What is the new transition economy?

An introduction to the new state of play

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The word ‘Transilience’ traditionally representing a major change, a transition, is exactly the way we need to turn our attention to sustainability in a post-pandemic world.

Still, for our team at Alchemy Crew, we also like its resonance with the concept of resilience. The ability to undergo transformation paired with resilience is the alchemic blend that will prove to be the bedrock of future sustained growth within insurance, finance, and across societies.

On 4 March 2021, we ran a workshop with 60 industry leaders. This article sums up findings from research we have conducted before the event and after the event to better understand the drivers behind the transition economy and the impact of sustainability-linked behaviour on people, the planet, and companies.

The transition economy: definition of what transilience means in terms of transition and resilience

 

As we embark on delivering on the UN SDGs or Sustainable Development Goals to achieve rapid changes, our recent 45-page paper which provides an in-depth interpretation of The Transition Economy aims to trigger a discussion covering challenges and opportunities, as well as emerging risks linked with current economic transitions.

This article is the first article in a series of 3 articles that dive into the central tenets of this much-needed discussion. Today, we’re looking at the challenges and opportunities posed by an imminent future.

A new definition for the transition economy

Traditionally, we’ve understood the transition economy as our gradual shift from central planning, control, and economic reform to a free market economy. The reality is that this definition applies well to market economies and transition countries that implement economic reform and recognize like the World Bank and the International Monetary Fund (IMF) that something must be done.

This definition isn’t insightful enough though for the private sector that is seeking to align with emerging requirements linked with transitioning to new economic growth drivers. Transition economies and private sector institutions are undergoing a transitional shift. They are shifting from the old-school over-reliance on fossil fuels to newer production methods which encouraged today’s structural adjustment and the radical usage of technology solutions to solve issues created by our old ways of operating.

The core word within transition economies today veer towards the word sustainability. The harsh truth is that we haven’t done many things sustainably for a while, which means that we now have to establish ways to remain competitive while being sustainable. We, therefore, must identify approaches to balance cost savings and sources of competitive advantage while implementing innovative and sustainable technologies.

The good news is that current trends, in pretty much all areas of humanity, are pushing towards greater sustainability. The word is on the lips of many people and in the annual reports of many corporations these days.

A recent survey found that more than two-thirds of consumers are willing to pay more for sustainable products. Consumers are cherry-picking sustainable firms, and that’s only set to become truer as Gen Z shoppers enter their most prolific spending years.

 

quote: more than two-thirds of consumers are willing to pay more for sustainable products as we move to more sustainable economies

 

There is demand for sustainability. This transition for developed and developing economies will lead to massive transformation and restructuring. And, as I’ve said beforeeveryone and every business have a role to play within their own industry, market, country, and geography. And that’s not recent news either – it was being reported in the Harvard Business Review in 2010, we’ve just taken a long time to step up to the plate.

When Covid-19 came about, sustainability was hit hard. Another study highlights that the pandemic set global sustainability back 25 years in just 25 weeks – a frightening statistic for all, not least those who have been championing sustainability for some time.

Is a pandemic the birthplace of resilience and the thorn in the side of sustainability?

The impact of the pandemic has been a thorn in the side of sustainability. However, we need to remember that we’re all still reeling from its catastrophic impact too – in health (both mental and physical health) in our society, food security, environment and greenhouse gas emissions, and every facet of how we operate. The pandemic has hit sustainability hard, but, like a boxer a little dazed from the impact, the effects shouldn’t be considered permanent.

Alongside the negative impact on sustainability, the pandemic has also given birth to greater resilience within businesses. This resilience isn’t temporary. In fact, the pandemic has catapulted resilience to the forefront of business success. Those businesses that have not just survived but have thrived have done so precisely because they won the resilience game, often by applying open innovation techniques, digitising inadequate processes, and admitting the value of home working. They are continually and reflectively building resilience into their changing business model.

 

business and individual resiliences are at the forefront of future success as we aim to build our own transitional path and economy

 

The pressure of the pandemic pushed resilience forward in a way that wouldn’t have happened otherwise. It put our foot on the gas of digital innovation, accelerating our progress in incredible ways. Today, global transition economies are presenting notable challenges. What are these, and what does this mean in terms of sustainability, transformation, and resilience for the next several decades?

The challenges to sustainable transilience

As I state in my introduction to The Transition Economy paper:

The next two decades will see significant change, thanks to evolving demographic trends, resource scarcity, climate change and rapidly adapting technology.

We really need to understand these changes to identify the great opportunities they present alongside the risks we need to mitigate.

Within the arena of insurance and finance, we have identified 4 core areas of challenge for sustainable transilience. These 4 essential areas of development, and within them are myriad risks.

However, this discussion isn’t complete without realising that with great challenges come great opportunities. So let’s start with identifying first the great challenges.

Growing urbanisation and population migration

Empirical evidence shows that our population is growing, it’s shifting, and its demographics are changing.

Please take a look at World Population Growth on Our World in Data. The global population will be 8.5 billion by 2030, with the majority living in developing countries. These fantastic graphs show you what is happening to the world and the population in ways that words alone cannot. These charts also highlight how much things have changed already and how much they will continue to do so.

However, we need to go further to understand evolving population shifts, and, most importantly, our attention must turn to migration patterns and global population demographics:

  • Migration: We are becoming increasingly urbanized as people progressively move towards cities. By 2050, it is estimated that 68% of us will live in cities (up from 55% today). There are many factors behind urbanization. However, looking at it from a macro-level, we need to be highly aware that environmental degradation is a growing and dominating cause too.
  • Aging: Our populations are aging and becoming increasingly top-heavy. By 2070, people over the age of 60 will make up 42% of the global population. To put it bluntly and painfully, there will be a shortage of working-age adults to support the elderly if we don’t make changes.
8.5 billion people around the world by 2030. We are rethinking what this means for the elderly with smarter way to deliver health and economic growth

Climate change and environmental degradation worldwide

There are so many different aspects of this. We’ve got enormous environmental challenges from micro-plastics to air quality and pollution to greenhouse gases and biodiversity loss. Businesses are now operating in a sphere where they cannot ignore environmental degradation – either what they’ve already contributed to or how to prevent it in the future.

Our planet is 1°C warmer than it was before the industrial revolution. But it’s worse than that; it will rise another 1.5°C in the next 10-30 years unless radical world-scale changes are made. We’re woefully behind where we need to be with this. Even if we stopped the causes of global warming today, it would take decades for the planet to correct itself. It’s not too late, but unless businesses and governments take this seriously, combined with our growing and aging population, it’s nearly impossible to overstate the looming problems on the horizon.

Everything that businesses do should factor in climate change and how to support renewable energy initiatives.

The increasing scarcity of – and global competition for – resources

Of course, when you combine the above two major challenges, we also see an intense scarcity of resources and therefore the competition for those resources increasing. Our traditional models of ‘produce, consume, dispose of’ become unsustainable. Instead, firms must confront their resource scarcity by looking at resource competition in new ways. Instead, they must consider and plan to use alternative renewable and recyclable resources and those that can be replenished with sustainable ease. This requires indeed a completely different approach to operating and making decisions.

climate change actions and technologies come together with wind farms for instance. Renewable sources of energy are a key part of the transition economy, new reforms and strategic execution

Accelerating technological change and convergence

The final challenge is also an opportunity, but we cannot discuss a sustainable future without addressing the reality that new technology is both a blessing and a curse.

New technology is giving us the tools and the systems to solve existing problems, but it’s also bringing new problems of its own. First, data centers create massive heat and, therefore, greenhouse gas emissions. This means that new strategies for cooling these data centers must be deployed. And then within the realm of ethical, privacy, and security issues, as increasing use of emerging technologies mean an increased lens on how we use data from inception to full digitization.

With challenges come opportunities

It is a challenging outlook for us all. However, with major challenges come plenty of opportunities. There are so many opportunities bubbling up in the new transition economy landscape that it’s difficult to list them all, but there are key ones worth exploring.

We know that those within and outside industries are looking for solutions that may become mainstream. And, as Nicole Anderson, CEO & Managing Partner Redlands Ventures says:

“History has repeatedly demonstrated that change comes from the fringe, not the centre, and mostly it is bottom-up. As a result, we can expect disruptors of little-known origin to come along to capitalise on the opportunities they present.”

So what are examples of opportunities that we are seeing linked with emerging transition economies?

Targeted opportunities in FinTech and InsurTech

Digital innovators and disruptors are facing down new and notable risks. The latter brings opportunities for established and transitional economy players to start engaging on a significant transformation journey by collaborating with those already ahead of the pack. Many entrepreneurs and new market entrants have already developed and are deploying green technologies to support transportation, energy, and construction firms, for instance, to assess, monitor, and report better on sustainability activities and transition risks. Our recent reviews show that over 20,000 growth ventures are already targeting private sector institutions with solutions able to ease the transition to a more sustainable world.

6,000 climate tech ventures raised $170 billion over 10 years. We estimated over 20,000 entrepreneurs and young firms are delivering sustainable tech today.

Opportunities for urban change and regeneration

Smart cities, such as Virtual Singapore, take urbanization to the next level by using information technology to manage and serve its growing population. While still in their infancy, these opportunities to manage energy usage brings opportunity for the city (and many others) to be more responsive for its elderly by digitizing key smart health and smart living elements, for instance, through self-managed care.

Opportunities for geo-engineering

There’s a huge space for technological innovation to create new systems to remove CO2 from the atmosphere. While the science for geo-engineering or environmental modelling is less advanced than climate change modelling, these emerging new techniques will drive change across many industries.

Opportunities for sustainable development models

With the demand from consumers and corporations to engage with sustainable businesses, many businesses have the opportunities to redesign more flexible and service-led business models. We see that subscription combined, circular economy principles, and ecosystem enablers could yield interesting results.

business models of the future. There are three subscription, circular and ecosystem all models to deliver on a transitional economic vision

Opportunities within the environment and climate change

Mark Carney, former Governor of the Bank of England, stated that combating climate change is

the single biggest investment opportunity in history.

Likewise, an Oliver Wyman report said the transition from a fossil fuel economy to a low carbon economy represents

the single biggest growth opportunity for global financial services.

While finance is gradually catching up to take advantage of emerging sustainable development opportunities resulting from the transition economy, they evaluate options to support retail and commercial clients and firms demanding improved investment, financing, and insurance practices.

They are already real winners who leapfrog forward to take advantage of this fertile ground. An excellent example is Orsted. Just a single decade ago, Orsted was painfully fossil-fuel intensive. It has slashed its carbon emissions by 86% and is likely to meet its goal of being carbon neutral by 2025. But, of course, they’ve not done it overnight – they’ve had to plan their transition through sustainable development paths and resilience to face shareholder demands for short-term results and financial value creation.

examples of companies that do well. These include Schneider Electrics, Orsted, ING, Tesla. All have excel at delivering long term visions geared towards alignment with transition risk management

Top tips to link the transition economy, sustainability, and competitive advantage

  • Focus on new worlds business models, such as subscription models or circular economy models, as they are more dexterous and innovative than traditional models
  • Review your current context thoroughly, evaluate emerging implementation and collaboration practices to drive operational resilience
  • Align your activities with UN’s Sustainable Development Goals; these goals provide a great starting point and platform for ideation and shaping innovative sustainable roadmaps
  • Focus on continuously building resilience into your business model as you are transitioning to new world transition economics. The latter is not an easy feast and won’t be an overnight success
  • Use data analysis, technological innovations, and open innovation techniques to take advantage of growth opportunities at all organizational levels whilst also using research and learnings to mitigate emerging risks
  • Involve all your stakeholders as you start shaping a unique and differentiating journey, and finally
  • Invest in disruptive technologies that are core enablers in accelerating your structural transition as well as addressing climate change and environmental issues among others.

Read more on the subject here:

You can download our 45-page report The Transition Economy: Sustainable Transilience… here

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If you have any questions email us at hello@alchemycrew.com

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