BY ROBYN MAK

Technology firms are due a green shake-up. Data centres and networks each use around 1% of the world’s electricity, according to the International Energy Agency – more, for now, than electric vehicles. That could hit double-digits by 2030, making related emissions a problem.

The infrastructure behind video conferencing and binge-watching “The Crown” on Netflix comprises mainly two parts: buildings that house tens of thousands of servers and the networks that connect servers to smartphones, PCs and other devices. Both require huge amounts of electricity. Data centres use roughly 200 terawatt-hours a year, according to a 2018 study led by Eric Masanet, an engineer at Northwestern University in the United States. That’s in the same ballpark as Australia’s annual consumption.

The good news is that figure has barely increased over the past decade. Even as data volumes have multiplied, networks and server farms, particularly so-called hyperscale centres operated by Amazon.com, Microsoft, and Alphabet-owned Google, have become extremely energy efficient.

But that trajectory looks unsustainable. Even without the isolation of the pandemic, widespread adoption of next-generation 5G wireless technology, autonomous driving and the internet of things will dramatically boost internet traffic. Moreover, chips that power servers are reaching technological limits, making efficiency gains harder to come by.

Estimates for how much energy consumption will rise vary. But for some countries, data may suck up a double-digit percentage. Ireland’s power operator, for instance, in 2018 estimated the country’s data centres may account for nearly 30% of electricity demand by 2028. The Irish Academy of Engineering reckons that will add at least 1.5 million tonnes of carbon emissions, 13% of the electricity sector’s current total.

Giant technology companies are among the world’s largest buyers of renewable energy. But that won’t be enough to spare them the attention of environmental, social and governance-oriented investors. At the top of the agenda will be pushing for better disclosure about energy use and emissions, perhaps even attributing them to specific bulk customers like Netflix and Zoom Video Communications.

In January 2020, Microsoft unveiled a tool to help enterprise clients analyse their cloud service-related emissions. That’s a step in the right direction, but ESG investors may demand much more in 2021.

First published December 2020

BY JEFFREY GOLDFARB

The new virtues of conducting business virtually will be up against old realities in 2021. Zoom Video Communications and its ilk have changed corporate behavior, often for the better. Yet the gravitational

pull of meeting in person is a powerful force.

Some perks of the digital working world outweigh the screen fatigue. Executives providing advice and professional services, for example, relish living on the ground instead of on an airplane. Ken Moelis is allowing investment bankers at his eponymous boutique to relocate far from the New York headquarters if they want.

Employers and clients also appreciate the related savings. HSBC was on track to spend less than $100 million on travel and entertainment in 2020, down from $400 million a year earlier, Chief Financial Officer Ewen Stevenson said in November. He expects a “modest snapback” in 2021.

As for mergers, there may be fewer mid-transaction flights involved, but it will take only one deal lost to a rival who pitched in person for throngs of M&A bankers to jump back into their business-class seats.

And while far more efficient digital roadshows should continue post-pandemic for many initial public offerings, some investors will want trust-building live interactions. Smaller stock issuers may struggle to drum up interest without pounding the pavement.

Online corporate get-togethers have cons as well as pros, too. Broadridge Financial Solutions, which supplies technological plumbing for funds and others, said it hosted about 2,000 virtual shareholder meetings in 2020, up from 300 in 2019. What’s more, it reported voting participation of 71%, higher than for the offline cohort. Although digital attendance prevents the decades-old trick of dodging investors by holding annual gatherings in faraway places, there is instead the risk of companies cherry-picking which shareholder questions to answer. Nor are internet links yet 100% reliable. Home Depot and others are aiming for an in-person format in 2021.

Many board directors also may want to sit around the same actual table again, for at least some meetings. Virtual sessions can be shorter while expanding the range of potential director candidates, but a survey co-led by the Governance Institute of Australia discovered some resistance. Missed body language and informal interactions were among the complaints. Fewer than half the respondents said they would keep convening by video conference “frequently.” Face-to-face business habits will die hard.

First published December 2020

BY GEORGE HAY

The sun will come out tomorrow for oil titans. Even as stock markets rallied broadly from pandemic-induced 33% dives in March, share prices for BP, Royal Dutch Shell and others failed to recover. Some artful corporate finance could help in 2021.

Cratering oil demand is one reason Big Oil has struggled. Fund managers are also heeding the call to scrutinise environmental, social and governance factors. Carbon-heavy investments are out; pure-play renewable energy is in.

Take Orsted. In early December, the Danish wind generator was trading at more than 40 times expected 2021 earnings, against BP’s 15 times. The Orsted valuation implies all its 15 gigawatts of projects through 2025 will be delivered without a hitch, with cash flows discounted at a lowball 1% cost of capital, Credit Suisse analysts reckon. The 25-fold increase in wind power generation envisaged by the European Union by 2050 could mean such lofty valuations eventually come good, but for now they reflect exuberance.

That makes it a good time to capitalise. BP and Total expect to own about 20 GW of wind turbines and solar panels by 2025. Spinning off these operations into separately managed entities, and selling one-third stakes, would allow them to maintain operational control while raising cash.

Orsted, including net debt, was worth $75 billion in early December, implying $5 billion per gigawatt for its targeted 2025 capacity. Total’s focus on lower-margin solar power deserves nearer $1 billion per gigawatt, Bank of America analysts estimate. Even then, it suggests a hearty $25 billion valuation, or over a fifth of the French company’s market capitalisation.

In theory, investors should already be factoring this in. Their ESG-era distaste for fossil fuels, however, means they probably aren’t. Spinning off the businesses should therefore bring higher valuations. Total, for one, could use the proceeds to grow renewables capacity and pay special dividends. Separately listed shares also would provide a currency for future consolidation.

There’s even a hedge of sorts. European utility Iberdrola listed its renewables businesses just before the 2008 financial crisis, before buying it back later when values dipped. Depending on how the green investment winds blow, Total and others could follow suit.

First published December 2020

BY ED CROPLEY

5G has had an inauspicious start to life. Though politicians have spent years debating security risks associated with suppliers of the high-speed mobile technology, few people have used it. Conspiracy theorists blamed it for Covid-19. And with mass gatherings like concerts and sports events cancelled, telecommunication bosses had few chances to show off their latest toy. The stage is set for a dramatic coming-out party.

The biggest factor in 5G’s favour is the availability of cheaper handsets. Apple’s new iPhone 12 retails at $799 in the United States, only marginally more than the company’s closest non-5G models. Handsets from rivals like Samsung Electronics or Huawei Technologies can cost as little as $250. Except for the most obdurate Luddites, anybody who upgrades their phone in 2021 will get one that works on new 5G networks.

For telecom companies which have spent billions of dollars buying wireless spectrum and installing kit, having consumers using the service rather than just hearing about it is a relief. In South Korea, historically an early tech adopter, the rollout of 5G since April 2019 has helped arrest a steady decline in the revenue operators extract from each user. SK Telecom, which claimed nearly half of South Korea’s 9.25 million 5G subscribers as of September, reported a nearly 4% year-on-year rise in quarterly sales in November. UK rival Vodafone, whose revenue is likely to fall 3% in its financial year ending March 2021, is watching with interest.

The pandemic offers further cause for optimism. In late 2018, research by consultancy PwC suggested consumers might pay $5 a month more for 5G networks’ improved reliability and ultra-high-speed downloads. After months in which housebound users have been forced to rely on intermittent home broadband connections, that premium will only have gone up. And word of 5G’s superior performance will spread quickly as users return to socialising and comparing gadgets.

The real benefits of 5G lie in commercial applications like smart factories, real-time voice translation, and enhanced-reality gaming. Promised applications such as enabling driverless cars or remote surgery in hard-to-reach locations remain distant prospects. Even so, the power of phone envy means 5G will finally make its mark in 2021.

First published December 2020

BY SWAHA PATTANAIK

Trade feuds will take on a different hue after the departure of Donald Trump. Slapping tariffs on countries out of the blue isn’t U.S. President-elect Joe Biden’s style. But his determination to fight climate change could emerge as a new source of commerce tensions.

Biden wants the United States to rejoin the 2015 Paris Agreement to curb global emissions and reach net-zero emissions by 2050. But his focus isn’t just domestic. The Democrat’s election pledges included a plan to apply a carbon adjustment fee against countries that fail to meet climate and environmental obligations. He also said he would push for labour provisions in any commerce deal that his administration negotiates.

Meeting these promises could set the stage for new tensions with China, which accounted for just over 14% of the $3 trillion worth of combined imports and exports reported by the United States in the year to October. Granted, President Xi Jinping is on board with the need to combat climate change. In September, he called for a green revolution and for the first time set a target date by which the world’s biggest emitter of carbon dioxide would achieve carbon neutrality. But what Biden views as pro-green, labour-friendly policies, Xi could see as unreasonable hurdles that will hurt Chinese exporters.

Global trade agreements typically leave the door open to differing interpretations and disputes. Countries can take measures to protect the environment, human health, and animal or plant life as long as unnecessary trade barriers aren’t thrown up, according to World Trade Organization rules. And America isn’t the only country that can play the green card.

China said in November that some imported coal had failed to meet environmental standards. For Australia, whose coal exporters find their shipments stuck in Chinese ports, this was one of a series of punitive trade measures that Beijing has taken since Canberra called for an independent inquiry into the origins of the coronavirus.

Trump was as apt to rile traditional allies such as Europe and Canada as he was long-term rivals like China. But America’s partners in the West would probably back any push by Biden to promote environmental standards, especially ones they think they already meet. A fight that pits developed countries against emerging ones could be as ugly as the ones the outgoing president unleashed on the world.

First published December 2020

BY LIAM PROUD

Covid-19 predominantly attacks the lungs, but with young people it goes straight for the wallet. The pandemic accentuates a wealth divide between millennials and the old, making a policy reset necessary.

Younger people already had a dwindling share of the West’s riches. In America, under-40s held 8.6% of the country’s assets in 2019, compared with 16.9% in 1990. In 2019, Brits in their early 30s had 20% less wealth than those born in the 1970s did at the same age, the Institute for Fiscal Studies said. Soaring real-estate prices have stopped young people getting on the property ladder. A decade of loose monetary policy has pumped up equities, mostly owned by oldies.

The pandemic twists the knife. Lockdowns decimated industries with mostly young staff, like hospitality and retail. That dents youths’ longer-term employment prospects and makes wealth accumulation impossible. In mid-2020, the percentage of 15 to 24-year-old Americans and Canadians in employment fell to around 40% – lower than after the last financial crisis, according to the Organisation for Economic Co-operation and Development. European data is flattered by job-retention schemes, but they’ll end.

Second, debt has ballooned. General government gross borrowings will on average be 124% of GDP in advanced economies in 2020, compared with 76% in 2005, using International Monetary Fund figures. Spending big is the right response to Covid-19, but debt-shy governments might then hike income taxes, hitting today’s young throughout their lives.

One solution is to tax wealth rather than labour, easing the pain for working millennials compared with wealthy older people. Equalising capital-gains and income tax rates, as proposed by U.S. President-elect Joe Biden, would be a start. Introducing a temporary 1% wealth tax could raise 260 billion pounds ($350 billion) in Britain, according to the London School of Economics’ Wealth Commission. Another radical move would be to just give young people money. Britain’s Resolution Foundation think-tank once floated the idea of a 10,000 pound 25th birthday present, funded by higher estate taxes.

It’s a fairer policy than forgiving student debt, which only helps college-educated millennials. And funding it with higher inheritance taxes should cancel out the benefit for youths with rich families, meaning the cash flows where it’s needed. The gray vote might want to attach some strings to the money. Fair enough. The Resolution Foundation recommended that it should only be used for housing, education, pension investing or starting a business. That should ensure the cash handouts lift young people out of their financial predicament, rather than helping them drown their sorrows at the bar.

First published December 2020

BY PETE SWEENEY

President-elect Joe Biden and Chinese President Xi Jinping won’t warm frozen ties immediately in 2021. China-bashing has become a bipartisan sport in America. Xi has let nationalist trolls take over his diplomatic corps. But with delusions about the status quo stripped away, both sides can renegotiate their $600 billion trade relationship with some semblance of economic realism.

President Donald Trump’s tenure was so irascible, Biden can calm troubled waters by simply declining to escalate. But only so far. Xi’s willingness to deploy economic coercion to advance the interests of China Inc, combined with ham-fisted crackdowns in Hong Kong and Xinjiang, has dashed hopes that patience alone might curb the Communist Party’s worst instincts. Under Xi the party has been reconfigured into a conservative political force at home, and a disruptive influence abroad.

To many Chinese, however, Washington’s reaction looks like a desperate attempt by rich, jaded colonialists to preserve their privilege by containing an emerging power. The turn to protectionism through tariffs has not only made American politicians look hypocritical, it has retroactively justified China’s employment of trade-distorting measures.

However, out of conflict comes clarity. Supply chain dependencies between China and the United States are deeper than many realised. Similarly, financial dependencies between Chinese banks and foreign financial systems make U.S. dollar sanctions double-edged. In the standoff over Hong Kong, Washington appeared to blink. Trade wars are hard to win.

Even so, from Beijing’s perspective a hostile Uncle Sam caused trouble via other channels. The White House has starved telecoms champions like Huawei and Semiconductor Manufacturing International of components, forced asset sales, named and shamed officials, and rallied international opinion against China. And for all the improvements to domestic equities markets, locking Chinese listings out of New York would sting too.

Concessions seem unlikely, but both governments can stop being gratuitously horrid. It’s not in U.S. interests to indulge bigotry, for example, much less discourage the People’s Republic from exporting its best and brightest to U.S. research institutions. Beijing would do well to mute “wolf warrior” diplomats like Foreign Ministry spokesman Zhao Lijian, whose Twitter account is dedicated to torching Western goodwill. The two sides may have nothing nice to say. The best start is saying nothing at all.

First published December 2020