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Tension growing between sustainability and cost of living crisis: Global Risks Report 2023

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The World Economic Forum (WEF) has released its 2023 Global Risks Report, identifying key global interconnected risks. The core challenge today is balancing the trade-offs between addressing short, medium and long term risk. Unfortunately profitability, political expediency and the science are all pulling in different directions.

  • Cost of living crisis is biggest short-term risk while failure of climate mitigation and climate adaptation are largest long-term concerns
  • Geopolitical rivalries and inward-looking stances will heighten economic constraints and further exacerbate both short- and long-term risks
  • Global Risks Report urges countries to work together to avoid “resource rivalries”

Conflict and geo-economic tensions have triggered a series of deeply interconnected global risks, according to the latest from the World Economic Forum’s Global Risks Report 2023.

The report focuses on how resent and future risks can interact with each other to form a “polycrisis” – a cluster of related global risks with compounding impacts and unpredictable consequences. It also explores the importance of “Resource Rivalry”, a potential cluster of interrelated environmental, geopolitical and socioeconomic risks relating to the supply of and demand for natural resources including food, water and energy.

These interconnected risks include energy and food supply crunches, which are likely to persist for the next two years, and strong increases in the cost of living and debt servicing. At the same time, these crises risk undermining efforts to tackle longer-term risks, notably those related to climate change, biodiversity and investment in human capital.

Companies, as well as countries, need to take a new approach to risk

Carolina Klint, Risk Management Leader, Continental Europe, Marsh, said: “2023 is set to be marked by increased risks related to food, energy, raw materials and cyber security, causing further disruption to global supply chains and impacting investment decisions.

“At a time when countries and organisations should be stepping up resilience efforts, economic headwinds will constrain their ability to do so. Faced with the most difficult geo-economic conditions in a generation, companies should focus not just on navigating near-term concerns but also on developing strategies that will position them well for longer-term risks and structural change.”

Understanding the complexity and ambiguity of risk

The world is in a state of polycrisis. That means that crises in different sectors multiply the negative impacts across all sectors. The impact of recent shocks to the world energy market driven by the war in Ukraine, for example, have been exacerbated by extreme weather and problems in global food production and distribution.  All of this is made worse by the impact of growing inflation, which is affecting the cost of action. And of course inflation is partly being driven by the enormous amount of government spending use to tackle the covid crisis.

The problem, as pointed out by Columbia University historian Adam Tooze, is that the current situation is defined by the lack of single cause of any of the problems facing the world – and that means that single solutions are no longer going to work. Single actions are not fit for purpose in the modern world, where environmental pressures and resource extraction are creating ongoing pressure on all systems underpinning human society, from food production, clean air, security and trade.

Risks have different salience for different parties

There will unquestionability be difficult trade-offs for governments facing competing concerns for society, the environment and security. Already, short-term geo-economic risks are putting net-zero commitments to the test and have exposed a gap between what is scientifically necessary and politically palatable. This is despite the fact that dramatically accelerated collective action on the climate crisis is needed to limit the consequences of a warming world.

At the same time, security considerations and increasing military expenditure may leave less fiscal headroom to cushion the impacts of an elongated cost of living crisis – military spending is on the increase in many economies. Without a change in trajectory, vulnerable countries could reach a perpetual state of crisis where they are unable to invest in future growth, human development and green technologies.

The danger is that focusing on short term issues could result in a failure to build systemic resilience. Saadia Zahidi, Managing Director, World Economic Forum warned: “The short-term risk landscape is dominated by energy, food, debt and disasters. Those that are already the most vulnerable are suffering – and in the face of multiple crises, those who qualify as vulnerable are rapidly expanding, in rich and poor countries alike.

“In this already toxic mix of known and rising global risks, a new shock event, from a new military conflict to a new virus, could become unmanageable. Climate and human development therefore must be at the core of concerns of global leaders to boost resilience against future shocks.”

The report calls on leaders to act collectively and decisively, balancing short- and long-term views. In addition to urgent and coordinated climate action, the report recommends joint efforts between countries as well as public-private cooperation to strengthen financial stability, technology governance, economic development and investment in research, science, education and health.

Global Risks 2023 warns that the window for action is closing

The report argues that the window for action on the most serious long-term threats is closing rapidly and concerted, collective action is needed before risks reach a tipping point. Across three timeframes, it paints a picture of the global risks landscape that is both new and familiar, as the world faces many pre-existing risks that previously appeared to be receding.

Energy, inflation, food and security dominate the crises today but they also create follow-on risks which the WEF believe will dominate over the next couple of years. These includef:

  • recession;
  • growing debt distress;
  • a continued cost of living crisis;
  • polarised societies enabled by disinformation and misinformation;
  • a hiatus on rapid climate action; and
  • zero-sum geo-economic warfare.

Unless the world starts to cooperate more effectively on climate mitigation and climate adaptation, over the next 10 years this will lead to continued global warming and ecological breakdown. Failure to mitigate and adapt to climate change, natural disasters, biodiversity loss and environmental degradation represent five of the top 10 risks – with biodiversity loss seen as one of the most rapidly deteriorating global risks over the next decade.

In parallel, crises-driven leadership and geopolitical rivalries risk creating societal distress at an unprecedented level, as investments in health, education and economic development disappear, further eroding social cohesion. Finally, rising rivalries risk not only growing geo-economic weaponization but also remilitarisation, especially through new technologies and rogue actors.

Is there room for optimism?

John Scott, Head of Sustainability Risk, Zurich Insurance Group, said: “The interplay between climate change impacts, biodiversity loss, food security and natural resource consumption is a dangerous cocktail. Without significant policy change or investments, this mix will accelerate ecosystem collapse, threaten food supplies, amplify the impacts of natural disasters and limit further climate mitigation progress.

“If we speed up action, there is still an opportunity by the end of the decade to achieve a 1.5ᵒC degree trajectory and address the nature emergency. Recent progress in the deployment of renewable energy technologies and electric vehicles gives us good reasons to be optimistic.”

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