The Taiwan Banker

One of the Earth’s most important carbon storage mechanisms is easily visible from space. Vegetation stores enough carbon to profoundly impact the climate, and chlorophyll for photosynthesis also gives the continental land masses their green hue. The application of human carbon mitigation technologies at scale will likewise affect the financial system in ways that will be easily visible from a top-level perspective. The amount of investment over required over the next few years will be equivalent to the entire “savings glut” which has characterized global macroeconomics since prior to the 2008 financial crisis. Based on this analysis, the financial effects of climate mitigation could therefore reach the scale of trends like globalization, inequality, and demographic aging. This insight came from one of the wide-ranging discussions at the 2022 Asian Financial Forum (AFF), held virtually on January 10 and 11 in Hong Kong. This was the 15thAFF; previous years have focused on Asian topics, but this year took a more global approach with the theme of “navigating the next normal towards a sustainable future.” Presenters spoke about everything from short-term financial outlook and the future of banking to Hong Kong’s international status. ESG principles represent one of the most profound recent changes in finance, and naturally received a great deal of attention over the two days, particularly as policy makers think about building back from the pandemic. An end to several paradoxes In his keynote session, Jean-Claude Trichet, former President of the European Central Bank suggested a possible imminent end to the productivity paradox attributed to the growth theorist Robert Solow, who once said that “you can see the computer age everywhere but in the growth statistics.” A variety of economic activities have been moved to digital format, and later online. Doing so has however either not reduced capital costs as much as anticipated, or failed to result in the expected growth in measured economic output. Trichet also maintains a working assumption that investment in the green transition, including both new projects and replacements for capital depreciation, will help prevent a stagflation scenario. In that case, buoyed by real economic growth, real interest rates may be adjusted higher. The result will be the end of an era characterized by high savings and low investment. To a large extent, the global savings glut has manifested as financial flows from Asia into developing countries, but international capital is only one aspect of the situation. Much of the investment will need to take place in the developing world, which hopes to replicate the economic success of Western countries in the coming decades. Trichet’s assessment was also echoed by Mark Carney, UN Special Envoy on Climate Action and Finance, who provided some numbers to this capital requirement. In order to stabilize global temperatures at 1.5°C of warming, about US$ 150 trillion is required over the next three decades – US$ 5 trillion a year, worth about 2% of GDP. Carney is optimistic about the prospects of these investments. “The financial system has moved from a mirror, reflecting a world that hasn’t done nearly enough, to become a window through which ambitious climate action can deliver the sustainable future which people around the world have been demanding, and which future generations deserve.” Financial vulnerability Despite his hopeful views on productivity and growth, Trichet also however mentioned that financial markets are exceptionally fragile at the moment. According to IMF figures, global debt increased by an amount worth 61% of GDP in the 13 years from 2007 to the end of 2020. Equity valuations now compare to those before the dot-com bust, and wealth has increased over twenty years from about four times GDP to about six times. Trichet estimates that overall vulnerability is even higher now than at the onset of the 2008 crisis. Central banks will need to pay close attention to stability concerns as they raise rates. One potential issue for future consideration is how financial crises might interact with sustainability objectives. In the short term, lower growth is associated with lower emissions, as demonstrated in 2020. Such a result is however not stable. In order to achieve carbon reduction targets, investments in green infrastructure must continue during these periods in order to prepare the economy for its subsequent growth. One of the aims of ESG investing is to shift the risk curve for sustainable projects outwards, so that projects which may not have otherwise received funding can do so. One major effect of financial instability would be to reduce overall risk tolerance, which could most deeply impact these projects. Climate stress tests can pick up financial stability risks from the climate, but risk pathways in the other direction may also be important and complex. Meanwhile, a further issue for discussion in the coming year by people who understand the nexus between macroeconomics and green finance will be the politics of energy inflation. The inflation that has dominated headlines so far and affected low-income people the most has been concentrated in energy, due largely to a constrained recovery in natural gas. Broadly speaking, this price movement would be a fortuitous development for those who seek to transition away from fossil fuels, but the backlash is a worrisome sign for future efforts. If energy is expected to become a larger part of consumption baskets, must central banks become more hawkish about the remaining portions? Or would this instead call for more generous use of cash-based stimulus, funded by easy money? Such issues may be addressed in future AFF forums. Scaling through customer acquisition Economic projections were not the only topic of the event. Another session featured Brett King, founder and Executive Chair of Moven, a financial services company, and author of the well-known Bank 2.0, 3.0, and 4.0 series of books. King spoke about the new challenger bank model, built from fintech and “techfin” startups. The key financial metric in their model is their lower customer acquisition cost. King noted that Nubank, the Brazil-based neobank and largest fintech bank in Latin America, has a blended customer acquisition cost of only US$ 5. (Blended cost is a measure of variable acquisition costs only, as distinguished from fully loaded CAC.) Nubank IPO’d for US$ 50 billion in December 2021, and makes up the primary bank account for 50% of its 48 million customers. WeBank, with a market cap of US$ 70 billion and customer base of 200 million, has a CAC of US$ 0.75. The way these challengers are reducing their acquisition cost is through contextual finance. “Plastic” (i.e. credit cards) is no longer exciting; rather, a payment services layer is being embedded within digital ecosystems. This format has several advantages, including ease of data collection, lower transaction costs, and programmability. Most importantly, it enables “digital scaling” for innovative companies who are able to grasp the trends: lower costs can eventually reflect in higher revenue. “Clearly, mobile wallets are the future of banking, not plastic,” King said, “yet the transition from incumbents to this new modality is quite slow.” “If you are a bank and you’re still issuing credit cards, you are going to see a decline in that business over time.” He estimates that the US is around seven years behind China in that respect. King also mentioned his new book,The Rise of Technosocialism, which creates a framework of four futures along the two axes of chaos versus planning, and inclusion versus exclusion: luddistan, failedistan, neo-feudalism, and technosocialism. Only the latter scenario is an optimistic vision for the future. This topic clearly goes far beyond banking, but payments are a quite fundamental aspect of economic activity. King also mentioned that these futures have an important environmental component. Proactive management of the green transition will have important impacts on the economy, and will further reflect society’s overall management capabilities and resilience towards novel challenges. As Mr. Carney also noted, this is a question of national power. “Great powers are going to be green powers,” he said.