Adapting in an Era of Financial Disruption
Mass layoffs and bank bailouts expose greater fissures in our financial systems. However, AI technology is playing a key role supporting consumers prioritizing their personal financial health as well as the health of the planet.
The global financial and economic outlook has soured rapidly in recent months, with Silicon Valley Bank and Credit Suisse serving as examples of a spiralling economic downturn. As the last dominos fall, the striking of the technology industry is just one of the symptoms of the global recession.
Between the cost-of-living crisis, the Russia-Ukraine war, and the lingering effects of the pandemic, advanced economies and emerging markets must reckon with the combination of stagnant growth and rising prices. Known as the “Great Stagflation,” this phenomenon and its repercussions on our economy have generated a broader discussion around the correlations between rising inflation and impacts of climate-related disasters.
Whether it be the impact of extreme temperatures on food prices and labour productivity rates, or the sharp increase in both green fuels and fossil fuels as we transition to a net zero world, the evidence for the correlation between climate change and economic challenges is growing. Climatenomics, a term coined by Bob Keefe, speaks precisely to the shifting recognition of the climate crisis being more than just an environmental issue, but an economic issue too. Last year, climate-related weather disasters cost the US economy more than $145 billion. Over the last five years, the total is $750 billion.
Companies of today, designed to maximise financial performance, have no adequate toolkit when it comes to addressing the impacts of climate change on their business. This cuts to a bitter truth that continuous growth is unsustainable for a planet with limited resources.
With increasing pressure on our financial systems, businesses are beginning to experience the effects of Climatenomics.
The Unravelling Effect on Consumers
The impact of the Great Stagflation has hit consumers hard. It is not surprising that 69% of global citizens describe the outlook for the world in the next two years as “consistently volatile across economies and industries.” In a recent report by Eurobarometer, two thirds of Europeans are dissatisfied with the measures taken by their governments to tackle their mounting financial pressures. This pessimistic outlook can be attributed to rising cost-of-living. Labelled as capitalism fatigue, consumers are tired of drawing the short end of the straw and are beginning to challenge the status quo that our financial system has been governed by.
As a result, consumers have developed innovative ways to reclaim power over their personal finances and, eventually, put their money towards a future that they believe in. As the biggest cohort of today’s workforce, millennial’s average wealth is lower than any other generation before. To better finance their earnings, we are witnessing millennials and other generations respond to the harsh economic climate by improving their financial literacy. The pandemic proved to be an extraordinary impulse for many, with a record number of people investing money and time to improve their personal finance expertise. Confirmed by the results of EPAM’s Consumers Unmasked report, consumers are becoming increasingly savings-savvy and gravitating towards deals and loyalty programs that give them more bang for their buck.
And as a response, businesses have developed a new toolkit of solutions that supports consumers and helps them become more resilient in an era of financial disruption. There’s now an increasing plethora of start-ups eager to become the Fin-Edu evangelists. A good example is the LA based start-up Arro, a fintech company that offers a series of gamified in-app activities to help consumers grow their credit score while also teaching them why that’s important.
Spoiler alert: Artificial Intelligence will appear multiple times.
Technology is Playing a Key Role in Personal Finance
On the one hand, with a tighter grip on wallets, consumers are looking for promotions and bargain-hunting for deals. On the other hand, there’s also an increasing interest in alternative investments that promise high returns fast (Hello, cryptocurrency). However, while the return on these investments can appear promising, there’s also been an underestimation of the volatility and risks underlying them from consumers (Au revoir, cryptocurrency). To address the risk involved in nascent investment models, we are seeing artificial intelligence (AI) as an increasingly promising tool.
To avoid black swan events in investments, new AI-backed mathematical models are being developed to guarantee solid returns during bearish markets. In the venture capital world, many companies, such as Pitchbook, are developing AI-powered features for their premium users to predict start-ups’ probability of success. For institutional investors, there is an increasing number of hedge funds that specialise in risk mitigation, with Nassim Taleb and Mark Spitznagel’s Universa Investments being at the forefront of this new wave. Many innovations are also occurring within the retail investment space (Unless you have millions hidden under your mattress, you fall into this category), with multiple AI products in development. From Chat-GPT generated ETFs that promise market-beating premiums to Amplify’s risk mitigation securities, the space is innovating quickly to reduce risk and improve returns. Investment advisory firms are also re-shaping their business models to meet changing consumer demand. For example, Delphia asks for consumers’ data in exchange for part of their returns.
The Search for Greener Alternatives
Aside from an increased awareness towards personal finance, there is also a growing desire for financial decision-making that is better for the planet.
The recognition of the severity of the climate crisis we’re heading towards is growing. This translates into a rising conscientiousness in purchasing attitudes and financial decisions. It is no surprise to note that ‘conscious consumers’ are increasingly looking to purchase from businesses that align with their values. An interesting example is online supermarket Oda; in winter of 2020 it started to include a weekly ‘climate footprint’ report — divided into food groups and quantity purchased by each customer — on receipts. Consumers were also given the possibility to see how their climate footprint for the current week compared to that of previous weeks. This initiative turned out to be a great success for the Norwegian grocer: since including a climate report, customers have been buying less red meat and the sales of plant-based products have grown twice as fast as meat.
A similar attitude is now becoming popular when it comes to investments, with green finance and ESG compliancy reaching unprecedented highs. We are already noticing the first signals of this new financial paradigm. Firstly, in new ecosystems that focus on long-term growth and sustainability, like LTSE, the stock exchange launched by famous author, Eric Ries, in 2020. Secondly, in the increasing presence of institutions focusing on green alternatives to their current financial products. A good example of this is digital bank, Tomorrow, that includes “sustainable by design” as one of its core values, dictating the design of bank accounts to its investment advisory offerings. These cases highlight not only that a new financial system, centered on sustainability and social responsibility, is possible, but that it is already taking shape.
The New Face of Finance
Despite the rise of personal finance and green financial decision-making, it seems like these two practices are at odds in practice. Within our current financial systems, conscious consumers of today are constantly having to choose between making financial decisions that are either in the benefit of their personal financial health or the health of the planet. And this dichotomy is felt even more acutely during a recession. However, does this have to be the case?
If the rise of personal finance and green financial decision-making has taught us anything, it’s that as humans we are quick to adapt and find solutions that meet our new needs. It’s clear that technology, namely artificial intelligence, can play an important role in the resolution of this dichotomy, providing businesses with the right tools to develop a new paradigm, where individuals aren’t burdened with the choice between financial wellbeing and the wellbeing of society. Instead, knowledge and data could be easily accessible and to make better-informed decisions.
Download our Consumers Unmasked report to learn more how consumers shopping habits have been impacted by world economic pressures.