Risk

Sustainability: 7 articles to inspire business leaders

Evie Burrows-Taylor — Fri, 17 Feb 2023 09:21:33 +0000

Sustainability: 7 articles to inspire business leaders

Evie Burrows-Taylor Fri, 17/02/2023 - 09:21

20 February 2023

Sustainability is a core area of research at Imperial Business School, with academics focusing on themes including climate, energy and sustainable business models. Here, we take a look at some of our most popular sustainability-themed articles

1. What is climate risk?

The financial implications of climate risk are increasingly discussed. In this article, Imperial Business School researcher Bob Buhr explains how he is helping investors, lenders and regulators address the financial implications of climate change.

2. Phasing out coal would save the world $78 trillion

The most common concern voiced with phasing out coal is that it would be too costly. But Imperial Business School researchers have found the move would save 1.2 per cent of current world GDP every year until the end of the century.

3. Why renewable energy outperforms fossil fuels

Analysis by Imperial’s Centre for Climate Finance & Investment shows how renewable energy has benefitted from technological improvements, policy support and lower financing costs.

4. 6 ways to reduce the environmental impact of your business

It is now widely accepted that climate change exists – and that there are ways we can help to stop the worst of its effects. Here, Imperial Business School researcher Mili Fomicov reveals six ways you and your business can help in the fight against climate change.

5. Why tackling climate change requires nothing less than a business revolution

Climate change is arguably the biggest crisis to face humanity in our history. But effecting a true green recovery will require changes that are even more profound, and which involve a fundamental reassessment of how businesses operate.

6. Banks are already considering climate change in their lending decisions

New research shows larger banks are lending less to small farms affected by abnormally high temperatures, with potentially huge repercussions for a large portion of the world’s population.

7. Agribusiness is not ready for the sudden shocks of climate change

Climate change models suggest temperatures will gradually rise, but the agriculture sector is not prepared for the acute risk of extreme weather events.

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MSc Climate Change, Management & Finance

MSc Climate Change, Management & Finance is a one-year programme that gives graduates the interdisciplinary skills required in business on issues relating to climate change and sustainability.

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2022 in business: 10 of the top IB Knowledge articles of the year

Evie Burrows-Taylor — Thu, 22 Dec 2022 09:33:12 +0000

2022 in business: 10 of the top IB Knowledge articles of the year

Evie Burrows-Taylor Thu, 22/12/2022 - 09:33

22 December 2022

We take a look at some of this year's most-read IB Knowledge articles

Over the past year, Imperial Business School academics have written about subjects as varied as climate change, AI and digital transformation, healthcare, and the challenges of scaling up a business. From practical tips for entrepreneurs and business owners to cutting-edge research, they've covered a lot of ground.

Here's a selection of some of our most popular articles of 2022.

1. What African tech startups can teach us about digital innovation

During the last decade, the African continent has pushed the frontiers of digital innovation. As the African tech startup landscape undergoes radical change, we take a look at what is helping certain businesses thrive in this new environment.

2. 9 digital transformation mistakes all organisations make – and how to avoid them

When it comes to digital transformation, we tend to focus on the success stories but 87 per cent of digital transformations fail to meet expectations. In this article, three experts reveal how you can avoid some of the most common digital transformation mistakes.

3. Could engaging in corporate social impact work damage your career?

These days many people are looking for more from their professional roles than the duties listed in their job description, and corporations are increasingly offering employees the chance to engage in social impact work. But is doing social good also good for your career?

4. Ukraine: what armed conflict means for climate change

The question of the impact of climate change on geopolitical risk has been circulating in research circles for a while. But, until now, few have turned the question around and asked: “How do armed conflicts affect the fight against climate change?”

5. 3 AI trends to look out for in 2022

Artificial intelligence looks set to transform every sector of the global economy. Here, we look at some of the most interesting AI trends for business, including creative AI, the metaverse and cybersecurity.

6. What is climate risk?

The financial implications of climate risk are increasingly discussed. In this article, an Imperial Business School researcher explains how he is helping investors, lenders and regulators address the financial implications of climate change.

7. 6 ways to reduce the environmental impact of your business

It is now widely accepted that climate change exists – and that there are ways we can help to stop the worst of its effects. Here, an Imperial Business School researcher reveals six ways you and your business can help in the fight against climate change.

8. The pandemic divide: how COVID-19 has increased health inequalities

The pandemic has exacerbated pre-existing inequalities, hitting people on lower incomes and those from ethnic minority backgrounds hardest. But why did these groups experience the most disruption to hospital care from cancelled and delayed hospital appointments?

9. Phasing out coal would save the world $78 trillion

10. How to scale up in an emerging market

Launching a business is certainly a challenge, but sustaining it and scaling up is something else entirely. Luckily, a new form of entrepreneurial support is here to help.

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Banks are already considering climate change in their lending decisions

Mandeep Singh — Thu, 10 Nov 2022 14:34:46 +0000

Banks are already considering climate change in their lending decisions

Mandeep Singh Thu, 10/11/2022 - 14:34

5 December 2022

New research shows larger banks are lending less to small farms affected by abnormally high temperatures, with potentially huge repercussions for a large portion of the world’s population

When unseasonably heavy rain hammered the grain fields of northern India in August 2022, farmers watched as their crops were destroyed and their revenues plunged to just a fraction of what they’d hoped for.

Most businesses are vulnerable to the effects of climate change, but farmers worldwide are more exposed than most to extreme weather: drought, heat, or too much rain can devastate their crops and income.

Vast swathes of the world's population work in agriculture, particularly in developing nations, where farming is often a backstay of the economy. Climate change will, in future, determine the viability of agriculture, but how well farms and farmers can adapt to higher temperatures will depend upon the level of financing available. With this in mind, it’s important to understand how the agricultural sector’s access to funds varies alongside local climate conditions.

Small farms in vulnerable areas look less and less like a safe bet for banks. How easily can farmers secure loans when climate change affects their livelihoods? We’ve looked at the credit supplied by major banks to small farms across the US – and the results are revealing.

We wanted to cast light on the plight of farmers – and, by default, small businesses with limited options to move – when extreme weather strikes. We also wanted to reveal more about how banks respond to the present and future risks created by extreme weather events.

Our research has revealed that, when temperatures soar to abnormal highs, larger banks lend less to small farms affected by these extremes – sometimes cutting the number and volume of loans by up to 4.5 per cent.

Why are banks cutting loans in the face of climate change?

A heating climate affects farmers’ productivity and success in the short and long term. As it appears more likely that nations will fail to limit temperature rises to below two degrees centigrade above pre-industrial times (as promised under the Paris Agreement), more spoiled crops and livelihoods are inevitable. Productivity will dwindle, farmland will depreciate, and the value of property and machinery will deteriorate.

Banks are often accused of contributing to climate change by funding dirty industries and failing to assess climate risks adequately in their lending; there is a perception that the complexity of climate change means banks struggle to calculate the cost of future risks and apply amended borrowing costs accordingly. Many accuse banks of simply withdrawing loans, for "safety", instead.

Our work shows that, contrary to that popular belief, banks calculate risks posed by climate change and respond accordingly – they are more across the problem than regulators believe. We show that banks also factor climate change into their future lending decisions – what happened last year will determine how banks extend credit this year, for instance.

We have managed to disentangle the separate stories between supply and demand of loans. We’ve also factored in a potential drop in demand for loans due to small farmers leaving the region.

We’ve done this partly by focusing on the lending decisions of larger banks – which, unlike their regional counterparts, can choose to withdraw credit from small farms in climate-affected regions in favour of safer bets elsewhere. And credit from these larger banks declines between 2.4 and 4.5 per cent in regions struck by soaring temperatures because banks believe these farmers are more likely to default on loans.

Impact of climate-related lending decisions

Policymakers should take note. Small farms depend heavily upon banks to fund their industry amid unpredictable crop yields and prices. If banks withdraw credit to farmers amid the onslaught of climate extremes, who will take responsibility for their welfare and livelihoods? Will private investors and fintech operators step in to lend to those in need – and at what price?

What if small businesses and households remain reluctant to leave a region even as climate conditions grow more hostile? This reluctance is not without precedent – even after the devastation of Hurricane Katrina, some residents of New Orleans chose to return to the city’s Lower Ninth Ward despite it remaining at risk of ruinous floods if another hurricane were to strike.

As temperatures rise, so does the number of livelihoods at risk of climate extremes, particularly in developing nations. While agriculture, food, and related industries account for 5.0 per cent of the US GDP and provide 10 per cent of employment, these ratios are far higher in areas of Asia and Africa. In India, for instance, more than 40 per cent of the population work in agriculture.

Where do the boundaries of government responsibility lie? Loans and investments are essential for day-to-day living, from buying a car to educating a child to starting a business. What happens if this resource dries up? How could authorities choose to regulate the likes of community banks so they can continue to lend? What should their capital requirements be? How can authorities ensure the effects of adverse climate shocks don’t spill over into other regions through these lenders?

These are all delicate questions in a complex market, and regulators and industry must urgently confront them.

This article draws on findings from "Information on Hot Stuff: Do Lenders Pay Attention To Climate Risk?" by Emdad Islam (Monash University) and Mandeep Singh (Imperial London).

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How to take the risk out of farming

Farmers in Tanzania lack access to affordable financial products, but a solution that combines climate analysis with business sense is changing that.

MSc Climate Change, Management & Finance

MSc Climate Change, Management & Finance is a one-year programme that gives graduates the interdisciplinary skills required in business on issues relating to climate change and sustainability.

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Le Monde covers Professor Markus Perkmann's research on risks of multidisciplinarity

Evie Burrows-Taylor — Tue, 27 Sep 2022 09:13:49 +0000

Le Monde covers Professor Markus Perkmann's research on risks of multidisciplinarity Evie Burrows-Taylor Tue, 27/09/2022 - 09:13

11 September 2022

Risk

What is climate risk?

Bob Buhr — Wed, 06 Apr 2022 09:06:07 +0000

What is climate risk?

Bob Buhr Wed, 06/04/2022 - 09:06

11 April 2022

A toolkit to help investors, lenders and regulators address the financial implications of climate change

Over the last several years, there has been increasing discussion of the financial implications of climate risk. Much of this work has focused on specific industries and financial sectors, and the impact of climate change on GDP. As we outline in our report What is Climate Risk? A Field Guide for Investors, Lenders, and Regulators, “this knowledge is not particularly helpful for lenders, investors, or regulators unless these risks can be further granulated in terms of their scope and, more importantly, their timing and likelihood.”

What financial analysts and investors need is a toolkit of common metrics that will enable them to assess the risks to a particular firm; whether that’s quantifiable current risks, or more intangible risks that are likely to materialise further down the road.

We have therefore identified four risk categories, some with a reasonable track record for demonstrating the level of risk and financial implications, others with almost none. All are intended to be layered onto traditional risk analyses, as shown below.

1. Physical risk

As is customary, we have divided physical risk into acute and chronic risk. These risks are already well documented, partly because they are more obvious, straightforward to assess, expensive, and in many cases already occurring.

Acute risks refer to events or specific episodes that have the potential to inflict significant physical damage: wildfires, river and ocean flooding, tropical storms and the like. Such events are occurring with greater frequency both regionally and globally; they are also becoming less idiosyncratic and more systematic, with the level of risk rising accordingly.

Chronic risks are those that carry a range of physical impacts of considerably longer duration than those posed by acute risks. They are best understood as processes, not events. For example, several countries in the Middle East and Central America frequently experience many of the impacts of drought, which tend to prompt significant outmigration. Sea level rise is perhaps the most familiar, and most studied, chronic risk.

2. Transitional adaptation

When it comes to adaptation to climate change, we really have no consistent track record to assess risk. This is partly because the horizon timeline of most financial systems is considerably shorter than the expected materialisation of climate risks. The problem with such transition climate risks is that they mostly lie outside traditional risk assessment horizons, and adaptation to physical impacts is a process – sometimes a very long one. Moreover, adaptation measures generally cost money, and these amounts remain largely uncertain.

3. Transitional mitigation

Mitigating against the physical effects of climate change will inevitably involve a range of potential transitional risks and associated costs, with the extent of these costs largely contingent on public policy decisions. A number of industries face regulatory compliance costs that may increase in the future as a result of mitigation efforts. For example, the EU has revised its carbon-pricing mechanism in recent years, laying out an ambitious programme to achieve a zero-carbon economy, with significant costs attached. This represents the kind of political and policy decision that is likely to become a more significant factor in industry and company costs going forward, especially in resource-dependent industries.

4. Natural capital risks

There may be significant natural capital risks deriving from climate impacts, but there has been little focus on these. Many natural resources are being rapidly depleted, or will cost considerably more in future to recover, and this will impact any number of businesses. For example, the minerals used in mobile phone manufacturing and electric car batteries are not in limitless supply. Potash is a key ingredient in agricultural fertiliser and is also likely to be in short supply in several decades. Perhaps most importantly, water resources are being depleted rapidly in many parts of the world, with broad societal and financial implications. Many of these potential depletion concerns are being exacerbated by global heating. These are all critical risk factors for a financial analyst or investor.

Additional considerations

In fact, water is a risk factor that falls under several categories. There is a fixed amount of water, and we are seeing a depletion of liquid water and ice, and an increase in water vapour, as a result of global warming. This amplifies levels of risk for any number of industries, posing a particularly significant risk to sectors such as agriculture, mining and utilities.

Aside from the more direct financial implications for industry operations, climate risk also has the potential to lead to other types of financial risk. For example, litigation risk, against both governments and firms, could escalate with potential financial implications for, and significant damage to, a range of business. Changes in consumer behaviour are also having an impact, as shown by how quickly consumer demand for electric cars and meat-free burgers led to significant changes in their respective industries.

Our taxonomy may well be modified and refined by others in the future. Regardless, we hope this taxonomy provides investors, lenders and regulators with a useful toolkit for addressing the financial implications of climate risk.

This article draws on findings from "What is Climate Risk? A Field Guide for Investors, Lenders, and Regulators" by Bob Buhr (Imperial London).

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Ukraine: what armed conflict means for climate change

A Western break from Russian oil and gas could also mean a break from fossil fuels altogether – but there are challenges

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Delivering brand resilience in the digital era

Omar Merlo — Thu, 29 Apr 2021 14:41:08 +0000

Delivering brand resilience in the digital era

Omar Merlo Thu, 29/04/2021 - 14:41

17 May 2021

Brand resilience is a term used to describe how strong brands can withstand external pressures through difficult times. If properly cultivated, brand resilience will ensure your brand stands the test of time – time and time again

In the digital era, brands are subjected to increased scrutiny. Online reviews, social media and intensified competition mean things can go wrong quickly, with any issues amplified.

In this context, building brand resilience is essential – even more so after the events of the last year.

Credit built up in good times can help brands endure the bad, from PR gaffes to global pandemics.

Customer participation is key to brand resilience

Brand resilience may be built through strong customer relationships. These can be cultivated over time through strong customer-brand connections and distinctive brand value propositions.

Brands can also strengthen customer relationships and build up resilience through customer participation and brand transparency, strategies which my Imperial colleague Andreas Eisingerich and I (alongside others) have researched.

Increased scrutiny may make some unwilling to invite customer opinions. Brands should resist this temptation and do exactly the opposite.

We have found that brands which invite feedback, reviews, suggestions, and even complaints, develop strong customer relationships. This has tangible results, including brand loyalty and improved sales.

Brands that go further, openly sharing positive and negative customer comments and feedback, gain even more. Transparency, we found, can increase purchase intention and willingness to pay.

Continued below video

We’ve even come across reports of developers building minor bugs into software, which they then fix publicly as customers report them, showing engagement, responsiveness and transparency. This approach is a little extreme, and not something we would encourage, but reflects organisations’ increasing awareness of the benefits of customer participation and transparency.

Conversely, organisations that merely pay lip service to customer engagement, treating it as an unwelcome chore, will not enjoy the benefits.

We have found customer participation drives a greater sales uplift than the much-coveted word of mouth, which arguably prioritises new over loyal customers. Ultimately, the latter is perhaps best left to grow organically. Customer participation can be a more active process.

Honesty can be the best policy

Credit can be built up during good times, but brands can also show off what they’re made of during difficult ones. The current pandemic has merely amplified ever-present realities related to brand transparency.

Brands that have responded well during the pandemic, with transparency and integrity, will have built up good will among customers. Others, seen to have been evasive and greedy (certain budget airlines may fit the bill), will see their resilience tested.

While brands may be unwilling to show weakness, admitting the last year has been difficult may resonate with customers, who have also had difficult years. Many praised the way (the now late) Marriott CEO Arne Sorenson handled his honest but contrite admission that he would have to lay off staff.

Trying to sweep issues under the carpet will weaken customer relations, eroding trust.

As a cautionary note, we must add that customer participation must not be allowed to negatively impact employee relations. Employees’ well-being, participation, and protection from customer negativity all contribute to brand performance. A balance should be sought between internal and external participation.

How to build brand immunity

Building strong customer relationships can help confer brand immunity, protecting brands from negative information that might otherwise be fatal. Remember Volkswagen’s emission scandal in 2015? Somewhat surprisingly, the company bounced back in 2016 to become the world’s top-selling car manufacturer, only being overtaken in 2020 by Toyota (which itself recalled eight million defective vehicles in 2008).

I am part of an Imperial London research team exploring ways in which brands can actively prime immunity to negative information. We have found that brands can do this by stimulating specific psychological processes among customers.

For example, merely asking customers how they would feel about a brand if it were hit by hypothetical negative information can boost future brand immunity. This suggests that, besides building strong relationships over time, there may be more immediate ways to build brand defence mechanisms, at a time when these are most needed. This is a very promising and timely research area.

Developing marketing talent to navigate difficult times

The MSc Strategic Marketing programme at Imperial Business School covers customer engagement, brand strategies, and building brand resilience across multiple modules and perspectives.

As well as academic researchers, provision comes from those with frontline experience. The crisis management module in our online programme, for example, is taught by a colleague who led American Airlines’ brand recovery strategy after the 9/11 attacks and other brand crises.

To anyone wondering whether this is a good time to enrol in an MSc in marketing, the answer is unequivocally yes. The skills to generate and analyse market intelligence and develop customer-centric strategies will be essential to brands’ survival.

Customer-centricity will be more pivotal than ever in the post-pandemic world. Brands must strive to hold a distinctive and relevant place in consumers’ minds (no, not all publicity is good publicity). This must be married to a narrative: a positive story that connects prospective consumers with the brand.

I’ve previously written (with Professor Eisingerich) that brands should not sacrifice marketing budgets post-pandemic, and that they need to find ways to adapt. Those who prosper will be those who manage to invest strategically. And highly skilled marketing talent may be the best investment of them all.

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Diversified household investment could be the key to economic growth

Harjoat S. Bhamra — Tue, 02 Feb 2021 12:40:25 +0000

Diversified household investment could be the key to economic growth

Harjoat S. Bhamra Tue, 02/02/2021 - 12:40

3 December 2018

By encouraging households to spread their bets, governments could achieve growth beyond anything possible through monetary or fiscal policy

Does household finance matter? That’s the question Raman Uppal and I set out to answer in our recently published paper of the same name, revisiting a theme we’ve been exploring for some time.

The short answer is yes, it does matter a great deal. Not only for the sake of individual households, but also for the welfare of society as a whole.

We found that households are failing to properly diversify their investments. We all know we should not put all our eggs in one basket, but as households we don’t seem to understand that at all. The consequence is that households fail to enjoy the risk-return trade-off they could expect.

Households invest disproportionately in companies with which they are familiar, or those that operate locally. Even worse (in the US in particular), we see employees invested in their own company’s stock, tying their entire fate to the fortunes of their employer. This can have potentially disastrous consequences: it did for the employees of Enron, who lost their nest eggs as well as their jobs when the company collapsed, because their pensions were invested entirely in the company’s stock.

Change at a household level could be a better spur to economic growth than anything that can be achieved through monetary or fiscal policy

Perhaps households believe investing only in familiar names is playing it safe. But the opposite is the case: if households fail to diversify their investments, they hold portfolios that are excessively risky in comparison to those that are properly diversified. Consequently, they might move money from risky assets to safer ones, resulting in lower returns. This will have a knock-on effect as to how much each household chooses to save and how much to spend, with a negative effect on their welfare.

Benefit to society

All these reductions in households’ welfare could be mitigated by simply encouraging them to properly diversify their portfolios. Wider society stands to gain from this. By our reckoning, if households diversified their investment portfolios, then the aggregate gains could result in as much as a fivefold increase in the returns for society as a whole. (And even if there are households to which the idea of contributing to the wider economy does not figure highly, the individual gain should be enough of an encouragement.)

We would go so far as to say that effecting this change at a household level could be a better spur to economic growth than anything that can be achieved through monetary or fiscal policy.

We all know we should not put all our eggs in one basket, but as households we don’t seem to understand that at all

There’s real impetus, then, for us to seriously think about how we can get households to diversify their investments. There are a few things we think could work, individually or in combination.

Improving financial literacy is one way. In an ideal world, this would happen at high school, but as we don’t live in such a world, we could look at good sense marketing campaigns or employer-led programmes instead (couching the issue in easily understandable terms). This could help address the notion in any given household that deeper financial thinking is “not for them”.

We could try to “nudge” households towards diversification (borrowing from the terminology of Richard H. Thaler and Cass R. Sunstein), gently guiding them to make better decisions for themselves and society alike. Offering default portfolios to households could be one way of doing this, or even some kind of automatic enrolment scheme. In either case, participants could choose from a handful of schemes of varying risk, with a default option in place for those not able or willing to make such a decision. We’ve seen this work in the paragon of good sense that is Sweden, where the default social security plan is diversified internationally.

The aggregate gains could result in as much as a fivefold increase in the returns for society as a whole

Thirdly, it could be through the introduction of legislation to encourage diversification. For example, a requirement that employer-led pensions be diverse (and not own-company stock). It could be through a simplification of investment procedures into mutual funds. Certainly, an obligation to offer plans with limited options could increase uptake – research has shown a negative correlation between the number of investment options and participation in plans. Or a requirement that households invest their wealth in funds rather than individual assets (in a way that didn’t require any great investment of time or effort for the households themselves).

Building the right products

There are already products out there around which we should aim to increase awareness – or even push as default options. Exchange-traded funds in particular can offer households a simple path to diversifying their portfolios.

We should be looking to the financial services sector to help design products that make it easier for households to diversify their investments, or to improve access to those that exist. From high-street banks to emerging fintech app developers, there’s plenty of scope to help people help themselves – with the further economic benefit that engenders.

If we inspect society with a magnifying glass, we will find that it is composed of individual households. If we see to the health of these constituent elements, then we might go some way in improving the health of the whole.

A simple enough concept, but judging by the lack of attention paid to this area, one that seems to have been neglected.

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The case for a COVID-19 carbon tax

A carbon tax could both help pay for the enormous costs of the pandemic and encourage “clean” investment. Crucially, it should be levied in a few years’ time, when the UK economy has begun to recover

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Infrastructure investing in an era of technological change

Simon Wilde — Mon, 01 Feb 2021 10:35:31 +0000

Infrastructure investing in an era of technological change

Simon Wilde Mon, 01/02/2021 - 10:35

17 December 2018

For infrastructure investors, understanding the risks they are accepting is an ongoing challenge – but it might be useful to consider the mistakes of Charlotte Brontë

Climate change is driving a major reassessment of the role of infrastructure in investment portfolios. For investors seeking to understand the changing landscape of today’s infrastructure markets, it may be very useful to revisit the long history of infrastructure investing.

Consider the example of British railway investment in the mid-19th century. It’s a good illustration of the fact that the financing of major infrastructure projects by private investors is nothing new – and not without risk.

The development of stock exchanges across Europe and North America in the 1800s was largely due to the huge capital needs for railway infrastructure. Given our current tendency to worry about the world’s infrastructure investment gap – estimated by McKinsey to be 0.4–1.2 per cent of global GDP annually – it is worth remembering that, in the UK alone, railway investment in the 20 years to 1850 was over two per cent of annual GDP, financed entirely by private investors. This investment increased the size of the British rail network from just 98 miles in 1830 to over 6,600 miles by 1850. That’s not much less than the 10,000 miles it is today.

The indirect effects arising from measures to tackle climate change can be more immediate

Of course, these Victorian and Regency period investments were not without risk. Due to over-optimistic revenue cases and increasing capex costs (remember those?), perhaps a third of the £225 million invested 1830–50 was lost. Listed stocks exhibited greater volatility, with one index of railways shares losing 64 per cent of its value in 1845–49, prompting anguish from investors as diverse as Charlotte Brontë and Charles Darwin. Both today and in the past, forecasting the impact of new technologies is not easy and markets are prone to both over- and under-shooting.

Changing finance structures

Fast forward to 2016, and we have a new wave of technology-driven infrastructure needs and a wide range of investors contemplating investment. This has spawned the renewable energy industry and rippled through other sectors from electric vehicles and batteries. There’s more talk about energy efficiency and the need for adaptation investment in flood defences and irrigation systems. For renewable energy alone, BloombergNEF observes investment volumes have risen fivefold in the decade to 2015; rapid growth, though not quite matching that of Victorian railway investment.

Interestingly, the financing structures created for 19th and 20th century infrastructure investment are changing, most noticeably with regards to long-term institutional investors. Pension funds, insurance companies, and sovereign wealth funds are investing in infrastructure assets more directly, rather than just buying listed shares of utilities and other infrastructure corporations.

The causes of this change include the success of similar models in private equity and venture capital, the willingness to hold illiquid assets for long periods, and perceived governance issues around listed corporations. And the effects have been dramatic, with unlisted infrastructure funds increasing from less than $17 billion in 2004 to $309 billion by 2015 (volumes updated regularly by Preqin). This is not far short of MSCI’s weighting for the listed European utility sector of $380 billion, and wider estimates of all unlisted infrastructure exceeding one trillion dollars.

Climate change is a potentially huge problem for long-term investors

One perceived attraction of unlisted funds is they avoid the day-to-day volatility – and occasional dramatic crashes – of listed stocks. These periods of heightened volatility were seen not just in the 1840s Railway Mania, but in recent market corrections. However, just because an asset is not being priced continuously, does not mean its value is not changing over time.

For infrastructure investors, understanding the true risks they are accepting is an ongoing challenge – and one that is potentially limiting the size of the market. Take the Norwegian sovereign wealth fund’s decision in 2016 not to invest in unlisted infrastructure due to a lack of appropriate risk benchmarks. The private equity market offers a number of benchmarking and performance assessment approaches that are starting to be used for unlisted infrastructure, at the fund level and for individual assets, but there remains a need for more data.

Climate change

Infrastructure investing and climate change are closely linked in two ways. First, infrastructure investors are seen by the OECD and others as a solution to the “green investment gap”. They point to the $90 trillion assets owned by long-term institutions and argue that increasing allocations to direct infrastructure (and implicitly away from listed equities and government bonds) can help fill this gap. Similarly, it has been argued that these long-term investors can find new ways to provide patient, socially responsible capital.

Perhaps a third of the £225 million invested 1830–50 was lost

On the other hand, climate change is a potentially huge problem for long-term investors. Climate effects can be direct, such as increased flood risks for transport infrastructure (which, although potentially decades away, are vital for long-term assets). Interestingly, the indirect effects – arising from measures to tackle climate change – can be more immediate. For example, increasing renewable energy capacity has knock-on effects on existing energy infrastructure and, in a more extreme case, widespread use of batteries may eliminate the need for various infrastructure grids. As an infrastructure practitioner, I have seen first hand how hard such risks are to assess rigorously.

A related issue is that infrastructure continues to be marketed as a low volatility investment with predictable cash flows. While this may generally be true overall, it has often not been the case, from rail revenue forecasting issues in the 1840s to the present day. Further, as infrastructure investors are asked to back new technologies, such as energy storage, and invest in new markets like off-grid power in Africa, the “low risk” narrative may become challenged. Understanding what risks should be priced, and how, remain open questions.

Imperial Business School’s Centre for Climate Finance & Investment offers the opportunity for me to explore in more depth a number of these themes: the risk/reward trade-off inherent in infrastructure investing, in the context of technology and climate change, and the increasing tendency towards investment in unlisted assets rather than listed stocks. Bringing together business academics, scientists, investors and policymakers will allow the broadest possible examination of this complex and important area.

History is a helpful guide, but there is clearly much work still to be done in charting the future.

This article was originally published on Imperial Business Intelligence in November 2016.

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Does COVID-19 really mean the death of globalisation?

Globalisation has dominated the world economy for decades, but COVID-19 represents an unprecedented threat to the international trading system

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How to make healthy eating easier

Marisa Miraldo — Wed, 27 Jan 2021 11:34:23 +0000

How to make healthy eating easier

Marisa Miraldo Wed, 27/01/2021 - 11:34

5 March 2018

Understanding how our attitudes to risk and our level of self-control influence our food choices could be used to make healthy eating easier

Today’s obesity epidemic costs the global economy around $2 trillion a year, and worldwide risk factors linked to poor diet contribute to more disease than unsafe sex, alcohol, drugs and tobacco use combined. For decades, countries around the world have been wrestling with the same problem: how to help people eat better.

We all know about the potential bad health consequences of obesity and an unhealthy diet: diabetes, heart disease and cancer to name but a few. But many of us, despite our best intentions to cut portion size, fat and sugar, keep yo-yoing between losing weight and regaining it.

The one-size-fits-all approach to healthy eating and losing weight just isn’t working, with evidence suggesting that, on average, people lose just three kilograms over three years. Current solutions rely on education campaigns to improve consumer choices, such as limiting snacks to 100 calories and traffic light nutritional labels. These interventions work for some but not for all.

People who are more risk-loving have poorer nutritional balance, while the more risk averse eat better

Thinking that everyone will be able do the right thing with enough information and encouragement is missing the point. The vast majority of us know what we should avoid eating and what is good for us: we just can’t stick to it. As anyone who has ever attempted to diet knows, our attitudes, preferences and discipline all come into play when we are trying to eat more healthily.

Understanding how we make decisions

To produce long-term improvements in eating habits, we need a better understanding of individual behaviours: why we make different choices, and the drivers that influence these decisions.

On average we make 35,000 decisions every day, 221 of which are food-related. So why do these decisions differ between people? There must be something deeply rooted in individuals that makes it hard for some of them to make the right choices to eat healthily and lose weight.

Ultimately, our individual decisions are determined by our behavioural preferences – namely our preferences for risk and our levels of self-control.

Worldwide risk factors linked to poor diet contribute to more disease than unsafe sex, alcohol, drugs and tobacco use combined

Risk preferences and self-control

To understand risk preferences, it helps to use an analogy. Before flipping a coin, which option would you choose? Option A: heads win £12, tails win £8. Option B: heads win £20, or tails win nothing. On average, these options give you the same return (£10). But peoples’ choices vary depending on their different attitudes to risk: those who are risk averse will take the safe bet and choose option A; risk-neutral individuals will be indifferent between both options; and risk lovers will choose option B.

Likewise, our level of self-control dictates whether we will delay gratification and wait for a bigger reward, or take what we can get immediately.

Because we are all different in our preferences for risk and our level of self-control, it is likely these preferences also influence our decisions about food. In particular, our attitudes to risk may influence how worried we are about the risk of developing diseases linked with our poor food choices, while our level of self-control can affect our ability to stick to healthy food choices. Only those with high levels of self-control will stick to their New Year diet resolutions!

On average, people lose just three kilograms over three years

Risk lovers have poorer quality diets

In a recent study published in The B.E. Journal of Economic Analysis & Policy – and which I presented at this year’s World Economic Forum in Davos – we mapped these behavioural types and investigated the relationship between a person’s behavioural type and healthy eating decisions. For the first time, we used the Healthy Eating Index as an indicator of nutritional quality alongside height and weight (body mass index).

We found people who are more risk-loving have poorer nutritional balance, while the more risk averse eat better. In other research we discovered that people with higher levels of self-control, who are less inclined towards immediate rewards, appear to have a healthier nutritional balance.

Because we are all different in how we perceive risk and self-control, we not only act differently but we will also respond differently to interventions. Therefore, we need to design solutions based on different behavioural types defined by our risk preferences and level of self-control.

The vast majority of us know what we should avoid eating and what is good for us: we just can’t stick to it

For individuals who lack self-control, for example, we could devise interventions through which they commit in advance to their daily meals. This would help to guard against bad on-the-spot decision making and help them stick to their eating plan for longer. For risk lovers, who get a sense of wellbeing from taking risks in order to earn a large amount of money, a big motivating stick might be to reward them with a chance to play high-payoff lotteries if they lose weight.

To develop these smart behavioural-rooted prevention interventions, we need to measure risk and self-control routinely in the same way we monitor sugar levels or blood pressure.

Promoting healthier communities around the world

In collaboration with Imperial colleagues at the Nutrition and Food Network and the NIHR Global Health Research Unit in Cardiovascular Disease & Diabetes in South Asians, we are validating our findings in other countries — for example, in Sri Lanka, India, Pakistan and Bangladesh, where obesity and diabetes rates are climbing. We are designing and evaluating interventions based on behavioural types (defined by risk preferences and levels of self-control) that will help people eat better and result in healthier communities.

We also plan to test whether behavioural types not only dictate food choices, but also have an impact on how people respond differently to interventions. Ultimately, we hope that our work will help bring a step change in tackling the global obesity epidemic.

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Climate change is the new big risk for business

Charles Donovan — Wed, 27 Jan 2021 10:40:01 +0000

Climate change is the new big risk for business

Charles Donovan Wed, 27/01/2021 - 10:40

30 October 2017

Firms already account for financial, operational and reputational risks they face. Soon they will have to make sense of how climate change will impact upon their businesses. How ready is your company?

One does not need to be a climate scientist to understand the supply chain disruptions associated with the physical impacts of climate change (e.g. inland flooding, extreme heat, and sea level rise) pose potentially severe threats to financial markets. Such fears have provoked investors, shareholders, lenders and underwriters to demand a more transparent reporting system for climate-related financial data. As I write, Commonwealth Bank of Australia is being sued by its shareholders over an alleged failure to properly disclose the risks its business faces from climate change.

In June 2017, the Task Force on Climate-Related Financial Disclosures (TCFD) – a global task force created by the G20 – developed a framework for companies to voluntarily disclose the financial impact of their climate risks. It has now been backed by more than 100 companies, holding $11 trillion of assets.

The recommendations of the TCFD draw on concerns assets may be mispriced because the full extent of climate risk is not fully understood by investors. According to Bank of England Governor Mark Carney, “Widespread adoption [of the TCFD recommendations] will provide investors, banks and insurers with that information, helping minimise the risk that market adjustments to climate change will be incomplete, late and potentially destabilising.” Although several disclosure frameworks have emerged to meet this demand, there is not yet a standardised way of reporting.

The uncertainties around future emissions and the response of the global climate system make forecasting risk an extraordinarily difficult exercise

The TCFD recommends companies should disclose both the actual and potential impact of those risks on operations, strategy and financial planning. The recommendations also call for clarity on governance arrangements and risk management processes.

Bulge bracket banks, insurers, and companies representing more than $3 trillion in market capitalisation have made public commitments to support the recommendations. Banks and investment groups in particular will face pressure to show they are better communicating the risks posed to their operations by climate change; it is moving quickly from a ‘nice thing to do’ to a business imperative. In 2015, France became the first country to introduce mandatory climate change reporting for institutional investors.

As these requirements go global, board directors will be expected to ensure their corporations appropriately report climate-related risks, just as they do with other material risks such as accelerated technology advancements. So what are the financial services firms that endorsed the guidelines – including Bank of America Merrill Lynch, Barclays and HSBC – doing to prepare?

Assets may be mispriced because the full extent of climate risk is not fully understood by investors

The common starting point is to undertake a full assessment of where climate-related risk lies within a firm, focusing on the transition and physical risks prioritised by the TCFD. These firms are also assessing the current state of their processes and data quality for identifying and reporting climate risk. They are upgrading their systems for reporting carbon emissions and studying new ways to translate this data into financial risk. This is not ‘environmental management’: it is an exercise in enterprise risk management.

Companies will eventually need to ensure their quality assurance and compliance approaches for climate risk are as rigorous as they are for financial disclosures. Many will look at integrating climate change into mainstream financial filings. They can do so by creating internal controls and external assurance processes, which would enhance objectivity and credibility.

While firms are putting new policies into action, many points of contention remain. For example, which future climate scenario should corporations base their reporting strategy on? The uncertainties around future emissions and the response of the global climate system make forecasting risk an extraordinarily difficult exercise. And while in most countries there is no immediate requirement to disclose, companies should use this time to get ahead.

In June, new evidence emerged that Exxon Mobil may have overstated the value of its assets and potentially defrauded its shareholders by not taking into account what carbon pollution will eventually cost the company. Lawsuits and investigations are now underway. That’s not a situation any company wishes to find itself in.

The TCFD has fired a first shot across the bow. Pressure from shareholders, institutional investors and the government seems certain to drive forward a demand for greater transparency and better risk management. The climate will only get worse for firms that refuse to adapt.

Image taken with kind permission of the Royal Geographical Society.

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Risk lovers have poorer quality diets

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