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FUTURE OF INVESTMENTS

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by Meena Jafferali – Associate Lecturer – LSBF Executive Education

 

In the words of Einstein: “Not everything that can be counted, counts; and not everything that counts can be counted.” We are seeing a shift towards sustainable investments and investors are considering sustainable portfolios to go with their changing ethos. So, is this the future of investments?

The trend is proving to be formidable since a study carried out in 2012 showed that high net worth individuals suggested that sustainable investment should be the choice beyond the norm of greed and motivation[1].

Investments should instead be based on deeper values of sustainable developments such as healthy goods, housing, energy and healthcare. These would all be part of the positive criteria in ethical screening that fund managers are more aware of when thinking of future investment for their investors.

In 2015, the UN set the Sustainable Development Goals (SDGs) dealing with challenges faced by nations. With 193 countries of the UN signing up to the agreement, it laid down the foundations of sustainable investing. This was further set out by The International Panel on Climate Change in 2018 stating that by 2030, greenhouse gasses need to reduce by 45% and CO2 emissions reduced to zero by 2050. Additionally, the emotional impact of COVID-19 and lockdown has seen investors becoming more socially aware and therefore looking towards ‘making the world a better place’ by rethinking their investment portfolios. It has also made investors aware of the vulnerability and resilience of the financial system.

Meena Jafferali

The question for an investor seeking high returns would be: Will these investments, with a sustainability filter, provide returns? We all know of the adage ‘high risk, high returns’ and this is still largely true, even for sustainable investments. However, sustainable investing is costly to research and some organisations may simply pay lip service to their green commitments. All investments carry some form of risk, even ‘risk-free’ government gilts are not entirely risk-free, but by using the framework of passive portfolio management (with positive screening), it would mean that more investors may consider sustainable investing as the future of investments. It is about finding that balance of financial considerations, short-term and long-term goals. The ever-increasing recognition of ESG (Economic, Social and Governance) factors mean that investors will be forced to consider sustainable investing over traditional investing.

What actions are needed to encourage sustainable investment? Education, education, education. It may become a common theme for educational providers to include sustainable finance as part of their course listings. This could also be achieved by encouraging new investors such as institutions, individuals and family offices to opt for sustainable investing as the future of investments by aligning financial returns with sustainability. More progress is still to be made to generate demand but where there is a will, there is a way to transform traditional investing. Post COVID-19 is the new normal, perhaps sustainable investing will also become the new normal.

 

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Looking to the future: How the insurance sector can meet new customer demands

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By James Harrison, Head of Insurance at Dun & Bradstreet

 

It’s been over two years since the pandemic began, causing significant turbulence for insurers tasked with keeping the weakened UK economy afloat. So much so in fact that, by September 2021, small businesses in the UK had been awarded $1.4 billion in full and interim business interruption payouts – all of which insurers were forced to foot the bill for.

And the challenges didn’t end there, of course. As the geopolitical landscape worsened as a consequence of the Russian invasion of Ukraine earlier this year, so too did the pressure placed on insurance firms to shoulder the growing financial burdens that came with it.

With the global economy still an extremely challenging environment, now is the time for insurance firms to get ahead of the next wave of hurdles, and develop an insurance offering that’s more flexible, digital and forward thinking – not just for their customers, but for themselves too.

In this piece, I’ll highlight some strategic ways insurance companies can evolve to fulfil the new demands we’re seeing in the sector – both now and in future.

James Harrison

Educate your customers

Traditionally, the only interaction between insurers and customers came about because of an incident such as theft or damage. But this needs to change.

It’s important that insurance firms lessen the negative association they might trigger by frequently communicating with customers about the more positive support they offer. This could include working with their broker partners to take on a more robust educational and advisory role with customers.

By proactively educating and supporting customers, instead of playing a reactionary role in times of need, insurers can develop a relationship that’s mutually beneficial.

As a result of taking on a positive advisory role, customers can learn the true value of insurance before an incident happens. For example, insurers must discuss with customers changes they’re seeing in the markets they operate in, and how they can plan for these advancements – helping them foresee any potential challenges and plan accordingly. If we take the ban on oil imports from Russia, insurers should contact clients working in this sector and emphasise the importance of looking for alternative suppliers now and provide them with information on how to stress test in order to mitigate risks – they will appreciate the strategic guidance and it also lessens the chance of future claims.  And firms that offer continual guidance will ultimately gain customer trust and loyalty that will propel their business forward.

Readily provide solutions

As the world has digitalised beyond anything we could have imagined – even a decade ago – and this has created new opportunities, we have seen the evolution of the gig economy. As of March 2022, there were around 4.23 million self-employed workers in the United Kingdom, compared to 3.2 million in December 2000. Since self-employed workers make up a huge percentage of total workers, insurers now need to cater to the specific needs of this demographic by offering professional indemnity insurance cover to limit liability.

We have seen innovative solutions come to market, such as “Working from Home Insurance” but there is still more to be done for gig workers whose independent contractual hours take place outside of the home, such as Uber drivers. It’s time that business leaders be forward-thinking and more agile in providing innovative solutions to entrepreneurs – particularly as the demand for freelance insurance only increases with time.

Be technology-driven

It’s a digital age and insurers aren’t just living in it – they need to be part of it.

And as every organisation works through this uncertain time, insurance firms will have to undergo an ongoing digital transformation if they’re to maintain growth and keep up with higher customer expectations and demands.

It’s now the responsibility of industry leaders to invest in digital technology to enhance operational efficiency and move forward as one. Specifically, investing and implementing AI technology will help with providing instant quotes without the need for firms to carry out extensive underwriting decisions, and can also assist in the renewal probability assessments, and potential premium and policy changes process – streamlining the overall claims procedure and cutting down delays. This will not only deliver a strong customer experience but will also provide firms with a competitive advantage

However, when firms use AI to wade through data and improve operational efficiency, it’s also essential that insurance firms have up-to-date material to drive impactful decisions. This should be a priority for businesses, as more than half (52%) of business decision-makers say their company won’t survive without the best quality data and 67% believe their data is vital to the future success of their business, displaying the need for software to help with the data curation process and uncover actional insight to thrive in a competitive market. Although implementing AI technology is a must, it should be mirrored with the correct metrics if firms are to make a success of this new way of working.

Looking forward

Customers are expecting more from businesses across all industries and the insurance sector is no different.

In today’s volatile economy, even legacy organisations are vulnerable. So, businesses that want to thrive and continue to gain new clients must transform their business processes, provide optimised offerings, and cater to customer demands while providing a seamless user experience.

Now is the time to drive further innovation in the market to deliver on customers changing demands. We have seen smaller innovative players enter the market, such as Zego, Wrisk, Shift Technology etc., but their initiative now needs to become mainstream to keep the sector evolving and pushing forward.

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Energy Storage Represents Latest Investment Opportunity in the Clean Energy Transition

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Alan Greenshields, Director of Europe, ESS Inc. 

The ongoing transition to clean energy has spurred new technologies, new markets and new opportunities for investors seeking to invest in a sustainable future and earn solid returns on their investments. Energy storage, a critical component of the clean energy future, is gaining notice by utilities, large-scale energy users and investors. Today, as the world reels from energy shocks stemming from Russia’s invasion of Ukraine and grapples with the ongoing consequences of global warming, investors seeking opportunities in the clean energy space are moving towards the massive opportunity presented by energy storage.

The UK Government recently published its “Energy Security Strategy” which established a target of 95% low carbon electricity by 2030. Achieving this target will require not only significantly more wind and solar generation, but Long Duration Energy Storage (LDES) solutions that can economically store and release clean energy over 10+ hours to balance the inherently intermittent nature of renewable resources like wind and solar. LDES technologies store valuable renewable energy when it is plentiful and ensure that energy is available when it is needed, eliminating the need for fossil fuels.

As the clean energy transition gains momentum, the rapidly growing need for LDES is already driving a new market with ample opportunities for investment.

 

The Decreasing Cost of Renewables Enables the Clean Energy Transition

Since 2010, the cost to deploy wind and solar energy has declined substantially. Today, they are among the lowest-cost options for new generation capacity. Meanwhile, recent geopolitical upheaval has driven up the price of fossil fuels and underscored the volatile nature of global energy markets. Gas prices have skyrocketed, and the UK energy price cap increased by 54% in April 2022, with speculation that the cap could increase by a further 30-50% in October.

Due to its low costs and both environmental and geopolitical developments, the transition to clean energy is proceeding rapidly. According to the International Energy Agency (IEA), the renewable energy sector is expected to grow 50% between 2019 and 2024.

However, even with improvements in technology, wind and solar remain intermittent sources of electricity. For the successful transition to renewables, the UK will need to couple wind and solar with energy storage to fully utilize these renewable energy resources and replace fossil fuels.

 

The Opportunity for LDES Technology

Today, the energy system is increasingly supplied by intermittent renewables and primarily balanced by fossil fuel generators which are able to augment the variation in wind and solar generation to maintain grid stability. With Lithium-ion (LI-ion) technology as the incumbent, most battery energy storage projects built to date have durations below four hours.  While these can help smooth brief fluctuations in generation, they lack the capacity needed to provide baseload renewable energy and fully replace fossil fuel generators over longer timeframes.

With these projects built on Li-ion technology, the same technology that powers most cell phones and EVs, they suffer from a number of operational and practical drawbacks which make them poorly suited for grid-scale storage. Risk of fire, reliance upon critical minerals and capacity fade, as you have likely observed with cell phone batteries, are just a few of the constraints presented by Li-ion technology.

New long duration technologies are now available which offer advantages over existing battery systems. For example, iron-flow batteries, such as those manufactured by ESS Inc., are now commercially available and offer a number of advantages over their Li-ion predecessors.

The new LDES systems on the market are ideal for long duration, (4 – 24 hour) energy storage. Where Li-ion system costs increase roughly in proportion to storage capacity, iron-flow batteries rely upon a low-cost electrolyte made of iron, salt and water, which is not only non-toxic and fully recyclable, but allows the cost-effective addition of capacity. At long durations, iron flow batteries are the most cost-effective form of energy storage. And, the technology is not theoretical: Iron flow batteries have already been successfully deployed at a number of utility and commercial sites.

Demand for long duration energy storage is already growing with over $3bn invested in technology providers in the last five years. These investments represent a start, but much more LDES capacity will be required in coming decades. According to McKinsey & Co., the world will need between 85 and 140 TWh of long duration energy storage by 2040 to achieve carbon neutrality.

 

Sustainable Energy Systems

Investments in the energy transition will enable society’s shift towards low-cost renewable energy to minimize climate change and deliver returns for years to come. LDES will be the lynchpin of that clean energy future, enabling wind and solar to provide baseload power and fully retire fossil fuel generators. The opportunity is commensurate with the need for LDES solutions as LDES technologies attract unprecedented interest from governments, utilities and transmission operators. This sector presents both short and long-term benefits which will deliver not only a return on investment, but a lower cost, more sustainable and more secure energy system.

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