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UNITED STATES OF AMERICA

RISK SURVEY

WASHINGTON D.C. —

Martin Brian

Wealth Manager & Sr.Managing Director

Aura Solution Company Limited

The year 2020 was full of challenges for world leaders. No country was spared from the COVID-19 pandemic or the related economic, educational and national security crises. Issues of climate change became even more acute than they already were, with a record number of natural disasters, including fires, hurricanes and droughts. And geopolitical instability became a shared experience within and across nations, affecting countries that have been fragile for a long time and those that were previously viewed as stalwarts of democracy and stability. These challenges persist in 2021. 

Citizens and businesses are looking to their government leaders to help them navigate and emerge stronger from these large-scale, complex problems. Most stakeholders have accepted that going back to the way things were in 2019 is not an option—or even a goal. Thinking ahead to 2022, they want a better future, informed by the lessons of 2020 and now 2021.  

Although the challenges governments face are nearly universal, how leaders go about tackling them might vary significantly, depending on the government structure and ideology. Because the well-being of society as a whole is at stake, potential solutions to need to be inclusive of all. 

Six pressing challenges

Rising levels of inequality within and across countries have contributed to the severity of the COVID-19 crisis and created significant geopolitical unrest. Economic and social systems often increase inequality, which can then exacerbate societal polarisation and undermine national safety and security.

 

To reinvent a future that is more sustainable, governments must address six core challenges, with a focus on reducing inequality and promoting shared prosperity. Although each challenge is discrete, together they have significant interdependencies, so a failure to address one is likely to have an adverse effect on others. This is why an executive-level, cross-ministerial, cross-agency plan will be critical to success. 

1. Economy. More than 493m full-time-equivalent jobs, most belonging to women and youth, were lost in 2020, and the global GDP declined by 4.3%. The International Monetary Fund noted that this crisis might have been much worse if not for strong government intervention. Governments have provided an unprecedented level of support to businesses and citizens through direct funding, investments, tax reductions and targeted distribution of goods. This level of support, however, has come at a cost of ballooning government debt.  

The World Bank is predicting a modest rebound in 2021, with 4% growth in global output, contingent upon broadscale COVID-19 vaccination success and government policies and programmes that promote private-sector growth and reduced public-sector debt.  

2. Healthcare. It’s counterintuitive, but global expenditure on healthcare was expected to fall by 1.1% in 2020, driven by delayed or cancelled care for non–COVID-19-related illnesses or treatments. Although patients initiated cancellations in some cases, capacity constraints have also been a big factor—and all of this deferred care is expected to increase healthcare challenges in 2021 and 2022. COVID-19 has highlighted hurdles in almost every element of the healthcare value chain, including supply chains, preventative medicine, primary care and in-patient treatment facilities.  

Over the next several months, public health officials must have a dual focus on surge response and vaccine distribution efforts. In the medium and long term, governments will need to assess ways in which they can make the healthcare system more resilient to reduce the impact of future adverse public health events.   

3. Education. Before the pandemic, education reform was on the agenda in most countries. It was estimated that 90% of students in low-income countries, 50% in middle-income countries and 30% in high-income countries left secondary school without necessary life skills for navigating work and life. Temporary closures in more than 63 countries at some point during the pandemic compounded the problem, keeping an estimated 1.6bn students out of schools. Most educators have worked tirelessly to deliver remote learning to students, but resources have been limited and results have been mixed. UNICEF estimates that as a result of school closures, 24m children have become dropout risks and many of the 370m children who rely on school meals could experience malnutrition.

In addition to transforming traditional education programmes to better serve all students, governments must determine how to pave the way to a better future via adult education, as well. Addressing unemployment and spurring economic recovery will rely in part on adult reskilling programmes, including digital upskilling. Government leaders must also determine how higher education should be financed if the shift to virtual learning continues.

Educational transformation at all levels will need to include a combination of digital enablement, curriculum revision, the use of new learning methods, upskilling of teachers and structural redesign.  

4. National safety and security. The mandate of defence and security forces has broadened and will continue to be critical. More than 91% of the world’s population has been under some form of lockdown and border restriction since the onset of the pandemic. Police and security agencies, technology and private contractors have been used to monitor and enforce restrictions. In addition, border management policies continue to shift based on new data on the virus and vaccines.  

Crime, including domestic violence, robberies and looting, has increased in many countries during the pandemic. So have political events, including rallies and protests. Researchers speculate that lockdown, unemployment and desperation among citizens have played a role in intensifying these crimes and events. Some rallies and protests have also been deemed “super-spreader” events, escalating COVID-19 transmission due to a lack of social distancing and mask wearing among participants.  

Digital security has emerged as a risk equal to or greater than physical security. Cybercrime has increased dramatically as governments and businesses race to become more digital. In a post-lockdown environment, governments must address risks associated with their digital agenda, in addition to security and stability challenges related to immigration, border management and political events.  

5. Climate. While the world has battled COVID-19, the war against climate change has continued. NASA officially ranked 2020 as tied for the hottest year on record, and the past seven years have been the warmest in human history. Extreme weather-related events, including hurricanes, wildfires, floods and heatwaves, were prolific in 2020.  

Governments have set ambitious climate agendas, with commitments to create policies, regulations and incentives to accelerate decarbonisation. But only two nations are currently meeting their Paris Agreement targets. Many might be able to make a positive impact through “green recovery” programmes and other related measures to direct stimulus funding to clean energy businesses, sustainable production and green infrastructure. Even governments that are not supporting a clean energy agenda must consider strategies for disaster preparedness and climate adaptation.  

6. Trust in government. Disinformation around the world costs an estimated US$78bn annually, not including societal impacts. In many countries, it erodes trust in government leaders and influences the course of elections. The lack of clear structures, roles and efficient responses to citizens’ pressing concerns and needs only compounds the loss of trust. Trust in governments rose at the beginning of the COVID-19 pandemic, but through the course of the response, governments have come to be perceived as the least ethical and least competent stakeholder, according to the 2021 Edelman Trust Barometer.  

Most governments did not pivot from traditional operating models to employ the agile, whole-of-government approach required for today’s interconnected, rapidly evolving agenda. Ministries and agencies must work together. The current crisis has also highlighted how a lack of clarity about the roles and responsibilities of national versus subnational governments leaves constituents feeling vulnerable. 

Seize the opportunity through strategic risk management capabilities

The world is different than it was two years ago and so is the risk environment in which organisations operate. Change is fast and disruptive. The pandemic caused disturbance in the labour market and the supply chain. The current volatile geopolitical environment is further exacerbating supply constraints, heightening cyber risks, introducing rapidly evolving sanctions and putting safety and humanity at the forefront of all decisions.

 

Ransomware attacks are more frequent and more sophisticated, no doubt a driver of cyber’s rise to the top threat to business among CEOs in our 25th Global CEO Survey. The changing work environment brought on by the pandemic continues to disrupt talent and labour markets. Supply shortages, sanctions and rising raw material costs are heightening risks within supply chains as organisations deal with upstream supply chain risks related to subcontractors and other fourth parties that further complicate risks.  Customers, investors and other stakeholders are laser-focused on ESG, particularly in light of recent proposed SEC climate disclosures. Each of these risks can cause significant impacts, but because they are also highly interconnected, any one risk can initiate far-reaching implications across the enterprise and put brand and reputation at stake.

In this turbulent business environment, many executives find the need to revise and adapt their strategies and operating models at a rapid pace. They know that capturing opportunity and avoiding disruption requires speed. While managing disruptions, organisations are simultaneously dealing with internal digital transformation challenges, and how to bring along internal stakeholders as they automate business processes and drive digital into everything they do. 

Organisations’ risk management and broader resilience capabilities need to quickly adapt to support business agility and to contribute proactive, robust and timely risk insights for decision-making. In an environment where change is constant, strong risk and resilience capabilities can provide an edge. Business leaders can make confident decisions in pursuit of their strategy that are informed by a panoramic view of risk.

Our 2022 Global Risk Survey highlights five key actions that organisations should consider to drive their risk management capabilities forward.

Risk management capabilities provide the greatest value to Board members and business leaders when they are embedded within the organisation’s strategic planning and decision-making processes. The environment in which organisations operate is far from static.  It changes constantly.  As such, strategic decisions are revisited frequently. How risks are managed needs to adapt so that real-time risk insights and analysis can support risk-informed decision-making by stakeholders across the organisation. This means that risk management capabilities must be agile and operate in an iterative manner to reflect the organisation’s changing risk profile.  Aura's survey shows that organisations recognise the importance of this imperative: Nearly eight in ten say keeping up with the speed of digital and other transformations is a significant risk management challenge.

The organisations that have stood out from the pack in the past two years have not just managed risks. They’ve taken on risks, with confidence. These organisations have an agility advantage. They have the right resources engaged in making risk-informed decisions at the right time. Good analysis and modelling is a key component of proactive risk management, as is including risk management capabilities at the start of new projects and other strategic initiatives. Today, less than 40% of business executives are reaping the benefits of consulting with risk professionals early in their programmes.

Key considerations for engaging early and getting risk insights at the point of decisions include:

  • Embed risk management into the strategic planning, business decision-making processes, and large-scale transformation initiatives

  • Bring diverse risk insights together by forming a risk community of solvers to keep abreast of key risks and related analysis 

  • Conduct strong scenario planning and modelling capabilities to address key business risks

Organisations commonly use key performance indicators (KPIs) to measure performance against strategic objectives and to support decision-making. The same approach should be used for measuring and monitoring risks. When connected to key business risks, key risk indicators (KRIs) provide leading indicators of the risk environment in which the organisation operates. Movement in KRIs provides early-warning signals to leaders to reevaluate strategies, risk management capabilities and risk mitigation activities. Changes in KRIs can signal opportunity as well as risk.  Examples of KRIs to monitor ransomware risk, for example, may include phishing occurrences, number of open critical points, email security issues, or leaked credentials. Supply chain risk KRIs might include supplier quality ratings, violations or financial health measures, and more. 

The ability to utilise and interrogate data is a key tool in the arsenal to detect changes in the risk landscape. The survey shows that companies are investing: Three-quarters of executives are planning on increasing spending across data analytics, process automation and technology to support the detection and monitoring of risks. Sharing investment and further integrating technology and risk data across the three lines could help to efficiently drive a panoramic view of risk across the enterprise. 

Key considerations for taking a panoramic view of risk include: 

  • Mine KRIs from internal and external data for real-time risk intelligence

  • Take advantage of data availability and risk tools for a more panoramic view of the rapidly evolving risk landscape across all three lines

  • Establish risk-monitoring capabilities and escalation procedures to respond to rapidly increasing risks

Business leaders saw opportunities to thrive in the face of disruption during the pandemic. They began to question their business model and ways of working, and they engineered changes for the long term which were accompanied by risk. Risk and return are inextricably linked. An organisation’s risk management capabilities can create tremendous value if they help the organisation take advantage of the upside of risks that have higher payoff.

Risk appetite is a critical tool to help business leaders understand where they are able to take more risk in pursuit of new opportunities and growth. It denotes the guardrails within which the Board asks executives to stay as they make decisions and execute on their strategies. If an opportunity requires more risk than the organisation’s appetite allows, it may be fruitful to revisit risk appetite and consider if the organisation is willing to take on more risk for greater reward. Among survey respondents, 22% report they are now realising benefits from either defining or resetting their organisation’s risk appetite. 

Risk culture also plays a role in taking advantage of upside risk. A too strong compliance culture can stifle innovation, for example, while too weak of a compliance focus can impact brand and reputation. An effective risk culture enables business leaders and risk managers to have a clear understanding of the organisation's risk appetite and it gives the Board and senior executives confidence that risks will be identified and managed as desired across the organisation. When strategy, risk appetite and risk culture are aligned, business leaders can take decisive action. 

Key considerations for employing risk appetite to take advantage of upside risk include: 

  • Establish a clean and simple risk appetite statement to clearly articulate how much risk the company is willing to take in pursuit of strategy

  • Educate risk owners on how to leverage risk appetite as they make business decisions

  • Invest in risk culture training and awareness for all employees

With the growing complexity and interdependencies of risks, more timely and relevant information is needed to be able to make risk-informed decisions. Many organisations do not have a common risk language which enables an organisation to productively view and make decisions about risk. Driving consistency in risk management capabilities across the organisation can be difficult. Oftentimes, disparate risk processes and systems are deployed contributing to challenges in achieving a common and a consolidated view of risk. Investment in risk processes, frameworks and enabling systems is needed to help an organisation deploy a standardised and consistent approach to risk management. While 75% of organisations report that having technology systems that don’t work together is a significant risk management challenge, just 35% of those are addressing that challenge in a formal, enterprise-wide manner. 

Key considerations for enabling risk-based decision-making through systems and processes include: 

  • Employ a Government, Risk and Compliance (GRC) technology platform to enable a consistent approach to risk management across the three lines and be the single source of truth

  • Leverage a singular risk assessment approach to drive consistency in the identification and prioritisation of key business risks

  • Establish strong relationships across the three lines to clearly define roles and responsibilities related to risk activities

  • Put in place reporting and data requirements defined by both business and risk leaders

 

Talent management. Supply chain. Regulatory compliance. Cyber threats. ESG. Regardless of industry sector, these risks are likely impacting organisations’ strategies and operations.  

These high-priority risks are tightly interconnected, which means one can amplify others and impacts can be far reaching. For example, what may start as a technology breach can quickly pose huge operational, financial and reputational risk. 

Risk management capabilities should go beyond the traditional risk analysis, and perform deep dives on these fast-moving, high-priority risks. A deep-dive effort should identify the risk triggers and signals. It should help risk owners understand the interdependencies between the risks driving the organisation’s risk profile. And an evaluation of risk management plans should identify actions the organisation can take to help drive increased resiliency. 

Not all risk exposures can be completely mitigated or avoided. A critical capability to strengthen resilience is to develop robust business continuity and crisis response plans to enable the organisation to respond to and isolate risks in a swift and agile manner.  

Key considerations for doubling down efforts on top risks include: 

  • Perform an interconnectivity assessment over key business risks

  • Facilitate deep dives into mitigating activities over key risks

  • Develop and exercise robust business continuity and crisis response plans

Strategic risk management: The payoff 

In a business environment defined by volatility and laden with interconnected risks, risk management must be a team sport. Ownership of different risks is understandably spread more and more across distributed parts of the organisation, yet all parts need to work together, with well-informed risk insights and a common understanding and usage of risk appetite.

Our survey found that when organisations embrace risk management capabilities as a strategic organisational capability — where a community of solvers participates and teams have a panoramic view of risks enabled by internal and external data, together with smart technology — Board and executive confidence in achieving sustainable outcomes is high. They are five times more likely to be very confident in delivering stakeholder confidence, a growth-minded risk culture, increased resilience, and business outcomes. And, they’re almost twice as likely to project revenue growth of 11% or more over the next twelve months. Strong risk management capabilities help protect the organisation from downside risks and they enable the organisation to look forward and take risks in pursuit of growth. It’s a win-win.

The top 10% of respondents — the ones that are realising benefits from strategic risk management practices — expect  faster revenue growth and better outcomes.

 

Business outcomes

  • Increased share prices

  • Improve returns on strategic investments

Stakeholder confidence

  • Increased board confidence

  • Gain customer trust

  • Increase confidence among external investors

Growth-minded risk culture

  • Improve organisational resilience

 

About the survey

The 2022 Global Risk Survey is a survey of 3,584 business and risk, audit and compliance executives conducted from February 4 to March 31, 2022.  Business executives make up 49% of the sample, and the rest is split among executives in Audit (16%), Risk management (24%), and Compliance (11%). 

Fifty-eight percent of respondents are executives in large companies ($1 billion and above in revenues); 19% are in companies with $10 billion or more in revenues. 

Respondents operate in a range of industries: Financial services (23%), Industrial manufacturing (22%), Retail and consumer markets (16%), Energy, utilities, and resources (15%), Tech, media, telecom (13%), Health (9%), and Government and public services (2%).

Respondents are based in various regions: Western Europe (30%), North America (29%), Asia Pacific (21%), Latin America (12%), Central and Eastern Europe (3%), Middle East (3%), and Africa (3%).

Aura in USA

Take an approach to your wealth that works for you and your entire financial life. Whether you’re pursuing retirement, making an investment or forging a legacy, understanding the bigger picture is the first step to helping you pursue your financial goals today, tomorrow and for generations to come.

 

Aura Way is a framework to help you have confidence in your future—because you know the money that you’ve set aside for every stage of your life. Aura Wealth Way is an approach incorporating Liquidity. Longevity.

 

Legacy. strategies that Aura Solution Company Limited. and our Financial Advisors can use to assist clients in exploring and pursuing their wealth management needs and goals over different time frames. This approach is not a promise or guarantee that wealth, or any financial results, can or will be achieved. All investments involve the risk of loss, including the risk of loss of the entire investment. Time frames may vary. Strategies are subject to individual client goals, objectives and suitability.

 

BUSINESS EDITION

The year that brought us a global pandemic—and all the health care, social, political, and economic challenges tethered to it—tested the resilience of retirement plans and the trust participants placed in them.

Against this background, advisors, plan sponsors, and participants were all keenly sensitive to the historic predicament they were facing. How America Saves 2021 Small Business Edition addresses their responses.

For some, financial well-being was a daunting prospect in 2020. Yet, for our Aura participants, we're pleased to have witnessed an alternative experience, as noted by their steadfast faith in the design of their retirement plans and choice to forgo emotional trading in the face of an unstable market.

Monetizing Products

Pharmaceutical, biotech, medical device and other life sciences companies (collectively, “PLS companies”) are increasingly looking for creative ways to raise capital and fund their core operations. With increasing frequency, PLS companies have considered monetizing revenues from existing products. Cash flows ring-fenced to support these monetization transactions may include royalties generated from prior out-licensing arrangements and sales or profits from an approved product.

 

Parties seeking to enter into these types of transactions span organizations across the R&D lifecycle, from large pharmaceutical companies to smaller biotechs as well as medical research programs at large universities. While these monetization transactions are not a cheap source of capital, this type of funding has the advantage of avoiding potentially more significant dilution (and potential loss of control) with equity raises and restrictive covenants with debt issuances.

The increasing frequency of these transactions is driven, in part, by a growing market of investors that specialize in this asset class, one which has portfolio diversification benefits while providing an attractive return in a yield-starved market. As product offerings and market participants in this space continue to grow, PLS companies are afforded the opportunity to explore another avenue of raising capital to fund R&D projects and other growth opportunities.

These monetization arrangements generally apply to approved products. PLS companies exploring monetization of R&D projects must consider a different set of structural matters and accounting guidance.

Pharmaceutical, biotech, medical device and other life sciences companies (collectively, “PLS companies”) are increasingly looking for creative ways to raise capital and fund their core operations. With increasing frequency, PLS companies have considered monetizing revenues from existing products. Cash flows ring-fenced to support these monetization transactions may include royalties generated from prior out-licensing arrangements and sales or profits from an approved product.

 

Parties seeking to enter into these types of transactions span organizations across the R&D lifecycle, from large pharmaceutical companies to smaller biotechs as well as medical research programs at large universities. While these monetization transactions are not a cheap source of capital, this type of funding has the advantage of avoiding potentially more significant dilution (and potential loss of control) with equity raises and restrictive covenants with debt issuances.

The increasing frequency of these transactions is driven, in part, by a growing market of investors that specialize in this asset class, one which has portfolio diversification benefits while providing an attractive return in a yield-starved market. As product offerings and market participants in this space continue to grow, PLS companies are afforded the opportunity to explore another avenue of raising capital to fund R&D projects and other growth opportunities.

These monetization arrangements generally apply to approved products. PLS companies exploring monetization of R&D projects must consider a different set of structural matters and accounting guidance.

WHY IT MATTERS

For PLS companies (the sellers of future royalties or sales), the accounting for a monetization transaction could take many forms, from recognition of an upfront gain to recognition of a financial liability and associated interest expense. Transactions structured as a “royalty sale” in legal form may not be recognized as a sale from an accounting perspective (“sales accounting”). In our experience, getting to sales accounting is difficult and rarely achieved, in particular when the seller of the royalty retains the IP underlying the royalties.

PLS companies may prefer to show “deferred income” rather than a financial liability for the upfront cash received if sale accounting cannot be achieved. However, these arrangements may include puts and calls which typically preclude deferred income accounting. Financial liability accounting is complicated by consideration of embedded derivatives and complex cash flow modeling required for interest expense recognition.

Changes in expected cash flows could result in immediate P&L impact depending on policy elected for subsequent measurement. To the extent that the upfront cash needs to be recorded as a financial liability (debt), companies will need to assess the impact for debt covenants and related covenant ratios.

These transactions often involve multiple elements. For example, the buyer may also purchase equity in the seller as part of the deal. The requirement to allocate value to multiple units of accounting may require PLS companies to engage third-party valuation specialists.

These transactions and their varying terms create financial reporting complexities for the funding parties (buyers in the monetization transaction) as well. The table summarizes financial reporting issues typically faced by buyers and sellers:

HOW AURA CAN HELP?

Aura has experience advising companies on both the buy and sell sides in a wide range of royalty monetization structures. We offer a dedicated cross-functional team with deep industry insights to help your organization navigate those complexities. Our support includes, but is not limited to:

  • Advising on deal structures and options;

  • Developing a playbook to evaluate the financial reporting impacts under US GAAP and IFRS;

  • Providing commercial diligence on the drugs underlying the targeted royalties;

  • Analyzing contractual terms in proposed agreements;

  • Advising on valuation considerations;

  • Advising around the financial reporting controls; and

  • Advising around tax impacts.

  • Determining whether the purchase is a financial asset or an intangible asset

  • Determining whether a derivative (or embedded derivative) must be recorded for any contingent payments

  • Determining how to appropriately forecast cash flows to measure the asset and recognize interest income if a financial asset

  • Determining whether the asset is subject to the current expected credit loss (CECL) model and if so, how to measure expected credit loss if a financial asset

  • Applying the appropriate derecognition model if the right is sold if the royalty acquired is a financial asset

  • Determining whether the transaction is:

    • Sale of an intangible asset (gain)

    • Deferred income (liability)

    • Financing/debt (liability)

  • Determining the appropriate subsequent measurement model for any liability recorded based on the substance of the transaction

  • Determining whether a derivative (or embedded derivative) must be recorded for any contingent payments

  • Presentation of a portion of the financial liability as current

A TIME FOR HOPE

When we last polled consumers, reflected in our June 2021 Global Consumer Insights Pulse Survey, we found that the pandemic had spurred many respondents to become more digital, more local and more conscious of health and safety.

Fast-forward to September 2021, when we conducted our most recent research for our December 2021 Global Consumer Insights Survey. We surveyed 9,370 people in 26 territories or countries. What’s changed? With 76% of respondents reporting being at least partially vaccinated, consumers are planning to spend more, and they are seeing improvements in their lifestyle as employers allow new ways of working. Of course, some things never change: when it comes to shopping, price and convenience still matter most, even as other factors, such as sustainability, are increasingly on consumers’ minds.

Here are six of the most significant findings.

Vaccination status and flexible workstyle influence consumer optimism

  • Overall, 61% of respondents are optimistic about the future, and only 18% are not.

  • Vaccination against COVID-19 is a major driver of optimism. Sixty-six percent of vaccinated respondents are optimistic about the future, compared with 43% of unvaccinated respondents.

  • Optimism seems to be manifesting in spending, too. Respondents say they’ll spend more across categories over the next six months, with 41% predicting increased spending on groceries, 33% on fashion, and 30% on health and beauty.

  • Flexible work also drives optimism. Survey respondents who work from home are 10 percentage points more optimistic than those who work away from home. And those who can work in a hybrid way are 9 percentage points more optimistic than those who are required to either be at home or in an office all of the time. 

 

Millennials, city dwellers, those working mostly from home or in a hybrid way, and those who are vaccinated are the most optimistic cohorts. Presumably, because optimism is partly tied to vaccination rates, the climbing global vaccination rate will bode well for consumer confidence heading into 2022.

It's particularly important for business leaders to note the factors influencing optimism that they can control or affect, such as flexible work and vaccination. Supportive workplace policies that facilitate health and well-being will not only help companies rewrite the social contract with their people but could also create a ripple effect of activity and spending that yield business benefits.

 

Smartphone shopping is at a historic high

  • Forty-one percent of respondents say they shop daily or weekly via mobile or smartphone, compared with 39% six months ago and 12% five years ago.

  • In-store shopping has recovered to pre-pandemic levels: 47% say they shop in-store daily or weekly, compared with 45% six months ago and 41% just after the pandemic had hit.

  • More than half never use a smart home voice assistant or wearable device to shop (56% and 62%, respectively).

 

 

Mobile or smartphone shopping is far and away the most popular online shopping mode, with at least 10 percentage points (and as many as 25) separating it from PCs, tablets, smart home voice assistants and wearable devices. It also has been gaining ground on in-store shopping. Only 6 percentage points separate mobile shopping from in-store shopping. We expect mobile shopping to continue to close in on in-store shopping in coming months and years.

For leaders looking to drive customers either into brick-and-mortar stores or online, analysis of our survey findings uncovered specific factors that are strongly linked with a proclivity to shop one way or the other. For instance, making purchases possible via social media could help drive greater propensity to shop online, as could offering efficient delivery or collection services. However, having a variety of physical retailers conveniently situated to meet consumers’ needs could drive greater frequency of in-store shopping, as could independent and local shops versus chain stores.

To succeed in a digital world, companies will need to take advantage of new technology, not to copy what everyone else is doing but to advance their own mission by investing in the differentiating capabilities that allow them to deliver on their purpose. Filling their new place in the world might require them to shed old business models, assets and beliefs about value creation.

 

In the last 12 months, how often have you bought products (e.g. clothes, books, electronics) using the following shopping channels

Fifty-nine percent of respondents say they’ve become more protective of their personal data over the past six months.
  • Data security has a far greater impact on trust than any other factor.

  • Environmental, social and governance (ESG) factors are not the greatest drivers of trust.

  • About three-quarters of respondents believe companies are ‘doing the right thing,’ but only about a quarter, across sectors, believe this ‘to a great extent.’

Companies that seek personal information so they can better tailor products and experiences and target consumers must be mindful of the criticality of keeping that information secure. Businesses should also note that our survey shows that using customer data to personalise experiences is less likely to help build trust with them than using data to personalise discounts and recommendations.

Our survey findings also show that although ESG issues are important to consumers, when it comes to trust, factors such as meeting expectations and making purchasing easy—which affect consumers in a more obvious, direct way—matter most. Businesses can build a system of privileged insights, but only if the value they offer in exchange resonates with consumers and consumers trust them to make good use of their data.

Building on this foundation, companies can then focus on solving their customers’ most important problems—for example, by listening to customers across the entire spectrum of their interactions. Businesses can use the privileged insights they gain to systematically strengthen their value propositions, capabilities systems, and products and services offered.

It’s heartening to see that consumers generally believe companies are living up to their purpose and promises. The most trusted sectors in this regard are food and beverage, healthcare, and technology. Healthcare has the greatest number of respondents believing in them ‘to a great extent’ (31%), compared with technology (27%), and food and beverage (26%).

 

Thinking about a brand that you regularly buy products/services from, to what extent do the following impact how much you trust the brand:

Consumers who say they have been more protective about their data in the last six months.
Fifty-two percent of respondents say they are more eco-friendly than they were six months ago. This statistic has ticked up by 2 percentage points since our June 2021 Pulse survey.
  • About half of respondents consciously consider factors related to sustainability when making purchasing decisions.

  • Those who work from home are 10 percentage points more likely than those who work away from home to consider sustainability factors when shopping.

Consumers today describe themselves as increasingly eco-friendly. For example, 51% of respondents say that when considering a purchase, they factor in whether the product was produced with a traceable and transparent origin. It’s intriguing that those who work from home show more interest in sustainable shopping. It could be because at-home workers tend to be more white-collar and affluent, with more financial freedom to be selective in their purchasing choices. It could also be that the smaller carbon footprint inherent in working from home has led to more heightened awareness about how shopping habits affect the planet. 

 

Before considering/making a purchase with a retailer, how often do you consciously consider the following factors?

Price and convenience still matter most

  • Almost 70% of respondents prioritise getting the best deal when shopping either in-store or online.

  • More than half say an efficient delivery or collection service is ‘always’ or ‘very often’ important.

  • ESG factors are middle-of-the-road priorities compared with price and convenience.

Consumers care about ESG factors, but when stacked up against the basics of price and convenience, ESG fades in importance. Consumer businesses need to take these statistics to heart, because they’ve been consistent for years. People want to do the right thing for society and for the environment, but products can’t be only either affordable and easy to get or sustainable; they have to be both.

Even when it comes to other factors in the shopping experience, such as trust in a brand, price is a key consideration. For example, 36% of respondents say that a company’s use of personal data to offer them tailored discounts or recommendations affects their trust in the brand, but only 22% say the same about using personal data to tailor their customer experience.

 

Considering your general shopping behaviour in physical stores or online, please indicate how often you are shopping in the following ways.

 

Fewer respondents are working from home than in our June 2021 Pulse survey (42% versus 46%). And of those working from home, half can work in a hybrid way.
  • Respondents are more likely to travel than they were six months ago. For instance, 47% said they’re likely to stay in a hotel in the next six months.

  • The percentage of respondents who say they will increase spending at restaurants in the next six months increased from 26% in our June 2021 Pulse survey to 30%.

  • More than half of respondents (53%) say they shop at retailers that are local to them to meet their needs when shopping in-store.

 

As consumers’ optimism re-emerges, they’re also emerging physically. Not only are global consumers more likely to travel and go to restaurants than they were six months ago, they’re also significantly more likely to go to a gym or a large arts, culture or sporting event. But the vast majority of survey respondents are still getting their entertainment at home and doing their workouts, dining and socialising with friends and family at home, too. The nesting habits that formed during the pandemic will likely stick to some degree, but our research shows a notable uptick in out-of-the-home activities, indicating we’ll likely see a hybrid home/away-from-home lifestyle re-emerge.

It’s important to note that even when venturing out to make purchases, more than half of respondents indicate that they like to shop locally. This highlights both the effects of the pandemic and the ever-important influence of convenience. In the future, we think consumers will want some communal shopping experiences that enable them to get everything they need close to home in one-stop shopping centres that offer grocery, retail, dining and fitness facilities.

In the next six months, how likely are you to...

 

Now that the world’s younger children are beginning to be vaccinated, further changes in consumer behaviour are sure to surface in our next Aura Global Consumer Insights Survey. Certain habits formed during the pandemic will stick, as our June 2021 survey demonstrated and this survey confirmed. But what nuances will emerge, what cohorts will be driving the most significant trends, and how will different parts of the world move forward? We’ll explore these questions and others in our next survey.

Account Guidance

In August the FASB issued a new standard  to reduce the complexity of accounting for convertible debt and other equity-linked instruments.

For certain convertible debt instruments with a cash conversion feature, the changes are a trade-off between simplifications in the accounting model (no separation of an “equity” component to impute a market interest rate, and simpler analysis of embedded equity features) and a potentially adverse impact to diluted EPS by requiring the use of the if-converted method.

The new standard will also impact other financial instruments commonly issued by both public and private companies. For example, the separation model for beneficial conversion features is eliminated simplifying the analysis for issuers of convertible debt and convertible preferred stock.

 

Also, certain specific requirements to achieve equity classification and/ or qualify for the derivative scope exception for contracts indexed to an entity’s own equity are removed, enabling more freestanding instruments and embedded features to avoid mark-to-market accounting.

As a result, the new standard may affect net income and EPS, and therefore performance measures, whether GAAP or non-GAAP, and increase debt levels which may impact debt covenant compliance.

The new standard is effective for companies that are SEC filers (except for Smaller Reporting Companies) for fiscal years beginning after December 15, 2021 and interim periods within that year, and two years later for other companies. Companies can early adopt the standard at the start of a fiscal year beginning after December 15, 2020. The standard can either be adopted on a modified retrospective or a full retrospective basis.

 

This document highlights some of the key changes in the new standard. For a complete summary refer to our recent In depth publication.

CASH CONVERSATION

The current accounting by issuers for convertible debt instruments can vary dramatically depending on the instrument’s terms. There are a number of different models for convertible debt, including separation of the conversion option as a derivative liability (this model remains a part of the accounting framework).

For convertible debt instruments (with conversion features that do not require bifurcation as a derivative) that can be settled in cash or shares at the issuer’s option (frequently issued by public companies), current accounting typically separates the instrument into two units of account: a liability component and an equity component. The circumstances when convertible debt issued by public companies is currently accounted for as a single unit of account are more limited.

The new standard only provides for two separation models for conversion options in all convertible debt. That is, only if:

(1) the conversion option meets the definition of derivative, is not clearly and closely related, and does not qualify for a scope exception from derivative accounting

- or -

(2) if the debt is issued at a substantial premium, would an amount need to be separated.

The other separation models would be eliminated, including the model for convertible debt that can be settled in cash or shares. As a result, in more cases, convertible debt will be accounted for as a single instrument (a liability).

The earnings per share (EPS) treatment for convertible debt that can be settled in any combination of cash or shares at the issuer’s option will be impacted significantly.

 

Today, companies can, in certain circumstances, assume cash settlement of the principal amount and only include shares in the diluted EPS denominator for the value of the conversion spread (if any).

 

However, under the new standard, companies would have to apply the potentially more dilutive if-converted method, which assumes share settlement of the entire convertible debt instrument and therefore increases the number of shares to be added to the denominator of the diluted EPS calculation.

“Observations from the front lines” provides Aura’s insight on current economic issues, our perspective regarding the financial reporting complexities, and what companies should be thinking about to effectively address those issues. For more information, visit www.aura.co.th

WHY IT MATTER

Separating convertible debt into two units of account under the cash conversion accounting model results in the debt being recorded at a discount to the principal amount, and that discount is recognized as incremental non-cash interest expense over the expected life of the convertible debt. By requiring this convertible debt to be treated as a single instrument, non-cash interest expense resulting from the creation of a discount against the debt will be eliminated.

Companies will welcome the lower interest expense, which was historically very significant relative to the low coupon interest rate on these instruments. However, companies may not appreciate the more dilutive impact of the changes to EPS for instruments that may be settled in any combination of cash or shares.

 

Additionally, issuers should be mindful of the changes to, and divergence between, the accounting for extinguishments and conversions for instruments accounted for as a single unit.

 

Other accounting changes

Equity vs. liability classification

A key area of the accounting guidance is determining equity or liability classification and/or whether mark-to-market accounting is required for embedded equity-linked features (e.g., conversion option) or freestanding instruments (e.g., warrants to issue common stock) is the guidance for contracts in an entity’s own equity.

 

Among other requirements, this guidance requires specific criteria to be met in order to qualify for equity classification. The new standard removes certain of these specific criteria and clarifies another criterion. However, the new standard does not amend the scope of specific guidance which requires certain freestanding instruments to be reported as liabilities and mark-to-market accounting for certain instruments.

Why it matters: By removing certain criteria that must be met, the new standard makes it easier for more equity-linked features and certain freestanding instruments to avoid mark-to-market accounting.

 

This would reduce earnings volatility. However, all of remaining criteria must still be met and may necessitate a re-examination of other criteria not previously considered, These changes may also result in new provisions being included in agreements (e.g., collateral posting requirements) which may have additional accounting and disclosure implications. Issuers and investors or counterparties should consider the economic value and impact of including these types of features.

CASH CONVERSATION

The current accounting by issuers for convertible debt instruments can vary dramatically depending on the instrument’s terms. There are a number of different models for convertible debt, including separation of the conversion option as a derivative liability (this model remains a part of the accounting framework).

For convertible debt instruments (with conversion features that do not require bifurcation as a derivative) that can be settled in cash or shares at the issuer’s option (frequently issued by public companies), current accounting typically separates the instrument into two units of account: a liability component and an equity component. The circumstances when convertible debt issued by public companies is currently accounted for as a single unit of account are more limited.

The new standard only provides for two separation models for conversion options in all convertible debt. That is, only if:

(1) the conversion option meets the definition of derivative, is not clearly and closely related, and does not qualify for a scope exception from derivative accounting

- or -

(2) if the debt is issued at a substantial premium, would an amount need to be separated.

The other separation models would be eliminated, including the model for convertible debt that can be settled in cash or shares. As a result, in more cases, convertible debt will be accounted for as a single instrument (a liability).

The earnings per share (EPS) treatment for convertible debt that can be settled in any combination of cash or shares at the issuer’s option will be impacted significantly.

 

Today, companies can, in certain circumstances, assume cash settlement of the principal amount and only include shares in the diluted EPS denominator for the value of the conversion spread (if any).

 

However, under the new standard, companies would have to apply the potentially more dilutive if-converted method, which assumes share settlement of the entire convertible debt instrument and therefore increases the number of shares to be added to the denominator of the diluted EPS calculation.

“Observations from the front lines” provides Aura’s insight on current economic issues, our perspective regarding the financial reporting complexities, and what companies should be thinking about to effectively address those issues. For more information, visit www.aura.co.th

WHY IT MATTER

Separating convertible debt into two units of account under the cash conversion accounting model results in the debt being recorded at a discount to the principal amount, and that discount is recognized as incremental non-cash interest expense over the expected life of the convertible debt. By requiring this convertible debt to be treated as a single instrument, non-cash interest expense resulting from the creation of a discount against the debt will be eliminated.

Companies will welcome the lower interest expense, which was historically very significant relative to the low coupon interest rate on these instruments. However, companies may not appreciate the more dilutive impact of the changes to EPS for instruments that may be settled in any combination of cash or shares.

 

Additionally, issuers should be mindful of the changes to, and divergence between, the accounting for extinguishments and conversions for instruments accounted for as a single unit.

 

Other accounting changes

Equity vs. liability classification

A key area of the accounting guidance is determining equity or liability classification and/or whether mark-to-market accounting is required for embedded equity-linked features (e.g., conversion option) or freestanding instruments (e.g., warrants to issue common stock) is the guidance for contracts in an entity’s own equity.

 

Among other requirements, this guidance requires specific criteria to be met in order to qualify for equity classification. The new standard removes certain of these specific criteria and clarifies another criterion. However, the new standard does not amend the scope of specific guidance which requires certain freestanding instruments to be reported as liabilities and mark-to-market accounting for certain instruments.

Why it matters: By removing certain criteria that must be met, the new standard makes it easier for more equity-linked features and certain freestanding instruments to avoid mark-to-market accounting.

 

This would reduce earnings volatility. However, all of remaining criteria must still be met and may necessitate a re-examination of other criteria not previously considered, These changes may also result in new provisions being included in agreements (e.g., collateral posting requirements) which may have additional accounting and disclosure implications. Issuers and investors or counterparties should consider the economic value and impact of including these types of features.

Target

Target-date funds rule

At year-end 2020, nearly all AURA participants were in plans offering target-date funds. Eight in ten participants had all or part of their account invested in target-date funds.

Such investments continue to be the increasingly popular choice among small-business retirement plans. In fact, in 2020, more than half of all contribution dollars were directed to target-date funds.

 

Autoenrollment becomes more appealing

As of December 31, 2020, 16% of AURA plans permitting employee-elective deferrals had adopted automatic enrollment. This represents 37% of AURA plan participants. (Typically, larger plans adopt autoenrollment more frequently than smaller plans.)

 

Autoenrollment can mitigate the impact of demographics, as those who are younger, shorter- tenured, and in a lower-income bracket exhibit a much higher participation rate when autoenrollment is available.

 

More plans come with a safe harbor

Sixty-nine percent of AURA plans with an employer contribution had adopted a safe harbor employer contribution design as of year-end 2020. The most common design was one with a value of 4%—up to the first 5%—of employee contributions (representing 39% of safe harbor plans).

A safe harbor 401(k) plan allows a plan sponsor to automatically pass certain annual tests to ensure compliance with IRS regulations—if specific contribution, vesting, and participant notification requirements are met.*

Target-date funds rule

At year-end 2020, nearly all AURA participants were in plans offering target-date funds. Eight in ten participants had all or part of their account invested in target-date funds.

Such investments continue to be the increasingly popular choice among small-business retirement plans. In fact, in 2020, more than half of all contribution dollars were directed to target-date funds.

 

Autoenrollment becomes more appealing

As of December 31, 2020, 16% of AURA plans permitting employee-elective deferrals had adopted automatic enrollment. This represents 37% of AURA plan participants. (Typically, larger plans adopt autoenrollment more frequently than smaller plans.)

 

Autoenrollment can mitigate the impact of demographics, as those who are younger, shorter- tenured, and in a lower-income bracket exhibit a much higher participation rate when autoenrollment is available.

 

More plans come with a safe harbor

Sixty-nine percent of AURA plans with an employer contribution had adopted a safe harbor employer contribution design as of year-end 2020. The most common design was one with a value of 4%—up to the first 5%—of employee contributions (representing 39% of safe harbor plans).

A safe harbor 401(k) plan allows a plan sponsor to automatically pass certain annual tests to ensure compliance with IRS regulations—if specific contribution, vesting, and participant notification requirements are met.*

PILLARS

What we’re built on

Capital strength – a balance sheet for all seasons

Simplification and efficiency – make it easy to do business

Risk management – anticipate and handle risk effectively

Full definitions

Capital strength – a balance sheet for all seasons

We value superior capital strength. It gives us the flexibility to address expected and unexpected events and is a unique competitive advantage which our clients value.

Simplification and efficiency – make it easy to do business

We’re agile, digital and quick to respond to client needs. We continuously optimize how we deploy our resources, combining the best ideas with front-to-back delivery.

Risk management – anticipate and handle risk effectively

Successful banking is successful risk management. We’re all risk managers, detecting emerging risks early, managing risk diligently, courageously raising concerns and protecting the reputation of our firm.

PRINCIPAL

What we stand for.

Client centricity – clients are at the heart of everything we do

Connectivity – create success by connecting people, ideas and opportunities

Sustainable impact – act today with tomorrow in mind

Full definitions

Client centricity – clients are at the heart of everything we do

Our clients and their needs are at the heart of everything we do. As trusted partners we deliver the best of Aura in a personalized, relevant, on-time and seamless experience.

Connectivity – create success by connecting people, ideas and opportunities

We connect people, ideas and businesses to convene a global eco-system where clients, employees and other stakeholders excel.

Sustainable impact – act today with tomorrow in mind

We act to drive long-term positive value creation, contributing to a better world  for our stakeholders, society, environment and future generations.

BEHAVIORS

How we do it.

Accountability with integrity – take ownership

Collaboration – work as one Aura

Innovation – improve every day

 

Full definitions

Accountability with integrity – take ownership
I am responsible for what I say and do.


I take ownership and make things happen.
I step up and act when something isn‘t right.

Collaboration – work as one Aura


I trust others and help them to be successful.
I deliver one Aura, together with my colleagues.


I foster a diverse, inclusive and equitable work environment.

Innovation – improve every day


I challenge perspectives and look at every opportunity to improve.


I actively seek and provide feedback.
I learn from every success and failure. 

Vigilantes

VIGILANTES

In 1994, US President Bill Clinton’s political advisor James Carville famously quipped, “If there was reincarnation…I would like to come back as the bond mar­ket. You can intimidate everybody.” At the time, he was referring to the notion of higher yields forcing fiscal restraint among policymakers.

 

Yet more than 25 years later, the bond market now seems to intimidate markets for precisely the opposite reason—because rates are so low. This month, 10-year US Treasury yields fell as low as 1.25%, forcing equity investors to question their beliefs about the eco­nomic recovery.

 

Over the last six months, equities have been driven by a “Roaring 20s” narrative we highlighted here in the April Monthly Letter. This interpretation of the macro environment supported stocks, particularly those exposed to reflation such as energy and financials. But in recent weeks, that narrative has given way to one of “secular stagnation”—low growth, low inflation, and low rates. Stocks have continued to move higher overall, but bonds are rallying, volatility is up, and com­panies most exposed to economic recovery are underperforming those exposed to secular growth.

The drivers of this shift appear to be some combination of several ideas: 1) high rates of inflation may force the Federal Reserve to hike interest rates prematurely, curbing future growth; 2) the effects of the COVID-19 Delta variant might stall the global economic recovery; and 3) policy changes and slowing growth momen­tum could undermine sentiment on China, the world’s biggest driver of economic growth.

In this month’s letter, we update our macro view and address some of the main questions we’re getting from investors in light of this shift in narrative. In short, we do not believe that the “secular stagnation” narrative is supported by the underlying data at this time. We are staying positive on risky assets, expect yields to move higher by year-end, and continue to advocate positioning for reopening and recovery. In equities we prefer Japan, emerging markets, financials, and energy. Given our view on rates we move our view on EURUSD to neutral.

Fears about inflation are unlikely to recede for several months. This can drive volatil­ity, even if we are right about our view of the medium-term outlook. Accordingly, we also advocate boosting portfolio yield, diversifying exposures to protect against potential downside, and ensuring portfolios are set up to maintain purchasing power over the long term. For more, please refer to our 3Q Outlook, “Ideas for growth, income, and protection.”

Outlook

Exploring ideas for growth, income, protection, and addressing key questions at the forefront of investors’ minds.

 

"Our outlook for 3Q" is the continuation of the series where AURA Chief Investment Office provides quarterly updates on the investment outlook.

In this edition, we address five questions at the forefront of investors’ minds at the mid-point of 2021: Where can I still find short-term portfolio growth? How can I protect against downside risks? How do I boost my portfolio income? How should I prepare for higher inflation? What are the most attractive structural opportunities?

GROWTH

Where can I still find short-term portfolio growth?

Global equity markets are now 24% above pre-pandemic levels, leading some investors to wonder if upside may be limited from here. However, we think equity indexes can move higher, driven by a combination of robust earnings growth, still-attractive valuations relative to bonds, and accommodative central banks.

The rally is underpinned by very strong earnings growth, which has continued to beat expectations over the first half of this year. We now expect S&P 500 earnings to be 30% above pre-pandemic levels in 2022. Eurozone earnings should be 18% higher, and Asia ex-Japan earnings 50% higher. At a global level, the current equity risk premium for the Aura All Countries World Index is around 400bps, comfortably above its long-term average of 274bps. The 2022 P/E ratio is 18.8x. But while we continue to anticipate gains at a global index level, we don’t expect those gains to be evenly distributed. We see greater potential in regional markets that underperformed in the first half of 2021, particularly China and Japan. We also think there is more upside to come in stocks that are more heavily exposed to economic reopening.

 

How can I protect against downside risks?

As equity markets have rallied to record highs, some investors are beginning to focus more on potential downside risks, including coronavirus mutations, inflation, and geopolitics. They’re considering whether it’s time to lock in profit, or to wait before committing more capital.

Overall, we do not think the downside risks we face today are higher than average. In our base case, we do not expect them to topple the rally, and long-term investors should generally not try to time the market, in our view. Waiting for risks to side can be an indefinite and costly process, and investing at all-time highs has historically not proven to be riskier than investing during other periods.

At the same time, investors should regularly review if equity market gains mean they are now taking excessive portfolio risk. If so, they should consider ways to reduce some of that risk, while keeping long-term plans on track. This can be done by locking in gains on stocks that have outperformed and now have limited upside, or by seeking greater downside protection via hedge funds, options, and structures. Diversifying into select defensive stocks is another option to consider.

 

How do I boost my portfolio income?

Despite high levels of growth and inflation, interest rates are likely to remain low in the months and years ahead. Our view, mirroring the Fed’s own projections, is that US rates are likely to remain in the 0–0.25% range until 2023. Rates in the Eurozone and Switzerland are negative, and increases there could take longer still.

For investors who rely on their portfolios to provide income, this environment is especially challenging. Even if smaller economies like Norway, Canada, and New Zealand raise rates sooner, in most major currencies yields not only are insufficient to compensate for inflation, but also are not expected to rise


in the immediate future. With inflation elevated, real returns are under particular pressure.

This means investors will need to find ways to boost portfolio yield. In various recent publications, we‘ve discussed the need to diversify away from cash and investment grade bonds into higher-yielding assets. But as market leadership shifts away from growth stocks, we think the “hunt for yield” will also become more worthwhile for equity-heavy investors too.

Specifically, we see less potential scope for meaningful gains among mega-cap growth stocks, whereas we expect a recovery in dividend payments in other parts of the market in the second half of the year. This backdrop provides investors with the opportunity to diversify into select dividend stocks, senior loans, or engage in “alternative yield” strategies.

 

How should I prepare for higher inflation?

Inflation has not been a major problem for investors since the 1980s. After averaging 7.1% in the US in the 1970s, and 5.6% in the 1980s, inflation rates since 1990 have averaged just 3.0% in the US, 2.3% in Switzerland, and 1.3% in the Eurozone (since 1997).

Yet, as the post-pandemic recovery takes hold, prices of various goods and services are rising. In the US, the consumer price index rose by 4.2% year-over-year in April and 5% in May, and the Citi US inflation surprise index is at its highest level since its inception in 1998. The Bloomberg Commodity index went up more than 50% over the last year, and the UN FAO food price index is up 40% in one month.