Author: Marta Re Ferrè

Covid-19: the impact on B2C eCommerce

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Lockdown has profoundly changed consumer habits: online purchases of food and essentials have grown exponentially. The reaction of retailers has been varied and influenced by the product sector and the presence of an eCommerce initiative. In the recovery stage, profound restructuring awaits the Retail world.

 

Riccardo Mangiaracina, Professor of Logistics and Production Systems Management, Scientific Head B2C eCommerce Observatory
Valentina Pontiggia, Director B2C eCommerce Observatory and Digital Innovation in Retail
School of Management Politecnico di Milano

 

Before the crisis ….. eCommerce, a channel growing in Italy and abroad

In the more mature markets, eCommerce has become a major channel for generating consumption. In 2019 in China or the UK, for example, of every 100 euros spent by consumers, about 20 went online. In markets where eCommerce has developed more slowly, online has nevertheless accounted for a significant slice of the growth of business. In Italy, for example, eCommerce in 2019, although it still represented a small part of total purchases (7.3% of the total), generated 65% of the total Retail growth (online + offline) [1].

In recent years, the online channel has increased not only the size of the market but also its range of action and influence. In the first place, eCommerce has become decisive in the development and promotion of highly innovative new models of relations with consumers that, although starting from online, have spread throughout Retail. This transformation has involved the entire value chain: marketing, where artificial intelligence and augmented reality have allowed the consumer to “experience” the product (both online and in-store) before owning it; payments, where the use of biometrics, already fairly widespread online, has become increasingly important offline too; and logistics, where various innovations have emerged both to improve the service and to give the end customer significant control of the process.
Secondly, the success of eCommerce and the emergence of new ways of buying and interacting have changed the original significance of the physical store, which is no longer the only means of physical access to the product. In this transformation process, traditional retailers have given the store new features, mainly from a relational point of view, and entrusting the transactional stage to eCommerce. There have been many experiments in new formats in Italy too, primarily in Milan [2].

The importance acquired by eCommerce has also led to greater public and institutional attention (not always in a positive way). New regulatory obligations (PSD2 with so-called Strong Customer Authentication to authorise financial transactions online and Web Tax), attention to sustainability issues (not only financial but environmental too) and the dominant position of certain giant corporations, in particular Amazon and Alibaba, are just some of the most hotly-debated topics.

 

During the crisis ….. eCommerce, a tool for responding to the emergency 

Business is one of the areas most affected by the Coronavirus emergency. The reaction of retailers has been strongly influenced by the presence or otherwise of their own initiatives on online channels.
Many physical stores, especially those focused on food and basic necessities, have engaged with eCommerce for the first time. The most immediate solution has been the use of third parties already online. Many restaurants have put their menu of ready-to-eat dishes online through food delivery platforms and many supermarkets have activated eCommerce solutions through alliances with platforms that have already enabled (from a technological and operational point of view) online shopping under the aegis of certain major retail chains. Even more widespread are the numerous neighbourhood stores that have started working with less advanced digital tools than eCommerce, but with are just as interesting tools, such as the many neighbourhood stores (grocery stores, pharmacies, …..) that can take orders via WhatsApp or by phone.
Players that have been online since the beginning of the epidemic have seen an increase in orders attributable to new consumers who have decided for the first time to use their services. This emergency, however, has revealed something as simple as it is important. In online initiatives, especially in food, operations have forcibly dictated rhythms and especially imposed limits. Practising eCommerce requires commitment and a perfectly functioning and efficient operating mechanism: optimised picking and transport processes, especially when we are talking about “supermarket” shopping (which, by the way, consists on average of 50 items of low unit value and which require special treatments such as temperature-controlled transport). The dependencies between the physical and digital worlds have had varied impacts: all those multi-channel retailers of clothing, beauty products, IT and electronics, forced to close their stores, have found online a valuable opportunity to maintain the relationship with customers, in some cases deepening it, and to create value (rather than sales) with their consumers. In this regard, note the sending of questionnaires to users to gather opinions and suggestions for improvement and the provision of online courses (fitness, cooking, …..) relating to products on sale.
During the crisis we have therefore seen the barriers to omni-channel integration, that had blocked the development of the digital strategy of Italian retailers for years, fall one after the other. The management of the emergency has convinced even the most reluctant to change to overcome internal interdepartmental conflicts, to define clear responsibilities and to dedicate the resources necessary to achieve a new idea of business, integrated and independent of channels. A green light therefore for investments in order to boost the eCommerce channel or to favour sales strategies founded on integration between online and offline experiences, like click&collect, drive&collect or the setting up of online ordering in store.

 

After the crisis ..… eCommerce, an essential element for the resumption of business

In these days of the emergency there are many questions to be asked about the effects and changes that await us in the business world. Among the few certainties, in our opinion, are the proximity that the online and physical channels are demonstrating forcefully at this difficult time and the indispensable role that eCommerce will play in the recovery of business and consumption.
During the health emergency Italian consumers have understood the value of this channel as never before: eCommerce has allowed a large slice of the population to benefit from value-added services, important and essential as they are, like food delivery. Growth of web shoppers (who at the end of 2019 amounted to just over a third of the Italian population) and greater familiarity with and confidence in online transactions and digital payments (including those shoppers already used to purchasing online) can generate a positive effect on the development of eCommerce.
The other side of the coin is that the praiseworthy efforts of supply-side players will not have been in vain. Once the crisis is over, investments in technology (to handle traffic spikes), the presence of new trained staff and the optimisation of picking and transport processes will be in place to better manage not only the current extraordinary demand but also a future in which the digital world will be increasingly fundamental.
eCommerce will be more and more the engine of Retail growth and innovation: once we have put this crisis behind us, as consumers we will be looking at a new and more digital normality. A major challenge for our Retail!

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[1] Source: B2C eCommerce Observatory – Politecnico di Milano School of Management
[2] For full Research results, “eCommerce: Retail Growth and Innovation Engine” available at www.osservatori.net

The global crisis since Covid-19 and the repercussions on international trade and global value chains

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The shock to the world economy caused by the Covid-19 health emergency has a global scope also because of the high interdependence between national economic systems. But closing borders and applying trade restrictions is not a viable solution: acting in a coordinated manner can ensure an effective restart for all economic systems, balancing the needs and production capacities of individual countries through international trade.

 

Lucia Tajoli, professor of International Markets and European Institution
School of Management Politecnico di Milano

 

It is still too early to have official stabilised data but it is now very clear that the spread of the so-called COVID-19 and the associated pandemic are having a very significant impact on the world economy, with clear implications for international trade as well.
International trade was already decelerating in the latter part of 2019, due to the general slowdown in the economic cycle in many countries. The early months of 2020 are confirming this strong slowdown in trade. The World Trade Organisation (WTO) is continuously updating forecasts for the current year, which show downward trends for both trade in goods and in services as a result of the shock to production and demand that is spreading to various countries. Given the high level of uncertainty, however, the major international institutions are not ready yet to provide precise figures. The estimates produced by the WTO in April on the possible dropoff in trade also show a very wide range, between -13% and -32%.

The fall in international trade is an inevitable consequence of the current situation, since the areas currently most affected by the health crisis with its serious economic repercussions are those of the major players in world trade: China, the European Union and the USA generate more than half of all world trade. Thus, the impact of the slowdown in these countries is felt in global trade flows, even in areas with relatively slight exposure to the contagion.

One particular aspect of trade makes the impact of the crisis more serious and concerns observers. The importance of global value chains and the role they play in world markets has grown for at least 20 years. According to a recent World Bank report, most trade flows between countries nowadays take place within the global value chains (GVCs), i.e. they are generated by production processes that cross the borders of countries and involve specialised companies located even in faraway areas in the chain of production of goods, especially complex ones. The role of these global value chains in this crisis appears crucial. According to some observers, this international organisation of production has created a fragile economic system that is more exposed to international shocks. The risk of a disruption in the supply of the inputs needed for production is greater in a production chain that is very geographically dispersed. Moreover, the presence of these production chains can amplify the transmission of shocks according to the so-called “bullwhip effect”. In the presence of a negative shock that affects many economically connected countries almost simultaneously, the slowdown in production of an economic system supplying essential production inputs is transmitted to related systems downstream, reducing their production capacity, adding a further negative squeeze to the local slowdown in production (which may be due to local supply and demand factors), and thus amplifying the shock. The areas where the spread of the epidemic has been greatest are closely linked by GVCs in many crucial sectors, from textiles-clothing to consumer electronics. As a result of this shock-amplifying effect, forecasts of the trends in the global economy and international trade are more negative than in any other crisis in the past.

It is important to remember, however, that these global production chains, although they have made the different economies more interdependent, have generated enormous efficiency gains in very many sectors and made many goods available at prices that have encouraged mass diffusion among all consumers. Without specialisation in specific stages and components of production of certain countries and companies connected with each other, many commonly used goods today would not be available or would only be available at prohibitive costs. In addition, this production organisation has also allowed emerging countries to participate in international markets, finding in the GVCs a means to access production that they could not develop independently, thus generating growth, employment and diffusion of technology.

Even before the current crisis there was talk of a trend in shortening GVCs and “reshoring“, i.e. bringing back to certain countries production cycles previously located abroad. This is because this international production organisation, even if it allows efficiency gains and cost advantages, for some companies and some sectors is too complex, with the loss of direct control over some production stages and an increase in organisational risks and costs. In fact, the phenomenon of reshoring has been limited to certain countries and certain particular production niches. Lack of control over the production cycle appears potentially risky for some countries, first and foremost for China, pushing it in recent years to shorten its international production chains for mainly geopolitical reasons. This choice has had global effects given the economic importance of this country. However, the current crisis could lead to a further downsizing of international production chains, for reasons that include reducing the interdependence of countries.

It should be remembered, however, that even in this time of crisis, trade between countries plays a fundamental role and it is essential that countries do not try to hinder it excessively. International trade often ensures the availability and affordability of vital medicines, medical products and healthcare services, particularly for the most vulnerable countries: no country is entirely self-sufficient for the products and equipment it needs for its public health systems. Much medical equipment is also manufactured within GVCs that make advanced components available that are not always easily produced in all countries. In addition, through international trade it is possible to overcome shortcomings in the production of medical equipment and drugs, as well as of various types of essential goods, distributing these goods more efficiently where they are most needed. In this emergency situation, despite the temptation of some countries to close borders and to apply trade restrictions in order to accumulate stocks, governments also realise that they need each other and that it is important to act in coordinated fashion as far as possible in the face of a problem that is absolutely global.

A drastic downsizing of global value chains would have very serious consequences, both during the crisis for the effect this would have on many goods and services supplied, and after the crisis impacting many key sectors that have developed as a result of this interdependence. However, the current crisis may be an opportunity to rethink certain organisational aspects of these production chains, accepting a rebalancing between risks and benefits, perhaps leading to a partial reduction in efficiency in order to achieve a reduction in risk, for example by accumulating larger stocks or further diversifying suppliers, distributors or logistics channels. Yet it is precisely this acute crisis and the need to ensure an effective recovery of economic systems that underlines the importance of not abandoning a mode of international organisation of production that has produced fundamental economic improvements, and of keeping international trade open precisely as a means of balancing the needs and production capacities of individual countries.

 

 

Figure 1 – Participation of countries in global value chains (2015 data)

Source: World Bank, World Development Report 2020

 

Figure 2 – Increasing trend of the involvement of GVCs in production sectors

Source: World Bank, World Development Report 2020

Logistics sector changes resulting from Covid-19 pandemic

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More than other areas, the Covid-19 pandemic forced the logistics sector to adapt quickly to the new regional, supply chains and consumer needs and test new flexible, digital and shared organisational models. The starting point for the next challenges.

 

Prof Marco Melacini, professor of Logistics Management, Director of the “Gino Marchet” Contract Logistics Observatory
School of Management Politecnico di Milano

 

The health system is at the forefront of the emergency response which work with other sectors providing essential services. Logistics, with its roots in military supply systems, provide the foundation to meet today’s challenge, ensuring these sectors’ operations by supplying necessary products. Although we are still in full emergency, it is useful to start thinking about “phase 2” and how the logistics will change, especially as it is unlikely that the country will return to normal in the medium term and there may be several “stop and go” moments, perhaps by limiting the “red zones” to smaller areas.

The best way to answer the question of how logistics will adapt, is to observe the last month’s reaction to the crisis which disrupted the lives of people and companies, and particularly the logistics of the pharmaceutical and food supply chain, which remained fully operational.

Adopting a “smart” rather than a cost-minimising strategy to handle the foreseeable demand, was seen as important. Practically this meant greater resource redundancy (firstly warehouses) to quickly locally reallocate stocks and overcome critical issues, such as stoppages. Implementing this strategy requires quicker decision-making, with increasingly dynamic and data driven choices. The smart working method was adopted for planning. This was more effective for companies that had experienced remote working and adopted cloud technologies and software. The latter allow remote access to computer systems and increase visibility along the supply chain.

However, there were some activities which must remain on site, such as order picking and transport. For these, it was essential to use social responsibility for workplace safety. Practically, this meant Personal Protective Equipment (PPE) distribution for workers, frequent workplace sanitisation (warehouses, transport cabins, and terminals or handling aids such as drugs delivery boxes), body temperature monitoring of everyone before site access, and reviewing operating procedures (e.g. to reduce the resource sharing, such as voice picking headsets, and increasing operating distances between operators). Reducing physical “contact” was a good reason to move to supply chain digitisation — making it possible to avoid printing and paper handling of transport documents.

The “smart” strategy is based on flexibility and allows quicker implementation of the most suitable solutions to respond to any change. The logistics tertiarisation and the related model used across the country enabled companies to be flexible. Some logistics operators quickly reallocated goods across more than 25,000 sqm of warehouse space. Horizontal cooperation between contract logistics operators (a sector worth more than € 84 billion in turnover) is and will be essential to a sharing economy. This cooperation consists of the use of stationary trucks/drivers from other supply chains to manage the high growth in demand especially sudden consumption peaks generated by fears in the population. It was possible to move warehouse personnel from mothballed sites making up for the reduction in operating capacity in the face of a physiological rise in absenteeism. The close relationship between company and worker, typical of the cooperative model, favoured communication within the company, reducing potential risk areas, and providing greater operational flexibility, to partially offset the inevitable productivity loss. We started daily planning, working closely with customer companies to align logistics capacity as closely as possible to market demand. This was essential to ensure economic sustainability in a low-margin environment such as contract logistics.

The situation we are experiencing led to a specific coordination model for emergencies: frequent alignment meetings, adoption of choices that in the short term do not always optimise costs (for example the greater difficulty of finding return trips or mandatory distances in the warehouse, to the detriment of productivity) but ensuring service continuity, cooperative customer company relationships that go beyond an outsourcing contract, an open book approach while sharing market signals and operational choices.

At the strategic macro-choice level, alongside the critical analysis of the future service to be provided based on contingencies (some companies have reduced the number of deliveries per point of destination to reduce order fragmentation), we noticed the centrality of delivery capacity in urban areas. This included home deliveries (e-commerce has made the definitive leap forward in its Italian development and grown by more than 50 per cent) and the individual sales point, with the rediscovery of the value of proximity stores (often used as omnichannel preparation points for urban deliveries). These urban logistics, with their city-centred origin and destination, will be increasingly important. In the transportation field there has been the development of road-rail inter-modality, which is fundamental to overcome transport blockages between EU countries, and future management of the crossing and supply of new “red zones”. Lastly, warehouse automation, which is still underdeveloped, will be increasingly important to promote work in protected areas with a lower concentration of people.

 

“Border” crossing times between European states (source: sixfold.com/covid-19)

In conclusion, it is not simply a matter of returning to a logistical “normality”, but finding new balances that will allow us to face this and future challenges, such as any economic recession and the need to increasingly focus on climate change.

2020 – Responsible Luxury is no longer a passing fad

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As the second fifth of the 21st century begins, no industry can avoid the challenge of boosting its sustainability. Luxury is no exception to this, but what if responsibility were an inherent part of luxury?

Alessandro Brun, Associate Professor of Quality Management, Director of Global Executive Master of Luxury Management and Founder of the Sustainable Luxury Academy

As the end of 2019 approaches, we are now suddenly realising that a fifth of the 21st century has already passed. And that an idea murmured by a choice few at the turn of the century has now grown to become the buzzword heard everywhere. No sectors can escape from public demand for a more sustainable and ethical business!
This is particularly true when it comes to the premium & luxury segment of most consumer goods sectors: from fashion to jewellery to beauty, the conversation about “responsible luxury” is now ubiquitous.

On 8th November, Prada’s US headquarters played host to a conference entitled “Shaping a Sustainable Future Society”: the third event in the “Shaping a Future” series which, this year, focused on Social Sustainability. On 5th December, Assolombarda (the Lombardy chapter of the Italian Entrepreneurial Association) hosted the event “4sustainability”, which saw 200 players from the textile and leather supply chains collaborating with international coalitions (such as ZDHC, Leather Working Group, Textile Exchange) and leading luxury brands in an attempt to develop reliable and shared measurement systems to assess sustainability performance. On 20th November, the Politecnico di Milano hosted the Responsible Luxury Summit, marking the third anniversary of the founding of the Sustainable Luxury Academy. This is merely the tail end of an extremely intense Milan autumn season for me and my team at the Sustainable Luxury Academy: earlier on, 10 Corso Como (a concept shop blending lifestyle, culture and commerce) hosted “A New Awareness”, whilst the Fashion Film Festival Milano hosted the conversations “FFFMilanoForGreen”.

It is important to explain why sustainable luxury is not a trend, let alone a passing fad. Sustainability is one of the central themes of the paradigm shift taking place in the business of luxury.
Before illustrating what is going to happen in the luxury sector in the 2020s, let us briefly recap what has happened to luxury iver the past 3 decades. In December 1998, professors Jose Luis Nueno and John A. Quelch published a paper in Business Horizons entitled “the Mass Marketing of Luxury”. They explained the reasons behind the double-digit worldwide growth of the luxury market since the mid-1990s, and concluded the paper highlighting a challenge, namely that top managers of luxury brands would have to decide “how far to democratise the brand through line extensions, junior product lines, affordable accessories and expanding distribution.”
This was extremely effective – perhaps even too effective. In 2007, American journalist Dana Thomas published a very illuminating report on how managers of top luxury brands had addressed the above challenge, and asked some questions worth pondering: Has the luxury of some products got lost? Have prices gotten out of hand? Has distribution become too widespread? In fact, the renowned Altagamma Worldwide Luxury Market Monitor labels the period from 1994 to 2000 as the “sortie du temple” of luxury brands, followed – in the years 2001-2008 – by the democratisation of luxury.

Why did this happen? As per Nueno and Quelch’s writings, the “nouveau riche […] can afford to indulge in the purchase of luxury brands, but lack the experience and confidence to discriminate”. What happened during the democratisation was a surge in the middle-class consumption of luxury goods. This global trend is called “trading up” (a neologism coined by American authors Silverstein and Fiske in their book “Trading Up: The New American Luxury”). As such, the middle class can also afford (albeit less frequently) to indulge in the purchase of luxury brands nowadays.
Whilst the publication of “the Mass Marketing of Luxury” marked, on the one hand, the beginning of the democratisation of luxury, it also heralded, on the other, the death of luxury as we (at least the lucky ones) knew it.

What happened in the first two decades of the third millennium is clear to everybody. According to the Altagamma report published in spring 2019, the global market of personal luxury goods grew from USD 76B in 1996 to USD 260B in 2018.

Given the evolution of the past few years, both in terms of Personal Luxury Goods and in the luxury sector more generally, it is now important to look ahead and try to understand what is about to happen. Global trends in Luxury in 2019 are well summarised in the NExTT framework by CB Insights, under which which trends are classified according to their market strength and industry adoption:

  • Trends with a high level of adoption but low strength are considered Transitory: Attracting Millennials with Collaboration is classified in this group.
  • RFiD Tagging, Authentication Tech, Ethical Consumption and Lab-grown Luxury Materials all belong to the Threatening trend group: adoption is still low, but their strength is high.
  • Necessary trends are characterised by both high strength and widespread adoption: here we have Pop-Ups, the Resale Channel, and Luxury Streetwear.
  • Trends like Luxury Goods on the Blockchain are considered Experimental, due to their low strength and low adoption level.

Here it is quite easy to envisage a scenario in which multiple trends are pointing in the same direction. Luxury brands cannot pretend to be blind to the power of millennials. Their voices called for bulky trainers – and all brands reacted by offering Luxury Streetwear. But millennials are also asking for more transparency, exploiting simple solutions (hence why a “simple” RFiD tag is considered Threatening whilst the Blockchain is not relevant at the moment) to provide more visibility throughout the supply chain. They are requesting environmentally-sustainable practices – calling for brands to stop the use of controversial materials (lab-grown materials could be the solution to such issues as incidental animal cruelty or materials which negatively affect endangered species, as well as ’blood’ diamonds) – as well as establish socially-responsible practices – to the point that ethically-responsible consumption poses a significant threat to some brands.

Before taking any action, brands should seek a deeper understanding of the meaning of being responsible.

Being responsible nowadays means being open and embracing new technologies – to guarantee cleaner processes, a more efficient use of resources, more opportunities to reduce, reuse, recycle, – whilst at the same time going back to the industry’s roots – the heritage of luxury is in the artisanal processes, craftsmanship and savoir-faire, where the talented artisan was at the heart of the company, never to be considered a mere “human resource” in a big industrial, profit-oriented organisation.
Being responsible also means using storytelling in the right way: that is, using it as a means to connect or reconnect disconnected departments in the organisation. European artisans in the Middle Ages, the age of craftsmanship, were one-man shows, taking care of sales, product design and manufacturing. Today, the storytelling of a truly luxurious brand has to focus on the supply chain. The heritage of some brands – and even of some iconic items – is deeply rooted in sustainability. One need only think of the history of Ferragamo’s cork wedge shoes and the Gucci bamboo bag, two defining items in the history of fashion, both launched in years in which – due to sanctions – Italian companies could not make use of very basic and desperately-needed materials. Italian genius proved stronger than adversity, though: in the 20s, during the dictatorship in Italy, it was not possible to import steel from Germany; Ferragamo replaced the steel shank necessary to support women’s shoes, inventing the world-famous wedge using cork from Sardinia; meanwhile, in 1947, post-WWII, Gucci launched a new bag whose handles were made out of bamboo, a material that could be imported from Japan without restrictions.
The Swiss shoemaker Bally was founded in 1851, as the result of Carl Franz Bally’s desire to create more jobs and improve the lives of local residents. In its golden years (in 1916, when the rest of Europe was crippled by the World War, it had 7,000 employees), Bally was providing employees with unmatched social and healthcare benefits.

When somebody asks me whether sustainable luxury is an oxymoron or an opportunity, I can barely contain my smile when mentioning the above cases. Sustainable Luxury is neither an oxymoron nor an opportunity. True luxury is inherently, quintessentially sustainable by its very nature. Hence, sustainable luxury is a necessity.
I dream that, one day, all consumers will say “If it ain’t sustainable, it ain’t luxury”. That day is coming soon.

Smart Learning in times of Coronavirus emergency … and beyond

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Federico Frattini, MIP Graduate School of Business Dean

The current emergency due to Coronavirus has forced schools and universities in Italy (but it is likely that the same will happen soon in other countries) to shift to online learning to ensure continuity to their educational programs. Some institutions are better prepared to this shift due to previous experiences in the field, others are experimenting with these new approaches to teaching in this moment of emergency. However, there is a strong and generalized effort made in this direction in Italy, which testifies to the maturity of online learning and to its practical applicability.

The biggest challenge in this shift is to recognize that online learning is not just a matter of using a digital platform to teach the same class that would have been otherwise taught in a physical setting. In fact, online learning requires a deep restructuring of the teaching approach and the use of different digital tools to satisfy different educational needs. In particular, it is necessary to acknowledge that in a traditional, face-to-face class, the teacher mixes up three different learning tools. First, there is the need to transfer to each student concepts, tools and notions (what we can call knowledge) pertaining to a particular discipline. Secondly, professors need to encourage students to apply this knowledge to solve practical cases, thereby transforming knowledge into competence. Finally, students need to use competence socially, by engaging in discussion around the key take-aways of the class and bringing competence closer to their personal experience. Of course, these three components have varying levels of importance in different educational settings. In post-graduate programs, the application of knowledge and its socialization are of the otmost importance. While in schools transferring concepts, notions and tools takes the highest priority.

In an online setting, these three components of an effective class cannot be blended and mixed up by using a single digital tool. They have to be broken down and taught by using various properly designed methods. Knowledge is better transferred by using asynchronous, self-paced digital materials, such as video clips recorded by the professor or selected from the huge landscape of educational material available on the web (for instance, the well-known MOOCs platform such as Coursera or EdX). The application of such knowledge to real cases and examples can be done through live, online sessions, using tools such as Microsoft Teams, Google Hangout, Cisco WebEx, Slack, Zoom or similar platforms. Finally, the socialization of the acquired competence can be supported by semi-synchronous social discussion tools, accurately moderated by the professors or tutors. It is only by carefully designing these three different components of an effective educational experience that schools and universities can successfully move their teaching online.

At MIP, the Graduate School of Business of Politecnico di Milano, we call this approach Smart Learning, and we have been using it since 2014 in our digital Masters and MBA programs. This is an area where we have obtained great results, with more that 550 students who have studied in one of our digital programs since 2014 and with our International Flex MBA which has been ranked among the top ten masters worldwide according to the recent online MBA ranking by the Financial Times.

The problem with Smart Learning is not technological. Digital tools that can be used to this aim are largely available at zero or very limited costs (interestingly, most of the biggest players mentioned above offer licenses for their platforms for free in this situation of emergency). It is also not a matter of internet connection. Most of the online learning platforms available on the market also work perfectly on mobile devices, with a standard 4G connection. The key issue is organizational. Designing an effective online program requires expertise and knowledge in fields such as instructional design or online discussion moderation, and the willingness and ability to train professors to use this new approach.

My hope is that the Coronavirus emergency will leave behind a greater familiarity with – and a better understanding of the value of – Smart Learning, which is a flexible and inclusive approach to teaching, with huge potential applications beyond a situation of emergency like the one we are all currently experiencing.

Impact investing: so far, so fluid

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As sustainability and impact take on a primary role in the business agenda and amongst financial players, impact investing has been growing steadily, but still falls short of having a clear and structured character. A fluid situation that pays testament to its salience, but that may also hinder its future development.

Mario Calderini, Full Professor of Social Innovation School of Management, Politecnico di Milano

The term ‘Impact Investing’ was coined in 2007 by the Rockefeller Foundation. It can be defined as a class of investments in companies, organisations and funds with the intention of generating a social and environmental impact alongside a financial return. It sets itself apart from mainstream finance by including social returns in the investor’s expectations, and yet it diverges from philanthropy and grant-making because some financial return, or at least return of capital, is expected.

Nowadays, the global Impact Investing industry is still in its nascent stages. Nevertheless, according to the report published in 2019 by the Global Impact Investing Network, the size of the Impact Investing market is growing at an impressive pace: compared to 2018, the volume of capital invested grew by 13%, reaching a total of more than $514 billion. Indeed, considerable public and private capital has been and will be deployed to fund organisations with the mission of addressing social needs; in that sense, the projection for future developments is optimistic.

As a matter of fact, 2019 has been a very significant year for impact investing. The newly-central role of the sustainability agenda, together with many other signals coming from the very heart of the economic and financial system – including the now world-famous letter by Larry Fink, the CEO of Blackrock, or the manifesto of the American Business Roundtable, together with the resulting cover pages of many influential newspapers around the world, such as the Financial Times and the Economist – have officially established sustainability and impact as the new normal amongst financial players.

It is for this reason that the period from late spring 2018 to the summer of 2019 was defined as the golden year of sustainability and impact, to mark the fact that sustainability and impact are no longer lateral, marginal or side issues in the business agenda, but rather they have made their way to the very heart of it. Mainstream economic and financial players are increasingly positioning themselves as proactive forces in the search for solutions to the most pressing environmental and social challenges being faced today. Whilst many are heralding this as excellent news, some others, on a note of scepticism, warn of the possible opportunism and ambiguity that this phenomenon could bring with it. Whatever the interpretation, it is without a doubt that this could represent a very significant paradigm shift.

Strictly speaking, the perimeter of Impact Finance excludes the approaches generally defined as ESG or thematic approaches. Impact Investing is a radical approach to investing in solutions for a better future, and its radicality translates into placing the intentionality-measurability-additionality triad at the centre of the definition of impact investing. Such a radical definition is crucial to identifying generative finance as a counterpoint to extractive finance, a solution-first way of investing, supporting business models that are suitable for promoting concrete creative solutions to emergent social issues whilst also remaining economically sustainable, or even profitable.

Since 2016, Tiresia, the Research Centre for Impact Innovation, Entrepreneurship and Finance at the School of Management of the Politecnico di Milano, has been delivering its annual Impact Finance Outlook, offering a comprehensive overview of the Italian impact investing market.

The first Tiresia Impact Outlook, in 2016, concluded with the consideration that the impact investing sector, as strictly defined, was still in a fluid, experimental phase, uncoordinated and slowly transitioning towards a clearer, more structured configuration. A snapshot that was not entirely different from the international one at the time, in its full development.

Quite surprisingly, the results emerging from Tiresia Impact Outlook 2019 are not significantly different. According to a definition of impact investing based on the intentionality- measurability-additionality triad, the perimeter of the industry still remains relatively small, characterised by a group of consolidated pioneers. The assets under management that qualifies as ‘impact’ total nearly 700 billion, although when we apply an even stricter definition of impact investing, this figure is reduced to just over 200 billion. This represents a relatively very small amount of assets, if compared to the total assets that are now being labelled as ESG or sustainable investment. Nevertheless, this also reflects an interesting feature of the Italian market on the international scene, namely that it is characterised by a significant level of real attention to the aspects which generate social impact and value. We may describe it as a very meaningful niche, potentially able to act as a role model for the more broadly-defined sustainable finance industry currently undergoing a transformation.

Having said this, the ecosystem of impact investing in Italy shows some signs of vitality and innovation. Operators are trying to organise their activities in a more structured way, in terms of both fundraising and asset allocation. These operators face three main problems. The first is linked to the scarcity and weakness of investment opportunities, and subsequently deal flow. An overabundant provision of capital with respect to actual market opportunities is pushing equity investors to face up to reality in two fundamental ways. The first and most virtuous of these consists of providing strong and direct managerial support to invested companies. This translates into providing not only non-financial services, but also structured partnerships with accelerators and incubators, both public and private, in order to engage proactively in the establishment of a pipeline proportionate to the size of the actual impact assets under management. The second, more controversial approach consists of relaxing constraints in impact screening, including target companies that do not entirely comply with the impact triad as eligible investments.

The second obstacle is linked to exit strategies, which yet remain largely undefined due to the lack of organised markets where the value of impact projects can be adequately assessed.

Thirdly, Tiresia’s report demonstrates the lack of convergence and shared interpretation amongst investors regarding the qualifying elements of impact investing. There is no agreement on the notion of impact risk on impact metrics – which are far from being standardised -, on governance models needed to guarantee so-called ‘mission-lock’ and the balance between financial and social objectives, and finally, not even on the nature of the fiduciary duties involved in impact investing. As a consequence, this potential asset class is beset by severe classification problems, hampering the development of the industry.

As a final remark, although we collected several elements indicating a remarkable growth in impact investing for the next ten years, we believe that the tipping point for a genuine and radical impact industry is still a long way down the road. This is mainly due to the lack of attention from public policy makers, poor infrastructural conditions and the persistent lack of business models that are at once robust and genuinely oriented towards social impact objectives.

The impact of climate change on economic growth

Posted on | by Marta Re Ferrè | Leave a Comment on The impact of climate change on economic growth

 

Climate change can reshape natural ecosystems, threatening life on Earth physiologically, but also economically. By analysing the economic impact of global warming, we can understand why this is a risk we cannot afford to take.


Massimo Tavoni, Full Professor of Climate Change Economics, School of Management Politecnico di Milano, and Director of the European Institute on Economics and the Environment

Climate change will have a profound impact on both ecosystems and human beings. Some of these kinds of impact are not quantifiable from an economic point of view because they have consequences such as the extinction of ecosystems and species. Others have been quantified, especially those which have an impact on production factors such as labour, capital and natural resources. Climate economists have been dealing with this problem for several years now, but to date, estimates regarding economic impact remain a very bountiful research topic, the depths of which have not yet been plumbed.

Recently, alternative methods have been developed to estimate the economic impact of the climate starting from historical empirical data. This approach analyses how temperature changes over the past 40 years have influenced the economic growth of every country in the world, taking into account their institutional, technological and climatic differences. This retrospective assessment has revealed a non-linear relationship between temperature and economic growth: for cold countries (i.e. those below an ‘ideal’ temperature), an increase in temperature could benefit the economy and lead to additional growth. For warm countries, however, it appears to lead to diminished economic growth, more significant in scale the warmer the country is.

By applying these estimates to different future global warming scenarios, we can observe some extremely significant economic losses. For example, for global temperature increases of 3°C – a very likely outcome given current emission trends – these estimates predict losses of World GDP of between 15 and 60%. It is important to bear in mind that these studies – as they extrapolate the information of the past in a future with a different climate – do not include factors such as rising sea levels, ocean acidification, etc.: factors that would, on the whole, increase the economic damage to the climate. As a counterpoint to this, an increased level of adaptability could limit damage. The latest IPCC report on 1.5°C has shown that limiting global warming to 1.5°C instead of 2°C would save 1.5-2.0% of the world’s gross domestic product (GDP) by halfway through the century and 3.5% of GDP by the end of the century. Based on a 3% discount rate, this corresponds to $8.1-11.6 trillion and $38.5 trillion in damage avoided by the middle and end of the century, respectively.

As shown in the Figure below, the impacts of global warming on economic growth are not felt the same way around the world. Both today and in the future, economic losses will mostly be concentrated in hot countries, where further warming leads to strong economic decline. Hot countries are also, on the whole, poorer than cold ones. As a result, climate change will not just slow global economic growth, but also exacerbate global inequalities, actually hitting the countries which have contributed the least to manmade climate change the hardest. This is likely to be the source of strong international tensions.

Figure 1. Projected economic impacts of climate change. Source: Burke et. Al, Nature, 2015.

 

We can attempt to break down the direct and indirect economic impacts of climate change into their relevant sectors. An OECD study (Dellink et al. 2019) assessed a wide range of impacts: changes in crop yields, loss of land and capital due to rising sea levels, changes in fisheries’ catches, damage to capital caused by hurricanes, changes in labour productivity and changes in healthcare costs from diseases and thermal stress, changes in tourism flows and changes in the demand for energy for cooling and heating. The results show that damages are expected to increase twice as fast as global economic activity – the impacts on productivity in both labour and agriculture have the most severe negative economic consequences. The damage caused by rising sea levels will grow faster after the middle of the century. The damage to energy and tourism is very small from a global perspective, as the benefits in some regions outweigh the damage in others. Climate damage caused by hurricanes can have significant effects on local communities, but macroeconomic consequences are expected to be relatively small. In line with the studies listed above, the net economic consequences are expected to be particularly serious in Africa and Asia, where regional economies are vulnerable to a range of different climate impacts.

Given this worrisome outlook, what actions should companies, governments and citizens be taking? Economists agree that pricing carbon is a fundamental tool for discouraging fossil fuels and incentivising green innovation. Staying below 2°C would require putting a price of about 50 Euros/tCO2 on CO2 globally. This seems politically challenging, especially in fast-growing economies which rely heavily on fossil-generated energy. Complementary policies such as incentives for green innovation, as well as behavioural change measures by consumers, could help to kickstart the low carbon transition. We now have the technology to achieve this transformation at reasonably low societal costs, if it is well-designed. It is a question of political capital and public acceptance. Regions such as Europe have a unique opportunity to use this green momentum to restructure their economies and favour a more sustainable and inclusive model.

School of Management for SDGs: the award for theses that impact Sustainable Development Goals

Posted on | by Marta Re Ferrè | Leave a Comment on School of Management for SDGs: the award for theses that impact Sustainable Development Goals

Claudia Cuttini, Celine De Vincenzi, Giulia Montuori, Anabel Velazque, Rocco Abbattista, Giulia Madoglio, and Sonia Saibene: these are the winners of the 2019 edition of the SOM award “for SDGs”, presented yesterday at the “School of Management for Non-Profit Organisations” event held at the Department of Management, Economics and Industrial Engineering.

The award relates to Final Theses and Projects by alumni of the School of Management that impact Sustainable Development Goals, making a contribution to resolving the social challenges of our times, as well as proposing models for sustainable development on an environmental, economic and social level.

There were 27 applicants who presented their work (18 Laureati Magistrali [equivalent to Master of Science] in Management Engineering, and 9 MBA Alumni and other MIP Masters), assessed according to four criteria: impact on SDGs, innovative content, methodology used, and transferability and replicability of the results.

In their MSc theses, Claudia Cuttini and Celine De Vincenzi addressed the issue of reducing food waste along the agri-food supply chain, whilst Giulia Montuori tackled patient experiences with cancer-fighting therapies.

The winning projects, meanwhile, regarded Data Science, in the case of Anabel Velazque (Master in Business Analytics and Big Data) and environment, in the cases of Rocco Abbattista, Giulia Madoglio and Sonia Saibene (International Part Time MBA).

The event also aimed to bring together non-profit organisations in order to share the experience accrued and results achieved within the “School of Management for the Non-Profit Programme”, as well as to launch a new cycle of collaboration.

Establishing ties with non-profit organisations and social companies plays a central role in the programme, which was launched in 2017 with a view to enhancingand forming the School’s social and environmental sustainability and business ethics initiatives into a coherent wider strategy.

This programme provides a space for mutual collaboration and discussion with the non-profit world, facilitating contact between these organisations and the School’s students, professors and staff, in order to make skills available and develop projects jointly.

Over three years, more than 400 students have put themselves to the test, dealing with the knowledge and management challenges posed by non-profit organisations and social companies, running more than 100 projects involving Laurea Magistrale [equivalent to Master of Science] theses and projects, under the guidance of 20 professors and researchers.

An increasing number of the School’s students and teaching staff see social organisations as central players in the economy and in society, and the services sector is an area in which Management, Economics, and Industrial Engineering is increasingly being applied, with scientific interest also growing in step with it.

Internships for students and graduates in the Master of Science Degree in Management Engineering and the MIP Graduate School of Business are yet another way of exchanging knowledge.

In addition to teaching, research projects have also been run with various organisations, the aim of which is to increase the opportunities for joint demonstrations, skill development and research activities. Finally, the School assists non-profit organisations and social companies with their internal training needs.