Sabine VanderLinden | What Is The Transition Economy

March 24, 2021 | Sabine VanderLinden

From smart cities to engaging with sustainability and climate change issues, the world is in a state of flux and reinvention, thanks in part to rapid innovation and the adoption of new technologies. 

But what are the drivers behind this change? 

Alchemy Crew founder and Redsand Ventures’ partner Sabine VanderLinden has identified this period as the Transition Economy and outlined some of the opportunities and risks to be aware of…  

How do you define the Transition Economy?

The Transition Economy is based on shifting business models and how they change from one state to another.

One example is the transition from fossil fuels to renewable energy sources such as wind farms or solar energy within the petrochemical sector or transport companies adopting electric vehicles over fossil fuels. 

This idea of transition has been around for a short time. It is often driven by businesses wanting to embrace a more active and dynamic open innovation model. When technology partners solve complex sustainability issues, they evaluate a company’s strategy to help deliver and launch practical sustainability concepts and services. 

What are the most significant drivers of this change? 

We have identified four behind the Transition Economy. One of the biggest is the growing urbanisation of the world’s population. 

By 2030, there will be an estimated 8.5 billion people worldwide, with 68 percent expected to live in megacities by 2050. There will also be a significant number of elderly citizens too. So the challenges for local authorities will be in designing urban and vibrant smart city centres capable of catering to the vulnerable and meet the needs of the affluent. 

Climate change is also a key consideration and one being addressed in both finance and insurance. For consumers, it’s about becoming more accountable for our carbon footprint and how to offset this. For commercial players, it will be about ways to define how we can mitigate climate change and emission and environmental risks.

Then we also look at the global competition and the increasing scarcity of natural resources. For example, how our agricultural demands will be impacted by climate change. Food production and fisheries are already challenged because they need to enhance how they control their greenhouse gas and methane emissions. 

All sectors will need to give a closer look at technological evolution. Today, the conversation is around ethics, privacy, and security. We will also need to address the amount of heat generated by data centres as we increasingly move to digital assets and use massive amounts of data.

What is the role of private market capital in fostering investment and fueling the Transition Economy?

When we look at sustainability and transition risk within a Transition Economic context, we think about it in terms of investing, financing, and insuring. Because of my 23 years of experience within the insurance sector, my interest is in helping market players identify those sustainability-related emerging risks linked to a changing customer portfolio.

I believe that the interest remains within investing in and financing new projects in private capital markets, such as electric vehicle infrastructures. It’s also related to recognising that assets heavily linked to fossil fuel may someday lose their value. Today, coal mining projects find it hard to find an insurer happy to back up such an initiative. In late 2019, up to 35 insurers signed a charter acknowledging their intent to avoid coal mining projects. 

In the insurance sector, we’re also seeing insurers financing smart building projects for the young and the elderly, utilising and leveraging technologies so they can be more mindful about future carbon footprints. 

Finally, on the investing side, we’ve seen big banks such as BlackRock and Santander supporting green bonds to demonstrate their sustainability commitment. 

The topic of risk is high on the agenda – what needs to be considered?

Sixty-eight per cent of the future population will be Generation Z and Generation Y, both very sustainability-centric. Businesses need to adapt and be more mindful of the environment and appreciate the concerns of younger consumers. 

They need to look at how they use sustainability to build their businesses. They should examine this within different contexts:

  • Operations – how they build and refine basic processes to make them more sustainable. Some of the most common actions have been to reduce carbon footprints, such as electric vehicles or lessen plane travel for business meetings. 
  • Workforce incentives – how can we educate staff on the purpose of sustainability. Some companies are beginning to embed green metrics into compensation schemes for employees. 
  • Products and services – this is easier to visualise when considering tangible goods such as clothing. The opportunity here is to move from creating fast fashion to more sustainable, quality, and slower production means, ensuring that products last longer. The latter entails creating clothing that lasts for longer. There are also new risks with new technology, so risk mitigation is part of this too.
  • Value chain – how are partners and suppliers honouring their sustainable commitments. Are they doing so? If not, then reputational risk comes into play. For instance, major airlines planting trees to offset their carbon footprint may demonstrate that they are doing enough for the environment. But as we see in the press, this is not always the case.

Where are we on the journey of transition? 

We are at a very early stage as we don’t have access to the complete set of frameworks required to do this effectively. However, we are moving fast to putting the proper steps into motion. 

For example, how we address greenhouse gas emissions will evolve as we learn what transition risk genuinely means.  Insurance has perfected its usage of climate risk modelling; however, with new risk types emerging, the focus will be on new kinds of models able to assess emission and environmental risks. Those do not exist today.

Something interesting to note and shared by the Bank of England is that if government policies were to change in line with the Paris Agreement, then two-thirds of the world’s fossil fuel reserves could not be burned. This would significantly alter the value of assets held by banks and insurers. 

The risks are significant and will lead to the repricing of certain traditional assets – big companies need to prepare for this.

Which companies have impressed you with the way they are approaching the Transition Economy?

Those leading the way with transition are those with a long-term strategy embedded within key sustainability drivers.  They have realised that the most effective way to approach the problem is via a combination of leadership, process, governance, structure, people and technology. And they understand well why and how technology will be an effective enabler to accelerate their ability to succeed. There are some big names out there, such as Orsted and Schneider Electric. Within finance, Intesa Sanpaolo has been working on its circular economy business model for quite a while.  

FinTech companies such as Stripe look to help their clients (both big and small) invest money into sustainable projects that can improve and reduce a business carbon footprint and educate them on the overall topic via practical examples. 

Online investment company Nutmeg has been doing some great work around socially responsible investing recently. 

Then Robotic Process Automation (RPA) company UI Path is humanising AI by understanding how best to combine ethical and augmenting AI. Several Insurtechs have recognised the challenge and are moving fast to becoming more responsible not only on paper but also with their actions. 

What is the most considerable risk in transitioning? 

You need to take action – the risk of doing nothing remains a significant issue for many. A recent study around Fortune 500 companies showed that only 51 percent of companies on the list in 1955 still are today. If you do nothing, then you are in grave danger of being left behind. 

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Watch the full exchange between Sabine and Redsand Ventures’ Nicole Anderson below:

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