As Border to Coast approaches its 5th birthday chief executive Rachel Elwell reflects on the achievement of building a sustainable organisation, what investment capabilities are still to develop and the priorities for the underlying partner funds.

When Border to Coast became an entity in July 2018 the initial five-year strategy was focused on building a sustainable corporate function and the capabilities for funds to pool assets. In that time it has gone from an organisation with zero to 130 employees and £47 billion of pooled assets.

“It was a complex project to deliver,” chief executive Rachel Elwell says. “It’s going pretty well. COVID slowed us down a little bit, so it will be a couple more years to get there.”

The fund is the result of 11 local government funds pooling their assets, and of the £60 billion in total funds between the underlying partners, about £47 billion has been pooled with Border to Coast responsible for £38.3 billion.

Already the pooling has resulted in net cost savings of £20 million, with a total savings target of £145 million over 10 years and £340 million over 15 years. But more than just cost saving it allows the underlying partner funds to access asset classes that would be difficult to invest in without pooling.

In the past year alone Border to Coast has launched a multi-asset credit fund, a listed alternatives fund, a £1.35 billion climate opportunities investment proposition within private markets and increased allocations to private markets to £10 billion with fee reductions of 24 per cent.

“The cost savings show one of the benefits of pooling,” Elwell says. “It is understandable at the beginning that people focus on that cost saving, that is important. But over time we need to move the conversation towards what value we are producing, which is generating returns and opportunities the partner funds didn’t have before. We need to really judge ourselves on whether we are adding value for money with the scale we have got and whether we are delivering well on what our partner funds set out to do.”

Private markets

Private markets are a good example of the value add of the pooled vehicles.

“We bought forward that build, recognising quickly that our partner funds were looking to get exposure there,” Elwell says. “One of the things we were keen to do is understand what our partner funds needed, rather than rush in and build something.  We spent a lot of time understanding the key features and needs, and really honed in on the important things from a risk, return, income and liquidity perspective. This will stand us in good stead in the future, we are in it for the long term.”

The offering is a combination of external managers and internal capabilities which were cultivated from the existing capabilities of three of the partner fund internal teams.

About a third of assets ae managed internally, a third externally and a third in a hybrid model for private markets where Border to Coast is selecting funds but acting as a fund of funds managers.

“We could bring in people with experience in deploying capital through funds and co-investments so we are not paying fees to fund of fund managers, we are the fund of funds. And we are deploying more scale so could get better fees.”

Other advantages include allowing some of the smaller partner funds to access private markets for the first time; and for all the partner funds it allows for new and tailored investment opportunities.

The newly launched Climate Opportunities Fund is an example of that. The fund will be invested over a three-year period across private equity, infrastructure and private credit focusing on clean energy, technology, transport, industry (such as low carbon cement and steel production), agriculture and carbon sequestration.

“Talking to partner funds they are really excited to deploy capital to help the transition and more actively contributing to that not just taking out carbon,” Elwell says.

While infrastructure investments were already targeting some of those areas, including a recent €100m commitment to the Clean Hydrogen Infra Fund, the Climate Opportunities Fund allows for smaller and different types of investments.

“It is hard to get into the smaller funds doing niche things, so we are exploring doing something aimed at different types of investments not just big wind farms, there is a massive interest in that.”

Roadmap to net zero 2050

The fund recently published its roadmap to net zero 2050 which includes clear interim plans. It targets a 53 per cent reduction in financed emissions across its portfolios by 2025 and a 66 per cent reduction by 2030, reaching net zero by 2050 at the latest.

Currently about 60 per cent of the assets are covered by the plan’s emission reduction targets and Elwell says a big focus is to try and figure out how to get the rest of the portfolio covered as well.

The focus will be working with industry to improve data quality and methodologies to enable the remaining 40 per cent – made up of private market and some fixed income assets – to be brought into scope over time.

“We want to be working with the industry on private markets and how to get a recognised standard. If we can get a standard then GPs can consistently provide the data that is needed. The industry needs to work together to get the information to understand the risks,” she says, pointing to the ESG data convergence initiative.

Of the total assets about £2.5 billion is in emerging markets, with about £1.5 billion of that in emerging market equities and a bit more in a multi-asset credit and private markets.

“One thing close to my heart is supporting the just transition in emerging markets,” Elwell says. “Knee-jerk reactions to divest from emerging markets doesn’t feel the right way to go. It can be harder to engage in and influence some of those markets but we really need to collectively think about how to do that as asset owners. For emerging markets where there is such a reliance on coal we need to understand the transition.”  Border to Coast is one of the founding members of the £400bn Emerging Markets Just Transition Investor Initiative.

The fund is also working on collective action and involved with Climate Action 100+ and the TPI transition initiative.t

“It’s really captured people’s imaginations internally and the purpose we have is very important, and means a lot for us,” Elwell says. “It motivates us all to try and do the right thing for the 1.1 million members we have.”

What next ?

The fund is also looking to invest in some green, social and sustainability bonds as well as develop a few more equities capabilities.

But the big area of focus over the next 12 months will be real estate.

“The single biggest capability we are still to build is real estate. It’s a complex asset class and particularly because we are looking to go direct.”

Another focus over the next little while will be how best to support partner funds with their passively managed holdings, which are managed outside of Border to Coast. Historically these have been market cap traditional passive mandates, however Elwell says that over the past couple of years there has been interest from partner funds to introduce an ESG tilt.

“As partner funds start to think about overlaying responsible investment into these, we are exploring how to ensure appropriate oversight and the most effective way for partner funds’ objectives to be achieved, as usual nothing is off the table,” she says.

And finally as the local government funds have been challenged by central governments to invest money in the United Kingdom, Border to Coast will help partner funds with that proposition and launch a UK Opportunities Fund.

Asset owners are increasingly under pressure to find alpha via active management because of declines in beta, but active investment may not offer a holy grail.  Speaking at FIS Maastricht, Rob Bauer, Professor of Finance, Institutional Investors chair; director of the European Centre for Sustainable Finance; Maastricht University highlighted challenges in active management around returns and fees.

Drawing on key points from research published earlier this year of which he was co-author, that looked at the active management strategies of the largest sovereign wealth fund in the world, Norway’s Government Pension Fund Global, Bauer argued that NBIM’s 200-odd active strategies weren’t making sufficient returns. Despite NBIM’s low active risk profile, many people work across the active programme in a complex process, but returns at the fund mostly derived from market beta.

NBIM’s active strategies also introduced a conflict of interest, he continued. For example, the sovereign wealth fund was seeking to beat the benchmark but also engage with companies to decrease carbon emissions. This typically leads to underweighting a company and therefore lower returns compared to the benchmark. “It is a trade-off – where do you use your resources?”

Arguing that academic evidence suggests it is very difficult to beat the benchmark in fixed income or equity allocations, Bauer warned investors active management is a “zero-sum game, minus costs.” Still, he noted that incentives for asset owners to adopt active strategies abound. Asset managers busily market active management, but there is little feed back via public statements on what these strategies have actually achieved.

Asset owners tend to mandate to active managers that have done well in the past but where performance subsequently declines. “After a period [managers] reverse to the mean,” he said. Typically, asset owners then take their money out and reinvest with better performing funds. “You end up with one flower in a field of flowers that don’t look so well,” he said.

The conversation also turned to the importance of asset managers measuring alpha against a fixed time horizon.  Manager selection is often based on three years, yet active strategies should match the time horizon of the strategy. Moreover, outsourcing active investment can amount to passing the buck – investors still need to understand the mechanics behind their active strategy.

Beliefs and testing

Fellow panellist Peter Kolthof, chief investment officer, PGB, countered that even small returns in active management can make a difference and are relevant. He noted that active investment involves consistency and should start with beliefs; it involves regularly testing assumptions in an approach that should be implemented throughout the portfolio, consistently monitored and results published. “It’s easy to generate outperformance if you don’t have a relevant benchmark,” he said.

Asset owners in the Netherlands are renowned for developing low cost, passive strategies. They are similarly renowned for developing numerous benchmarks, driven by ambitions to integrate ESG and reflect the wishes of participants, said Kolthof. The process raises questions about whether these strategies are still passive – after all ESG integration is an active decision to make the portfolio more sustainable. “These benchmarks make it subjective, and you get to a point where each fund has its own benchmark,” he said. “If you put more choices into the benchmark, what is left for active?” He noted that benchmarks can be implemented by third parties in cost effective strategies and bought off the shelf.

Still, he reasoned that the most important element is for asset owners to create a benchmark that incorporates all elements of their decision-making process. “To me, it doesn’t matter if it is active or not.” This approach allows investors to monitor and evaluate the investment process and consistently implement. Delegates concluded that labelling these strategies active or passive lies in the eye of the beholder.

Private markets

Investors are increasingly switching to private markets to access alpha, adding segments to their allocations that are outside the benchmark. Investing in private markets requires skill – and investing in fund of funds means investors risk losing the extra return in fees. Bauer also warned delegates to be careful interpreting private equity numbers; ask GPs how they calculate their return and if the IRR makes sense. Delegates also discussed the importance of valuing private market allocations correctly. Private markets lag public markets values and are likely to fall in line with lower public market valuations.

PGB is currently building out its private equity allocation in the hunt for niches and corners of the market it is difficult to access via the listed market. “We won’t seek exposure to segments that are available in listed markets,” said Kolthof.

Elsewhere, delegates questioned the extent to which UK pension funds will continue to move into private markets. The rise in bond yields has improved the funded status of many pension funds, meaning that they may reassess their private market allocations – high solvency levels could focus minds on getting rid of private market exposure.

The pandemic has exposed tragic fault lines and new levels of inequality, said Sharan Burrow, general secretary, International Trade Union Confederation, speaking at FIS Maastricht on the eve of her departure from the organisation where she has been general secretary since 2012.

Fault lines visible in the number of informal workers and the loss of women from the workplace. While inflation in food and energy following in its wake has made life much more challenging for families, causing more inequality and poverty, and pushing back the transition, she said.

Burrow linked companies’ struggle for talent to a “broken” labour market. Over half of the global economy works in the informal sector, with another large proportion of the world’s workforce in insecure work.

“The world of work is not serving anyone well,” she said. In a new Social Contract, she outlined key demands for workers spanning jobs, rights, social protection, equality and inclusion.

Returning to full employment is key for people to trust economies and governments again. She stressed the importance of creating more jobs in sectors spanning care to green infrastructure and technology. Without this kind of investment, the divisions between nations will grow, and with it discontent. “Trust in democratic institutions is so low,” she warned.

Companies need to be prepared to pay minimum living wages to build confidence in the economy and to ensure people can afford to support themselves through increasing shocks, whether climate or health-related. She said that more than half the world’s population has no social protection.

Burrow also sounded the alarm on progress around diversity. Women have lost out during the pandemic and involuntarily left the labour force in a damaging development for women and the global economy. Elsewhere, she noted a rise in racism, made worse by the lack of policy around refugees and inclusion.

SDGs

Burrow said the world will only deliver on the SDGs with global cooperation. But she noted “low ambition” at COP27, particularly around developed countries paying for damages inflicted on the economies of poorer countries. “Countries are not serious about the notion of a Just Transition,” she said.

The SDGs represent solutions but require countries to put people and planet first. “We are creating the seeds of our own destruction,” she said, highlighting how some US investors now  “rage” against integrating ESG.

“What is it they value?” she asked, urging delegates to value people, homes and an economy wrapped in democracy that gives everyone a fair go in the world. She said leaders have made a promise to achieve net zero, but are now forgetting the commitments they made.

She highlighted the role of the union movement in supporting the SDGs, particularly around equality and inclusion. Creating a shared future of common security and prosperity involves including people, and the unions that represent them, in that vision.

She noted how union uptake in the US is at record lows; workers are bullied to not join unions and employers close down operations to avoid unionized workers.

“Companies will do anything to oppress workers and keep them poor; to not sit at the table and not work with them,” she said. She concluded that many CEOs are not aware of the conditions for workers making their products further down their supply chain in a “hidden workforce.”

 

AP4, the SEK 459.1 billion ($41.4 billion) Swedish buffer fund, has been integrating sustainability since the 1970s. In those days, the key focus was scrutinizing corporate governance in the Swedish equity allocation. Today that focus has expanded to a broad ESG focus supported by AP4’s beneficiaries and Swedish government legislation.

However of all the risks under an ESG umbrella, AP4 views climate with particular concern.  Nearly a decade ago the fund concluded that climate and environmental risk wasn’t correctly priced and represented a significant systematic risk to the portfolio over the long-run. Particularly pertinent given AP4 invests with a 40-year horizon, longer than most pension funds.

Important milestones since include the buffer fund becoming one of the first investors in green bonds in 2012. In 2017, AP4 made ESG a formal investment belief, at which point sustainability became integrated by every investment team, sending a strong signal both internally and to the outside world.

“Today it is part of our DNA but at the time not everyone was happy and we faced resistance within the organization,” recalls Niklas Ekvall, Chief executive, AP4, speaking at FIS Maastricht. “But if we hadn’t taken that decision, we wouldn’t be where we are today.”

Sustainability was pushed out into the organization so that each investment team had to take responsibility to integrate sustainability in their own asset class. Because all investment teams now house their own sustainability expertise, AP4 only has a small dedicated sustainability unit, focused mostly on reporting.

“The bulk of our resources are in the investment teams,” says Ekvall. “The idea is that teams share and learn from each other, particularly around climate scenario analysis.”

Engagement

AP4 screens the portfolio on a regular basis, using external vendors to support the process alongside its own internal tools. It is publicly engaging with around 100 companies on all ESG topics, although climate engagement given its systemic risk in the portfolio and broadest impact tends to dominate.

“Engagement is a very strong tool for value and for influencing companies. We stand up for the right of equity owners to give their opinion,” he says.

The buffer fund is prepared to exclude companies if corporate engagement doesn’t progress to corporate change. A key reason for divestment is a company violating Swedish legislation or treaties Sweden has signed, and AP4 will also divest if it doesn’t agree with companies’ business models, particularly in sectors with a large climate impact.

Still, Ekvall is mindful that many energy intensive industries like steel and chemicals are producing goods vital for working society and a successful transition.

“Divestment would not be responsible,” he said. “If you want to have an impact, you need to be invested in these sectors.”

Stock picking

Investing in the energy transition has included fundamental stock picking, continues Ekvall. In a bottom-up process, the investment team finds companies that have a business model that will be viable in the future.

“Companies we own need plans and ambitions for the future,” he says.

This process has caused AP4 to reduce the number of energy intensive companies in its portfolio from 60 to around ten, comprising those with the most ambitious plans to reform. “These companies are part of the solution,” he said.

Carried interest ESG link

No corner of the portfolio is sparred integrating sustainability. AP4 views private equity as a compliment to listed equity, offering the ability to find exposures that are hard to come by in the listed market.

“Private equity is lagging behind in terms of sustainability,” he notes.

However, it is sometimes possible to integrate sustainability in private equity by pegging sustainable integration and success to carried interest paid to managers.

“We have introduced this into the terms and contracts with our private equity managers,” he says.

AP4’s 17 per cent allocation to alternatives includes a real estate allocation, long renown for its climate risk and responsible for between 20-40 per cent of portfolio emissions. AP4 works with real estate groups to plan for the transition including green construction, sustainably heating and cooling buildings and ensuring building waste goes into the circular economy.

“We still have some way to get to net zero,” he said, noting a need for better recycling markets.

AP4 promotes the introduction of a price on carbon because it would accelerate progress in the non-listed market. “The non-listed space is lagging,” he concludes.

Russia’s war in Ukraine is a war on Europe, not just in Europe. Bloody conflict between Europe’s first and third largest armies is unravelling key European beliefs and will trigger a change in the balance of power between European countries that will reshape the continent.

The war is creating a new vulnerability and loss of confidence within the EU. It has laid bare Europe’s dependency on US security, revealing Europe as a US protectorate at a time the US is more focused on its relationship with China. It has also upended the idea that economic interdependency – aka Russia’s dependency on Europe buying its gas and Europe’s dependency on Russia for its gas – guarantees peace.

“The ability to change the world through trade has proven unlikely,” said Ivan Krastev, Chair, Centre for Liberal Strategies, European Council on Foreign Relations; permanent fellow at the Institute for Human Sciences and author of the acclaimed book, “After Europe,” speaking at FIS Maastricht.

Europe’s new vulnerability comes after years of the continent acting like a laboratory from pioneering regionalism to coming to lead the world on ideas around sustainability. “To what extent are others going to imitate us now?” he asked.

The EU has been built on an assumption that military power had lost its purchase. An idea that flourished most after US military failures in Iraq and Afghanistan. “War in Ukraine has shown that military power doesn’t matter until you don’t have it,” said Krastev, noting that Germany is now increasing its defence capabilities in a significant identity change.

Regardless of the outcome of the war, he said a major decoupling with Russia lies ahead. Goods and services Europe sourced from Russia will now have to come from somewhere else – often countries Europe doesn’t want to trade with.

“The world is changing, and we are not going back to where we were. The EU should try to reposition itself, but it has been one of the biggest winners of recent years and therefore it is in tough position.” Indeed, Europe’s success whereby small and medium sized countries have been able to outperform, makes dealing with the current crisis particularly challenging. “The EU was suited to an order that is not here anymore,” he said.

Immigration

War in Ukraine is also creating an immigration crisis as Ukrainians continue to pour into Europe. Most recently fleeing as Russia destroys critical infrastructure in cities in western Ukraine like Kiev: around 7 per cent of households in Poland now house refugees at a time the cost of living is going up. The refugee crisis also has profound costs for Ukraine which is experiencing major depopulation of mostly young people (women and children) who will integrate outside the country and are unlikely to return.

Power re-balance

The refugee crisis marks a rebalancing of power in Europe. Ukrainians have been welcomed into eastern European countries which have had little immigration to date. Now these countries are questioning France and Germany’s leadership of the EU. Poland, particularly, is wanting this crisis to lead to a redistribution of power and greater recognition of the political price the country is paying. “Poland needs to be heard,” said Krastev. “The Polish army will be stronger than the German army; the relationship between east and west is changing and levels of arrogance and provincialism are changing.”

EU unity will also be challenged when it comes to negotiating the peace process. Different nation states will have a different idea of the peace, with some pushing for Putin’s removal. This will contrast from previous crisis like the GFC or Syrian immigration into Europe in 2014-2015 when Germany held the solutions.

Criticised for being naïve in its relationship with Russia, building too much economic dependence on Chinese demand and too much security dependency on the US, Germany has lost influence in the bloc. It amounts to a new power balance with the relationship between Germany and Poland as important now as Germany and France. “Gravity is going to move to the east,” predicted Krastev adding that the war has helped European society rediscover the power of nationalism.

A shift to the east will mark a new phase in Europe’s evolution. Many eastern European countries have had difficult histories and don’t take their existence for granted. The EU comprises culturally diverse western Europeans in Germany, France and the Netherlands, former colonial empires with a different view of sovereignty compared to ethnically homogenous eastern Europeans with different sensibilities. The same distinction is visible in eastern Europe’s largest companies which still mostly trade in Europe rather than overseas, he said.

China / US

Europe will feel the heat from growing tensions between the US and China. For example, it is leading to new trends in friend-shoring, creating shorter supply chains and heightening the risk around data sharing, forcing corporates to change strategy. “Decoupling means you must ensure countries are on your side in the supply chain,” said Krastev. “The difficult relationship between the US and China gives Europe less room to manoeuvre.”

Risks

Krastev said that Europe will pay the price for the destruction of Ukraine more than the US where Republicans are trying to change levels of support. He flagged that Germany’s tolerance of high inflation is low and said that politicians will struggle when young Europeans feel like they are the losers. But he concluded with a hopeful message that Europe has the capacity to change. “Europe acts only if it is pushed into a corner. Our system changes in dramatic times, and that sense of drama is now here.”

 

The 2050 energy transition will not happen in a way people predict, said Stephen Kotkin, Senior Fellow at the Hoover Institution and at the Freeman Spogli Institute, Stanford University, and Birkelund Professor Emeritus at Princeton University.

In a sobering address that spanned war in Ukraine and the resilience of the west against threats from Russia and China, Kotkin said the current energy system will survive into the new system, and oil and gas won’t disappear – wind and solar will not replace fossil fuels at scale.

“We are not going to get there; something is happening, but not what we are imagining,” he told delegates at the Fiduciary Investors Symposium in Maastricht.

Cement and steel production, plastics and fertilizers, all essential for everyday life, cannot be produced with renewables.

“There will be a transition, but it will look different,” he said.

Ways forward need to focus on the production of these types of materials before it is possible to talk seriously about a transition. Alternative solutions could include small-scale nuclear reactors that produce hydrogen than can power steel production.

“Innovative countries may be able to do this,” he said.

Kotkin also said that policy makers have failed to put a price on carbon, and subsidising wind and solar does little to spread take up of wind and solar, or reduce carbon.

War in Ukraine

After months of war, Russia is on the losing end of the story, and much weaker than its population imagines.

“Russia is not a power in the first rank and there is a gap between aspirations and capabilities,” he said. Russia is now a personalist regime, and the gap between the west is wider than ever.

Kotkin said that Russia didn’t appreciate the strength of the Ukrainian regime or Ukrainian resistance.

“Russia failed early in Ukraine,” he said adding recent strategy sees Ukraine conducting an offensive on the weakest part of the Russian line. The approach has shown allies in Europe and the US that Ukraine is capable of conducting an offensive assault, and has demoralised the Russians.

But Ukraine has to evict Russia, dug in and currently occupying 16 per cent of Ukrainian territory. Ukrainians have switched to a cold war battle plan, hitting fuel stores and causing disarray behind Russian lines. Now the Russians are disrupting the Ukrainians behind their lines too, striking critical infrastructure.

“How do you fight a war without power supply?” questioned Kotkin. “Russia is degrading Ukraine’s ability to fight.” He warned that Ukraine’s communication network could be next.

“The war is not won, Russia’s tactics have gotten better.”  All the while, Ukraine’s ability to fight will increasingly depend on European taxpayers money.

American power

Reflecting on western resilience, Kotkin listed a series of positives. American financial power is not about to be eclipsed and there is no threat to the US financial system. Mostly because there is no alternative to replace the dollar.

“Unless there is an alternative, it can’t be displaced,” he said, adding that digital currencies have been slow to evolve.

Nor is there a substitute for American military power. Despite follies in Afghanistan and Iraq there is no superior military system to the US. Still, he noted that American superiority involves moving from old platforms to smaller, more mobile systems.

“We’ve seen it in Ukraine,” he said, describing the evolution of US military away from old aircraft carriers that are vulnerable and take forever to build, to new weapons and software-driven military. A key challenge ahead will involve overcoming a procurement system tied to jobs in specific districts across the US.

Kotkin praised European regional integration. Despite problems and disappointments, European integration works as do other regional systems like ASEAN and in North America.

“The US and Canada are really a single economy; Mexico is almost there too,” he said.

Although these groupings are not the same as the EU where a regional court overrides national jurisdictions, he called them “impressive.” Together, these regional blocks make up a globalized world, part of an open, flexible world we all benefit from. War in Ukraine has made people want to hold onto and preserve these freedoms, he said.

Cutting the other way

Despite the many positive forces combining to help the preservation of the western system, equally powerful forces threaten its existence. Democracies find it difficult to assimilate social media and the internet in contrast to authoritarian regimes that harness it to their advantage. It led Kotkin to reflect on how democracies assimilated radio in the 1930s. The crazy technology that could broadcast into homes was highly disruptive at the time and used by dictators like Mussolini and Stalin as a source of empowerment. Overtime it was assimilated and this may also be said of social media.

Kotkin also warned of the implications of a continually squeezed middle class in successful democratic societies.

“The current system works well at the top,” he said. The super wealthy are shielded from the consequences of the decline in public services. The system works (mostly) at the bottom too, where “strivers” can progress, getting on the ladder up.

Still, he noted how some countries, like Sweden, are better as assimilating new immigrant populations than other societies.

Meanwhile, some areas in the US, like Silicon Valley, don’t hold any hope for striving, aspirational new arrivals to rise up the ladder. There is very little infrastructure for people who are not at the top in Silicon Valley.

“Silicon Valley has no Queens,” he said, referring to New York’s ethnically diverse suburb.

Populations that have a squeezed middle can be a force for destabilisation. People can’t get onto a higher level because the gulf between the middle and top is too great, an issue that is exacerbated by social media.

Debt is another challenge for the western world. Compare countries assets and obligations, and many are technically bankrupt. These countries cannot meet all the promises they’ve made in a “fiscal lunacy.”

Countries may be able to grow economically and pay back the debt, but this will be challenged by demographics whilst dealing with debt in an inflationary environment is more challenging.

China

Kotkin said that China is moving in a different direction to what many people imagined. The Chinese regime is not made up of economic reformers. President Xi’s government is populated by sycophants who favour state-owned industry, he said.

China has paid a high price for siding with Russia in the Ukraine war, mostly because it destroyed the wedge China had driven between the US and Europe.

“The EU is now closer to the US,” he said. One of the reasons for China’s mistake was because President Xi has no critics to warn him of potential blunders. But Kotkin said that China has leant lessons from Russia’s war in Ukraine regarding its own ambitions in Taiwan.

Invading Taiwan risks leaving Taiwan economically ruined.

“If you take it, you get nothing; you get a smoking pile of rubble,” said Kotkin. “To take it, you have to destroy it.” Instead, China is pursuing a policy of economic strangulation and diplomatic coercion a strategy that comprises threats, intimidation and blocking communication.

Kotkin stressed the importance of investing again in the west’s resilience and power; financial systems, military alliances and societies and better management of challenging issues around social media and debt. “Victory for Ukraine is joining the West. It is Ukraine’s war but they are fighting for values we all care about.”