Prepare for a decade of volatile risks ahead, warns WEF

Investment in risk management and mitigation will be critical as geo-political conflict, climate change and the cost of living create a volatile risk landscape over the next decade, warns the World Economic Forum (WEF). Launching the forum’s Global Risks Report 2023, insurance industry and WEF experts urged businesses and political leaders to build resilience, and prepare for a challenging and risky ten years ahead. “Today, leaders are facing multiple crises that are happening at the same time. Essentially poly-crises… It is clear that wave after wave of crises, the current poly-crises situation, is creating an incredibly challenging environment for leaders,” said Saadia Zahidi, managing director of the WEF. “The investment made in resilience today is critical because in this extremely fragile environment, were there to be another shock like the one we saw last year, it may be unmanageable. That medium to long-term focus on resilience across multiple systems is critical,” she told media at the report’s launch event in London. Drawing on views of 1,200 global risk experts and policymakers, the cost of living crisis tops the ten biggest threats over the next two years in the WEF report. However, when looking at the ten-year timeframe, environmental and climate risks dominate. “In terms of overall optimism or pessimism about the state of the world… when we asked leaders, well over 80% are expecting consistent ongoing crises that are compounding each other on an increasingly volatile trajectory. Although ten years out that number goes down to 50%, it’s still a fairly negative outlook for a decade,” said Zahidi. Business leaders face a combination of re-emerging old risks and new geopolitical, economic and environmental threats, she warned. The risk landscape presented in the WEF report is volatile and evolving, with interconnected risks that impact and exacerbate one and other, according to Carolina Klint, risk management leader in continental Europe at Marsh. Businesses need to take a step back and start planning for the unexpected, she advised. “The things we worry about are too short term and modest. Taking a long-term and holistic view of risk on the horizon is vital, making sure we have diversity around the table when we talk about risk and resilience to ensure all different perspectives are being captured. If we do work together we are able to prepare for, and respond to, these compounding risks with better agility, and we might even be in a position to create a more secure future,” Klint said at the WEF report launch. The more volatile risk landscape is also an opportunity for risk professionals to move from risk management to “strategic resilience”, according to Klint. “Connecting risk with strategy there is an opportunity to capture the positives and opportunities that come with change… staying in business, remaining relevant, adapting to a changing customer base are all positive opportunities,” she said. Natural disasters and climate change were among the global risks ranked highest by severity over the short and long term in the Global Risks Report 2023. The failure of climate mitigation and adaptation, for example, ranked first and second respectively over a ten-year horizon. They were also the risks that businesses felt least prepared for, with more than 70% of respondents to the Global Risk Perception Survey that informed the report rating climate mitigation as ineffective. Natural disasters and extreme weather events were ranked second by severity over the next two years, and third over the ten-year timeframe. “Climate change is still an existential risk for our planet and it will lead ultimately to greater crises and shocks than we are experiencing today. A Net Zero future is still in reach, but the window of opportunity to take action is closing rapidly. And the time for action is definitely now,” said John Scott, head of sustainability risk at Zurich Insurance. He warned that the world is not doing enough to tackle climate change, as shown by last year’s UN FCC report. It predicted a 50% chance of breaching the 1.5c limit built into the Paris agreement by the end of the decade. “It feels like we are really challenged in achieving our climate objectives,” said Scott. He is not optimistic about any marked improvement when it comes to climate mitigation in the near future. He warned that with climate mitigation lagging, the worry is that the focus is now simply turning to adaptation. “We are living in a world now where what is scientifically necessary and what is politically expedient don’t match… At COP27, unlike COP26 where there was at least an agreement to phase down thermal coal, we failed to agree on phasing out fossil fuels, which was a missed opportunity. It feels like we are heading for a much slower and disorderly climate transition in reality,” Scott said. Klint stressed that the list of big risks facing business continues to grow. Certain themes are emerging, such as the effect of inflation and the cost of living crisis, as well supply chain security and accesses to raw materials, she said. And many of these risks are interlinked, with inflation stoking civil and political unrest, which then creates supply chain risks. The war in Ukraine, meanwhile, has affected access to certain raw materials and led to sanctions, said Klint. The conflict between Russia and Ukraine has also highlighted Europe’s vulnerability to energy insecurity, noted Klint. “We are at the point now where we need to recognise we will not be able to solve the energy crisis by next winter. It’s not about surviving this now or next winter, but about the next five winters, and it is about extreme summers that can also put pressure on power grids,” she warned. Zahidi noted that the nature of conflict is changing, with less emphasis on traditional warfare and greater concern in the survey over geo-economic conflict and cyberwarfare. However, increased defence spending suggests companies should still consider military conflicts, she added. Klint also highlighted concern over cyber risk and cyberwarfare, ranked eighth by severity over the next two and ten years in the WEF report. “This is an area where public private partnership is incredibly important to provide better protection against these risks,” she said. Increased volatility is forcing businesses to make changes, build resilience and boost redundancy, explained Klint. “As a result, we see companies are turning from a just-in-time approach to a more just-in-case strategy. We see that in terms of bringing production closer to home, near-shoring, friend-shoring, stockpiling and the trend of vertical integration, where companies look to acquire both suppliers and clients to take control of the chain,” she said. “The relative predictability of the business environment is down, which is forcing companies to allow more slack in the system, being willing to invest a little more upfront in order to stay in business and build resilience,” she added.

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Opportunity for risk managers to build strategic resilience

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