WHEN IT COMES TO TACKLING the world’s biggest challenges, neither government policies nor piecemeal philanthropic efforts have, by themselves, proved equal to the task. Leaders from across industry, government and the nonprofit world are increasingly aware that working in concert is the key to finding solutions for many of these pressing concerns. At the 2017 World Economic Forum held in Davos, Switzerland in January, hundreds of global leaders came together for this very reason. On the table were 14 major topics, ranging from the global food supply to income inequality, along with a number of trends shaping trade, technology, the environment and politics.
Here are insights on seven of those topics from several of Bank of America Corporation’s top thinkers. They look at the progress that’s being made to address these issues, and the ways these approaches may evolve in the future.
The kind of economic growth that leaves behind large parts of the global population isn’t sustainable, says Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research. He points to a surge in financial inequality in recent years, which helped fuel the Brexit vote in the United Kingdom, the outcome of the recent U.S. presidential election and a wave of related populist responses around the world. “Many voters are telling policymakers, ‘We’re only going to vote for you if you conquer inequality,’” Hartnett says.
“What we’re seeing today has been a long time coming,” he adds. The North American Free Trade Agreement (NAFTA), enacted in 1994, marked the acceleration of globalism into the United States, but ultimately displaced many U.S. workers, particularly in manufacturing, Hartnett says. The global financial crisis that began in 2008 sped up the pace of inequality. “The policies put in place to prevent another Great Depression worked much better for rich, educated people than for the poor and uneducated,” he says. “As well-intentioned as it has been, the exclusive reliance on monetary policy and interest rates to achieve rising living standards may have been a mistake. It took us to a breaking point with the electorate.”
What now? Any solution will have to steer clear of numerous potential pitfalls. “You don’t want an abrupt shift from monetarism to Keynesianism, or from globalism to either protectionism or a real redistributive, Robin Hood policy,” Hartnett says. At the same time, it would be a mistake to think that there aren’t very large changes coming, which are likely to include increased fiscal stimulus in many countries, along with curbs on immigration and the free flow of trade, labor and capital. “These changes are a very big deal,” he says.
Environmental protection used to be seen as the enemy of economic growth. To the contrary, they reinforce each other and must go hand in hand if our world is to have a secure, inclusive future, says Sarbjit Nahal, head of Thematic Investing at BofA Merrill Lynch Global Research. He notes that the link between the two is becoming clearer to both businesses and governments — even more so as the global economy and energy-related emissions, which have historically moved in tandem, have begun to move apart. “Data from the International Energy Agency indicate that the energy intensity of the global economy declined in both 2014 and 2015, despite positive economic growth of 3% or more both years,” says Nahal.
This shift has to continue, says Nahal, because the cost of inaction could be catastrophic. “The question is how we’re going to be able to feed nine and a half billion people, whether we’re going to be able to cope with demands on water, whether we’re going to be able to provide enough energy to supply the growing population coming out of poverty, and whether we’re going to be able to do all this while mitigating and adapting to climate change,” he says.
In addition to degrading global quality of life, climate change is already causing unprecedented damage to the world’s financial stability. Annual costs, which have averaged about $200 billion globally for the past 10 years, could soon consume from 1% to 5% of annual global gross domestic product, according to 2015 research from insurance company Munich Re. “And those hardest hit will be emerging markets and the world’s poorest people,” Nahal observes.
Interestingly, many of these regions are the ones working hardest to address these problems. The biggest investor in renewable energy is China, and the fastest growth in renewables is in India. Meanwhile, in the United States there is much greater bipartisan agreement on the need for change than most people realize. “But most of the action is at the city, state, corporate and investor levels, rather than at the federal level,” he says. “This is an inevitable tide that simply can’t be turned back by short-term political events.”
The fourth industrial revolution, which links automation with Internet-enabled connectivity and smart machines, is reshaping labor markets. It’s making the availability of an agile, educated well of human capital crucial. Success will mean rethinking traditional approaches to how we invest in workers, now and in the future, says Jackie VanderBrug, managing director and investment strategist at U.S. Trust, Bank of America Private Wealth Management. That’s a tall order, but there’s a way to jump-start the process — by investing in women.
Research from 2015 by consulting firm McKinsey suggests that closing the labor participation gap between women and men would increase global gross domestic product by $28 trillion. “This has become a huge priority for those who believe in sustainable growth,” says VanderBrug.
But labor force participation depends on a whole set of social enablers: access to family planning, equal legal status, efforts to end violence against women, closing the wage gap and increasing representation in government. Most important, it depends on education. Around the world, progress on that front has been mixed to date. The number of girls enrolled in primary schools worldwide has grown quickly, but they remain underrepresented in secondary education, especially in the fields of science, technology, engineering and mathematics.
So how do women gain equal status in the global workforce? One way to move the ball forward is through what’s called gender lens investing. “This approach isn’t about ignoring the fundamentals of stock picking; it’s about strengthening it. It’s about having gender-based factors increasingly considered in all investment analysis, just as a routine aspect of good investing,” says VanderBrug.
“The growing economic power of women is transforming our planet,” she adds. “Investors who are not aware of the role of women — as employees, as leaders, as consumers and as agents of global change — are going to miss out on significant investment opportunities.”
In decades past, the current slump in global oil prices would have likely sparked a downturn in the prospects for wind, solar and other clean energy sources. But it’s different this time, says Ray Wood, head of Global Power and Renewables at Bank of America Merrill Lynch. Renewables have become truly cost-competitive with fossil fuel sources and now make up the vast majority of new capacity being added to the world’s electrical grid. That’s good news not only for the environment but also for the 1.3 billion people who still don’t have reliable, affordable modern energy. “Access to electricity is one of the basic catalysts for economic growth and development,” Wood says.
A combination of rapid technological advances, economies of scale and modest government incentives in some countries have brought us to this tipping point, Wood says. “Prices in many countries, for instance, have fallen so far that prices for solar and wind power are near parity with energy from fossil fuel sources,” he says. “With low natural gas prices and the rush to deploy wind and solar, high-carbon sources like coal and even nuclear projects are having trouble competing.”
And while most new electrical generating capacity is being installed in mature markets, the increasing competitiveness of renewable energy is enabling it to expand into less developed regions. “In emerging markets, the big problem with access to electricity is the high upfront cost of developing a grid across the entire country, especially where there may not be a lot of industry or heavy demand,” Wood says. But in Africa, Indonesia and parts of the Philippines, for example, there has been significant growth in “micro grids” serving local areas. “Solar not only allows you to replace something that’s more polluting, but it’s also easier to deploy,” says Wood.
His conclusion: “With the technology of clean energy today and where it will go over the next five to 10 years, the entire world’s energy system is up for grabs.”
In the coming decades, digital technologies and the Internet will continue to drive how we communicate and do business, with the potential to improve and shape the economic lives of billions around the globe. Education, government, commerce, banking—all will continue to be transformed. But in order to continue realizing this enormous potential, we must be able to ensure the safety and security of digital networks.
“We must strike the right balance between letting commerce work and protecting ourselves,” says Cathy Bessant, chief operations and technology officer at Bank of America Corporation. “Attacks are increasing across all industries at exponential rates, but defending against those attacks is not as simple as taking a defensive posture; we have to take an aggressive, forward-looking approach to identifying where attackers will come at us next. Every element of how we design our businesses must reduce cyber risk instead of increasing it. We have to have the creativity to stay ahead of that.”
Bessant says that partnerships are key. “We are only as strong as our weakest link. It’s important to have active cooperation with others across the industry and investments in resources and ideas by government agencies.” Bessant also says you can’t let your company be constrained by resources or talent. “Those elements matter in this space. And to develop a world class talent base, we must grow our own and develop talent from all sectors.”
“Every element of how we design our businesses must reduce cyber risk instead of increasing it. We have to have the creativity to stay ahead of that.”—Cathy Bessant,Chief Operations and Technology Officer, Bank of America Corporation
Meeting other kinds of challenges in the digital landscape will also require vigilance and the flexibility to respond to a constantly evolving mix of innovations and societal concerns, says Justin Post, Internet software, ecommerce and interactive entertainment analyst at BofA Merrill Lynch Global Research. “Consider the rapid growth of massive social networking platforms, some of which now have more than a billion users,” Post says. They enable a level of communication and collaboration that was unthought of just a few years ago, Post says, and the proliferation of mobile devices allows people in developing countries and remote regions to join the global conversation — something they’ve never been able to do before.
“Now virtually anyone anywhere can contribute to a knowledge base that is organized to be shared and built upon without each person having to reinvent the wheel,” he says. “And on the social networking side, you can communicate with a huge network of people all at once. With everyone connected, you can collaborate much more easily, and that enables advancement at a much faster pace.”
Until relatively recently, central banks operated in the background, ensuring that the financial system functioned smoothly around the world, and stepping forward only briefly during economic and financial crises. But the big crisis of 2008 has compelled the U.S. Federal Reserve and other nations’ central banks to stretch their roles in unprecedented ways, says Ethan Harris, head of Global Economics at BofA Merrill Lynch Global Research. Now, as rapid technological change transforms the financial landscape, central banks have been left in a precarious position when it comes to supporting economic growth and preventing future shocks to the system.
“During and after the crisis of 2008–2009, central banks were forced to do things they hadn’t really contemplated before,” says Harris. Once they’d cut interest rates to near zero in most major economies, they had to resort to extraordinary measures, such as buying vast amounts of government securities.
If the U.S. Congress and other countries’ fiscal authorities had been more willing to spend in order to jump-start the economy, the Fed and other central banks wouldn’t have needed to do so much, Harris says. And now, with interest rates still at very low levels, “we find ourselves in a world in which central banks don’t have as much ammunition when crises occur,” he notes.
Harris is encouraged by the growing willingness of governments in the major economies to loosen budgetary restraints and take other steps, such as requiring banks to increase capital reserves. Such moves may help create a more stable financial system — one that won’t need central banks to intervene as aggressively.
Other efforts to promote global economic stability are taking advantage of the interconnectedness of the world’s banks and financial institutions — the very factors that made the system vulnerable to catastrophic failure, says Ather Williams, head of Global Transaction Services at Bank of America Merrill Lynch. “During the crisis, there was a sort of domino effect because of the antiquated systems and models we use to move securities and cash around the world,” says Williams. “The question now is how to move from a model that hasn't changed in hundreds of years to one that operates transparently and securely in real time and provides better access for all.”
“Technology promises to raise confidence and reduce friction in a global system of increasing — and increasingly important — commercial connection.”Ather Williams,Head of Global Transaction Services, Bank of America Merrill Lynch
One step in the right direction, he believes, is the embrace of technology for real-time payments, especially in the developing world. Williams points to companies such as M-pesa, a mobile phone–based system that lets users securely send and receive funds, and is now used by 90% of adults in Kenya1. Such innovations are crucial in a global environment that increasingly depends on products and services that are created, bought and sold in far-flung regions, often by small-scale entrepreneurs. “This promotes inclusion in the financial system in parts of the world where holding cash is not safe. It connects people to the commercial world.
“But we also need to create a level of transparency in these transactions that lets everyone know what’s going on at a particular moment,” says Williams. For example, in what’s known as a “distributed ledger” system — sometimes known as a blockchain — all parties to a transaction can see it simultaneously, in real time, and if there’s a problem it can be quickly resolved. “That increase in transparency is a dramatic improvement over the current status quo, and reduces the risk of fraud,” Williams says. And while that evolving technology isn’t yet ready to transform a system that moves many trillions of dollars around the world every day, says Williams, “it promises to raise confidence and reduce friction in a global system of increasing — and increasingly important — commercial connection.”
A focus on short-term investment gains can make it difficult to marshal the resources needed to solve large infrastructure problems that are being faced around the world. It’s particularly a challenge to bridge the gap between the needs of developed and emerging markets and the funding that’s available to them. But because of creative new thinking about financing such projects, the next 10 years may well become the decade of infrastructure, says Christopher M. Hyzy, chief investment officer at Bank of America Global Wealth & Investment Management.
“In an interconnected world, it’s in everyone’s best interests for the areas of greatest need to have access to resources,” Hyzy says. While the shortfall in meeting the world’s infrastructure needs is often estimated at a trillion dollars annually, that number is actually much higher, he notes. He adds that the money will have to come from private as well as governmental sources. Impact investing and blended finance — which combines philanthropic, institutional, private and government funds — will need to play a greater role.
But beyond the nuts and bolts of paying for development projects, Hyzy says, is redefining what infrastructure means. “Infrastructure development has traditionally meant roads, bridges, highways, airports, water and energy projects,” he notes. “But now it also has to include broadband, access to the Internet, an entirely new grid system and the means to make such a system secure.”
Hyzy, for one, is optimistic. “It’s very powerful when responsible growth and capitalism intersect. What the developed world has is capital. What the emerging world has is labor and a desire to grow. Put those two things together, you can close a lot of gaps and do much good.”
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- Are there opportunities in emerging Internet and banking technologies I could consider?
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160 Minutes. “The Future of Money.” CBS, November 22, 2015.