On October 17, 2018, ROBO Global, LLC (ROBO) hosted a panel on robotics, automation and artificial intelligence (AI) at the New York Stock Exchange prior to ringing the closing bell.  ROBO is an index, advisory and research company focused on helping investors invest in the fields of robotics, automation and AI globally. The firm is an index provider with an ETF, under the ticker ROBO, that tracks the index and is traded on the NYSE. Panelists included experts on Robotics and AI from academia, investment banking and industry. The panel discussion is timely given the relatively recent explosion of big data, which ROBO cites as the fuel for AI, the big leap in machine intelligence capability, and its impact on multiple sectors of the global economy. The following are some highlights of the panel discussion.

Disruptive technology – should it be feared or embraced?

Overall, the panel had a positive outlook for the future of AI, robotics and human productivity. A lot has been written in the American press about machines taking over human jobs and fear about the dangers and related disruptions attributable to AI and robotics. According to the panel, this is counter to the attitude in Asia and Europe, which seem to embrace the emerging technologies. U.S. fears, while understandable, may not be realized fully. One of the panel experts noted that machines make a lot of mistakes by themselves and human workers tend to be error-prone as well. But when humans partner with machines, mistakes plummet and productivity improves.

Big data fuels AI and robotics

Big data is the fuel of AI and it is growing by billions of gigabytes daily. Given the massive growth of data, improvements in AI, automation and robotics technology, the outlook for a new era of productivity can be realized through these disruptive technologies across multiple sectors of the economy. Everything from defense and manufacturing to the medical field will be impacted. For example, Wyatt Newman, a professor of computer science at Case Western Reserve, sees a day when physicians will be elevated to become mainly supervisors… of robots. Already, physicians direct robots built by companies such as Intuitive Surgical to more accurately perform surgery.  Long term, he believes there will be “home” robots far more sophisticated than Roomba, a vacuum cleaning robot, able to tackle many needed tasks.

What’s driving the evolution of this technology?

Dr. Newman noted that a fundamental change in the AI/robotics industry is happening due to a confluence of events.  The cloud, big data and automation are all benefiting from technological advances in the gaming industry, where advances in hardware have helped Google and Intel innovate. He notes that reusable software for robots is bringing costs down while “deep learning” helps make robots function more effectively.  Deep learning is part of a broader family of machine learning methods based on learning data representations. Specifically, deep-learning software attempts to mimic the activity of neurons in the brain where thinking occurs. The software learns to recognize patterns in digital representations of sounds, images, and other data as opposed to task-specific algorithms.

Asian and global juggernaut

Morton Paulson, head of research at CLSA Japan and an expert in the industrial sector, notes that while the U.S. fears AI and robotics, Europe, Asia and other countries broadly embrace the technology. China, India, Southeast Asia and Mexico are investing heavily in robot technology.

Panel members noted that China has been investing heavily in AI in recent years versus a relatively small investment just a few years ago. One panel member opined that the Chinese are investing five times as much in AI today compared to the U.S. China’s goal is to be on par with the U.S. by 2020 and to dominate the technology by 2030.  While most Chinese investments are in China, some are in Silicon Valley and other places outside of China. China has a huge amount of data and more users of the data versus the West, which adds up to enormous revenue potential.

China and Europe step up STEM Education Investment while the U.S. falls behind

According to Raffaello D’Andrea, Professor at ETH Zurich and Co-founder of Kiva Systems (Amazon Robotics), China is investing heavily in STEM education – emphasizing computational analysis. The takeaway is that the U.S. is likely missing a big opportunity, especially when it comes to investing in educating the next generation; in comparison, China and Europe are trying to give students a leg up regardless of their socioeconomic class. As measured by standardized test scores, it’s no secret that many public schools in the U.S. fail to educate students adequately in the STEM subjects. If the U.S. neglects to properly educate a broader swath of students, it may miss out on a huge technological opportunity in the decades to come.  The panel also noted that education must be life-long, instead of ending with four years of college, because technology is constantly changing and the pace of change is accelerating.

The catalyst for change

With regards to AI, Professor Newman noted that massive uses of data are still to come. Companies are collecting a huge amount of data but don’t know what to do with it yet. When data and AI connect, there will be a big explosion of innovation.

According to the panel, some potential catalysts for change in the AI industry include a China/U.S. trade war resolution and companies such as Apple getting on board with robotics and AI.  Apple and other companies will need to invest massively in AI/automation/robotics ahead of the innovation wave, as Netflix did five years ago to create content.

This is just the beginning of a massive technological wave

Most aptly, in the marketing piece for its ETF, ROBO quotes technologist Pete Trainer regarding the next wave of AI, big data and robotics: “We are at the precipice of one of the most significant discoveries since we learnt how to light a fire.”

Author and futurist Alex Salkever, formerly Marketing Communications Manager at Mozilla, spoke at the Financial Women’s Association’s May 9 Summit “The Future of Work.” The presentation, “The Driver in the Driverless Car: How Our Technology Choices Can Change the Future” addressed the intersection of artificial intelligence (AI) and automation with human employees in the workplace.

Mr. Salkever pointed out that AI is better than humans at certain tasks and will take over parts of our jobs.  For example, AI is already used for specific, repetitive tasks such as figuring out credit ratings or transcribing multi-person conference calls. AI can learn and recognize faster than humans in narrow applications such as voice or image recognition. This is referred to “weak or narrow” AI, which represents over 99% of AI tasks today.

The future of AI is referred to as “strong” AI, where the computer acts like a human brain and learns a task from scratch using creative thinking. Experts in the field predict that this type of AI could become available in another 40 years, perhaps sooner. One early example of strong AI is AlphaGo. This program essentially taught itself to play the game of Go, and went on to beat one of the best professional human players of Go without handicaps in a five-game match. Another example is a four-legged robot created by a Columbia University engineer. The robot learned to walk and when one of its legs was cut off, it relearned how to walk on three legs.

Mr. Salkever opined that parts of jobs in various industries, including finance, will disappear as AI takes over rote tasks, but that other jobs will be created. He cited the case of “Flippy,” a robot introduced at Caliburger restaurant in California in 2017. Flippy was intended to handle the hot, dirty, repetitive task of grilling, leaving employees to complete the orders and interact with customers. The robot’s introduction did not go as smoothly as planned – Flippy was so fast that the restaurant needed to add more workers. Flippy wasn’t intended to replace people but rather to serve as “extra hands” at the grill. Ultimately, Flippy’s creators hope to introduce Flippy into 50 Caliburgers.

In finance, AI also does rote spreadsheet work and generates visual content. Mr. Salkever noted that at Goldman Sachs, 25% of employees are now computer engineers, many of whom work on creating AI and algorithms for processes and investing. Mr. Salkever claims that AI is good at buy and sell stock recommendations based on pattern recognition (technical analysis) and is cheaper than humans since it requires no benefits or bonus. Robo-advisors such as Acorn, Betterment and Wealthfront use algorithms and AI to invest customers’ money in ETFs, primarily index-oriented funds, thus cutting out the middle-man broker. Mr. Salkever also discussed a company that uses AI to automate bank processes such as credit, fraud detection, settlement and underwriting. Additionally, this technology can be used in in legal services and insurance. He notes that economic desks at brokerage firms use AI for portfolio construction.

In human resources, Mr. Salkever discussed Textio — an algorithm which creates less biased job descriptions versus its human counterparts. However, he cautions, algorithms can inherit the biases of their creators.

In a nod to human ingenuity, Mr. Salkever notes that AI is not good at collaboration, teamwork, people skills, creative problem solving, non-linear thinking, relationship building and management. It appears that there’s hope for the human race.

The inaugural Peter Peterson Lecture on National Security and Fiscal Policy was held by the Foreign Policy Association on April 19. The session featured John O’Neill, former U.S. Treasury Secretary and former Chairman and CEO of Alcoa.

The far-ranging lecture featured topics such as defense spending, the changing nature of global threats, national debt, wage stagnation, the presidential election, and tax reform. Mr. O’Neill’s overarching message was that we, the people, need to be better fiscal stewards of our country. Within this message he sees the responsibility of broader society to set expectations, manage responsibilities and frame a stronger future for America.

On national defense, Mr. O’Neill sees the reduction in defense spending over recent years as a worrying development given the rise of turmoil across the globe and America’s historically expansive role in international security. He also argues that spending should focus on investments that derive real results, citing that of the 11 aircraft carriers owned by the US Navy, at least half are in maintenance at any one time. He believes investments in cyber security and other innovative threat detection and management technologies should be a priority.

The reduction in defense spending has coincided with growth in the entitlement system, with tax exemptions and social spending rising at significant rates. The growth in national debt to $19 trillion, which includes $6 trillion borrowed from social security, indicates that American society is living beyond its means, according to Mr. O’Neill. Student debt has now topped $1.23 trillion and 40% of graduated student loans are in default. Mr. O’Neill points to this phenomenon as a sign that the core principles of contracts are no longer respected. Fiscal responsibility should, therefore, hinge on paying for what we, as the people, agree is important and what we can afford to pay for.

Mr. O’Neill called for fundamental tax reform. In his view, the system should remove tax credits and exemptions which create inequities and generate perverse incentives. The current system, for instance, provides a greater mortgage tax credit for larger mortgages, effectively providing higher tax relief for higher earners.

On the election, he called for candidates that have a better understanding of the key elements of government such as defense and tax. He referenced President Jimmy Carter as someone who already had a working knowledge on key issues so his decisions were not so dependent on the briefing system. Mr. O’Neill did not see a plethora of candidates with this knowledge.

Finally, he opined on wage stagnation and the plight of the American worker. He noted that when he sat on the board of General Motors in 1995, the average production line worker was paid $145,000 per year including benefits. With the advent of non-union factories, the average wage fell to $60,000 per year. In effect, GM workers had benefited from the ocean as a trade barrier and the belief that no other country could make a good car. While Mr. O’Neill did not discuss potential solutions to wage stagnation, he noted that free trade remained a good ideal and globalization had delivered benefits. He finished saying that if the US does not have a vibrant economy, then we cannot “be the light.”

Sebastian Vanderzeil is a Research Analyst with Cornerstone Capital Group. He holds an MBA from New York University’s Stern School of Business. Previously, Sebastian was an economic consultant with global technical services group AECOM, where he advised on the development and finance of major infrastructure across Asia and Australia. Sebastian also worked with the Queensland State Government on water and climate issues prior to establishing Australia’s first government-owned carbon broker, Ecofund Queensland.

The New York Stock Exchange held its first Cyber Investing Summit on May 3. The event featured a range of speakers and panels on investing in cyber security.  Key speaker Richard ‘Dick’ Grasso, former NYSE chair and CEO, spoke about cyber security in his role as advisor to cyber security firm root9B.  The firm is owned by Joe Grano, former PaineWebber CEO and Chairman of the Homeland Security Advisory Council. Mr. Grasso sits with a number of ex-government people on the advisory board of root9B.

Mr. Grasso spoke about the growing cyber security threat, particularly to financial institutions, utilities and aircraft control, as a war on capitalism. The response by companies, he said, should be to draw upon the US Government’s expertise, including recruiting its people, and to prepare for war. The way forward, in his view, is to combine people and technology to develop solutions that respond effectively to this threat.

Mr. Grasso made a bold prediction on cyber security and corporate governance, stating that over the next two to three years, companies will introduce independent cyber security board committees. This statement was applauded by the crowd but, separately, some cyber security vendors and advisors believe that cyber security is a standard business risk and will remain part of existing risk committees. How businesses will ultimately integrate cyber risk into their operations is seemingly still under consideration.

Mr. Grasso ended by reiterating the need to recruit people or hire companies that have government experience in dealing with cyber security.

Other takeaways from the conference include:

The conference will now occur each year and will focus on where investments can be made in the industry.

Sebastian Vanderzeil is a Research Analyst with Cornerstone Capital Group. He holds an MBA from New York University’s Stern School of Business. Previously, Sebastian was an economic consultant with global technical services group AECOM, where he advised on the development and finance of major infrastructure across Asia and Australia. Sebastian also worked with the Queensland State Government on water and climate issues prior to establishing Australia’s first government-owned carbon broker, Ecofund Queensland.


 

Bloomberg New Energy Finance (BNEF) just held its annual Future of Energy Conference in New York. The theme of the conference was “The Age of Plenty, the Age of Competition,” a reference to the growth in energy options through fracking, solar, wind and storage and the relentless competition reducing costs and driving innovation. Below we summarize the main messages from the conference.

In our view, a major takeaway was the exponential growth in renewable energy deployment. However, due to the expenditure required to continue pushing down the cost, it remains unclear how investors can benefit aside from direct investment in projects.

While utilities are waking up to a “customer first” focus, we believe their capacity to deal with changes is limited, particularly with a slow-moving regulatory environment. There is an understandable fear that Silicon Valley is turning its attention to the power markets; one need only look at Uber and the taxi industry to consider the impacts of technology-driven disruption on incumbents. To this end, we observe the rapid growth in the number of companies developing software to manage sections of the grid from the generation to the household.

Utilities see the role of renewable energy as a part of the electricity generation mix, to be integrated by extending the grid through additional transmission infrastructure. Conversely, battery storage providers see the possibility of using renewables to downsize the grid and avoid transmission capex. The jury is still out on the winner, but the recent history of solar and wind provides evidence that storage could be substantially cheaper and more widely adopted than many industry observers currently forecast.

Batteries represent a new era for electricity, enabling warehousing and driving new applications that we have only begun to explore. In discussing the positon of storage in the system, “behind the meter” – at the customer location — seems superior as it generates all of the benefits of in-front-of-meter with the added advantage of reduced consumption and exposure to peak prices. Corporates appear to be major drivers in the uptake of storage.

Turning our attention to the transportation industry, electric vehicles are being viewed as a way to engage consumers in an energy discussion and increasingly as a “device that you drive.” One emerging idea for EV charging payments is block chain. This could enable seamless payment for EV charging anywhere on the grid. EVs may also be a boon for utilities as a new source of electricity demand with consumption potentially adding 11% to demand over the next decade.

In the traditional energy space, the nuclear discussion in the US remains focused on regulatory barriers, but new technology is coming. Small modular reactors, such as NuScale Power’s SMR, could be in operation by 2024-2025, and Transatomic has updated an older technology, the molten salt reactor, enabling it to use nuclear waste as fuel. Oil & gas companies are concerned about short term prices but the technology breakthrough in fracking has been breathtaking, enabling cost reductions and lower breakeven prices, notwithstanding the low price environment.

The investor panel discussed the selloff in Yieldcos. Panel members reiterated their confidence in the YieldCo model, though pointed to the need for improved governance. (For more on this topic see our report Are YieldCos Looking After Their Investors?) In discussing growing demand for green bonds, an investor said that price premiums relative to similar corporates will signal a new level of confidence in green bonds. Finally, asset owners are increasingly demanding that environmental, social and governance factors be considered in their investments, and divestment considerations are now becoming part of the discussion for ‘mainstream’ asset managers.

Michael Shavel is a Global Thematic Analyst at Cornerstone Capital Group. Prior to joining the firm, Michael was a Research Analyst on the Global Growth and Thematic team at Alliance Bernstein. He holds a B.S. in Finance from Rutgers University and is a CFA Charterholder.

Sebastian Vanderzeil is a Research Analyst with Cornerstone Capital Group. He holds an MBA from New York University’s Stern School of Business. Previously, Sebastian was an economic consultant with global technical services group AECOM, where he advised on the development and finance of major infrastructure across Asia and Australia. Sebastian also worked with the Queensland State Government on water and climate issues prior to establishing Australia’s first government-owned carbon broker, Ecofund Queensland.

 

 

More than 2,000 people gathered in Vancouver last week for GLOBE 2016, North America’s Largest International Environmental Business Summit, to learn how businesses and investors are meeting the growing demand for innovations to move the world toward a low-carbon future. Business executives, government officials, investors, and delegates from 50 countries shared their views on the state of play on dozens of topics, most focused on the contributions the private sector is making and can make to adapt to climate change, meet the climate targets that 195 countries and the European Union committed to at COP21 (the 21st Conference of the Parties to the United Nations Framework Convention on Climate Change) in Paris last December, and accelerate the shift toward a clean-energy and environmentally sustainable economy.

Scientists have warned for decades that global climate patterns are shifting in ways that are dangerously different from historical patterns, with some places getting stormier, others getting drier, some getting cooler, and others getting hotter. Along with those shifts has been a rise in the average global temperature that, above a certain point, would melt the planet’s permafrost, devastate small islands and coastal communities with rising sea levels, and permanently change weather and storm patterns in ways that would endanger agriculture, marine species, and the economies that depend on them. The scientific consensus has been that these changing patterns are a result of the growing volume of greenhouse gases being released into the atmosphere by certain carbon-heavy economic activities. And only by dramatically reducing the volume of such emissions, climate scientists have argued, will we be able to slow average warming to a point where risks to human lives and assets can still be understood, a level estimated at around 1.5° or 2°C above the current average. As pension actuary Karen Lockridge of Mercer put it, “A two-degree world might be insurable. A four-degree world would not be.”

Some damage has already been done. Droughts leading to urban migration and political instability have already contributed to outbreaks of war (followed by refugee crises). Some communities in the tiny islands of the Pacific and Indian oceans are preparing to relocate (one already has). Entire industries are at risk (how will changing temperatures in France affect the quality of its wine grapes?), and while some businesses, investors, and governments are preparing to mitigate those risks, the more entrepreneurial ones are recognizing that with such a large shift in economic forces comes the potential for large opportunities. For that reason, the theme of GLOBE 2016 was “innovation,” the search for opportunities to adapt, mitigate, profit from, or contribute to rapid changes in the global economy.

My three big takeaways from the week: Heading toward a low-carbon economy, demand is moving up, supply is catching up, and policy is lagging behind.

Demand: Moving On Up

The shift to a low-carbon economy did not begin with government regulations or international treaties. It began with consumers who demanded more and more environmentally friendly products and climate-friendly business operations, and who increasingly turned away from products and companies that did not meet the demand fast enough. Not all climate-friendly companies have succeeded, but many of the companies that predicted where social demand, environmental changes, and likely regulation were heading and got out in front of their competitors have turned out to do very well. Philips certainly has not regretted its move into LED light bulbs, BASF has profited nicely after reformulating some processes and products, and Boeing’s increasingly fuel-efficient planes are lowering its customers’ operating costs. In the mid-19th century, the whale-oil industry collapsed in a few short years as consumers turned to kerosene amid volatility in oil supply from declines in the whale population. As the Rocky Mountain Institute founder Amory Lovens put it, “Whalers were surprised that they ran out of customers before they ran out of whales.” It is likely that, as innovators meet the demand for clean technologies and materials, and industrial designers find more efficient uses of existing technologies and materials, peak oil might turn out to be a peak in demand rather than a peak in supply. It is market forces that will drive the low-carbon economy — if corporate boards and government regulators will let them.

Supply: Catching Up

Corporate social responsibility (CSR) came about in response to consumer divestment movements and investor activism, but CSR efforts were generally housed in public affairs offices rather than integrated into business operations. By contrast, a growing number of corporate directors and officers, as well as investment analysts, are recognizing the value of accounting for social, environmental, and governance (ESG) factors as part of their calculations of risk and opportunity. Some investment analysts are responding to investor demand for social impact and ESG performance with financial products based on simplistic screens. But more sophisticated analysts are digging deeper and encouraging more standardized reporting of ESG-relevant corporate reporting. More and more are recognizing, as Cornerstone’s Erika Karp has pointed out, that sustainability is just another term for “corporate excellence” or, according to the UN Global Compact’s Ingvlid Sørensen, “good corporate governance,” both of which demand that companies examine the real risks they face from climate change, climate adaptation, and the social disruptions that will emerge from both. But many boards still do not see it that way, instead simply waiting for policy makers to introduce the regulations they will need to follow.

Policy: Lagging Behind

Many companies are not waiting for policy makers. And many are not even looking for subsidies to support their innovations against dirty-energy products, although many did express a desire for a simplification of tax incentives and the removal of subsidies for their less climate-friendly competitors. What most businesses and investors are looking for is a predictable policy environment. It helps to know the commitments that most countries have now made to reducing their emissions, and at the Climate Action Summit in Washington DC in May, many of those countries will meet to begin developing an action plan. In the United States, the Labor Department ruling that allowed pension fund managers to account for ESG factors as part of their fiduciary duty was a welcome development, although there is still some confusion about how to interpret the ruling. But there is still a long way to go. Delegates to GLOBE 2016 wanted to see reforms in the financial sector to encourage more disclosure of risk and a policy framework that rewards longer-term investments, for example. And the policy change most speakers and delegates at the GLOBE conference wanted above all was a price on carbon pollution, a change that would give them a quantifiable way to incorporate climate considerations into their plans and reporting.

None of this will come easily. Corporations that are deeply concerned about climate change and spend a lot of money on policy advocacy for other issues are not asking their lobbyists to encourage policy changes on climate. That needs to change. In fact, it was clear from the talk on the panels and in the hallways of the convention center in Vancouver that adapting to and moving toward a two-degree world will require work at every level. Policy makers need to set a predictable framework. Corporations need to lobby them to do so, even while finding ways to create innovative new products and ways of doing business to reduce the carbon footprint in their operations and supply chains. Index, rating, and research agencies all will need to create the standardized data and tools that are needed to analyze climate risks and sustainability impacts. Social movements will need to advocate for communities and sectors who inevitably will be negatively affected by climate change and climate action alike, and businesses and policy makers will need to respond, both because it is the right thing to do and to reduce the social and political risks that could be associated with climate action. Consumers are going to need to shift their spending habits even more toward low-carbon products. And investors and investment managers are going to need to move billions and probably trillions of dollars into the companies that are best positioned to thrive in an economy that will see rapid changes in the next decades.

 Robert Lamb, PhD, has been a strategist, policy adviser, public speaker, and collaborator in Washington, DC, for more than 20 years. Hi research focuses on hidden systems and barriers that affect strategic success in organizations and societies, from social dynamics in war zones to intangible factors in business relationships. This academic year he is a visiting research professor at the U.S. Army War College’s Strategic Studies Institute, working to improve U.S. and international policy in fragile and conflict environments.