Elizabeth Harnett

Urbanization has been a defining trend in economic development for millennia, but the past two decades have witnessed urbanization at an unprecedented scale and speed. In 2008, for the first time in history, the human race became predominantly urban (Chart 1). By 2025, there will be 37 cities with more than 10 million people in them; only 7 will be in the developed world. This trend is a key part of the economic growth and development narrative. No prosperous nation is predominantly rural, and no urbanized countries are poor. While it is impossible to forecast accurately the path that human history will take under future demographic and environmental change, urbanization is likely to be a key trend during the next half century at least. China is urbanizing at 100 times the scale, and 10 times the speed of the UK. By 2025, there will be more than 600 cities exceeding one million inhabitants. This will not only boost capital stocks through the need of cities for basic infrastructure, but will also contribute to the domestic and global economies through increased consumption of goods and services (Chart 2). This will predominantly benefit those companies exposed to emerging markets which still have room to urbanize further and enjoy a burgeoning middle class. We identify 4 main ways in which urbanization can cause economic growth: improved agricultural productivity as small farms are replaced by larger holdings enabling greater scale economies; the reallocation of labour away from agriculture towards higher productivity manufacturing and service sectors; higher economic growth and consumption due to urban incomes exceeding rural incomes; and greater spill over and scale effects in urban areas. But economic, social and policy changes must accompany new infrastructure if urbanization is to be a success.

Fund managers are inherently concerned with risk. This note explores the relatively new concept of Stranded Assets and seeks to show how they are already a critical 'hidden' risk in almost every Global Multi-Asset and Equity portfolio and how they will become increasingly important to all asset managers in the coming decade. " Stranded Assets " are a relatively new concept (coming from the Economic Geography literature) and are defined as those physical assets which lose their economic value well ahead of their anticipated useful life. The academic literature highlights how environmental change is making investments over a wide range of sectors and asset classes at risk from being 'stranded'.

The fifth Stranded Assets forum examined ultra high-net-worth individuals (UHNWIs), the advice they receive on sustainable investment topics, and how they could shape demand for and the practice of sustainable investment. The entire global population of 211,275 UHNWIs was worth US$29.7 trillion in 20142, compared to OECD pension funds with assets of US$24.7 trillion. There also appears to be a growing propensity for many UHNWIs to be motived in part by environmental, social, and governance (ESG) considerations - for example wanting to directly or indirectly support social or environmental objectives through their investments, while simultaneously generating an appropriate risk-adjusted returns across their portfolios. Many UHNWIs also give generously to charities which sometimes target similar environmental or social outcomes.

Given this and the scale of capital involved, it is important to find out how good private banks and private wealth managers are at providing advice on green investment topics. Do private banks and private wealth managers possess the skills, training, and expertise to cater to the apparently growing demand for advice on sustainability? If not, what can be done to address this problem and if it is an issue, what are its causes and consequences? Could there be structural barriers preventing the private wealth management industry from catering to these priorities and how could they be resolved? Moreover, what is the state of client demand for these products and services and how might it be evolving?

Over the last few years, the topic of “stranded assets” resulting from environ- ment-related risk factors has loomed larger. These factors include the effects of physical climate change as well as societal and regulatory responses to cli- mate change. Despite the increasing prominence of these stranded assets as a topic of significant interest to academics, governments, financial institutions, and corporations, there has been little work specifically looking at this issue in Latin America and the Caribbean (LAC). This is a significant omission, given the region’s exposure to environment-related risk factors, the presence of extensive fossil fuel resources that may become “unburnable” given carbon budget con- straints, and the particular challenges and opportunities facing lower-income and emerging economies in LAC.

This report includes an extensive literature review, reviews of case studies, in-depth interviews, extensive informal consultation, and a survey instrument to identify gaps in the stranded asset literature. The report builds on work undertaken in 2015 by the Inter-American Development Bank (IDB) on the issue of stranded assets. It aims to provide a deeper understanding of the issue and the existing literature about it, as well as highlight opportunities for future work, especially in LAC.