Invest

5 Reasons to Hire Underperformers Instead of Industry Leaders

7 February, 2019
  • Deb Clarke

    Global Head of Investment Research, Mercer

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“Sometimes the intoxication of an extended period of laudable returns can lead to cultural apathy, lack of humility and reduced desire to innovate.”

It is human nature to celebrate success. People love trophy ceremonies and hugs, confetti and high fives. Everyone loves a winner. The specter of “winning” associated with highly achieving firms in the investment industry, however, can be dangerous. Sometimes the intoxication of an extended period of laudable returns can lead to cultural apathy, lack of humility and reduced desire to innovate. This collective mindset can ultimately result in future woes.

Underperforming firms, in contrast, constantly seek new ways to create value, leverage innovation and force their way into the winner’s circle. CIOs responsible for investing on behalf of asset owners should recognize that underperforming firms could offer tremendous opportunities—especially when currently successful firms have become too comfortable with, well, winning. Below are five reasons why CIO’s should not overlook underperforming firms when seeking new avenues to invest an asset owner’s assets:

1. The Continued Success Fallacy   
 

The investment industry is predisposed to viewing past success as an indicator of future success. Reasoning tells us that firms that have generated winning returns in the past have the talent, mindset and resources needed to generate high returns in the future. This bias, however, can be misleading. Continued success is never guaranteed in the investment industry, and could even be considered a liability. People are innately fallible, and investment firms are run by people—who are prone to the familiar trappings of success: apathy, entitlement, hubris and being lulled into complacency by the inertia of the past. The world is full of parables about the many perils of success, and human nature is always at the center of those failures.

The Chinese proverb “The spectators see more of the game than the players,” highlights the dangers of tunnel vision and why it is wise to consult outside opinions. Relying solely on proven resources can lead to an echo-chamber of the same strategies, attitudes and insights over time. The investment industry’s tendency to view past success as an indicator of future success is an understandable, but precarious, bias. Replicating effective strategies is a formula for obsolescence in an industry that is constantly evolving. In contrast, underperformers keenly aware of their shortcomings are always thinking about new opportunities on the horizon. Experienced CIOs who have witnessed the inherent dangers of presumed continued success are more inclined to value a focus on inventiveness and creating the future. Just look back at how much the investment industry has changed over the past ten or twenty years. Change never stops.            

2. The Complacency Trap     
          

CIOs must exercise due diligence on behalf of their stakeholders when evaluating the perceived benefits of working with currently successful investment firms. Complacency is a very strong and common psychological pitfall. After all, if the clients are happy and value is being created, why change? But complacency is deceptively quiet; it creeps in unnoticed over time, almost imperceptibly, and becomes part of a firm’s culture and operational routines. Complacency, as the byproduct of success, can masquerade as success itself and take root as soon as a firm begins patting itself on the back—and showcasing its latest industry awards beneath the bright lights of their lobby display box (you’ve seen them!). 

The antidote to complacency is vigilance, humility and action. Investment firms must seek out groundbreaking or contrary ideas and learn to leverage evolving technologies and new regulations. Successful firms may ignore the inevitability and sweeping power of change because they are blinded by the glow of their current fortunes. What worked yesterday will certainly work today and probably tomorrow, they think. All investment firms—regardless of their prevailing circumstances—need to focus on what comes next. Firms that experiment with strategies and mechanisms that might give them a competitive advantage are more likely to stay ahead of change instead of chasing it. Investment firms with something to prove to themselves and the market, embrace change as opportunity.     

3. The Client Conundrum                 
 

Contented clients resist change for obvious reasons. Who in their right mind would change a strategy that is currently providing healthy returns? The onus to implement new strategies and a bold vision, therefore, falls on the investment firm. Educating clients today about future opportunities is key to winning tomorrow. An investment committee needs to be sure of its convictions if it wants to deviate from a historically lucrative path. Changing course and going out on a limb will be more difficult if the historic performance of the incumbent has been strong. The client conundrum constrains investment firms with the disadvantage of being trapped in a relationship that is inherently opposed to change. Underperformers, particularly less-established firms that are still making a name for themselves, tend to not have long-term clients, and therefore do not face the same obstacles. Not having to fight the gravitational pull of long-term success frees them to explore new or less traditional approaches to creating value. For investment firms that can only move as fast as their slowest parts, sometimes happy clients create headwinds that, in the long run, work against their interests.      

4. Timing Is Everything                 
    

The investment industry is filled with firms that are at some point in their ascendancy or decline. CIOs, to effectively serve the asset owners that employ them, should strive to be as informed and insightful as possible with regard to timing. They must have the ability to read the tea leaves, so to speak, to identify where the most innovative ideas are coming from and know how to capitalize on those ideas before anyone else. Outperformers could be deceptively close to decline because they have realized their potential, and in an effort to maintain that success, have focused their energy inwards instead of outwards—which is where change and opportunities are born.

When determining the best investment strategies for their clients, CIOs should conduct qualitative, forward-looking assessments. The competitive edge could be found in underperformers who offer strategies that provide fresh perspectives. If a CIO waits too long to replace declining outperformers with ascendant underperformers, it could be too late to capitalize on the opportunities ahead. In this competitive industry, news regarding the “newest best thing” travels fast. Timing is key. CIOs who lack conviction can miss game-changing opportunities presented by lesser-known firms. In the famous words of financier James Goldsmith, “If you can see the bandwagon, it’s too late.”         

5. Evolving Technology and AI       
               

The investment industry is entering a new era of technological experimentation. There will be winners and losers; disruption from modern technologies like AI will be the norm. FinTech is revolutionizing the industry, and it is especially poised to catapult lean, tech-savvy underperformers into new spheres or relevance. CIOs will be increasingly tested on their understanding of how technologies, like blockchain, impact the future of the industry. AI and automation are progressively doing the work of actual people, which means outperforming firms with resource intensive products or services and aging operations are particularly vulnerable to change.

This charged atmosphere makes new, and maybe untested, investment firms more prone to seek out alternative sources of information and apply technology in new ways to derive value. Underperforming firms can also use new technologies to leapfrog into prominence, as the digital age has democratized access to information and resources. The history of investing teaches us that the future of the industry will come from unexpected places. Measures of past success such as assets under management and length of time running a particular strategy often counter-predict future success. To outperform through active management, CIOs need to consider underperformers who offer new, innovative strategies and mindsets. The digital transformation of the investment industry is underway and advancing rapidly.

Finally, it is human nature to seek the familiar and comfortable. The brand names and reputations of some outperforming firms may offer a reassuring and intangible sense of security. To compete, underperforming firms must offer forward-thinking strategies that differentiate their services from long-established rivals. That fight for survival is what drives innovation and change. And that survival instinct is what many of today’s successful firms can lose as a result of their good fortunes.  

more in invest

John Benfield | 16 May 2019

Times are changing. The world is moving toward an ethical, long-term sustainable way of investing. Forward-looking governments are increasingly emphasizing the role of financial markets in fostering sustainable development. Investor demand for responsible investment (RI) solutions has increased significantly, as observed by the growth of assets being allocated to RI-related investments. Combined with the shift toward low-cost equity index tracking, this has led to an increase in the number of RI indices that are now available. We expect RI indices to become an important first step in integrating environmental, social and corporate governance (ESG) considerations for many investors with existing passive or factor-based investments. At Mercer, we define Responsible Investment as the integration of ESG factors into investment management processes and ownership practices in the belief that these factors can have a material impact on financial performance. Meanwhile, in the GCC region, with efforts to diversify the economy, governments are gaining awareness around the importance of responsible investing. The GCC makes up four of the six Sovereign Wealth Funds (SWF), which founded the One Planet SWF Working Group in December 2017 at the occasion of the "One Planet Summit" in Paris. Within the UAE itself, numerous initiatives — such as The Green Economy for Sustainable Development and Green Agenda — are propelling the country into the future of responsible investing. In keeping with the diversification strategy, these initiatives support Vision 2030 by aligning with the nation's economic growth ambitions and environmental sustainability goals. Abu Dhabi is contributing to the agenda in a major way through various developments, such as Masdar City — a multi-billion dollar green energy project.1 Meanwhile, Dubai set up an energy and environment park called Enpark — a Free Zone for clean energy and environmental technology companies.2 As the business case for responsible investing gets stronger in the GCC, there is a growing demand for incorporating ESG factors or sustainability themes into investment decisions and processes. Institutions are factoring the benefits of responsible investing, not only to their investments but also to their reputation and bottom line. Sustainable investing offers attractive opportunities to tap into the growth potential of companies providing solutions to various challenges of resource scarcity, demographic changes and changes in the evolving policy responses to a range of environmental and social issues. Studies and industry evidence have shown the benefits of integrating ESG factors on the company's long-term performance. For example, Deutsche Bank reviewed more than 100 academic studies in 2012 and concluded that companies with higher ESG ratings had a lower cost of capital in terms of debt and equity. Another study in 2015 by Hsu (Professor at the National Taichung University of Science and Technology, Taiwan) and Cheng (Professor at the National Chung Hsing University, Taiwan) found that socially responsible firms perform better in terms of credit ratings and have lower credit risk.3 With companies operating against the setting of public concerns around environmental and social issues, incorporating ESG considerations is now also considered best practice. Employees increasingly want to work for and invest in companies that make a positive environmental impact. Global initiatives and bodies, such as the CFA Institute, have highlighted the financial and reputational risks of not taking ESG considerations into account. While the GCC is beginning to understand the benefits of applying ESG, the region hasn't been too far from its concept. Sharia-compliant investing has been around for the last two decades. Both frameworks apply the negative screening approach and seek investments which provide a sustainable return. With the combination of ESG factors and Sharia screening, Islamic investors can improve investment performance while meeting social and environmental goals at the same time. As the UAE is now focusing on diversifying its investments, it can highly benefit from creating a responsible investing market and culture where strategy and processes go hand-in-hand as important steps for successful integration. When seeking sustainable growth, an additional layer of insight and oversight is extremely crucial to mitigate emerging risks, like climate change. To that end, implementing ESG assessments will help set clear KPIs and identify where and how projects generate value and mitigate risks associated with them. For example, Mercer applies an Investment Framework for Sustainable Growth with its clients, which distinguishes between the financial implications (risks) associated with environmental, social and corporate governance factors and the growth opportunities in industries most directly affected by sustainability issues. Measuring impact and mitigating risks has become increasingly important and represents a strong investment governance process. The benefits of adopting ESG are numerous. While the GCC has started with the implementation of ESG principles, more work still needs to be done in making sure governments are fully engaged with stakeholders, including investors, and strategies are aligned across the region. Regulatory pressures to meet global standards of ESG integration will only increase in the coming years. Instead of hiding from it, it is time for companies, investors and governments to come together and define a way of working that moves the GCC forward in terms of responsible investing and sustainable growth. 1Carvalho, Stanley, "Abu Dhabi To Invest $15 Billion in Green Energy," Reuters, January 21, 2008, https://www.reuters.com/article/environment-emirates-energy-green-dc/abu-dhabi-to-invest-15-billion-in-green-energy-idUSL2131306920080121 2Energy and Environment Park:Setup Your Company In Enpark, UAE Freezone Setup, https://www.uaefreezonesetup.com/enpark-freezone 3Chen, Yu-Cheng and Hsu, Feng Jui, "Is a Firm's Financial Risk Associated With Corporate Social Responsibility?"Emerald City, 2015, https://www.emeraldinsight.com/doi/abs/10.1108/MD-02-2015-0047

Damien Balmet | 09 May 2019

Sovereign wealth funds (SWF) adopt differing mandates based on a country’s macroeconomic profile and the government’s priorities. Saving for future generations – as is the case with the Abu Dhabi Investment Authority (ADIA) or the Kuwait Investment Authority (KIA) – is the widely adopted mandate. But more recently, governments have begun to leverage their funds to transform their economies by adding an economic development component to their fund’s mandate. Consider the Kingdom of Saudi Arabia’s Public Investment Fund (PIF), which has identified several economic development initiatives under its ‘Public Investment Fund Program 2018-2020’, prioritizing maximising the value of PIF’s investments in Saudi companies; launching and developing new sectors; developing real estate and infrastructure projects and companies; and undertaking giga-project initiatives (developments costing more than $10 billion). One reason why countries establish sovereign wealth funds is to both professionalise and institutionalise the way the sovereign invests and manages its wealth. With this in mind, the combination of a strong governance framework and a highly experienced investment team are integral for success. When pursuing an economic development agenda, sovereign wealth fund investment professionals have a complex dual role to fulfil: Not only are they instructed to look after and transform the existing portfolio, but they are also tasked with identifying, initiating and leading new investment opportunities. Transforming a direct investment portfolio occurs through various initiatives aimed at improving the performance of the portfolio companies or monetising some of them. To improve performance, the critical first task is to implement best-in-class governance, often requiring the training or replacement of directors representing the sovereign wealth fund on the boards of portfolio companies. In turn, boards become more business savvy and gain more clarity on shareholders’ expectations, putting them in a stronger position to fulfil their fiduciary duties. When the situation requires drastic actions (for example, when a direct investment operates at a significant loss), the fund needs to swiftly engage an external advisor to identify strategic options, then supervise the implementation of the selected strategy. Such drastic actions can be expedited when the sovereign wealth fund owns 100 percent of the company or has the majority control of the board. Portfolio transformation also occurs when the sovereign wealth fund decides to monetise one of its portfolio companies. This can occur for various reasons, such as the need for cash to re-invest into more promising opportunities, or the need to eliminate excessive downside risk. In the Middle East, the sale of a state asset often requires an intermediary step consisting of corporatising the entity. This process aims to transform state assets or government agencies into corporations with a legal structure and financial statements for the last three or five years. Going through this process is usually the first step towards a sale or an Initial Public Offering (IPO). When it comes to new investment projects, sovereign wealth funds can operate in a structured approach. New viable investment opportunities need to be built on a detailed understanding of the economic sectors and strengths of a country. Once a sector or opportunity of interest has been identified, a more in-depth study should be performed to confirm the opportunity, its profitability, landscape of potential partners, risks, and employment potential of the project. A compelling example is the concept for a downstream aluminum cluster pursued in Bahrain by its sovereign wealth fund, Mumtalakat. One of its portfolio companies, Aluminum Bahrain (Alba), is currently building a sixth smelter line that will add 500,000 metric tonnes of aluminum per year, starting in 2019. In parallel, Mumtalakat is teaming up and co-investing with international partners to create joint ventures in Bahrain that will utilise this additional capacity while creating 2,000 new employment opportunities. By developing a strong understanding of attractive sectors in a country or a region, sovereign wealth funds should be in a position to quickly form an opinion on an opportunity. If an established player from overseas or an adjacent country has a compelling business case for expanding in the Middle East or in the country of a SWF, then the SWF should engage with the potential partner to further assess the opportunity. Funds with an economic development agenda represent a great opportunity to accelerate the development of their economy. Some African countries such as Angola (Fundo Soberano de Angola - 2012)1 and Nigeria (Nigeria Sovereign Investment Authority - 2012)2 set up their sovereign wealth funds over the last decade and both have developmental components in their mandates. Egypt passed a law in May 2018 to establish its own fund3. One of the contemplated objectives for this fund is to manage state companies ahead of listing on a stock exchange. The PIF in KSA has a huge task ahead of itself as it is expected to play a major role in the stimulation of the Saudi Arabian economy. The large and rapidly growing value of assets managed by sovereign wealth funds as well as the leadership expected of them in their countries’ economic transformation agendas is placing them in the public spotlight. It does not come as a surprise that citizens want to know how their public funds are being employed to their benefit. In developed countries, governments have traditionally focused on the regulatory aspect of an industry and then let the private sector flourish. On the contrary, in the Middle East and other developing countries, significant industries have often emerged from the will of the government. Sovereign wealth funds can be an effective tool to make this happen. To learn more click, here. 1International Forum Of Sovereign Wealth Funds https://www.ifswf.org/assessment/angola 2International Forum Of Sovereign Wealth Funds https://www.ifswf.org/assessment/nigeria. 3Egypt Plans Sovereign Wealth Fund-of A Kind https://www.gfmag.com/magazine/may-2018/egypt-swf

Gareth Anderson | 21 Mar 2019

The size and scale of China’s domestic marketplace has become one the nation’s greatest economic achievements. From the middle-class explosion to the sweeping impact of digital transformation throughout its population and industries, China—and the global economy—are entering a new era of investment opportunities. There is money to be made by investing in China but opening up the country’s heavily regulated domestic assets to foreign investors entails a learning curve on both sides. Perspective: China vs. Growth Economies The Mercer report The Inclusion of China A-Shares in MSCI Indices: Implications for Asset Managers and Investors, explains why opening China’s domestic market to the global economy has created a wave of excitement throughout the international investment community and marketplace. This enthusiasm is being carefully managed by the measured strategy China and the MSCI are implementing while forging a framework for future growth. The initial phase only weighted 226 stocks at a mere 5 percent of their market cap, demonstrating that this new era will be defined by an incremental, long-term mindset. This cautious approach may be welcome news to competing growth economies in the region. Despite the conservative rollout of Chinese A-shares (domestic assets) to the international marketplace, inclusion in the MSCI Index will profoundly impact the global economic landscape, especially with regard to the influence of emerging economies. Take, for instance, what the MSCI Index will look like with the inclusion of 5 percent of Chinese A-shares, and then at 100 percent inclusion. Growth economies such as India, Taiwan and South Korea may be negatively impacted by the inclusion of domestic China in global indexes, especially if investors shift their focus from growth markets to new opportunities in Chinese A-shares. (Source: MSCI) Change is inherently fraught with breakthroughs, obstacles and the anxiety of the unknown. Though no one can 100 percent accurately predict the future, let’s examine the opportunities and challenges of China’s new status in the global economy, and what it means to equity investors. Opportunities from Inclusion in MSCI: 1.      Market Size: The Chinese domestic market is large, comprising more than 3,000 stocks, and is the most liquid in the world. Since the beginning of 2017, the Shanghai and Shenzhen Stock Exchanges have experienced higher aggregate daily trading volume than the New York and NASDAQ Stock Exchanges combined.  2.     Diversity: The Chinese domestic market entails a cross-section of companies that represent a broad number of industries, and it is much more diversified at the sector level than the China shares listed in the Hong Kong Stock Exchange (which is highly concentrated in IT and financials). 3.     Uniqueness: Historically, China’s A-share market has displayed a low correlation with other equity markets, marking an era of new and unexplored opportunities to create value. 4.     Limited Foreign Ownership: With domestic Chinese retail investors comprising more than 75 percent of the free-float market cap—the number of outstanding shares available to the general public—there is a lack of informed institutional owners in the market. The unprecedented nature of the situation can create inefficiencies, but also yield an environment that can be conducive to investors willing to explore new opportunities. Challenges from Inclusion in MSCI: 1.      Volatility: Although the market is large and liquid, it is volatile and has experienced periods when liquidity has fallen dramatically in short periods of time. However, China has taken steps to mitigate volatility, including the formation of a “national team” to help stabilize the market by purchasing A-shares in times of market stress. 2.     Concentration: There is concern regarding the composition of benchmarks when China A-shares are included in indices at their full weight. Global emerging market benchmarks are relatively diversified at present, but they will become increasingly dominated by China following the full inclusion of the China A-share market. However, to address this issue, many innovative organizations are recruiting analysts and portfolio managers experienced in the region—or are nurturing in-house/hybrid solutions to explore standalone investments and other strategies. 3.     Global Uncertainty: Trade tensions between the US and China, and other geopolitical concerns have made some investors skittish about opportunities in China’s domestic marketplace. As markets seek stability over chaos, an unknown future and emerging investment realities and mechanisms will have some organizations choosing to stay on the sidelines. This, however, means more potential opportunities for investors with the portfolios and risk tolerance to explore new opportunities. To learn more about how the inclusion of China’s A-shares in MSCI Indices will impact the global marketplace and create new investment opportunities for your organization, visit Mercer Wealth and Investments (or Mercer Wealth and Investments – China).

More from Voice on Growth

Mustafa Faizani | 30 May 2019

There is no doubt that family businesses are prominent across the Gulf Co-operation Council (GCC) in various industries. From small to renowned multinational corporations, family owned and managed companies are the foundation of the modern country. Many of these businesses have been in existence for five decades and still exist today. As the first-generation of individuals begin to step down, we're seeing a shift to second and third generation ownership. It is estimated that, in the Middle East, approximately $1 trillion in assets will be transferred to the next generation of family owned companies over the next decade.1 The transition from the first to the second generation, and increasingly, the second to third generation, will have tremendous implications on the sustainability and growth of these companies. As a result, legacy and succession planning are becoming an increasing concern for the region, as many businesses stand in a position to pass the baton over to the next generation. While existing leaders prefer to keep the business within the family, there are many challenges that can arise if there is no preparation done well in advance of the transition. This lack of preparation is common, as it's easy for leaders to be so involved in the day-to-day running of the business that they lose sight of longer-term, more strategic priorities. The penalty for failing to tackle leadership or ownership changes can be significant. Lack of a clear, strategic succession plan can cause disruption, conflict and uncertainty within the business, making it vulnerable to an acquisition or takeover. The long-term survival of a business and the preservation of the wealth that has been built, will likely depend on getting ahead of those changes through legacy and succession planning. Have a Strong Internal Talent Strategy   Planning can have many benefits. The priority is to ensure leadership continuity, which is an important factor in keeping employees engaged and ensuring retention. It also allows time to hire internal candidates for key positions, therefore avoiding the cost of external searches. Internal candidates know the organization better and tend to have a better chance of success than external hires. Additionally, promoting internally helps retain good people, because they see opportunities for growth and will stay on to pursue them. A strong talent strategy can also fill leadership positions quickly, not only avoiding the potential cost of unfilled positions and errors from a lack of leadership, but helping to circumvent legal consequences from potential missteps. Evaluate Your Operating Structure and Execute in Phases   Leaders often first look at the current reporting structure and organizational chart to evaluate who the next leader(s) may be. However, it is also important to think of an organization's operating structure and how it may change over time. Leaders must consider how functional activities will evolve as the business grows, while also looking at the experience of the shareholders during this significant change. These factors need to be reviewed before selecting the people who will take over the function. As part of this process, it's critical that succession planning is done in phases. Firstly, it is important to identify the roles critical to the business and the pool of successors that best fit the organization's requirements. Ensuring the right assessments to determine readiness levels can solidify the next generation of company leadership. Multiple assessments methods are suitable, including looking at historical measures of performance, 360 leadership behaviors tests and predictive measures of potential. Involve Executive Leadership   Lastly, executive leadership involvement is essential in the succession planning process. The organization's top leaders should be fully on board with the plan to bring in the next generation and meet frequently to discuss strategic talent management issues. The ultimate results of a business succession plan depend on the adherence and commitment to it from the organization. It requires a high level of engagement and continuous efforts to keep the succession moving forward over time, despite inevitable interruptions of operational needs and unexpected changes. To learn more about succession planning for family businesses, visit us here. 1Augustine, Babu, "Middle East's Family Businesses Get Serious on Sustainability" Gulf News, November 7, 2015,https://gulfnews.com/how-to/your-money/middle-easts-family-businesses-get-serious-on-sustainability-1.1614502.

John Benfield | 16 May 2019

Times are changing. The world is moving toward an ethical, long-term sustainable way of investing. Forward-looking governments are increasingly emphasizing the role of financial markets in fostering sustainable development. Investor demand for responsible investment (RI) solutions has increased significantly, as observed by the growth of assets being allocated to RI-related investments. Combined with the shift toward low-cost equity index tracking, this has led to an increase in the number of RI indices that are now available. We expect RI indices to become an important first step in integrating environmental, social and corporate governance (ESG) considerations for many investors with existing passive or factor-based investments. At Mercer, we define Responsible Investment as the integration of ESG factors into investment management processes and ownership practices in the belief that these factors can have a material impact on financial performance. Meanwhile, in the GCC region, with efforts to diversify the economy, governments are gaining awareness around the importance of responsible investing. The GCC makes up four of the six Sovereign Wealth Funds (SWF), which founded the One Planet SWF Working Group in December 2017 at the occasion of the "One Planet Summit" in Paris. Within the UAE itself, numerous initiatives — such as The Green Economy for Sustainable Development and Green Agenda — are propelling the country into the future of responsible investing. In keeping with the diversification strategy, these initiatives support Vision 2030 by aligning with the nation's economic growth ambitions and environmental sustainability goals. Abu Dhabi is contributing to the agenda in a major way through various developments, such as Masdar City — a multi-billion dollar green energy project.1 Meanwhile, Dubai set up an energy and environment park called Enpark — a Free Zone for clean energy and environmental technology companies.2 As the business case for responsible investing gets stronger in the GCC, there is a growing demand for incorporating ESG factors or sustainability themes into investment decisions and processes. Institutions are factoring the benefits of responsible investing, not only to their investments but also to their reputation and bottom line. Sustainable investing offers attractive opportunities to tap into the growth potential of companies providing solutions to various challenges of resource scarcity, demographic changes and changes in the evolving policy responses to a range of environmental and social issues. Studies and industry evidence have shown the benefits of integrating ESG factors on the company's long-term performance. For example, Deutsche Bank reviewed more than 100 academic studies in 2012 and concluded that companies with higher ESG ratings had a lower cost of capital in terms of debt and equity. Another study in 2015 by Hsu (Professor at the National Taichung University of Science and Technology, Taiwan) and Cheng (Professor at the National Chung Hsing University, Taiwan) found that socially responsible firms perform better in terms of credit ratings and have lower credit risk.3 With companies operating against the setting of public concerns around environmental and social issues, incorporating ESG considerations is now also considered best practice. Employees increasingly want to work for and invest in companies that make a positive environmental impact. Global initiatives and bodies, such as the CFA Institute, have highlighted the financial and reputational risks of not taking ESG considerations into account. While the GCC is beginning to understand the benefits of applying ESG, the region hasn't been too far from its concept. Sharia-compliant investing has been around for the last two decades. Both frameworks apply the negative screening approach and seek investments which provide a sustainable return. With the combination of ESG factors and Sharia screening, Islamic investors can improve investment performance while meeting social and environmental goals at the same time. As the UAE is now focusing on diversifying its investments, it can highly benefit from creating a responsible investing market and culture where strategy and processes go hand-in-hand as important steps for successful integration. When seeking sustainable growth, an additional layer of insight and oversight is extremely crucial to mitigate emerging risks, like climate change. To that end, implementing ESG assessments will help set clear KPIs and identify where and how projects generate value and mitigate risks associated with them. For example, Mercer applies an Investment Framework for Sustainable Growth with its clients, which distinguishes between the financial implications (risks) associated with environmental, social and corporate governance factors and the growth opportunities in industries most directly affected by sustainability issues. Measuring impact and mitigating risks has become increasingly important and represents a strong investment governance process. The benefits of adopting ESG are numerous. While the GCC has started with the implementation of ESG principles, more work still needs to be done in making sure governments are fully engaged with stakeholders, including investors, and strategies are aligned across the region. Regulatory pressures to meet global standards of ESG integration will only increase in the coming years. Instead of hiding from it, it is time for companies, investors and governments to come together and define a way of working that moves the GCC forward in terms of responsible investing and sustainable growth. 1Carvalho, Stanley, "Abu Dhabi To Invest $15 Billion in Green Energy," Reuters, January 21, 2008, https://www.reuters.com/article/environment-emirates-energy-green-dc/abu-dhabi-to-invest-15-billion-in-green-energy-idUSL2131306920080121 2Energy and Environment Park:Setup Your Company In Enpark, UAE Freezone Setup, https://www.uaefreezonesetup.com/enpark-freezone 3Chen, Yu-Cheng and Hsu, Feng Jui, "Is a Firm's Financial Risk Associated With Corporate Social Responsibility?"Emerald City, 2015, https://www.emeraldinsight.com/doi/abs/10.1108/MD-02-2015-0047

Danielle Guzman | 16 May 2019

Imagine you're tasked with creating a brand-new city from scratch. A broad, meandering river cuts through a level plateau of arable land, and you're responsible for whatever's to come. What do you do first? Lay out a street grid? Install emergency services? Block off land for preservation and development? Think wisely, because your next decision may determine the fate of your city's inhabitants for generations to come. At its core, this is the same decision that local leaders of the world's emerging megacities face today. They may not be starting from scratch, but tomorrow's megacities face a similar potential for dynamic growth and expansion as yesterday's frontier boom towns. What should be their number-one priority when focusing on future development? People. According to a recent report from Mercer titled, "People First: Driving Growth in Emerging Megacities," we must prioritize humans (not robots) for a competitive advantage. We must design technology with humans at the center. To quote Pearly Siffel, Strategy and Geographic Expansion Leader, International, at Mercer, "In the future, work will be less about 'using' technology and more about 'interacting' with technology." 1. Technology Is Fungible, People Are Not   The well-worn axiom that AI will transform the future of work is more true today than ever before, but it misrepresents how the future will be transformed. What may start as a race to adopt and leverage AI in the workplace will inevitably end in a saturation of technology: As soon as one firm unlocks the full potential of automation, it'll be a matter of time before their competitors replicate the model. Who wins in a world where AI is in every office? The organizations with the best talent. Consumer and workforce demands will inevitably adapt to an AI-empowered future, and the real differentiator will be the human skills, such as critical thinking, emotional intelligence and creative problem solving, paired with technology. A recent report by the World Economic Forum outlines the 10 skills humans will need to create value in an increasingly automated world, and it's a great reminder that peoplemust remain the focus if we're to build anything that works in the future of work.1 Tamara McCleary, Founder and CEO of Thulium, summarized this point well in a recent conversation we had: "If we are distracted by all that glitters with the promise of a frictionless future with AI, then we will surely miss the mark. While technology may be an economic accelerator in the future of work, people are still the core drivers of sustained productivity." 2. When AI Is Everywhere, People Will Still Go Somewhere   Everyone's familiar with the dystopic tomorrow-lands depicted in literature and film: techno-centric, automated megacities serviced by an army of robots where people are undervalued. This is not how I envision the future of work. The proliferation of AI may mean some jobs will be automated, but those displaced workers still represent remarkable potential to cities, employers and economies. McKinsey estimates that disruption from digital transformation, automation and AI will force approximately 14% of the global workforce — 375 million workers — to find new career directions.2 However, as the economy of the future becomes less murky and reskilling/upskilling becomes a staple of every career path, there will be a massive scramble to find talent to plug newly created roles in the workforce. This new economy is why people-skills will be so sought after in the future of work, according to April Rudin, CEO and Founder of The Rudin Group. "AI will be a tool to empowerhumans instead of replace them, enabling people to spend time on the things they do best: making relationships, exercising judgment, expressing empathy and using their problem-solving skills." Those cities that remain people-focused will be the ones with talent on-hand, and they'll be the ones to succeed. 3. A Clean Start Provides a Leg Up   Think about the investment that today's economic powerhouses have made in their broader commercial infrastructure. Think about public transportation systems, electrical and IT networking, private development and public zoning districts. Billions of pounds, dollars, yen, renminbi, rupees, euros and more spent on getting those cities ready for the economy of today. How will those investments pay off in the future of work? Today's emerging megacities are "unencumbered by the legacy systems of their larger and more established brethren," according to Mercer's People-First research. While it may require massive investment to install the building blocks of a future-focused economy, there's none of the wasted expense or necessary compromise that comes with retrofitting an outmoded city for the tech-enabled future. Those cities can focus time and resources on building attractive, people-centric cities where employees will want to live, work and raise families in the future. "It's hard to fathom the competitive advantage a modern, mass transportation system gives a city," says Walter Jennings, CEO of Asia Insights Circle. "When economic reforms started in China, Shenzhen was a fishing village of 50,000 people. Today, there are estimates of 12–16 million residents." What's Next?   Let's return to the city planner. You're overlooking your parcel of land, and you're trying to envision the ideal city of the future. We may not know the street names, but we have a better sense of the guiding principles for your soon-to-be booming metropolis. I leave you with my three takeaways, just one lens through which to explore the opportunities which lay ahead with people, technology and the emerging megacities that will power global growth. 1. Build your city (or company) around people. 2. Don't discard valuable assets. There will always be a place for good talent in good places. 3. Look for what will carry you into the future, not what's carried others in the past. 1Desjardins, Jeff, "The Skills Needed to Survive the Robot Invasion of the Workplace," Visual Capitalist, June 27, 2018, https://www.visualcapitalist.com/skills-needed-survive-robot-workplace/. 2Illanes, Pablo, Lund, Susan, Mourshed, Mona, Rutherford, Scott and Tyreman, Magnus, "Retraining and Reskilling Workers in the Age of Automation," McKinsey Global Institute, January 2018, https://www.mckinsey.com/featured-insights/future-of-work/retraining-and-reskilling-workers-in-the-age-of-automation  

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