions and our promotion of sustainable insurance and financial values.

Branching out to bring banking to the people

After more than 81 years as a catalyst for the Dominican economy, Banco de Reservas de la República Dominicana is now taking firm steps towards internationalisation. The opening of our first representative office in Madrid, Spain, last January represented a milestone; this year the largest bank in the Dominican Republic, Caribbean and Central America plans to further expand with an additional two international offices, in Florida and New York.

The representative offices are information and processing units whose main objective is to reach clients with economic interests in the Dominican Republic residing in other countries. By linking these individuals into the Dominican banking system, we are providing banking services to the Dominican diaspora, which totals more than two million migrants and their descendants born abroad, who have strong links to their parents’ and grandparents’ country of origin. These offices will also provide support to the exports of large, small and medium-sized companies.

The Spanish and American offices will replicate all the banking services offered by other banks in the places where they operate, but the financial transactions themselves will be carried out in the Dominican Republic. This will enable and expedite banking procedures in their country for Dominicans residing abroad.

This expansion by Banreservas is the first time that a Dominican bank has appeared before the Central Bank of Spain to request its approval to be part of the Spanish banking system. The office in Madrid is located on Paseo de la Castellana, one of the Spanish capital’s major thoroughfares, giving our institution a strong, bold presence in the city. Numbering over 45,000 residents, Dominicans make up just one percent of Madrid’s population, but seven percent of the population of foreigners in the city.

Our objective is to bring our services as close as possible to where the majority of Dominicans reside

During this first stage of the bank’s internationalisation process, Dominicans will be able to apply for mortgages, acquire housing and other properties in the Dominican Republic, and open new accounts and financial instruments. The Banreservas office in Madrid is also making agreements with construction companies in the Dominican Republic to promote housing projects. The office affirms Banreservas’ position as a facilitator to attract foreign investment to the Dominican Republic.

Customers in Madrid will also be able to manage their insurance needs, with Banreservas acting as a second-tier bank for procedures with other affiliates of the Reservas family, such as Inversiones y Reservas, and Seguros Reservas.

The second representative office will be located in Miami, Florida, across the street from the Dominican Consulate on Brickell Avenue, one of the most illustrious addresses in the state. Around 72,000 Dominicans reside in the Miami-Fort Lauderdale-West Palm Beach metropolitan area, the largest concentration in the US, aside from New York-Newark-Jersey City with 641,000 and Boston-Cambridge-Newton with 81,000. The office in New York will be in Washington Heights, Upper Manhattan, where Dominicans account for some 60 percent of the immigrant population, with a local population of over 48,000. With these choices of location, our objective is to bring our services as close as possible to where the majority of Dominicans reside. Both US offices will open in the second semester of 2023.

Business opportunities
This business strategy can bring the Dominican diaspora in the US, which numbers some 1.4 million US residents either born in the US or reporting Dominican heritage, even closer to the Dominican Republic. This will result in better investment opportunities in businesses with capital produced by Dominicans abroad and facilitate the transfer of social security and medical pension benefits back home. We will also offer processing facilities for banking services in the Dominican Republic, such as accounts and credit services.

We plan to develop mortgage programmes to enable property purchases in the Dominican Republic, with services to formalise procedures available within the Banreservas offices. Hitherto, these sorts of transactions have required travelling to the Dominican Republic in person or empowering a third party to act on your behalf, so our services will save customers both time and money. Given that Dominicans in the US have lower median household incomes than both foreign-born and native populations, the arrival of such services could have a significant impact for the community.

The Dominican diaspora, from residents to business owners and from community leaders to campaigners, has been clamouring for a way to maintain investment links with and send money back to the home country for a long time now. The internationalisation of Banreservas will satisfy that need, bringing convenience, peace of mind and wealth-making opportunities to our communities in Spain, the US and here at home in the Dominican Republic.

A revolution in retirement planning for the Philippines

Almost everyone has a clear idea on what they will be doing after retirement from work. Unfortunately, most have not taken any concrete steps to prepare for retirement. As is often the case, planning for retirement takes a backseat compared to taking care of other members of the family and even the extended family. Filipinos tend not to actively prepare for eventual retirement and greatly depend on either the mandatory company retirement payout or through the state-sponsored retirement systems, the Social Security Services (SSS) for private citizens or the Government Service Insurance System (GSIS) for government employees. A good number depend on their children to help them with their finances upon retirement. Unfortunately, dependence on any one, or even all three, methods is not sustainable in the long run.

In a recent survey, Filipinos believe that savings equivalent to 2.1 years’ worth of personal income is enough for their retirement, which is way below the regional average of 2.9 years. If you consider that the average current life expectancy of Filipinos is 72 and the standard retirement age is 60, retirement savings could be short by up to 10 years, maybe more.

The lack of retirement planning is exacerbated by the general gaps in financial knowledge among Filipinos to manage their retirement finance. Either the funds are left in savings accounts, which produce near zero income, or they are depleted due to bad business decisions or spent on unnecessary extravagance. The lack of financial literacy, discipline and annuity type of pension payout can contribute to early depletion of retirement funds.

The state of pension funds
The Philippine Institute for Development Studies conducted a study in 2018 showing that the Philippines will be an aging population by 2032, when at least seven percent of its population will be 65 years and older. This only means that more people will be relying on pension benefits, whether through private or public pension systems. The Philippines, unfortunately, has much to improve upon when it comes to retirement systems. According to Mercer CFA Institution Global Pension Index, the Philippines has the second worst retirement income system among 44 nations.

Today, the Philippines has around 7.6 million Filipinos aged 60 and above. The SSS provides a monthly pension of approximately PHP 5,000–18,000 ($90–$320) to retirees. Considering the increasing cost of living, expected medical costs and other lifestyle expenses, it is safe to say that the pension provided by the state is insufficient.

Republic Act Nos. 4917 and 7641 enacted a corporate pension system for the private sector, designed to augment SSS benefits. Under the law, private companies can establish their own retirement plans that enjoy certain tax benefits including exemptions from investment income and compensation taxes. Currently however, the creation of a retirement fund is not mandatory and oftentimes only the large companies establish such retirement plans for the benefit of their employees. Most SMEs or traditional family-owned corporations still use the ‘pay as you go’ scheme to provide retirement pay as their employees retire.

Considering that these payments are not pre-funded, it places employees’ retirement pay at risk during difficult times for businesses where many employers are in financial straits. Simply put, the current state-sponsored and private pension plans are oftentimes not adequate to provide for 10 years’ worth of living expenses for retirement especially if additional income is lacking.

Revolutionising pension funds
Both the government and private sector have acknowledged that there are serious flaws in the current pension system that need to be addressed. For one, current corporate pension funds are not portable, leaving the burden of retirement planning solely to the last employer. As funding of corporate retirement funds is not mandatory, the majority of companies just provide the minimum mandatory retirement pay on a ‘pay as you go’ basis or in some cases no retirement payments are made. Many companies cite cumbersome and expensive processes to establish formal retirement plans, thus negating the tax benefits granted to formally established retirement programmes. The result is companies fall back to these ‘pay as you go’ schemes. The unfortunate consequence is that retirees are forced to either continue working for additional income, change their lifestyle to reduce their expenses, or depend on family members to finance their retirement years. The worst-case scenario is when retirees are unable to fund their expenses and fall into poverty.

The Capital Markets Development Act of 2021 aims to change all that. The bill has already passed Congress and is currently awaiting the Senate’s approval. If passed, the law will help improve private pension plans and compel companies to redesign current retirement systems to adapt to the law. The objective of the bill is to establish a private retirement and pension system that is fully funded, portable, and more actuarially fair for employees.

One significant change is that the responsibility of deciding and funding for the employee’s retirement benefit will now be shared by both the employer and the employee. Currently, investment decisions and pension payouts are decided and shouldered solely by the employer whether the pension is based on the mandatory retirement pay or based on a defined benefit arrangement. The pending bill allows for the creation of a mandatory, fully funded and portable Employee Pension and Retirement Income (EPRI) account under the name of the employee, created at the start of employment. The EPRI account shall be permanent, owned and managed by the employee regardless of changes in employment or transfer of employer until their eventual retirement. As a benefit of establishing EPRI, employer contributions are allowed as a deductible expense and shall not be considered as part of the employee’s compensation subject to income tax. In addition, all income and gains earned from investments of the EPRI assets, and all benefits and distributions received by the employee upon his retirement shall be exempt from all taxes.

Given the great shift in the age of the population, the corporate pension law as well as the retirement mindset of Filipinos, much more thought must be given to this. Not only do employers need to prepare for and study how to transform their existing retirement plans, but it is just as important to include the beneficiaries of their retirement plan, their employees, in the transformation process.

Finding ways to redefine retirement
We at BDO have been finding ways of reimagining retirement plans in the country. BDO believes in a holistic approach to attain sustainable retirement plans by supplementing corporate retirement programmes with a personal stake in one’s own retirement journey.

BDO is redefining corporate retirement planning through an integrated retirement plan solution, Pension 360. It is designed to assist companies to fulfil their retirement obligations more efficiently, while helping it attract and retain the best talent. Pension 360 combines our core pension services with personal wealth-building programmes to offer a comprehensive approach. Pension 360 consists of four main services: Corporate Pension Programme, Employee Education Programme, Personal Pension Plan, and Personal Annuity Plan.

Corporate Pension Programme: Companies can fulfil their retirement benefit obligations without the complexities of planning and intricacies of day-to-day administration with our Corporate Pension Programme. BDO helps companies design and optimise their retirement plan, whether it’s defined benefit, defined contribution or hybrid plan, to deliver long-term value with prudent governance management for their business.

Employee Education Programme: To empower employees to take charge of their retirement future, BDO provides complimentary financial literacy seminars to employees. The goal is to equip employees with knowledge, information and insights through learning modules designed to help them manage their finances and grow their wealth through investments. Employee education is a crucial step in improving the long-term sustainable financial wellbeing of Filipinos especially in preparation for their eventual retirement. There are currently four financial education modules that match the employees’ level of investment knowledge. One of the four modules is dedicated to retirement planning. A team of professional trainers is assigned to fulfil this notable task.

Personal Pension Plan: Empower employees to take charge of their finances through wealth-building programmes such as the Easy Investment Plan (EIP) and Personal Equity and Retirement Account (PERA). The EIP helps individuals get into the twin habits of regular saving and investing automatically and regularly in various investment funds. PERA, on the other hand, is a long-term voluntary tax-exempt retirement programme provided by law to encourage Filipinos to invest towards their own retirement. Either employees, employers or both can contribute to an employees’ PERA. Moreover, there are tax advantages which are only available with PERA such as exemption from taxes on investments, estate taxes, and five percent tax credits from the annual PERA contribution. Employees can start their investment journey for as low as PHP 1,000 (approx $18) or $500 for dollar-denominated investment funds.

Personal Annuity Plan: Lastly, upon retirement, assure employees’ peace of mind with an income payout scheme with Easy Pension Pay. The plan lets retirees enjoy the fruits of their hard work with proper management and disbursements of their funds as if the retirees are still receiving regular semi-monthly salaries. With this, the retired employees’ retirement funds are safeguarded against unnecessary expenditures and are made productive by investing to earn investment income. Pension 360 includes employees as an integral part of the programme and not just as beneficiaries of the company’s pension plan, thus enabling a truly sustainable retirement programme.

Reaching the retirement goal
For individual clients who have decided to plan for their retirement ahead of time, BDO offers a fiduciary service that allows clients to dedicate a specific investment portfolio for a defined need. The Money Manager is a personal management trust arrangement that allows clients to set amounts for each life goal, such as retirement, and define specific dispositive conditions unique to each client and portfolio. Having a dedicated portfolio for each life goal, whether for retirement, education or wealth accumulation, helps clients deliberately plan for its achievement in the long term.

By allocating funds for life goals, it sets the path for the achievement of such purpose. In addition, the ability to create dispositive clauses under a personal management trust makes this trust arrangement unique and personalised, thus able to address the very specific needs of the client and/or their beneficiaries. The Money Manager is available to clients with different risk profiles and asset allocations. Clients can invest in either Philippine Peso or US Dollars, giving clients the flexibility to invest in local or global assets.

Now more than ever, planning for one’s own retirement must be a deliberate endeavour and a personal engagement. A carefully crafted long-term plan is key to ensuring a comfortable retirement in the future. With the availability of information at one’s fingertips, there are many options and routes to achieve a comfortable retirement, but one must take action to arm themselves with knowledge and tools to help chart the best course of action.

Corporate retirement plans and the government-sponsored pension are good to have, but these should not be the only source of funds at retirement. BDO’s goal is to help build, design and execute a sustainable retirement fund both at the corporate and personal level. We don’t always know what the future will bring, but to paraphrase the poet William Ernest Henley, we must each be the master of our fate and the captain of our soul.

Investing in food production for a sustainable future

Russia’s invasion of Ukraine in February 2022 highlighted the weaknesses in Europe’s energy system and made energy security a significant issue. After the outbreak of war, energy prices initially rose sharply, and volatility increased – but food prices also rushed to record levels. The consequences were particularly severe in the poorer parts of the world. The UN’s sustainability goal of achieving zero hunger before 2030 has become more distant.

Agriculture and our way of producing and consuming food is, like the energy system, in need of a comprehensive adjustment, both from a sustainability and health point of view. Sustainable food is an interesting investment theme, since food production accounts for around 25 percent of global greenhouse gas emissions. In recent years, we have witnessed a series of disruptions in the global food system from factors such as Covid-19, war, and extreme weather.

Today, we are fully aware of how vulnerable the sector is from a security perspective. In several aspects, we have created an effective but fragile system, which leads to poorer health, increased environmental destruction, water shortages, and reduced biodiversity. These negative externalities risk getting worse without change. As with energy, restructuring the food system requires large investments in the coming years.

Everything is energy
The availability of food has shaped human history and development. It has determined which societies and countries have dominated, often triggering revolutions and shifts in power. Thanks to the innovations of modern agriculture (fertilisers, pesticides, genetic modification, etc), the global population has increased by nearly six billion people in the last 100 years. We have put Malthus pessimism behind us, as agricultural productivity has improved enormously. The most important explanation is access to cheap energy in the form of fossil fuels, which power the machines of modern agriculture and are used as raw materials in the production of artificial fertilisers and pesticides. About half of all food production today is made possible by nitrogen-based fertilisers. Producing these requires large amounts of natural gas, which is why the increase in gas prices after the outbreak of war in Ukraine also made fertilisers more expensive.

The food chain also generates greenhouse gases in many other ways. Restructuring the food system is therefore an important part of the larger energy transition away from fossil fuels. This is not an easy task in agriculture either – the transition takes time and requires a new, sustainable but at the same time efficient system. A complete return to organic farming, without artificial fertilisers and pesticides, is impossible if production is to feed eight billion people (as recent experience in Sri Lanka has shown). In addition, the population on earth is growing and people’s living standards are improving – which will lead to an increased demand for food by more than 50 percent up to 2050.

The fragile system
Agriculture has succeeded in increasing the yield of several crops, and thus also food production. However, productivity in the world varies greatly. Large parts of Africa have significantly worse agricultural productivity than North America and Europe. Just like global manufacturing chains, agriculture has made use of increased specialisation and efficiency. Harvests are maximised by focusing on a few standard varieties that are grown where the conditions are best.

It creates an efficient but highly fragile system, which has made more and more countries dependent on imported food. The uniformity of agriculture is also due to the diet becoming more similar in different parts of the world. The processed industrial food of the West – cheap to produce but rich in sugar, fat and carbohydrates with lower nutritional value – has become increasingly widespread. Overweight and obesity-related diseases are increasing rapidly. Over the years, humans have grown 6,000 different crops, but today more than half of all calories come from rice, wheat, and corn.

Specialisation and import dependence make the system vulnerable if the export of important crops, or fertilisers, fails. The invasion of Ukraine broke the supply chain from a region that accounts for nearly a quarter of the world’s wheat exports. At the same time, sanctions against Russia, the world’s largest fertiliser exporter, contributed to rising fertiliser prices. The chain effect resulted in rising food prices globally during the first half of 2022. Some 20 countries responded with export restrictions on certain crops, for example wheat in India and palm oil in Indonesia. Today’s deglobalisation trend makes such ‘food nationalism’ an increased risk for import-dependent countries, especially in poorer parts of the world.

Another risk is climate change with increased occurrence of extreme weather that causes drought, fires, and floods. It can destroy individual crops, but above all lead to the erosion of fertile agricultural land, with poorer crop yields and reduced food production in the longer term. In the UN’s worst-case scenario, the crop yield could fall by 30 percent while demand increases by 50 percent. Already today, productivity growth in agriculture is levelling off in many parts of the world. It is also common to use too much fertiliser and pesticides, which can damage the environment in other ways.

Climate refugees are a politically charged issue. Africa will account for most of the population growth expected over the next 50 years. Many African countries already have a difficult food situation today, with inefficient agriculture and food shortages. If countries’ population growth exceeds resource availability and countries do not build up a better and more sustainable domestic agriculture, climate refugees will become a more common phenomenon. Europe is the geographically closest destination – and we already witness a series of negative political consequences from the refugee flows of recent years. Climate factors could force 216 million people in the world to live in poverty by 2050, the World Bank has predicted.

Modern agriculture has extensive environmental costs. Deforestation, overconsumption of fresh water and overuse of fertilisers and chemicals damage water and land. Agriculture is one of the sectors that has the biggest negative impact on biodiversity. At the same time, agriculture’s future harvests are based on functioning ecosystems with biological diversity.

A large part of food production requires pollination by insects. Studies show that 75 percent of all insects have disappeared in the last 30 years, and according to the UN, 40 percent of all insect species are at risk of extinction within a few decades. Three quarters of all crops that depend on pollination are at risk, corresponding to 35 percent of total food production. We are likely in a sixth mass extinction, where one million animal and plant species could disappear, according to the UN.

World food production now derives from fewer than 200 species, of which nine crops account for two-thirds of total food production. If disease knocks out the harvest for any of these, crisis is a fact.

Investment opportunities
Several catalysts, such as the EU taxonomy, the Kunming-Montreal Biodiversity Framework and increased consumer interest, all point towards investing in the transition to a more sustainable food system. There are several verticals with interesting investment opportunities. Let’s look at five of them.

Foodtech: This area includes everything from vegetarian meat and dairy alternatives to health food, products that improve animal and plant health and natural enzymes, probiotics, and additives. In recent years, a large investment bubble arose in the sector, where many companies had difficulty finding a clear path to profitability. We are therefore very selective in our investments in this segment and prefer exposure to agriculture-related companies in areas such as agritech and fertilisers where valuations are lower.

Agritech: New technology takes on a key role in realising agriculture’s great efficiency potential. Already today, growers could reduce their emissions by nearly 30 percent if everyone behaved like the 10 percent most efficient farms. Efficient and environmentally friendly use of fertilisers is key since agriculture today overuses fertilisers by an average of 40 percent. Precision technology can optimise the amount of fertiliser considering soil conditions, weather forecasts and the current needs of the plants. Agritech includes everything from software that analyses weather and soil data to precision tools for planting, spraying and irrigation.

Fertilisers: Producing nitrogen-based fertilisers is an energy-intensive process and both phosphorus and potassium are limited resources and hence, important to preserve. Despite negative environmental consequences, today it is impossible to feed the world’s population without these raw materials. However, it is possible to use them more wisely and find alternative processes with a smaller climate footprint. If the demand for food continues to increase, however, there is a structural demand for fertilisers. We prefer companies with focus on phosphorus and potassium, where the supply of raw materials is limited.

Biodiversity and circular economy: Improving biodiversity is important for securing our future food supply. There is a shortage of investable companies that focus entirely on biodiversity. However, another sustainable opportunity is the transition from linear to circular production to reduce waste and pollution. Often it is about designing products for easier recycling and a longer shelf life. Both areas are prioritised in the EU taxonomy, and interest from investors is likely to increase in the future.

Agricultural land: Increased demand for food in combination with more uncertain harvests because of climate change and degraded soil mean that there may be a shortage of fertile agricultural land in the future. Private investments in a portfolio with such real assets can be an interesting way to increase diversification.