What is a Market Disruption?
A market disruption is a situation where markets cease to function in a regular manner, typically characterised by rapid and large market declines. Market disruptions can result from both physical threats to the stock exchange or unusual trading (as in a crash), but need not always be associated with the share market. Examples of market disrupters are: Uber entering the ride share market, AirBNB for hotels, the car disrupted the horse and cart market, similarly, renewable energy is disrupting the traditional energy market.
We are currently facing a transition in the finance market that is being driven from three directions:
1 In order to avoid a disruptive transition in the finance market, policy makers are energetically promoting a more effective and transparent method of disclosing the risks resulting from climate change. Chairs of a number of influential Reserve Banks have recently re-iterated their intent to change the way financial entities disclose and manage risks. They know that for markets to do what they do best – allocate capital effectively and dynamically – they need the right information. When risks are unknown or ill-defined, the market cannot allocate resources in an efficient and profitable manner.
2 The WEF Global Risks report published at Davos in February this year categorised five (of the top six) major risks emanating from climate change. When a group of such power and authority identifies risk of this magnitude, it is imperative that Directors pay heed and have a clear understanding of this risk and a resulting mitigation strategy.
3 All countries are facing a substantial disruption in their energy markets – particularly in power generation. The drive towards renewables and battery technology will result in early adopters making investment decisions that will result in the way business is done. Electricity supply is fundamental to the operation of an economy and one way or another – all businesses will be impacted by this transition.