Tuesday4 February 2020 ★ FINANCIAL TIMES 11

Opinion

build understanding and manage risk.

Nato and the EU are already taking

initiative in some of the five key areas.

They are prioritising space andcyber-

space; increasing focus on critical infra-

structure; increasing defence spending;

readiness; and their understanding of

our collective challenges. Nato’s efforts

to build resilience and focus on hybrid

warfare are also positive — and neces-

sary steps. Yet more needs to be done.

The transatlantic community must

stand together to hold China account-

able and refrain from transactional

approaches that prioritise short-term

economic gain over security and our

open way of life. Treating Beijing’s

ambition for hegemony and economic

supremacy as a fait accompli also does a

disservice to Chinese citizens who yearn

for reform.

The US and Europe must remain the

guardians and sentinels of a stable,

inclusive, rules-based order and draw

upon shared strengths and principles to

meet China’s challenge to it.

The writer is an acting US assistant

secretary of defence

be allowed to mask terrible truths. We

must think strategically and stay uni-

fied, particularly within multilateral

frameworks, avoiding actions that could

drive Beijing and Moscow closer.

Beijing’s efforts, whether economic

inducements or military and paramili-

tary operations, do not discriminate

between affluent, industrialised states

and fledgling ones. Left unchecked,

China would reshape global norms and

place Beijing at the centre. We must

strengthen our resilience by sharing

information about Chinese economic

malpractice and offering credible alter-

natives o Chinese investment andt

financing, and empowering civil society,

such as an independent media.

Lastly, we must carefully consider our

interactions with the PLA. China

engages with advanced militaries to

strengthen its capabilities, gain insights

on adversaries, and make itself appear

more legitimate. We must be consistent,

realistic and clear-eyed about the limits

of our ability to influence the PLA. The

US and Europe should adopt common

approaches to defence ties with China

that keep lines of communication open,

China’sPeople’s Liberation Army si

rapidly increasing its military capabili-

ties and expanding its global footprint.

Beijing has positioned itself to play a

spoiling role by enabling local aggres-

sion and coercion, or limiting access to

economic corridors vital to Europe. We

must close our vulnerabilities. We must

revitalise and reinvest in our shared

defences, harden networks and deepen

interoperability with training, exercises

and information sharing.

While Nato stays focused onthreats

posed by Russia nd prepares to com-a

pete with China, we must recognise that

these authoritarian regimes are seeking

to replace a rules-based order with their

own particular brand of governance.

Their propaganda praising the benefits

of authoritarianism regimes must not

atlantic community must make China

a shared priority, and stand together to

advance an affirmative vision grounded

in the rule of law, the peaceful resolution

of disputes, freedom of navigation and

overflight, and free, fair and reciprocal

trade. We should develop a common

strategicunderstanding of the challenge

— and opportunity — of China’s rise

and commit to principled responses in

five key areas: critical infrastructure,

military capabilities, China-Russia rela-

tions, resilience, and contacts with

China’s military.

China seeks strategic advantage in

key technologies, telecommunications,

transportation and energy. Chinese

companies such asHuawei nd ZTE, area

seeking to corner the market in 5G tech-

nology. If they succeed, the practical

risks include the erosion of data secu-

rity, information sharing, and military

readiness — all critical capabilities for

Nato’s defence of our common home-

land. We must avoid dependency

through tighter screening of foreign

investment, using trusted providers,

and investing in homegrown infrastruc-

ture, research and development.

A

fter seven decades of adapt-

ing to the changing security

environment, transatlantic

unity faces a new test: the

return of great power com-

petition spurred by the rise of China.

As a first principle, it is important to

understand what competition with

China is, and what it is not. It is compre-

hensive, spanning economics, political

influence, technological advantage and

military balances; it is not containment,

nor does it imply the inevitability of

confrontation or conflict. We should

welcome competition with China — pro-

vided that it occurs on a level playing

field. Fair competition would allow Bei-

jing to better serve the needs and aspira-

tions of its people while contributing to

global stability, security, and prosperity:

conditions that would benefit us all.

To compete successfully, the trans-

I

t is easy to be rude about the ven-

ture capital industry. So here goes.

The criticism runs that the VC sec-

tor is full of too many over-funded,

ill-disciplined chancers who pass

off hype for reality, groupthink for

insight and luck for good judgment.

What’s more, a staggering 95 per cent

of VC firms fail to make a decent enough

return o justify the risks their investorst

run. Yet it is hard to detect a blush as

they extract extravagant management

fees for mislaying their backers’ money.

Well mightJim Clark, one ofNetscape’s

founders, describe venture capitalists as

“velociraptors”, intelligent but rapa-

cious dinosaurs.

We may also wonder how far the cur-

rent mindset of the VC industry is

responsible for the slowdown in new

business formation and lack of eco-

nomic dynamism in the US. All too

often, addicted to capital-light, metric-

heavy software businesses, VCs are fail-

ing to bet big enough on the break-

through technologies that tackle our

biggest challenges, such as climate

change or cancer.

Katie Rae, chief executive and manag-

ing partner ofThe Engine, a Boston-

based “tough tech” venture fund, says

that many VCs have lost sight of their

original purpose.

“VCs were all about funding tech

breakthroughs but that has got lost,” she

says. “A lot of VCs look more like private

equity companies that do not want to

lose any money so they end up backing

dog-walking apps rather than quantum

computing.”

Historically, the best venture capital-

ists have performed a vitalcapitalistic

function: turning seemingly outlandish

ideas and transformative technologies

into everyday realities. Semiconduc-

tors, recombinant insulin and internet

search engines have all come to market

largely thanks to VC backing.

One study rom 2015 found that 42f

per cent of all US companies that went

public since 1974 were VC-backed, cre-

ating some $4.3tn of market capitalisa-

tion. These companies employed 4m

people and accounted for 44 per cent of

the research and development spending

of all US public companies.

“The VC industry is cut-throat. It has

unappealing characteristics. But most

countries would kill for an industry like

this,” says Tom Nicholas, a professor at

Harvard Business School. “It provides

the capital and expertise for start-ups to

succeed.”

InVC: An American History, Mr Nicho-

las traces VC’s high-risk, high-reward

mentality back to the19th-century

whaling industry, which developed a

novel form of venture financing. The

idea was to back an expert captain who

could fit out a robust ship, hire the best

crew and endure an average of 3.6 years

at sea. On landing a whale, the captain

would return investors’ money several

times over. But many ships returned

empty-handed or sunk.

Intriguingly, the pattern of financial

returns made byGideon Allen &Sons,

the smartest backers of whaling ven-

tures, were almost identical to those

achieved bySequoia Capital, one of the

best VC firms operating today.

One of the striking features of the sub-

sequent evolution of the VC industry,

according to Mr Nicholas, was how con-

tingent it was on time, circumstance and

people. The west coast model of VC

investing, with which we are most famil-

iar today, owed an enormous amount to

massive government investments in

technology during the cold war, the

expansion of world-beating universities

in California and the emergence of some

remarkable entrepreneurs and vision-

ary investors, such as Arthur Rock, Tom

Perkins and Don Valentine.

The worry for Silicon Valley is that

some of that Schumpeterian impulse for

creative destruction is now fading.One

argument has it hat Silicon Valley ist

becoming increasingly “corporatised”

with Big Tech firms, such asGoogle,

Facebook nda Apple, championing the

mantra that “big is beautiful” in the face

of emerging competition from China.

The benign view is that Big Tech may

be internalising much of the innovation

once carried out by start-ups; the

malign interpretation is that Cupertino,

California is snuffing out smaller rivals.

Mr Nicholas says that other tech clus-

ters in the US and the rest of the world

will provide fiercer competition in

future. “I have been teaching a course

on Silicon Valley for 14 years and people

always think there is some degree of

permanence about it. But other centres

of innovation such as Lowell, Pitts-

burgh, Cleveland, Detroit lasted shorter.

“Silicon Valley is overdue a disrup-

tion. It is not a hotbed of start-ups any

more,” he says.

Metaphorically, at least, the VC indus-

try needs to get back in the business of

funding wildly ambitious entrepreneurs

intent on harpooning whales.

[email protected]

The worry for Silicon

Valley is that the

impulse for creative

destruction is fading

Europe and the US must stand together on China

David

Helvey

The west needs to make

Beijing accountable and

efrain from prioritisingr

short-term economic gain

W

hat gets measured gets

managed. Theclimate

impact of business and

consumer decisions is

not being fully meas-

ured and thusnot being properly man-

aged. Decisions on where to invest and

what goods and services to buy are

ignoring the consequences for our

planet. This market failure could prove

to be our undoing, unless it is urgently

fixed.

A global carbon tax ould be by farw

the neatest policy solution: put simply it

would force everyone to internalise the

climate externality. The IMF estimates

that to deliver the 2015 Paris climate

agreement’s goal of keeping the global

temperature rise well below 2C,we need

a tax worthabout $75 a tonne of carbon.

But a charge of that magnitude is politi-

cally toxic for many and, despite consid-

erable efforts to clinch a global deal,

there is little sign of a governmental

breakthrough.

While we wait, there are other levers

we should pull to help transform behav-

iour. To put us on track toward net zero

carbon emissions by 2050, we need five

groups of market participants to step up

and align their work with the Paris

agreement goals. They have the power

to reshape financial incentives in this

area.

First, we need to incorporate climate

effects into the rules that govern how

companies calculate their profit and

capital.Inmore than 140 countries, the

International Accounting Standards

Board sets these standards. Until

recently, companies could report

accounting numbers with little regard

for either the climate consequences of

their activities or the probable impact of

efforts to reduce carbon emissions.

This matters because financial state-

ments underpin capital allocation deci-

sions. If you ignore decarbonisation

promises, a coal-fired power station

looks like a good investment choice

because it appears to offer high returns.

Factor in policies to phase out coal

power, and the station looks like a much

riskier, less attractive choice. In Novem-

ber, the IASB reminded companies that

they should be including anticipated

material climate-related impacts in

their accounts. We need to go a step fur-

ther. Companies need to make visible

what their profit and capital would be,

given a sustainable climate. Paris-

aligned accounting would be catalytic.

Second, auditors — particularly the

Big Four firmsPwC, KPMG, EY nda

Deloitte —need to call out companies

that fail to acknowledge that their finan-

cial statements would be hit by an accel-

erated transition to net zero carbon.

This would enable investors to evaluate

climate risks, and shift capital today,

reducing the danger of a disorderly

transition in coming years.

Third, shareholders need to vote

against directors and auditors who fail

to act to prevent climate harm. Proxy

agenciesInstitutional Shareholder Serv-

ices nda Glass Lewis, which advise

investors on how to vote on an estimate

97 per cent of company votes, have a

responsibility to lead here. Their voting

recommendations should not support

directors who are pursuing strategies

that exacerbate climate change.

Fourth, the largest asset managers

have a critical role to play.BlackRock,

Vanguard nda State Street hould com-s

mit to supporting only those directors

who align their corporate strategies

with net zero carbon emissions by 2050.

Fifth, the credit rating agencies,S&P,

Moody’sandFitch, have the powerto

help determine companies’ borrowing

costs. If they capture climate risks in

their ratings, fossil fuel-based activities

would become more expensive, while

cleaner solutions would get cheaper.

The rating agencies should pledge to do

that.

Together, these five groups could do

a lot to align business incentives with

the goals of the Paris agreement. Who

knows, they might even generate much-

needed momentum toward a political

settlement as well.

The writer is head of stewardship at Sarasin

& Partners

How to measure

the impact

of business

on the planet

Natasha

Landell-Mills

We have to incorporate

climate effects into rules

that govern how corporate

profits are calculated

Venture capitalists should harpoon more whales

businesses are hooked on cheap labour

so don’t look for ways to become more

efficient.”More important tosupporters

is that higher wage costs translate into

higher incomes. The blue-collar con-

servatives of cohesion country like this.

But a lean business controls costs.

Add in increases to the minimum wage

and the shelving of a corporation tax cut

and the investment landscape is more

nuanced. The digital services tax on the

UK revenue of tech giants is popular pol-

icy with a fairness narrative — pure

cohesion country — but it is a wrinkle in

US trade talks and unlikely to attract

venture capitalists.

Where possible though, the govern-

ment will attempt to inhabit the overlap

of its two visions or at least say it is doing

so. Mr Johnson is, after all, a fan of hav-

ing and eating cake. For now his govern-

ment is talking the talk of a start-up

nation. But when the imperatives clash

he knows that the legions who voted for

him were cohesion conservatives rather

than radical technocrats.

[email protected]

divergence looks strong to Brexiters.

The stories we spin round our dreams

can convince even the authors.

The Huawei decision, made in defi-

ance of security concerns and strong US

pressure, was a win for the start-up

nation. But ranged against the suppos-

edly containable security risk were the

demands of a competitive economy for

superfast broadband. The start-up

nation felt it could not wait.

The HS2 rail project ticks the infra-

structure box. But it is bloated, expen-

sive and speaks to many of the concerns

about top-down pet projects. A start-up

nation can think of better ways to spend

the money. But those who support cohe-

sion country want HS2. Its most power-

ful supporter is the Tory mayor of the

West Midlands.

Last week also saw the government-

commissioned report on a new immi-

gration system. Start-up nation sup-

porters can point to moves to secure

more high-skill migrants, but other lim-

its on inflows are intended to increase

wages at home. One minister arguesthis

will boost productivity: “Too many

probable next business secretary, is a

cohesion play for the regions couched in

the language of the start-up nation.

But not every issue is so well located

and nowhere is this more obvious than

in Brexit trade negotiations. The

start-up nation view wants regulatory

divergence, not least for biotech and sci-

entific innovations. It sees opportunities

in sloughing off the EU’s regulatory and

protectionist instincts and will accept

costs to existing businesses for this free-

dom. This view is unsentimental:some

ministers talk blithely of accepting hits

to “legacy industries”. A country

focused on cohesion may prefer to hold

on to existing manufacturing jobs until

the new ones look less theoretical. For

now the two sides are talking tough

ahead of a deal both want. But the lure of

The closest thing Brexiters have to an

economic case is the start-up vision. In

it, the UK is forced to become more

competitive, even though this ironically

was the same argument originally made

for British membership. In this view

Brexit serves an adrenalin shot to the

nation’s sluggish economic heart,

though it will need to be quite a jolt to

make up for the .9 per cent lower 4

growth ver 15 years anticipated by theo

Treasury under a Canada-style trade

agreement with the EU of the type the

prime minister seeks.

The foremost advocate of the start-up

nation is Dominic Cummings, the prime

minister’s chief strategist. He sees the

UK as a buccaneering spin-off from an

over-regulated European megalith. It is

a nation of innovation, high ambition,

pioneering science and less bureauc-

racy; government projects are data

tested and product managed; people

move fast and break things. He sees

public spending on research and devel-

opmentdoubled to £18bn ver fiveo

years. Even so, conditions are not ideal.

UK growth is likely to remain sluggish.

There are limited funds for a moonshot.

The conflict between this and the

cohesion country narrative is a tension,

not a war. Mr Cummings also argues for

levelling up the UK economy with infra-

structure investment for the north and

Midlands. In the Venn diagram of these

imperatives, policy will often land in the

overlap. Investment in skills, which

chancellor Sajid Javid favours, is in the

sweet spot. The new enthusiasm for free

ports, championed by Rishi Sunak, the

A

nyone wishing to under-

stand the tensions slowly

building in thegovernment

should study the policy

arguments of the past few

days. The divide is not as simple as the

often suggested one between free mar-

keters and interventionists. There are

few non-interventionists in Boris John-

son’s administration. The strain is

between two only partially aligned

visions of Brexit Britain: the cohesion

country versus the start-up nation.

The rival policy principles are visible

in the debates over allowingHuawei

into the UK’s 5G network, immigration

controls and the future ofHS2, the high-

speed rail project connecting London to

big cities of the north. On one side is the

notion of a re-engineered competitive

economy with new high-tech industries.

On the other is the more prosaic impera-

tive of fixing the social problems that

presaged the Brexit vote.

For many Leavers, Brexit was always

about social cohesion, immigration and

sovereignty. Those who claim an eco-

nomic benefit have struggled to move

beyond the conceptual case. For some

the dividend would be new free trade

deals, especially with the US.

Start-up nation

versus cohesion

country

Some ministers talk of hits

to ‘legacy industries’, while

others prefer to wait until

new jobs are less theoretical

BRITAIN

Robert

Shrimsley

TECHNOLOGY

John

Thornhill

FEBRUARY 4 2020 Section:Features Time: 2/20203/ - 17:56 User:alistair.hayes Page Name:COMMENT, Part,Page,Edition:LON , 11, 1