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Tomorrow’s Company Inquiry into capital markets explores incentives needed for long-term investment

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On 27 October 2015, Tomorrow’s Company launch a new reportTomorrow’s Capital Markets: Investing in what we value’ brings to a formal conclusion the research into Tomorrow’s Capital Markets, which began in 2010. An initial report was published in 2012.

The report explores how the operation of incentives, both hard and soft, within the capital markets system could be better structured. This would be in a way that gets resources channelled to where they can be most productively used for long-term human development, while also producing sufficient return to incentivise market participants to invest.

You can watch a video of the launch event here. The report argues that:

– We face serious threats to climate, quality of life, water supply, nutrition etc.

– Our capital markets have a vital part to play in enabling society to meet these human needs.

– Long-term financial value comes from meeting human needs on an intergenerational basis, taking account of economic, social and environmental factors, using a broad range of indicators.

– This wider view of value needs to permeate all information and decisions in the system.

– Markets are good servants but bad masters: we need to curb the casino economy and shift the balance in markets between trading and owning – between ‘value in use’ to ‘value in exchange’.

– Markets will respond to client priorities. We want asset owners to take a wider view of value embed this view into their requirements of investment managers and advisors. We also want to help savers exercise individual choice.

Commenting on the release Mark Goyder, CEO and Founder Director of Tomorrow’s Company, said: “We need capital markets, like companies to be a force for good. We need them to be the servants of society and not behave like the masters of the universe. They are stewards of our savings. We need to design the rules of markets and shape our habits as market participants so that we see life this way. Working in partnership with many other groups, that is what I hope the contribution of Tomorrow’s Company will be.”

Barbara Ridpath, Director of St. Paul’s Institute, and a member of the steering group, co-hosted today’s launch event said: “If we are to restore trust in the financial system we need to shorten the chain of intermediation between the source of the savings and the investment, in order to remind people in the capital markets that there is also a human being’s wellbeing behind the money they are moving. This is achieved through individual actions and behaviours of participants in the system and is driven by collaboration of these people. This is where the strength of this project lies.”

Mike Clark, Director of Responsible Investment at Russell Investments, and member of the steering group: “There is currently too narrow a focus on interpreting risk and return when looking at long-term financial systems. Tomorrow’s Capital Markets places a greater emphasis on the creation of wealth, its distribution, and the meaning of value by taking a broader view through recognising environmental, social and governmental factors.”

Ingrid Holmes, Director of E3G and a member of the report’s steering group, “With growing concerns about value at risk from climate and wider ESG risks, a ‘do nothing’ approach to ensuring  investments deliver longer-term value looks increasingly untenable.”

Donald Fleming, Managing Director, Pensions Advisory at Gazelle Corporate Finance, and member of the steering group: “A core function of the capital markets is to create and allocate capital efficiently, both across society and over time. But this is not a linear process and what this project has identified is that it operates in a sense like a neural network, with the actions of each player affecting its neighbour, with knockon effects over time through the system.”

Damian Carnell, Director at Towers Watson, and member of the steering group: “Incentives are a powerful tool to endorse behaviours. However it is essential to understand the effects that specific incentives will have to avoid unwanted consequences. The strength of this report is that it has analysed which incentives within capital markets can enhance long-term investment without causing unwanted consequences. In future there needs to be a much greater awareness of the design process, the importance of governance in design and operation, and the role of good corporate culture for incentives to be improved. ”

Tim Wright, Partner at PwC, and member of the steering group: “Creating the right incentive model for a globally sustainable capital markets system is difficult enough, but how can stakeholders really be sure that what is being incentivised is right? Tomorrow’s Capital Markets has grasped the nettle in looking at how hard and soft incentives within capital markets could be structured in a way to better channel resources to where they can be most productively used.”

John Neill, CEO of Unipart, said: “We at The Unipart Group recognise the shared and widespread concern surrounding present-day capital markets and we therefore welcome this report and the issues it raises wholeheartedly. We have learned throughout our own transformational journey that to truly change a global business’ culture, we need to systematically engage our people at all levels to embrace a sustainable way of working with a strong customer focus and responsible values at the core. This same commitment applies to the financial system.”

George Latham, Managing Partner and CIO at WHEB Listed Equity said about this report: “This valuable paper from Tomorrow’s Company is focussed on the need to find ways to incentivise capital to be deployed in such a way that it better supports the long-term needs of society and future generations.”

Highlights from ‘Tomorrow’s Capital Markets: Investing in what we value’

This report brings to a formal conclusion the research by Tomorrow’s Company which began in 2010. A first report Tomorrow’s Capital Markets: an invitation to work with Tomorrow’s Company to set new incentive structures for a sustainable world published in 2012 set out an agenda for change and recognised that change needs to be created and owned by those in the system and those who are responsible for the system.

This second report has moved beyond the diagnosis to test and refine the findings of the first report and set out an agenda for change and recognised that change needs to be created and owned by those in the system and those who are responsible for the system. The report focuses on the UK, and to a lesser extent the EU. However, many of the principles behind the findings are just as applicable in other regions. Tomorrow’s Company’s vision for the system is one in which long-term financial value is understood as meeting human needs on an intergenerational basis, takes account of economic, social and environmental factors, and is measured using a broad range of indicators.

This is achieved by ensuring that:

– a wider view of value is adopted and reflected in the information provided to support decision making.

– savings are channelled into investments which create wealth and secure well-being.

– strong investment performance is pursued over the long-term through a focus on stewardship, underpinned by collaboration and standards of integrity and transparency, and all the intermediaries in the system publicly declare the extent of their commitment to act in this way and explain how they fulfil these obligations.

– long-term value creation is reinforced through aligning skills and linking targets and incentives to the needs of clients and beneficiaries

– there is an appropriate balance between long-term investments and the need for liquidity

– the scale and activity of what some refer to as the ‘casino’ economy does not pose a threat to the operation of the ‘real’ economy, while recognising the need for sufficient, but not excessive, trading to enable the real economy to operate effectively.

Tomorrow’s Company believes this vision is best achieved by values-led, market based self-regulation wherever possible to reduce the need for imposed rules by regulators. For both regulatory and self-regulatory approaches, there is a need to ensure that they act in the public interest, and not just private interest, and have effective systems and processes of transparency and public accountability. The report poses a series of challenges in the forms of questions which identify where the levers for change exist and what combination of changes can build on existing momentum to shift the system.

Economy

Will Self-Driving Cars Be Better for the Environment?

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self-driving cars for green environment
Shutterstock Licensed Photo - By Zapp2Photo | https://www.shutterstock.com/g/zapp2photo

Technologists, engineers, lawmakers, and the general public have been excitedly debating about the merits of self-driving cars for the past several years, as companies like Waymo and Uber race to get the first fully autonomous vehicles on the market. Largely, the concerns have been about safety and ethics; is a self-driving car really capable of eliminating the human errors responsible for the majority of vehicular accidents? And if so, who’s responsible for programming life-or-death decisions, and who’s held liable in the event of an accident?

But while these questions continue being debated, protecting people on an individual level, it’s worth posing a different question: how will self-driving cars impact the environment?

The Big Picture

The Department of Energy attempted to answer this question in clear terms, using scientific research and existing data sets to project the short-term and long-term environmental impact that self-driving vehicles could have. Its findings? The emergence of self-driving vehicles could essentially go either way; it could reduce energy consumption in transportation by as much as 90 percent, or increase it by more than 200 percent.

That’s a margin of error so wide it might as well be a total guess, but there are too many unknown variables to form a solid conclusion. There are many ways autonomous vehicles could influence our energy consumption and environmental impact, and they could go well or poorly, depending on how they’re adopted.

Driver Reduction?

One of the big selling points of autonomous vehicles is their capacity to reduce the total number of vehicles—and human drivers—on the road. If you’re able to carpool to work in a self-driving vehicle, or rely on autonomous public transportation, you’ll spend far less time, money, and energy on your own car. The convenience and efficiency of autonomous vehicles would therefore reduce the total miles driven, and significantly reduce carbon emissions.

There’s a flip side to this argument, however. If autonomous vehicles are far more convenient and less expensive than previous means of travel, it could be an incentive for people to travel more frequently, or drive to more destinations they’d otherwise avoid. In this case, the total miles driven could actually increase with the rise of self-driving cars.

As an added consideration, the increase or decrease in drivers on the road could result in more or fewer vehicle collisions, respectively—especially in the early days of autonomous vehicle adoption, when so many human drivers are still on the road. Car accident injury cases, therefore, would become far more complicated, and the roads could be temporarily less safe.

Deadheading

Deadheading is a term used in trucking and ridesharing to refer to miles driven with an empty load. Assume for a moment that there’s a fleet of self-driving vehicles available to pick people up and carry them to their destinations. It’s a convenient service, but by necessity, these vehicles will spend at least some of their time driving without passengers, whether it’s spent waiting to pick someone up or en route to their location. The increase in miles from deadheading could nullify the potential benefits of people driving fewer total miles, or add to the damage done by their increased mileage.

Make and Model of Car

Much will also depend on the types of cars equipped to be self-driving. For example, Waymo recently launched a wave of self-driving hybrid minivans, capable of getting far better mileage than a gas-only vehicle. If the majority of self-driving cars are electric or hybrids, the environmental impact will be much lower than if they’re converted from existing vehicles. Good emissions ratings are also important here.

On the other hand, the increased demand for autonomous vehicles could put more pressure on factory production, and make older cars obsolete. In that case, the gas mileage savings could be counteracted by the increased environmental impact of factory production.

The Bottom Line

Right now, there are too many unanswered questions to make a confident determination whether self-driving vehicles will help or harm the environment. Will we start driving more, or less? How will they handle dead time? What kind of models are going to be on the road?

Engineers and the general public are in complete control of how this develops in the near future. Hopefully, we’ll be able to see all the safety benefits of having autonomous vehicles on the road, but without any of the extra environmental impact to deal with.

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Economy

New Zealand to Switch to Fully Renewable Energy by 2035

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renewable energy policy
Shutterstock Licensed Photo - By Eviart / https://www.shutterstock.com/g/adrian825

New Zealand’s prime minister-elect Jacinda Ardern is already taking steps towards reducing the country’s carbon footprint. She signed a coalition deal with NZ First in October, aiming to generate 100% of the country’s energy from renewable sources by 2035.

New Zealand is already one of the greenest countries in the world, sourcing over 80% of its energy for its 4.7 million people from renewable resources like hydroelectric, geothermal and wind. The majority of its electricity comes from hydro-power, which generated 60% of the country’s energy in 2016. Last winter, renewable generation peaked at 93%.

Now, Ardern is taking on the challenge of eliminating New Zealand’s remaining use of fossil fuels. One of the biggest obstacles will be filling in the gap left by hydropower sources during dry conditions. When lake levels drop, the country relies on gas and coal to provide energy. Eliminating fossil fuels will require finding an alternative source to avoid spikes in energy costs during droughts.

Business NZ’s executive director John Carnegie told Bloomberg he believes Ardern needs to balance her goals with affordability, stating, “It’s completely appropriate to have a focus on reducing carbon emissions, but there needs to be an open and transparent public conversation about the policies and how they are delivered.”

The coalition deal outlined a few steps towards achieving this, including investing more in solar, which currently only provides 0.1% of the country’s energy. Ardern’s plans also include switching the electricity grid to renewable energy, investing more funds into rail transport, and switching all government vehicles to green fuel within a decade.

Zero net emissions by 2050

Beyond powering the country’s electricity grid with 100% green energy, Ardern also wants to reach zero net emissions by 2050. This ambitious goal is very much in line with her focus on climate change throughout the course of her campaign. Environmental issues were one of her top priorities from the start, which increased her appeal with young voters and helped her become one of the youngest world leaders at only 37.

Reaching zero net emissions would require overcoming challenging issues like eliminating fossil fuels in vehicles. Ardern hasn’t outlined a plan for reaching this goal, but has suggested creating an independent commission to aid in the transition to a lower carbon economy.

She also set a goal of doubling the number of trees the country plants per year to 100 million, a goal she says is “absolutely achievable” using land that is marginal for farming animals.

Greenpeace New Zealand climate and energy campaigner Amanda Larsson believes that phasing out fossil fuels should be a priority for the new prime minister. She says that in order to reach zero net emissions, Ardern “must prioritize closing down coal, putting a moratorium on new fossil fuel plants, building more wind infrastructure, and opening the playing field for household and community solar.”

A worldwide shift to renewable energy

Addressing climate change is becoming more of a priority around the world and many governments are assessing how they can reduce their reliance on fossil fuels and switch to environmentally-friendly energy sources. Sustainable energy is becoming an increasingly profitable industry, giving companies more of an incentive to invest.

Ardern isn’t alone in her climate concerns, as other prominent world leaders like Justin Trudeau and Emmanuel Macron have made renewable energy a focus of their campaigns. She isn’t the first to set ambitious goals, either. Sweden and Norway share New Zealand’s goal of net zero emissions by 2045 and 2030, respectively.

Scotland already sources more than half of its electricity from renewable sources and aims to fully transition by 2020, while France announced plans in September to stop fossil fuel production by 2040. This would make it the first country to do so, and the first to end the sale of gasoline and diesel vehicles.

Many parts of the world still rely heavily on coal, but if these countries are successful in phasing out fossil fuels and transitioning to renewable resources, it could serve as a turning point. As other world leaders see that switching to sustainable energy is possible – and profitable – it could be the start of a worldwide shift towards environmentally-friendly energy.

Sources: https://www.bloomberg.com/news/articles/2017-11-06/green-dream-risks-energy-security-as-kiwis-aim-for-zero-carbon

https://www.reuters.com/article/us-france-hydrocarbons/france-plans-to-end-oil-and-gas-production-by-2040-idUSKCN1BH1AQ

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