ESG Focus: Investing For The Fourth Industrial Revolution

ESG Focus | Feb 24 2020

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ESG focus: Investing For The 4th Industrial Revolution

-ESG investing and reporting standards continue to develop
-Fourth Industrial Revolution is carried by both ESG and new technologies
-Global manufacturing will be transformed in the decade ahead

By Sarah Mills

The Fourth Industrial Revolution (4IR) is set to transform the manufacturing industry, which in turn is squarely in the sustainability sights of the world’s leaders.

Manufacturing’s early and pivotal position in the supply chain, and in the 4IR, means it will drive sustainability reforms across the globe, and will subject to greater-than-average scrutiny on many fronts.

In fact, many aspects of ESG appear to have been developed specifically to ensure that the Fourth Industrial Revolution occurs in a sustainable, orderly fashion; and particularly to ensure the social unrest witnessed in former industrial revolutions is not repeated.

A quick history 

Industrial revolutions tend to occur around transformative communications, energy and mobility convergences.

The First Industrial Revolution started in England in the 1760s and quickly spread to France, coinciding with the French Revolution (and being considered one of several causative factors). 

It started in Russia more than a century later in roughly 1880, and coincided there with the Second Industrial Revolution, a phase of rapid standardisation and industrialisation  (think centralised electricity and telephones) from the late 1800s to early 1900s. The Russian Revolution began in 1917.

Neither the French nor the Russian revolutions stopped the industrialisation process but they did wreak substantial disruption upon the world order. 

The Third industrial Revolution started in the 1950s with the advent of semiconductors, mainframe computing, personal computing, and the internet – yielding the first digital revolution. Thirty years later, the Berlin Wall fell and a new order began.

ESG provides a framework for the rollout of Industry 4.0

Many consider ESG as an important organising principle to ensure world peace and prosperity in what promises to be a period of intense upheaval. 

The World Economic Forum’s Global Risks Report rated unemployment and underemployment as one of its top five risks, noting its potential to create profound social instability. 

Interestingly, previous revolutions all generated economic growth and jobs and there is no reason not to assume the same will happen this time.

According to a Deloitte survey of industry CEOs, 87% of respondents believe Industry 4.0 will lead to greater social and economic equality and stability. The problem with most industrial revolutions is not jobs, but conditions, pay, stability and the pace of change.

But there is one major variable this time – the introduction of advanced robots and artificial intelligence, that will replace many low-to-medium skilled jobs.

Governments globally are canvassing options for a universal basic income, just in case, and the addition of a sustainability platform is expected to expand the breadth and scope of industry investment into a circular economy, which is being touted as a massive investment opportunity in its own right. 

Together, 4IR and the circular economy are expected to work hand in fist, in a ratcheting fashion, to accelerate productivity.

So the UN Sustainability Development Goals (SDGs), which sets the tenor for ESG standards, is expected to operate as an enabler of job generation, a securing of the world’s largest global asset – nature, as well as a brake on corporate excess.

World leaders set the sustainability agenda – it begins in 2020

Technological advances in manufacturing, combined with regulation aimed at improving economic efficiency and sustainability, will enable companies to support the UN’s SDGs and support a shift to a circular economy.

Regulation is expected to guide investment, but it is hoped the cost of transition will be largely offset by productivity gains from new technology.

“With 2020 being seen as the “super year”, kick-starting a decade of action for people and planet, there is also an opportunity to bring sustainable markets into focus in each of this year’s major global meetings,” declared Prince Charles at the World Economic Forum in January.

In order to secure our future and to prosper, we need to evolve our economic model. … I have come to realise that it is not a lack of capital that is holding us back, but rather the way in which we deploy it. Therefore, to move forward, we need nothing short of a paradigm shift, one that inspires action at revolutionary levels and pace.

Changes are already under way in manufacturing. According to a 2019 survey by PWC and The Manufacturing Institute of 100 US manufacturers, titled Navigating 4IR to the bottom line, nearly half reported they are in the early stages of a smart-factory transition (the awareness, experimental and early adoption phase). More than half planned to increase investments by up to 25% this year – a significant pool of money, which has to go somewhere.

Citi’s Factory of the Future report estimates growth rates for several manufacturing industries and service providers, and expects some could record compound average growth rates of up to 60% a year over the first half of the decade.

A McKinsey Global Institute simulation suggests that the front runners in adoption of artificial intelligence, a key 4IR technology, will increase their cash flow by 122%, while followers will see only a 10% cash-flow increase.

“The key driver is that higher transition costs and capital expenditures of the front runners is overcompensated for by output gains,” says McKinsey.

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