Risk managers urged not to lose sight of long-term risks
Companies and their risk managers must strike a balance between short- and long-term risks, as climate and societal threats look set to dominate the risk landscape over the next ten years, according to Carolina Klint, risk management leader for Europe at Marsh.
Pointing to the World Economic Forum’s (WEF) 2023 Global Risk Report, which paints a bleak picture, Klint told Commercial Risk that companies will need to manage risks differently in the world emerging from the pandemic.
She explained that the cost-of-living crisis toped WEF’s ranking of global risks over the next two years by severity, followed by natural disasters, geoeconomic confrontation and an erosion of social cohesion. However, when looking at the ten-year timeframe, environmental and climate risks dominate the landscape, with environmental issues taking five of the top six spots.
“For businesses in this environment, where we have so many immediate pressing issues to tend to, it is always critical to strike the right balance between short and long term. Even though you are in crisis management mode, it is critical not to lose sight of those long-term risks as well. Human nature is hard wired to focus on what is in front of us. Right now, the cost-of-living crisis, economic downturn and energy crisis, could distract us from the longer-term risks,” Klint said.
The risk landscape feels new but also eerily familiar, according to Klint. “We are dealing with basic risks that many of us thought we had figured out, like food security and energy, inflation and cost of living. Very basic stuff… But we are also in a very complex and volatile environment, and risks are now surprisingly interconnected. One will accelerate and exacerbate another. In that environment, it is important to stay focused, prioritise and have a balanced view on short-term vs long-term risks,” she said.
Klint believes companies need to change the way they think about risk to adapt to increased volatility and complexity. “The rise of stakeholder capitalism and shareholder activism, and the increased appetite of companies and investors to use ESG targets and metrics, is reshaping the economic landscape. This is something companies need to be very aware of, and prepare for an increasing pressure on climate issues from all stakeholders, whether investors, employees, customers and communities,” she said.
“Companies also need to pay attention to transition risks because we will continue to see rapid shifts in policy and regulations in this area, and the need to develop low carbon technologies. They also need to watch changes in consumer behaviour and investor preferences as this is an area that will develop quickly,” Klint said.
In addition to environmental and climate-related issues, the Global Risk Report says a number of societal risks are worsening. This includes severe mental health deterioration, collapse or lack of public infrastructure and services, and more chronic diseases and health conditions. The erosion of social cohesion and societal polarisation, alongside large-scale involuntary migration, both featured at the top of the short- and long-term risks rankings.
Meanwhile, trust in government institutions is reducing, while public services are coming under pressure, Klint explained. Notably, healthcare is feeling the strain post pandemic, while digitisation and Covid are impacting employment. All this could further erode social cohesion and increase polarisation.
“Global public health is under real pressure, and health systems around the world are at risk of becoming unfit for purpose. Healthcare systems face worker burnout and continued shortages, at a time when fiscal consolidation risks deflecting attention and resources elsewhere, and as medical advances enable people to live longer in poor health,” said Klint.
According to the WEF report, complacency is already setting in on preparing for future pandemics and other global health threats. Infectious diseases plummeted from the sixth-most severe risk on a global scale over the next ten years in last year’s Global Risk Report to 27th place this time around.
Capacity challenges for healthcare systems, more frequent and widespread infectious disease outbreaks, and chronic diseases, all risk pushing healthcare systems to breaking point, according to Klint. “We need to recognise that a future pandemic, which is more a question of when not if, against the background of chronic diseases, has the risk of pushing already-exhausted healthcare systems to the brink of failure,” she said.
“In addition, we must not forget the mental health element here. Mental health issues continue to be an area of concern. The pandemic was the emotional equivalent of a marathon. Now mental health is further exacerbated by violence and poverty, the cost-of-living crisis and loneliness,” she added.
Geopolitical risks feature prominently in the 2023 Global Risk Report, with concern focused on economic, rather than physical, impacts.
Geoeconomic confrontation, including sanctions, trade wars and investment screening, was ranked the third-most severe risk over the next two years, and remains in the top ten over the ten-year horizon. Interstate conflict was ranked 14th in the short term and 13th in the long term.
“Interstate conflict, or hot conflict, is not highly ranked. Respondents are more concerned with the geoeconomic consequences of tensions and the cyber war element. This is interesting as we are in the middle of a hot conflict – we have a war in Europe playing out in front of us. Despite that, the attention is on the geoeconomic and cyber consequences,” said Klint.
