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The Top 4 Threats to Asia-Pacific Growth Economies

18 April, 2019
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“Digital transformation offers APAC the ability to connect workforces to a global surge in technological advances, entrepreneurship and innovation.”

Asia-Pacific (APAC) economies experience fluctuations in the global economy in unique ways, because each is defined by particular geographic, societal and financial circumstances. However, the accelerated pace of digital transformation and tightening geopolitical tensions have connected the fates of all APAC growth economies to the ubiquitous effects of globalization.

Though APAC economies are projected to experience solid growth of 5.6 percent over the next two years, this optimistic forecast for the region remains prone to serious vulnerabilities.1 The areas of exposure can be organized into four categories: economic, geopolitical, technical and environmental. Let's take a look at each and how they may create challenges for nations poised for growth in the near future.

1. Economic: Debt & Housing

 

In 2016, APAC surpassed North America as the largest contributor to global debt. In fact, APAC accounted for 35 percent of the world's debt, marking a steady and significant rise since the financial crisis of 2008. This debt makes regional economies susceptible to increased interest rates and a potential default crisis.

Each economy has specific areas of exposure. In China, for example, nonfinancial corporations and household debt are rising, while in Japan, the primary concern is public debt that exposes its sovereign bond market to risks. India is also facing the impact of US$210 billion in spending on nonperforming assets in state banks.

Figure 1: Nonfinancial sector debt as a percentage of GDP across APAC.

Housing prices across APAC have been growing faster than income since 2010, especially in places like Hong Kong, Australia, New Zealand and India — where families in Mumbai find affordable housing nearly nonexistent. Though the costly housing situation has the region feeling anxious about a looming asset bubble on the verge of popping, each country has unique credit lending mechanisms and household debt numbers that determine their risk levels. These economies must heed lessons learned from the 2008 U.S. housing market crisis, where private households unable to pay their debts contributed to a global economic crisis that continues to haunt the international banking industry.

In fact, Australia currently has one of the world's highest levels of household debt. Considering that Australian bank portfolios are majority grown from mortgage lending — now at levels far surpassing the U.S. housing market just before the 2008 crash — many U.S. and global investors are more inclined to hedge the Australian market.

Figure 2: Compound annual growth rate for real residential property price and GDP per capita for selected countries across APAC, 2010–2017 Housing price data from Bank of International Settlement, GDP per capita data from Economist Intelligence Unit.

2. Geopolitical: Protectionism & Inequality

 

In an interconnected global economy, every region is affected by international trade dynamics and tariffs. The escalating trade war between China and the U.S. threatens supply chains across APAC, and a trend toward protectionism could infiltrate the area's closely intertwined network of economies as some countries struggle more than others.

Fast-paced geopolitical developments create uncertainty. That anxiety often compels businesses and policymakers to contract and insulate their economy's exposure to negative consequences. In fact, as China and the U.S. redefine their priorities, nations in APAC are forced to decide where and how they fit into this continuously evolving situation. From Australia to India, APAC economies must navigate the complexities of cooperating and competing with other nations without alienating business partners or sacrificing growth opportunities.

Figure 3: Wealth GINI coefficient in selected countries in APAC, 2012–2017 Data from the Global Wealth Data book (Credit Suisse).

While APAC seeks stability in chaotic geopolitics, many are experiencing seismic demographic shifts internally as a result of global trade and commerce. Access to trade-friendly seaports, modern technology hubs and high-skilled job opportunities has led to the rise of metropolises and megacities. The continued migration of younger generations to urban areas that offer innovative cultures, ideas and infrastructure is marginalizing peripheral and rural communities. This widening disparity between the haves and the have-nots could lead to income and wealth inequality, widespread resentment and civic unrest.

Policymakers are attempting to manage the prevailing attitudes and regulations that shape human capital management in APAC. Josephine Teo, Singapore's Minister of Manpower, recently addressed the need for Singaporeans to travel and work in surrounding countries — asking her fellow Singaporeans to keep an open mind about opportunities in other growth economies in APAC, particularly as Singapore strengthens business ties with China.2

3. Technological: Miracles & Menace

 

Technology will shape the future of the global economy. Emerging devices and technologies are developing faster than governments can regulate them, and this gap in oversight will create unprecedented opportunities for economic growth, innovation and crime. Technology has helped APAC increase workforce productivity, advance social reforms and champion environmental sustainability. The impact of digital transformation for ASEAN nations is tremendous, especially in e-commerce, where ASEAN nations accounted for 40 percent of global sales in Q1 2017; in Southeast Asia alone, the number of people with access to the internet and all of its possibilities is expected to triple from 200 million to 600 million by 2025.3

While new technologies will result in the loss of some jobs, these same technologies are set to create many new jobs. In fact, many companies building AI systems have found that human employees play an active role in designing and running AI.4 History reveals that innovation leads to job creation. Take the advent of the computer as an example. While the demand for typist-related roles may have decreased, the demand for computer-based work created new jobs related to developing, operating and programming. These gains, however, come with modern challenges, too.

Sophisticated cybercriminals from around the planet will continue to seek and exploit weaknesses in governments, institutions and enterprises of every size. As data and information become as valuable as natural resources, state-on-state cyber-attacks will increase in frequency and complexity. The confluence of alliances between governments and multinational corporations will have life-changing ramifications for populations and their rights to privacy. As different countries adopt different policies regarding human rights and access to personal information, a new generation of cyber-laws will emerge to set protective boundaries and mitigate human fallibility as people become more intertwined with their technologies.

Figure 4: Weighing the benefits of technology against its various risks.

4. Environmental: Natural Disasters & Man-made Solutions

 

Environmental factors will determine the future economic prospects and overall quality of life for APAC. Geographically, APAC is the most disaster-prone area in the world. Environmental events, such as floods and tropical cyclones, inflict tremendous damage on coastal areas — where most people, infrastructure and institutions are located. The unpredictability of natural disasters often results in the sudden — and sometimes massive — loss of human life, displacement of populations and widespread social and economic disruption.

In the aftermath of such trauma, individuals and communities must navigate their way through emotional grief and destabilized healthcare operations until governments and other agencies can provide relief. APAC must be proactive about implementing integrated policies and systems that can mitigate the devastation natural disasters pose to their people and economies. This is already happening: More mature markets, like Hong Kong, have exponentially increased the ability to align resources and swiftly respond to events, such as hurricanes. As technologies and business interests continue to connect APAC more closely, governments will have to decide what, exactly, their responsibilities are to other nations and the region.

Figure 5: Projected vulnerability changes for Asia and the Pacific.

Data from UNESCAP
 

On a global scale, APAC plays an integral role in curbing harmful emissions and pollutants. Antiquated infrastructure and lax regulations must be replaced with modern technologies and policies. Change, however, can be slow and expensive. Many APAC economies are still dependent on legacy energy resources, such as coal and other fossil fuels. Yet, strong progress has been made on regional and local levels.

China, for instance, has made remarkable progress in implementing green fuel technologies to replace coal and oil and reduce airborne pollutants.5 China's new initiatives to supplant fossil fuels with clean energy resources, such as wind and solar, has led to vastly improved air quality in cities, like Beijing — without negatively impacting the country's economy. In fact, China considers sustainable resources to be the future of energy and is aggressively investing in green businesses, such as high-tech solar panels (two-thirds of the world's solar panels are manufactured in China) and electric vehicles—surpassing even Tesla with a projected 7 million annual sales by 2025.6

APAC, as a region, has also agreed to frameworks and new technologies that promote renewable energy sources to combat air pollution and water scarcity issues that pose a direct and immediate threat. Balancing economic development with progress on climate and sustainability initiatives will be challenging but necessary.

Climate change, as with other challenges in the region, will require a new era of cooperation among APAC nations, governments and workforces. With the withdrawal of the U.S. from the Trans-Pacific Partnership (TPP) in January 2017, APAC was compelled to consider a more regional approach to solving global issues. APAC leaders, however, persevered and, in 2018, signed a revised version of the TPP with commitments from Australia, Brunei, Canada, Chile, Japan, New Zealand, Malaysia, Mexico, Peru, Singapore and Vietnam.

The new agreement, named the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), represents about 14 percent of the global GDP (down from the 40 percent the original TPP represented) and not only details new trade dynamics and oversight regulations among the participating nations but also compliance with mutually agreed-on environmental protection laws. Some of the clauses around intellectual property, arbitration and investment dispute resolution have been left out in the new treaty to allow for continuing reliance on ongoing multilateral collaboration on specific issues and local interventions by individual governments needed in public interest. The new treaty does not regulate movement of workers in the region, and member countries have ensured the interests of their agrarian and services economies are protected.

An increasingly internally focused U.S. may compel APAC to strengthen their ties to each other, opening up more avenues for business opportunities, talent exchange and shared participation in worldwide digital transformation. With most members set to ratify the new treaty, this represents a glowing bastion of free trade amid an increasing protectionist rhetoric elsewhere in the world.

There are many reasons to be optimistic about the future of APAC. Digital transformation offers the economies of APAC unprecedented growth opportunities and the ability to connect workforces to a global surge in technological advances, entrepreneurship and innovation. The pressing need to address environmental concerns and financial headwinds is creating a sense of urgency throughout APAC. The collaborative approach to solving problems bodes well for the future of APAC, as its committed leaders and locally based organisations coordinate their collective strengths to create prosperity throughout the region. As the global economy continues to evolve, APAC is poised to play an increasingly influential role.

Read Marsh & Mclennan's 14 Shades of Risk in Asia-Pacific report to learn more.

1Evolving Risk Concerns in Asia-Pacific:, http://bit.ly/2APQVlZ.
2
Lee, Pearl. "Ties with China Multifaceted and Strong: Josephine Teo." The Straits Times, 2 Mar. 2017, www.straitstimes.com/singapore/ties-with-china-multifaceted-and-strong-josephine-teo.
3
"Asean the 'next Frontier' for e-Commerce Boom." Bangkok Post. https://www.bangkokpost.com/business/news/1249798/asean-the-next-frontier-for-e-commerce-boom.
4
Mims, Christopher. "Without Humans, Artificial Intelligence Is Still Pretty Stupid." The Wall Street Journal,https://www.wsj.com/articles/without-humans-artificial-intelligence-is-still-pretty-stupid-1510488000?mod=article_inline.
5
Song, Sha. "Here's How China Is Going Green." World Economic Forum, www.weforum.org/agenda/2018/04/china-is-going-green-here-s-how/.
6
Jeff Kearns, Hannah Dormido and Alyssa McDonald. "China's War on Pollution Will Change the World." Bloomberg, www.bloomberg.com/graphics/2018-china-pollution/.

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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