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Pay attention to the risk environment, or live to regret it

20 January 2022 Gareth Stokes

A thorough understanding of the global risk environment is necessary for firms operating in today’s competitive marketplace. Even small and mid-size, domestically-focused firms can get a jump on competitors by staying up to date on the dominant themes keeping the leadership teams at global multinational corporations up at night. The Global Risks Report 2022 (GRR), published annually by the World Economic Forum (WEF), offers a comprehensive assessment of prevailing risk sentiment. This year’s report was compiled with assistance from Marsh McLennan, SK Group and Zurich Insurance Group.

Risk and resilience nuggets

FAnews attended the GRR virtual report launch to get wind of the main risk concerns as we enter 2022. WEF President, Børge Brende, confirmed what media attendees had expected all along, namely that environmental and societal concerns feature prominently in the survey. Climate action failure, extreme weather and biodiversity loss took first, second and third place on the list of ‘most severe risks on a global scale over the next decade’  with social cohesion erosion and livelihood crises occupying positions four and five. 

The report’s executive summary kicked off with some comment on the pandemic: “Covid-19 and its economic and societal consequences continue to pose a critical threat to the world [whilst] vaccine inequality and a resultant uneven economic recovery risk compounding social fractures and geopolitical tensions”. This inequality, they write, reflects in the uneven distribution of vaccines, globally, with the world’s 52 poorest companies vaccinating an average 6% of their populations against Covid-19 by the time of publication. It also reflects in recent economic data, with the GDP growth in developing economies, excluding China, languishing 5.5% below their pre-pandemic forecast GDP growth whereas advanced economies are on track to exceed their 2024 forecasts by 0.9%. 

Risk across the ages

When asked to identify when a particular risk would become a critical threat, survey participants shortlisted extreme weather and climate action failure among the top five on a 0-2, 2-5 and 5-10 year view. “Climate change is already manifesting rapidly in the form of droughts, fires, floods, resource scarcity and species loss, among other impacts,” notes the GRR. 

There is plenty of data to support the climate change narrative, not least the rise in frequency and severity of natural catastrophes. Global reinsurer Munich Re estimates that overall natural disaster losses exceeded US$280 billion in 2021, with Hurricane Ida weighing in with US$65 billion on its own. “Many of the weather catastrophes fit in with the expected consequences of climate change, making greater loss preparedness and climate protection a matter of urgency,” writes the reinsurer. The GRR meanwhile draws attention to recent extreme temperatures recorded in Madrid, with a record summertime high of 42.7C, and Dallas with a low of -19C in winter. In 2020, the Arctic Circle achieved average summer temperatures 10C higher than in prior years. 

Peter Giger, Group Chief Risk Officer at Zurich Insurance Group, said that the ongoing transition to net zero would be as transformative as any of the past industrial revolutions. “Failure to adapt will lead to a loss of relevance and the [possible] disappearance of companies and whole sectors,” he warned. Although progress was made at COP26, the latest commitments fall short of achieving the desired 1.5C world, referring to the target of limiting the global average annual temperature rise to just 1.5C by 2100. The good news, according to Giger, is that “governments, consumers and businesses are increasingly focused on sustainability”. He expects new IFRS frameworks to improve disclosure standards and the rapid rise of carbon offset prices to finally take effect. 

“On the positive side, we are close to a situation where [the producers of] almost 80% of global emissions are part of a commitment towards a net zero; five years ago this was at less than 20%” said Brende, adding that the cost of inaction far exceeds the cost of action. 

This is where things get interesting

A common thread in risk reports is that risks are inextricably linked. So, for example, climate change failure has a link into social cohesion erosion and vice versa. “Governments, businesses and societies are facing increasing pressure to thwart the worst consequences [of climate change], yet a disorderly climate transition characterised by divergent trajectories worldwide will further drive apart countries and bifurcate societies, creating barriers to cooperation,” notes the GRR. This explains why social cohesion erosion is seen as a top short-term threat in 31 countries including G20 economies such as Argentina, France, Germany, Mexico and of course, South Africa. 

South Africans experienced first-hand what happens when extreme poverty and increasing polarisation and resentment in society intersect. The July 2021 civil commotion that tore through areas of KwaZulu-Natal and Gauteng resulted in at least R50 billion in damages, with state-owned special risks insurer Sasria SOC Limited expected to pay R32 billion post-event. 

There are a number of peripheral issues that the GRR spends some time on, including rising nationalism and worsening fractures in the global economy that will result in less foreign aid flowing from wealthy to poorer nations. And governments are struggling to intervene. Giger said that the economic impact of pandemic, including tighter supply chains, rising commodity prices, inflation and increased levels of debt made it more of challenge for nations to start implementing policies that will have material impact on their economies and citizens. 

Money is the root of all evil

An unimaginable US$14 trillion was injected into the global economy through pandemic. “This stimulus has brought us through a difficult period, there was no alternative, but now countries must find a balance between continued stimulus, quantitative easing and inflationary pressure,” said Brende. Of greater concern is that governments could struggle to service their ballooning debts as inflation rises. 

It was surprising that cyber risk did not feature in the top 10 risks for the coming decade. The report did, however, acknowledge the risk posed by growing dependencies on digital systems. In 2020, Malware and ransomware attacks increased by 358% and 435% respectively… “Lower barriers to entry for cyberthreat actors, more aggressive attack methods, a dearth of cybersecurity professionals, and patchwork governance mechanisms are all aggravating the risk,” notes the GRR. Carolina Klint, Risk Management Leader: Continental Europe at Marsh observed that cyber risks were rapidly evolving despite many companies not having started contemplating the risks they face in this area. “Last year we saw the highest average cost of data breach yet,” she said, adding that US cyber insurance pricing had gone up by as much as 96% in Q3 2021. 

Other emerging risks stem from the ingress of the private sector into space, with 70000 space launches planned between now and 2032. “One consequence of accelerated space activity is a higher risk of collisions that could lead to a proliferation of space debris and impact the orbits that host infrastructure for key systems on Earth, damage valuable space equipment, or spark international tensions,” notes the GRR. Space, incidentally, was among the five ‘flags’ raised by acclaimed scenario planner and futurologist Clem Sunter recently. 

Collaboration and partnerships indicated

“The risks identified in this report demonstrate the need for companies to improve their organisational risk resilience,” concluded Saadia Zahidi, Managing Director at the WEF. She said that companies had to ensure that their resilience measures were externally focused to include firms across the supply chain. She also warned against rewarding efficiency over resilience, and growth over sustainability. The bottom line: global risks can only be addressed with international collaboration and genuine partnerships between the public and private sectors. 

Writer’s thoughts:
The WEF Global Risk Report 2022 runs to 117 pages containing detailed assessments of established and emerging risks. It is impossible to sum up the information contained in this report in a single line; but if I had to accept the challenge, I would say: Pay close attention your firm’s approach to environmental, social and governance (ESG) matters. Do you think your business does enough to address the E and S in ESG? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected]

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