A new industrial revolution has arrived, fueled by technologies encompassing digitalization, artificial intelligence, automation, biotechnology, fintech and clean technologies . The spread of technology offers the opportunity to address both major environmental challenges, such as climate change, and social issues, such as the need to empower women. But technology is also leading to significant company and sector disruption and therefore presents risks and opportunities for investment portfolios.
Digital technologies which are enabling more individuals and businesses to gain access to financial services via mobile phones and the internet will assist G20 efforts to increase financial inclusion. According to the World Bank, there are an estimated 1.7 billion working-age adults with no access to financial services, and a disproportionate number (56% of them) are women. The delivery of financial services is also part of the solution to a number of the United Nations' Sustainable Development Goals, such as gender equality and ending poverty, and fostering good health and well-being. Research by McKinsey Global Institute also finds that broadening access to financial services could increase the GDP of all emerging economies by 6% by 2025. This would represent additional economic growth of 3.7 trillion U.S. dollars, equivalent to adding an economy the size of Germany to global GDP.
Meanwhile, we believe environmental or clean technologies such as wind, solar and water efficiency (blue tech) and electric vehicles, which are increasingly viable due to improved cost competitiveness, will also have a transformative impact. Solar photovoltaic (PV ) costs have declined by over 80% since 2009. Renewables represent just 8.4% of total global power generation but accounted for almost 50% of the growth in 2017. In our view, these technologies will trigger not just a transformation of the power-generating sector globally but also curb carbon emissions across other parts of the economy. Electric vehicles threaten to disrupt traditional auto makers significantly, given that more and more countries are introducing bans on the sale of petrol and diesel cars, in some instances as soon as in 2030. That the 25 largest auto manufacturers make up just 20% of the market cap of the world's 15 largest tech companies today, compared to 60% eight years ago, shows the extent of the sector repricing that is taking place. Many of the new technologies are being deployed to address air, land and water contamination as well as the broader objectives of the Paris climate agreement and the United Nations' Sustainable Development Goals.
Technology is also bringing smart farming techniques to help cope with the increasing demands on the food sector from global population growth, rising incomes and climate change. Technologies can help to deliver more site-specific weather intelligence and disease-probability mapping, which can enable a more optimal crop production process. This, in turn, can help fertilizers and pesticides to be used more efficiently. These and other techniques can also reduce the ecological footprint of farming. In addition, lab-grown meat from cultured cells could cut the environmental costs of producing meat and reduce the unethical treatment of farm animals.
Technology will, in our view, also contribute to the building of smarter and more sustainable cities. Cities account for almost 70% of the world's energy consumption and a similar share of global CO2 emissions. Part of the improvement will come from technological advances in the energy, transportation and real-estate sectors.
However, technology also has a dark side. Digital currencies can be used for criminal activity, and cyberattacks or malware can cause large-scale economic damage. For example, in 2017, the NotPetya cyberattack meant that the most affected companies reported quarterly losses of around 300 million U.S. dollars. Technologies such as robotics, sensors and machine learning could also enable capital to replace labor in an expanding range of jobs and sectors, with potential negative implications for income equality and social cohesion. Understanding these risks and capturing the opportunities will determine many of the successes and failures of investment strategies in the years ahead.
Source: PRI and Willis Towers Watson (December 2017). Responding to megatrends. Survey among asset managers, asset owners and service providers in the asset-management industry.
* Composite trend score reflects the addition of severity of impact and difficulty of management
1. World Bank (April 2018). The Global Findex Database 2017
2. McKinsey Global Institute, (September 2016). How digital finance could boost growth in emerging economies
3. Irena (January 2018). Renewable Power Generation Costs in 2017
4. BP Statistical Review 2017 (June 2018)
5. KMPG (January 2018). The changing landscape of disruptive technologies 2018
6. C40 Cities https://www.c40.org/why_cities
7. World Economic Forum (January 2018). The Global Risks Report 2018