The disrupters – Cover story
Further, investors want to understand the practical actions companies are taking to ensure they do not contribute to cli- mate change and ensure physical risk resilience. A suitable re- porting framework is essential in being able to address climate risk.
In a practical and realistic response, it comes as no surprise that the Task Force on Climate-related Financial Disclosures was chosen as the first-choice reporting framework by 75% of investors. A unified reporting system would help iron out much debate about the data and response to climate change. Yet all this can only go so far in addressing the disruptive part of climate change. As is revealed by a significantly bigger problem for investors existing among the disruptive climate change scenario: one in which they should prepare for a torrid transition to a low-car- bon future. This is because none of the G20 countries are on track to meet their climate ambitions, according to report from risk intelligence company Verisk Maplecroft. There is “no longer any realistic chance” for an orderly transi- tion for global financial markets, warns the report, because political leaders will be forced to rely on “handbrake” policy i nterventions to cut emissions, according to the research (for more on fighting climate change turn to page 24). Under this analysis investors face a nightmare situation with an increasingly disruptive impact of severe weather events which are expected to take a heavier toll on the global economy in the years ahead. Verisk Maplecroft’s head of environments and climate change, Will Nichols, warns: “These conditions will leave businesses in carbon-intense sectors facing the most disorderly of transi- tions to a low-carbon economy, with measures – such as restrictive emissions limits for factories, mandates for buying clean energy, and high levies on carbon – imposed with little warning.”
That is bad enough, but there is more. “Our data underscores that it is clear there is no longer any realistic chance of an orderly transition,” adds Rory Clisby, one of the report’s authors. He then highlights: “Investors across all asset classes must prepare for at best a disorderly transition and at worst a whiplash from a succession of rapid shifts in policy across a host of vulnerable sectors.” Such a scenario sounds closer to a nightmare than a mere dis- ruption. It could be time for investors to get out their tin hats.
Identifying a digital disruption
Digital disruption has been a key theme in recent years. And looking at it today, it is possible to identify a real emerging dig- ital disruption trend among the numbers and projections in this space. For example, we are moving from a world with bil- lions of devices, the so-called digital 3.0, to a world with tril-
lions of devices – the Internet of Things (IoT) and digital 4.0. A big factor here is that as digitalisation increases and a greater number of devices and applications are digitalised, the amount of data generated has exploded and continues to grow at an ever-faster pace. For example, in 2015 there were 584 data interactions per con- nected person per day – this is set to grow more than eight times by 2025 to almost 5,000 interactions per connected per- son per day. These are big numbers and may, in fact, just seem like nothing more than numbers. But they have big implica- tions. “It may feel like digitalisation has been a story that has been around for a long time, but we are still in the early innings: in the US, digital GDP as a percentage of total GDP is still only 5%,” an asset manager tells portfolio institutional. This theme, in turn, will have wide ranging ramifications, play- ing out in multiple scenarios, most notably healthcare, trans- port, robotics and the automation of knowledge work. Right at the heart of Digital 4.0 is the cloud, and the opportu- nity ahead is promised to be enormous – the penetration of the cloud for example is still below 10%. Yet, at the same time, a report by McKinsey estimates that tech- nology will replace 400 million full time jobs by 2030. Already today, 50% of current work activities can be automated by adapting currently available technology, meaning going for- ward, the workforce will need to adapt to this extremely chal- lenging picture. But the roadmap for Digital 4.0 shows that the next phase of adoption within disruptive technologies involves some, or all, of the Internet of Things (IoT), 5G, data and artificial intelli- gence. These are believed to deliver the biggest opportunities during the next five to 10 years.
Disruption in perspective
There can be no doubt the pace of disruption is increasing, leaving challenges in its wake, particularly in the investment landscape. Companies once considered attractive can quickly suffer from disintermediation in that their products or services are becoming obsolete.
Disruption is also impacting on the lifespan of companies. In 1960, the average age of an S&P company was 60 years, today it is 20. At the same time there can be no doubt that innovation and disruption, with all its positives and negatives, is the driv- ing force behind markets and with it, investment. The whole disruptor narrative is fascinating, but at the same time challenging, for institutional investors, presenting mas- sive challenges and big opportunities. And investors looking out for the disrupters of tomorrow could well be a hopeless task. As one asset owner observes: “Identifying the disrupter winners is a real challenge. As the biggest companies and dis- rupters of 20 years’ time, have probably not been created yet.”
Issue 104 | June 2021 | portfolio institutional | 19
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