Evolving global risks and the challenge of reform

Based on the views of 750 diverse stakeholders the report identifies many of our top global risks are grounded in socio-political and environmental dynamics. These include a failure to deal with climate change, involuntary migration driven by conflict and environmental reasons and social instability.

" Environmental and social risks can have economic ramifications."
Dr Martin Joy, Senior Manager, Global Regulatory Change, ANZ

Britain’s departure from the European Union, arguably a protest vote against migration and forces of globalisation, is a clear crystallisation of some of these risks.  In this light, the report helps us understand our current and future risk environment and the reform challenges facing us.

THE SHIFTING FOCUS OF GLOBAL RISK

In the late ‘00s the main risks we worried about were economic or financial; financial crises, asset price collapses and recessions.  Today, global risk emanates from environmental and social breakdown.

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The report’s top risks are large scale involuntary migration; the failure of climate change policies and adaptation; extreme weather events; major natural catastrophes; water crises and interstate conflict. Only one directly economic risk, the threat of a severe energy price shock, makes the top five.

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Critically, these environmental and social risks are projected to have continued relevance for the next 10 years. These are not acute concerns but chronic problems.

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Of course, environmental and social risks can have economic ramifications.  Indeed, using the report’s definition, this is partly what makes them ‘risks’.

For example, Japan’s 2011 earthquake and tsunami is a classic example of how environmental shocks can affect economic stability and growth, while Brexit shows us how social and political change can affect the economy.

THE EVERGREEN TENSION

The Global Risks Report highlights the evergreen tension besetting many globalised problems in a nation-state oriented world. What matters at the global level doesn’t always carry through to the regional.

While global risks are overwhelmingly social and environmental, regional risks as identified by business leaders are much more economic, at least through the developed world. 

Cyberattacks, unemployment and fiscal crises loom much larger at the regional level.  In the Asia-Pacific, the top two risks identified are energy price shocks and asset bubbles.

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Such divergence between global and regional concerns highlights the unenviable challenges faced by governments and business. To maintain legitimacy, governments need to address local concerns.

But at the same time, failure to address the much more profound and deep-seated global problems will undermine social and economic stability over time. 

SOLVING DEEP STRUCTURAL PROBLEMS

The financial risks of the late naughties at least appeared soluble with fiscal priming and monetary easing (even if in practice this has not proven to be so neatly the case).  

Solving the report’s contemporary risks may be more challenging. The risks reflect deep structural issues concerning our relationship with the environment and the ability of current political-economic arrangements to maintain social stability. 

• Environmental change appears certain, even if we do manage to limit temperature increases to 2 degrees above pre-industrial levels. 

• There are high (but decreasing) levels of distrust in government and business, according to the Edelman Trust Barometer. 

• Current economic problems which can feed into social discord through poor job opportunities, income inequality and declining relative living standards are arguably rooted in flatlining productivity, high levels of public debt and structural change.   

McKinsey recently found “real incomes of about two-thirds of households in 25 advanced economies were flat or fell between 2005 and 2014”. If you agree with Professor Ben Friedman’s thesis, declining income growth could build into social instability.  Indeed, the Edelman Trust Barometer finds a connection between income inequality and distrust in institutions.

Environmental and trust-building social and political-economic reforms will require strong, long-term commitment and innovation from a variety of actors, as well as sustainable economic growth which benefits all.

Resolving income inequality, reorientating industry towards climate change solutions and underpinning the legitimacy of political institutions through citizen engagement are all major challenges in need of attention.

It is impossible to address with justice the measures which deserve consideration towards these ends in this short article.  However, taking a cue from the report, we can start to think about measures such as:

• Environmental. Reorientation towards a low-carbon economy would bring obvious environmental benefits but may also bring economic payoffs though large-scale investment and the retooling of our means of production and transport. 

Increased economic growth could help social instability through providing employment although transition costs obviously need to be factored in. Green bonds, which Moody’s notes are increasing in issuance, are one way the finance industry can contribute to environmental reforms (click here for ANZ’s contribution).

• Digital. As the reportnotes, increasing digitisation of the economy and society brings both threats and opportunities. Digitisation could accelerate wealth and income disparity as labour is replaced.   Cyber-security will also be critical.

But data and digital could help engage citizens and consumers with government and business, potentially rebuilding trust. Building trust with digitally engaged citizens and consumers will, however, require a responsive and reflexive relationship; concerns must be understood and substantively addressed.

• Social. Business engagement is important to help government and civil society solve pressing social issues.  The report raises the promise of social impact bonds wherein investors contribute capital to solve social problems and are paid back on the basis of the success of their solutions. Australia has a nascent but developing social impact bond market.

Business can also give consumers opportunities to express their values. The report cites the example of Patagonia, the clothing company, which encourages its customers to repair garments rather than buy new ones.

What are your ideas for dealing with the identifiedsocial and environment risks? Please respond in the comments below.

Dr Martin Joy is Senior Manager, Global Regulatory Change at ANZ