Investing in sound value-driven opportunities that can significantly reduce global threats are “good” investments, not only in a humanitarian sense but also in driving monetary value.
So how do we know what lies ahead of our future? What is the greatest crisis of our generation? What is relevant to us?
There is a lot of noise to screen out what is certainly dangerous or not. I would personally refer to the World Economic Forum’s The Global Risks Report. The attached link is the version for the 2019. A quick primer on risk management is that it starts with identifying and estimating the probability and impact of a given threat.
The first thing you will see is a map of different colors into the following categories of risks: economic, environmental, geopolitical, societal, and technological. It will also show you the likelihood of the event happening as well as the magnitude of the risk inherent. On the top right of the corner of the graph, you can view the events that are most likely to happen with the greatest magnitude.
For your interest, the top three items all belong to a single category – Environmental. They are – “extreme weather events, failure of climate-change mitigation and adaptation, and natural disasters.” Another one that is close to the three is cyber-attacks under the category of Technological. There are other interesting graphs in the report, but I’ll leave them to you for your own pleasure.
The companies with the new promise of a future are often misunderstood. Another way that we value the “good” or a potential “impact” of a company might be the assessing the potential of the companies to hopefully bring the imminent risks (indicated above are natural disasters, extreme weather events, and failure of climate-change mitigation and adaptation) lower on the graph spectrum. In other words, to have less impact when it happens or less likelihood of happening.
One thing I would note is that these categories refer to systematic challenges, where the identified problems are interconnected in every field of human activity. Therefore, the attempts to solve one issue may unintentionally contribute to another – like a technology that attempts to predict extreme weather events may put government employees out of work or potentially contribute to asset bubbles in a major economy.
In how companies create value, perhaps the first way of looking at sound companies is whether or not they are aimed at tackling systematic challenges or in a way to maximizes efficiency in a respective industry. In today’s globalized economy, often this is built upon a bedrock of transnational production, an inflow of people, goods, money, and ideas through multiple networks and other economic decentralization movements.
Here’s an example. Cyber-attacks are happening more often in prevalence and disruptive potential. They present serious strategic critical infrastructure damage across the world including the government, railways, banks, and telecommunications providers, as the vulnerability to attacks increase with radical and systematic shocks.
One that may be well and alive in people’s memories is the North Korean government-sponsored hacking of Sony Pictures. North Korea could potentially hack into intelligence about nuclear deterrence in the United States or South Korea. Another adversary can also thieve nuclear material or sabotage nuclear facility by knocking out digital systems in nuclear facilities.
A growing trend that could mitigate this increased risk is the adoption of blockchain technologies. Blockchain technology can be used to protect systems and devices from attacks. They can protect data exchanges between IoT devices without a centralized authority and a data verification mechanism. Implementing robust processes is essential for effective management of complex systems and is at the heart of long-standing quality management programs across the industry.
However, often technologies have been swept up in a web of restrictions, regulations, and international conventions. Innovators and investors can address the barriers in different ways, but more effective partnership mechanisms may be prudent. As technologies have been subjected to regulatory regulations or in scrutiny for a positive pricing environment, it might be more effective to identify shared priorities across stakeholders or finding a way to reduce costs in streamlining the industry.
For investors, this means having to navigate the policies of governments of uncertainties that require expertise. Perhaps this means providing early-stage risk capital for entrepreneurs to de-risk business models.
New technologies and dynamics have improved our ability to identify trends and assess risks. In investing into emerging markets, the way to realistically mitigate risk is to obtain insurance through Overseas Private Investment Corporation or partnering with government institutions, like USAID, which provides loan guarantees to encourage banks in poor countries to lend to targeted groups.
The goal for OPIC is to provide innovative financial solutions for private investors and provides upfront due-diligence to assess the ability to raise additional private equity capital. What is really interesting is that OPIC goes to the country to ask the locals for trends in local deregulation and indicators on how open the economy is to understand how returns will be made. They then connect with investors with the right skill set to capitalize on the opportunity in operating experiences, locale, and in the ability to add enough value for the entrepreneurs.
The proper risk mitigation starts with due diligence. Once we have vetted out what “issue” is interesting and is relevant, the investors conduct comprehensive due diligence covering legal, economic, technical, and others to assess eligibility criteria.
So, how do we invest in our most emergent crises? In sum, I would point to a business that can is operationally sound to curb its own organizational risks and systematically tackles inefficiencies in an industry in a given area – for instance, environmental or cyber. Match them with investors that are well-equipped for the operating environment to achieve its business objectives.
The role that promote a common platform for deals with risk profiles may be needed to build a momentum to build and scale. Investments could be better classified by factors such as performance, risk, expected return, and an exit timeline for investors preferences.
Greater collaboration among players can help lower due diligence expenses to realize synergistic potential. From a policy perspective, often this means supporting a more balanced analysis that helps companies and stakeholders to make strategic decisions about investment and collaboration opportunities.