Reflections from Davos

Encouraging action on several of the World’s most critical issues

This year, the World Economic Forum’s Annual Meeting in Davos, Switzerland helped reinforce an interesting paradox. For 50 years, the meeting has been held in the cold and unchanging mountains of the Swiss Alps. Outside this small mountain town, however, the world is getting hotter and more unstable. From military disputes between the United States and Iran to protests in Hong Kong, from debates over the presidential impeachment south of the border and massive bushfires in Australia, the beginning of this new decade has been marked by heated tensions to match the ongoing warming of Earth itself.

As I reflect on my sixth year at Davos as part of our Deloitte delegation, I come away feeling conflicted. While I feel hopeful, having observed the passion of our global leaders in working together to solve some of our most important collective challenges, the current lack of structure around how we might actually go about solving them is concerning.

The theme of this year’s Annual Meeting was ‘Stakeholders for a Cohesive and Sustainable World,’ echoing the ‘stakeholder capitalism’ concept championed by World Economic Forum founder Professor Klaus Schwab. Stakeholder capitalism challenges the traditional model by asking corporations to consider a broad set of stakeholders (e.g., employees, communities, the environment) when making strategic decisions, eschewing the traditional profit-only, shareholder-primacy calculus. Just prior to the Annual Meeting, this concept was reinforced by Blackrock CEO Larry Fink, who committed in his annual letter to CEOs that the company would no longer invest in companies with high sustainability-related risk and called for a “fundamental re-shaping of finance.”

This is not the first time we have been at this table discussing stakeholder capitalism. But this time felt different. The discourse felt more urgent, more anxious. The conversation fluctuated between a desire for action, and expressions of uncertainty about how to move forward and collaborate appropriately. That’s why I believe we need to focus, now more than ever, on codifying the ways in which organizations measure and do the right thing, and the ways in which they hold each other accountable. We need a code for good, one that brings structure and clarity to the topic of sustainability.

As I leave Davos this year, I’d like to impart on you a few key takeaways and how they relate to codifying organizational sustainability.

1. The risks of climate change are intensifying drastically, and the transition will need to be “unnatural”

This year, the theme of climate change permeated a majority of the sessions, panels, and events throughout the week. Many were entirely dedicated to the topic. And for good reason: what were once seen as tail risks are quickly becoming reality. In the last twenty years, we have lost half of all Arctic sea ice. We will need to halve emissions over the next decade to have a shot at meeting our Paris Agreement goals. The 2020s must be a decade of action, and will likely be among humanity’s most definitive. In this year’s edition of the Global Risks Report, a Forum publication released just before the Annual Meeting, the top 5 risks over the next decade (as measured by their likelihood) are all directly related to climate change.

The week began with a speech by teenage activist Greta Thunberg. She advocated for immediate and complete divestment from fossil-fuels. While she represents an important voice, the rhetoric of immediate divestment is surely not feasible. Doing so would likely cause more harm than good, setting off destabilization in global capital and energy markets. We need an aggressive, but balanced, transition. The week closed with a debate between US Treasury Secretary Steven Mnuchin and European Central Bank President Christine Lagarde over whether long-term climate risks could be accurately modeled and priced-in to markets. Ms. Lagarde advocated for climate risks to be “anticipated, measured, and hopefully mitigated” to drive investment, while Mr. Mnuchin expressed doubt that such long-term risks are possible to measure accurately.

During the week, in a session attended by the majority of financial industry CEOs, the group dedicated half of the discussion to this topic. In their discussion, they took a rigorous approach to codifying their approach to climate change, and laid out initial steps to drive positive impact. They committed to “financing the transition” to a carbon-neutral economy, while recognizing that this transition would be “unnatural.” They conceded that it would require large business model shifts by both energy producers and consumers. Leaders committed to 1) developing consistent, auditable reporting standards for climate risks; 2) contributing actively to dialogue with regulators and the broader public sector; 3) developing more accurate valuations of all-in costs of carbon-emitting investments; and 4) taking steps to make large financial institutions themselves carbon-neutral.

Tackling climate change will have several practical implications for financial institutions including additional requirements for transparency and reporting, as well as new capital costs (e.g., CCAR in the United States). I believe that as we advise our clients on their most critical strategic choices, we need to think through our recommendations with the lens of how climate change will disrupt their business models.

2. We need a new, structured calculus for sustainability

To ensure that the 2020s are a decade of action, we must implore our leaders to stand tall, pursue actionable solutions, and move from reactionary and emotional arguments to logical ones. We need a new calculus and a new structure for how we approach these critical topics, one that is data-driven and action-oriented. Without the right data, measured accurately and used effectively, it is difficult to determine how we deliver impact.

But a new structure and calculus do not emerge out of nowhere. The first step is a rigorous and iterative approach to scenario planning. It is imperative to understand our choices in the context of different future states of the world, and to build resilient strategies for each of these states. These should be grounded in the facts of environmental, social, and economic change, but flexible enough to consider different tail events. After exploring the state space of future risks and our planned responses, we need a way of measuring outcomes, because measurement is the driver of risk management and action. Here, I believe that we benefit from consistent, auditable, and mandatory reporting standards, focused on the need to achieve net zero emissions. The Task Force on Climate-related Financial Disclosures (TFCD) guidelines are a start, but we need a common language for talking about the issues across both industries and jurisdictions. In this way, we have a basis for comparing outcomes, analyzing potential, and making investment tradeoffs. Several major jurisdictions have ongoing plans to make such disclosures a reality this year ahead of the COP26 summit – it is more important than ever for the industry to work with regulators to ensure that we are leading the conversation.

However, disclosure must drive actual action towards net zero. Here is where the new calculus of sustainability is necessary. Today, financing the transition to net zero is difficult, in large part because carbon is mispriced. Its long-term negative externalities (e.g., on the environment) are not accounted for. This results in more sustainable investments having artificially low relative ROIs, distorting the flow of capital away from carbon-reducing investments and nations, and impacts how we plan for the next decade and beyond of capital investment. A common framework for valuation of these externalities (e.g., in the form of a carbon tax) was discussed this week. Looking at the all-in costs of our investments is something we should be aggressively preparing for. This type of new valuation framework is likely to be regulated, and so we should prepare to be in front of the conversation with policymakers – their current reticence to act will not last forever. The opportunity for the industry to emerge as drivers of this change and lead the transition is up for the taking.

While implementation will be challenging, a more accurate carbon valuation, grounded on an understanding of future scenarios and based on consistent disclosure, will allow us to make the sustainability case to our shareholders. It allows us to make strategic choices around whether existing projects (e.g., stranded assets) are worth re-investing in, and provide a guide for making new investments. It also gives us an objective ground to push for remuneration for good behavior, including certifications of carbon neutrality, tax credits, and offsets.

3. We are examining data as both an asset and a (potential) liability

While the environment dominated the conversation this week, not far behind in terms of intensity of debate was the topic of data. Last year, the conversation at Davos was focused mostly on the long-term benefits of leveraging data. This year, I sensed a willingness from participants to focus more on the liability side of the ‘data balance sheet,’ including the risks of large-scale collection and analysis. This is an important conversation. Data rights and responsibilities have been discussed thoroughly in years past, but now organizations are beginning to codify more formal contracts around data collection, storage, and use. Along with a responsibility to environmental sustainability, commitment to data sustainability should be a core tenet of any organizational code for good.

The development of consistent data principles, not only in financial services but across all industries, would help level the playing field and create mutually-reinforcing structures of competition. In conversation with executives on this topic, a key point of debate was whether such legislation should be set globally or locally. Some argued that achieving global cooperation would be nearly impossible, and that regional-level legislation that was broadly aligned would be sufficient. Others believed that global alignment was the only path forward. Regardless of the debate, the call for development of more regulation in collaboration with the public sector was a welcome discussion. Leaders also recognized that banks (amongst other institutions) hold a privileged position to serve as data custodians given the level of trust they are afforded by customers. But with this privilege comes serious responsibility. Those that I spoke to outlined the basis of a framework for responsible custodianship, which centered on prioritizing informed customer consent and using data “only in the way that customers would expect, regardless of what is in the terms and conditions.”

4. Trusting emerging technology will be essential to address growing data risks

The multiplicative effects of emerging technologies (such as AI, Cloud, IoT, and Quantum) will help define the structure of the financial services industry over the next decade. Today, this is largely driven by customers, who are demanding the technology-enabled experiences they are receiving from other (perhaps less regulated) sectors. As I discussed above, however, the data balance sheet has an important liability side. I believe that this liability side will continue to represent an important driver of emerging technology adoption. If we believe that data sustainability is a core tenet of a code for good, then these technologies represent a way to ensure this code is adhered to as we consume and deploy data. During the course of the week, I observed two key manifestations of this liability-driven innovation being put into mainstream practice:

a) Last year, we published a report in collaboration with the World Economic Forum on the potential for various Privacy Enhancing Techniques (PETs) to change the way data is shared and consumed in financial services. PETs are a collection of techniques that allow for data sharing and analysis without revealing sensitive underlying data. This year, I noticed that leadership is beginning to connect the dots between PETs and many of their data privacy challenges. For instance, some discussed how PETs could help underpin and kickstart a much-discussed industry utility for KYC/AML analysis. Leading experts in encryption techniques have also proposed using homomorphic encryption to securely share data in M&A transactions as well as global fraud detection. We are still only just beginning to surface and test the use cases and potential for these techniques.

b) The use of more unstructured data to strengthen so called “AI for Defense,” or the use of artificial intelligence to enhance risk-prevention tools (e.g., payments fraud, trade surveillance), is becoming mainstream. Increasingly, this data is coming from new sources, such as connected devices (mobile phones, IoT sensors) and blockchain ledgers. However, the use of AI tools for defense is still in its nascent stages, due in large part to the ambiguity of current legislation and the desire for algorithm explainability on behalf of large institutions (i.e., the argument that “we cannot deploy it if we do not understand it”). There was broad commitment to working with regulators to develop a minimum set of standards for explainability and error tolerance, such that these tools can be deployed without fear of regulatory reprisal.

5. We are moving towards a new corporate contract

In 1973, the World Economic Forum published what would come to be known as the “Davos Manifesto,” a framework for stakeholder capitalism that focused on corporate management’s responsibility to clients, investors, employees, and broader society. It described the need to take a long-term approach to every decision that would affect these different constituents. Nearly 50 years later, it is unclear whether we have fully embodied these principles. In the capital markets, the focus on short-termism continues to reward the near-term profitability of publicly-traded companies ahead of long-term sustainability and innovation. Elsewhere, we have only recently seen the discourse around corporate social responsibility shift from being largely a cost-center distanced from the rest of the business, to a driver of purpose, product, and service development.

However, it IS happening. Blackrock, for instance, recently committed to developing new investment products that screen for fossil fuels. As a commitment to gender and racial diversity, Goldman Sachs CEO, David Solomon, called for the end of the white, all-male board, stating that the bank would no longer underwrite IPOs for companies without at least one diverse board member. This policy will take place as of July 1st, with the hopes of increasing the standard to a minimum of two diverse board members by next year. Bloomberg Law estimates that this policy would have cost Goldman Sachs approximately $101M in underwriting fees in 2019, representing nearly a third of total underwriting fees Goldman earned in the United States that year. Every code needs principles, and both Blackrock and Goldman Sachs have shown a real, business-impacting commitment to key principles like climate sustainability and inclusion.

However, the development of a new corporate contract does not imply the destruction of the old one. Nor does it necessarily limit the role of profitability as the primary responsibility of the corporation’s directors. Instead, throughout the week, what I heard most were calls for nuance around the nature of profitability. A valuation framework for investments that prices in negative externalities (e.g., the environmental impact of carbon emissions), as discussed previously, does not change the basic calculus of profitability; it simply prices in real costs that were previously underreported. An Environmental, Social, and Governance (ESG) disclosure framework, developed this year by the Forum’s International Business Council (chaired by Bank of America chief executive Brian Moynihan), does not replace the corporation’s annual report, but sits alongside it. It serves as a tool for the market to more accurately assess the long-term risks and rewards of the firm, addressing the short-termism problem. And the calls to build sustainability principles directly into industry regulation, which I heard discussed this week in the context of insurance, makes clear the impact of being a poor corporate citizen on overall profitability. The message that I heard was not of forgetting profitability, but putting it in its proper context in order to incentivize sustainable action.5. We are moving towards a new corporate contract

6. Three models of capitalism are emerging

A number of heads of state missing from last year’s Meeting (including US President Donald Trump and European Commission president Ursula von der Leyen) returned to Davos this year. As I reflected on their presentations, many which gave equal attention to domestic policy as they did to issues of international trade and cooperation, I observed the emergence of three competing approaches to capitalism. For the United States, American exceptionalism dominated President Trump’s address. He made no mention of a willingness to pursue global collaboration, and called for market forces to solve the climate change problem. This was Protectionism Capitalism, a pursuit of domestic interests over global collaboration, and aggressive negotiation of bilateral trade agreements over international cooperation. In a reversal of traditional roles, Chinese Vice-Premier Han Zheng reinforced his country’s commitment to Globalist Capitalism. He called for globalism that is “more open, inclusive, balanced, and beneficial), and underlined a commitment to working with multilateral institutions. China’s motives are clear: they have the scale in data, capital, and labour necessary to become the leader of the Fourth Industrial Revolution, and are looking for new avenues of growth. Perhaps the only area of agreement with the United States in Mr. Zheng’s speech was the lack of real focus on climate. The final model of capitalism, what I’ll call Environmental Capitalism, was laid out by German Chancellor Angela Merkel (often a spokeswoman for wider EU policy). She laid out a commitment to 65% renewable energy for her country by 2030 and the need for a transformation in the way that we consume energy. She also underscored the EU’s willingness for global collaboration and support of multilateral institutions. But the European model of collaboration comes with important caveats; elsewhere during the week, the EU reinforced its willingness to sanction trading partners (and their constituent companies) who do not meet its strict ESG standards. It is collaboration, but on their terms.

These three distinct models promoted by these heads of state often contradict the arguments made by corporate leaders at Davos, many of whom promoted the need for a unified, stateless approach to regulation around climate change, data privacy, and inclusion. This becomes more difficult in a three-track world, and could serve to reinforce disparities and re-shape national allegiances. It makes the development of a universal code for good quite challenging. In financial services, this is manifesting itself in the debate over digital currencies. As large, stateless technology companies begin to launch their own digital stablecoins, governments (most notably, China and Sweden) are taking active efforts to develop central bank digital currencies. Ostensibly, these are meant to make digital payments as frictionless as communication is today. But if we cannot agree on global approaches to identity and risk (KYC/AML, fraud), we might end up running twice as fast to end up in the same place.

7. The leading financial institutions of the next decade will be organized and equipped differently

As we transition the workforce to incorporate emerging technologies, improving customer experiences and streamlining back-end operations, we are often explicitly replacing or augmenting the work of existing employees. Financial institutions will need to get serious about supporting employees through this transition and specifically, ensuring that employees maintain a sense of purpose and importance at work. Along with the pillars of environmental sustainability, data sustainability, and diversity, the empowerment of employees is a critical piece of a code for good. Yuval Noah Harari, author of Sapiens and Homo Deus, stated this year “It’s much worse to be irrelevant than to be exploited.” In a world where so many individuals define themselves by their work, financial institutions will need to ensure these employees continue to feel a sense of worth in the organization to avoid creating a class of people without direction or purpose.

Equally as important is that employees understand the technologies they interact with on the job. In our session on AI in Financial Services: The Financial Institution of the Future, we learned about the disconnect that occurs when employees are unable to explain an algorithmic output or learn from its failures. Not only does this risk upsetting the customer if they disagree with the output and the employee is unable to explain it, but it also limits the opportunity for continuous improvement if we are unable to pinpoint the flaws in algorithms. One participant remarked, “We cannot just fire and forget the algorithm.” Education is the first piece of this equation. While educators should be striving to adapt their teachings to offer more specialized technology skills, it is also up to the institution to instill a culture of lifelong learning to keep up with the pace of technology and innovation. What once was a linear path (learn | execute | retire) is now becoming much more circular, and is reinforcing the need for continuous reinvention and learning.


Reflecting on the past week, I truly believe that organizations are beginning to make real progress in codifying formal policies around many of these global issues, and doing their best to align these policies in a cohesive way.

While topics such as climate change, consumer data usage, diversity, and employee empowerment are not new ideas, I believe that we have started to move away from only talking about why these ideas matter to, discussing how we can measure progress and hold one another accountable to doing the right thing. We are in the early stages, but we are beginning to develop the shape and structure of an organizational code for good.


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