As global risks evolve into trends, management focus narrows

Some of the risks identified over the years by the World Economic Forum’s (WEF) Global Risks Report are now considered to be “structural forces”, or trends that reflect long-term shifts in the relation between the systemic elements of the global risk landscape. Many of these have strong links to sustainability, said John Scott, Head of Sustainability Risk at Zurich Insurance Group, who is also a member of the WEF Global Risk Report Advisory Board.

“We used to talk about climate change as a risk, but it is much more than that. It is a structural force, or trend, that materially impacts the speed, spread and scope of global risks, such as Critical Changes to Earth Systems. The #2 most severe risk that the world faces in the next decade,” said John.

In remarks at the ESG Insights and Intelligence conference hosted by Commercial Risk, Scott said climate concerns go beyond the well-known environmental impacts such as those related to sea-level rise and melting permafrost that arise as the planet warms. The “key climate risks”, which are also sustainability risks, include “the physical risks related to extremes of severe weather and the transition risks, such as natural resource shortages, driven by new technologies that reduce greenhouse emissions, leading towards a net-zero future and achieving the Paris Agreement goals,” he added.

The demographic bifurcation driven by longevity, migration, fertility and related to changes in the size, growth and structure of national, regional or global populations, is also identified by the report as a strategic force or trend that demands attention, is an example, according to Scott. “In lots of countries around the world, especially the more-developed nations, we’re seeing people living for much, much longer,” he said. “That brings enormous risks and challenges – socioeconomic and political risks, which are essentially sustainability risks.”

Other risks have emerged from the strategic force or trend of technological acceleration, Scott said. “Artificial intelligence as well as other technologies such as biotech and quantum computing create enormous opportunities and promise,” he added, but “technology has its own links to sustainability risks.” Issues such as data protection and privacy, availability and monetization of data, which are components of many big technology companies’ business models, can lead to the risks of censorship and surveillance infringing human rights, or technological power concentration, resulting in capabilities or knowledge being held among a small number of individuals, businesses or states,” he added.

The growing battle for hegemony between the U.S. and China is part of a continuing strategic force, or trend of geostrategic shifts, referring to changing geopolitical power dynamics affecting all companies with a global presence, Scott said. Choices such as where and how to expand operations affect decisions on sustainability issues that “quite frankly might be alright in one sphere of influence, but not in another,” he added, pointing to diversity and inclusion as an example.

Weather worries remain top of mind

The Global Risks Report’s Global Risk Perception Survey 2024 which incorporates the views of around 1,500 risk experts, lists extreme weather events as the top global risk concern today and over the next 10 years. That risk also ranks second in the list of concerns over the next two years, with misinformation and disinformation at the top of the two-year ranking.

Almost daily, there are news items about wildfires, floods, hurricanes, hailstorms and other extreme weather events around the world, Scott said. “It’s real, it’s definitely happening,” he said of severe weather events, but their relationship to the changing climate is not entirely clear, especially for the more chaotic weather systems.

Scott noted, however, that the scientists working on the Intergovernmental Panel on Climate Change (IPCC) acknowledge that it is not completely understood how all extreme weather events are linked to climate change. “Some events seem to have a stronger link to climate change, especially periods of extreme heat and extreme cold,” he added, and there are indications that tropical cyclones are changing direction and more likely to become extreme rainfall events once they make landfall.

“So, something very interesting is going on with extreme weather that we as the insurance industry are spending a lot of time analyzing and trying to understand,” Scott said.

Managing global risks locally

Around five years ago, the long-held belief that a multilateral approach was best for addressing global risks began to change, Scott noted. “The World Economic Forum now talks about the world as being multi-conceptual and multi-polar,” he said. “It’s no longer a world where a rules-based multilateral system is the only approach to addressing global risks.”

Leadership styles differ across many blocs, regions and countries, Scott pointed out, and “it’s not all democracy versus communism. There are all sorts of versions of democracy and autocracy out there and that makes political agreement very, very challenging” in finding and agreeing common approaches to dealing with global risks, he added.

The COVID-19 pandemic highlighted that challenge, Scott said. Despite well-founded science-based advice from the World Health Organization, politicians in some countries resisted, instead giving their own, sometimes conflicting, directions to their citizens on how to respond to the crisis. “That spelled disaster for some countries in terms of their attitudes and responses towards dealing with the pandemic,” he said.

As it turned out, there was “amazing collaboration” between governments and private enterprise, especially in the G20 nations, that led to rapid development of COVID-19 vaccines, according to Scott. That response enabled the world to come out of the economic lockdowns, that were initially the main response to controlling the pandemic, much more quickly than it otherwise would have, he said.

Because many global sustainability risks manifest locally, it is important for them to be dealt with at a local level, Scott said. While flooding, for example, is a risk that creates losses worldwide, it must be addressed locally, whether to strengthen overall flood resilience or in response to a local hazard event, he added.

The threat of flooding illustrates how simple but effective local solutions can be put in place to protect against a global risk. Physical flood defenses can protect towns and cities, while early-warning systems can alert at-risk populations that flooding is imminent, so they can move to higher ground Scott said, while businesses can move critical equipment to parts of a factory high enough to keep them safe from rising water. Just three practical examples of local responses to the risk of flooding.

Individual behavior makes a difference

Eating less meat, driving an electric vehicle that is largely built of recycled materials and designed to be recyclable itself, or taking “staycations” instead of traveling to vacation destinations by plane are sustainability risk actions that some people are taking to lower their carbon footprint, Scott said. And while those individual actions on their own may have little impact on the environment, if they are embraced by large enough numbers of people, their collective action will make a difference, he added.

And that appears to be what is happening, Scott said.

“We’re seeing significant penetration of electric vehicles in many markets around the world,” Scott noted. International Energy Agency data¹ indicates that annual energy efficiency investment is up 45% globally since 2020 and in the U.S. oil refiners have already reduced their production capacity by more than 1 million barrels a day, equal to about 5% of the U.S. total², he said.

Eventually, oil will “no longer be the most important fuel for transport,” Scott said, which means emissions will decline.

“So, your personal choices about what you do, collectively to address global and sustainability risks, have a huge impact. And I think that’s a real opportunity for businesses to take advantage of,” Scott said, as well as for politicians and policymakers to develop legislation and regulations to encourage the wider use of low-carbon technologies.

Scott told conference attendees that “it is in your hands” to make and encourage changes that will lead to “the brighter world that we all want to live in.”

1. EA Energy Efficiency Report 2023: Efficiency policy momentum builds, but global energy intensity progress slows. Executive summary – Energy Efficiency 2023 – Analysis - IEA
2. Fortune Magazine article, Gasoline demand in the U.S. has peaked. Drivers will benefit in the long run—but experience some short-term pain first, by Chunzi Xu and Bloomberg, January 21, 2023 Gasoline demand in the U.S. has peaked. Drivers will benefit in the long run—but experience some short-term pain first | Fortune