Asia-Pacific must recognise link between economic and environmental risk: Zurich

The insurer’s research reveals that economic risks are seen as the biggest threats to doing business in the APAC region.

Much less concern is directed towards environmental risks but, said the insurer, businesses in the region must be more aware of the interconnectivity of risks and the likelihood that the threats to APAC’s economic growth will come from environmental and social trends.

Consequently, Zurich is appealing to APAC risk managers to ensure their companies build resilience to environmental and social risks as well as economic risks in order to ensure the continued, long-term development of the region.

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The research was based on the insurer’s work with the World Economic Forum’s Global Risks Report, and canvassed more than 13,000 APAC-based executives from 19 countries in the region. The executives were asked to rank 29 separate global risks for both impact and likelihood over a 10-year time period.

The report has been running for more than 10 years and this year’s global version was notable for the fact the risk with greatest potential impact was the failure of climate change mitigation and adaptation. This is the first time an environmental risk has topped the poll.

Furthermore, environmental and social factors made up the top five risks of highest concern—from water crises, climate change and extreme weather (39.8%, 36.7% and 26.5% respectively) to food crises and social instability (25.2% and 23.3%).

Environmental and social trends also featured heavily in terms of likelihood, accounting for all of the top five—from large-scale involuntary migration, extreme weather, climate change, interstate conflict and natural catastrophes.

The global survey also highlights the increasing interconnectivity of risks facing the world, said Zurich. However, these trends were not replicated among the APAC-based participants in the survey.

Instead, economic risks were ranked as the number one risk by 13 of these countries. Within this category, energy price shocks were identified as the biggest concern, predominantly by developing countries including Bangladesh, Indonesia and Sri Lanka.

Energy prices have been volatile in Asia for some time, ever since the financial crisis and the commodity price hikes of 2010-2011. However, observers are increasingly highlighting the precarious reliance that Asia has on its endowment of fossil fuel reserves.

According to Asia’s Energy Challenge: Key Issues and Policy Options, a study published by the Asia Development Bank (ADB) in 2014, the region currently possesses around a quarter of the world’s coal reserves but just 16% of conventional gas reserves and 15% of technically recoverable oil and natural gas liquids.

To bridge this gap, Asia will have to triple oil imports by 2035, making it even more vulnerable to external energy price shocks.

Consequently, the ADB said that “meeting developing Asia’s growing energy needs without radical energy shifts in the energy supply will result on both local and global environmental deterioration”, citing an increase in the use of fossil fuels and an alarming 81% rise in coal consumption.

“This would double carbon dioxide emissions to nearly 24 billion tons per year by 2035. Developing Asia alone would then emit more than 22 billion tons, which climate change experts see as that year’s maximum sustainable carbon dioxide emissions for the whole world,” adds the report.

Following closely behind is concern about asset bubbles, a risk felt equally by both developed and developing APAC nations, given that it was named as the number one threat by six APAC nations—Australia, Cambodia, China, Hong Kong, Myanmar and Thailand.

As with the worry over energy price shocks, the concern over asset bubbles is understandable for APAC businesses. Ever since China’s economy first showed signs of a slowdown, it has faced unprecedented levels of market volatility that have spread across the region’s securities markets and beyond.

Attempts by the Chinese authorities to intervene in the market by banning short-selling, restricting the capital outflow from the country and internationalising its currency have done little to quell the market’s unease or stop references to China building the greatest construction boom and credit bubble in recent history.

Meanwhile, APAC countries named cyber attacks as the seventh biggest risk to doing business, with Japan, Malaysia and Singapore all singling it out as the risk of highest concern.

Zurich said this is another indicator of the region’s overwhelming business and economic focus, given that cyber attacks did not make it into the top ten in the global report.

Environmental risk is a less predominant concern for APAC businesses though, when compared on a global scale, and this is of concern to Zurich. Just two of the top ten perceived risks were categorised as ‘environmental’. Natural catastrophes were ranked fourth and man-made environmental catastrophes were ranked ninth.

In addition to the high ranking for social and environmental concerns, the Global Risks Report is notable for the broad range of high-ranking risks—something which underlines the increasing interconnectivity of risks, said Zurich.

This means the risks to APAC’s economic growth will also come from environmental and social trends and will be exacerbated by global climate change in the medium to long term.

“In Asia-Pacific, we are witnessing the very tangible effects of climate change in the rising frequency and intensity of water shortages, floods and storms,” said Stuart Spencer, APAC chief executive, general insurance, Zurich Insurance Group.

“It will be increasingly important that the region understands the connection between its economic growth drivers and impacts of climate change, else we will face a perfect storm that could ultimately put APAC’s long-term growth in danger.

“We must act now and the insurance industry has a critical role to play in supporting economic activities that help people, communities and businesses increase resilience and adapt to what we know to be inevitable changes—in an environmentally-conscious and sustainable manner.

“If Asia-Pacific can balance economic and environmental priorities, our region will not only protect its impressive progress and achievements to date, but also continue to thrive in the future.”

Zurich’s report includes a number of potential scenarios for Asian companies that could result from the aforementioned environmental and social trends.

For example, climate change could lead to large-scale forcible population displacement. Globally, more than 60 million people have already experienced this, which is equivalent to the entire population of Thailand.

Rising temperatures and rainfall shortages could also create food crises by reducing crop yields and driving up prices, creating added pressure on the supply-demand balance.

Meanwhile, southeast Asia could suffer from unprecedented summer heat extremes if climate change was to result in a two-degree increase.

For multinational companies with a presence in APAC, these scenarios could have serious operational implications, said Zurich, citing the logistics disruption that could occur from flooding, damaged infrastructure or raw material price volatility.

Zurich’s research also cites the rapid urbanisation of Asia as an important factor in the relationship between economic growth and social and environmental trends. Asia’s urban populations are forecast to increase from 48% to 64% by 2050.

Asian countries are developing from largely rural areas into urban cities in the pursuit of economic growth—if this urbanisation is too rapid and unplanned it could create a number of environmental and social risks.

These could include water crises and the spread of infectious disease, social instability and the failure of critical infrastructure. Meanwhile, in coastal areas these risks could also include rising sea levels and increased weather volatility, as has been the case in other regions in the world.

“City populations punch above their weight in terms of economic and social contribution but development must allow for an increasingly wide range of risks for it to be truly sustainable,” said Steve Wilson, chief risk officer, general insurance, Zurich Insurance Group.

“As Asia-Pacific develops, the concentration of people, assets, critical infrastructure and economic activities in cities will increase vulnerability to damage from natural catastrophes, especially when compounded by climate change impacts such as storm intensity and sea level rise,” he continued.

“The Global Risks Report shows clearly that the impact of climate change is intrinsically bound to economic prosperity. Asia-Pacific’s challenge is to respond to this combined threat and opportunity with structured, collaborative and sustainable action,” concluded Mr Wilson.