WEF warns interconnected risks will have long-term impact – unless action is taken now

WEF warns interconnected risks will have long-term impact – unless action is taken now

Deeply interconnected global risks are threatening both short-term security and longer-term stability, warned the World Economic Forum (WEF) in its latest annual risk report.

Published ahead of the WEF’s annual meeting, it said conflict and geo-economic tensions have triggered a series of deeply interconnected global risks.

Global Risks Report 2023 highlights 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.

It also 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.

The report, produced in partnership with Marsh McLennan and Zurich Insurance Group, draws on the views of more than 1,200 global risk experts, policy-makers and industry leaders. Across three timeframes, it paints a picture of the global risks landscape that is both new and eerily familiar, as the world faces many pre-existing risks that previously appeared to be receding.

Little of the report mentions Africa as a continent, however, the report makes clear that these risks are a live danger in all corners of the world. At present, it said the global pandemic and war in Europe have brought energy, inflation, food and security crises back to the fore.

“These create follow-on risks that will dominate the next two years: the risk of 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,” it warns.

“Unless the world starts to co-operate more effectively on climate mitigation and climate adaptation, in 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 in the next decade.”

In parallel,  the report adds 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 weaponisation but also remilitarisation, especially through new technologies and rogue actors.

More specifically, climate- and nature-related risks lead the top 10 risks, by severity, that are expected to manifest over the next decade. Differentiated as separate risks for the first time in the 17 years of the report, failure to mitigate climate change and failure of climate change adaptation top the rankings as the most severe risks on a global scale, followed by natural disasters and extreme weather events and “biodiversity loss and ecosystem collapse”.

Comparing the two-year and 10-year timeframes provides a picture of areas of increasing, decreasing and continued concerns according to the report respondents. Four environmental risks have worsening scores over the course of the 10-year timeframe, indicating respondents’ concerns about increased severity of these risks in the longer term. Large-scale involuntary migration rises to fifth place in the 10-year timeframe, while erosion of social cohesion and societal polarisation is perceived to be slightly more severe over the longer term.

Risks that are growing in severity into the longer term include biodiversity loss and ecosystem collapse, and misinformation and disinformation. Among other technological risks, digital inequality and lack of access to digital services and adverse outcomes of frontier technologies are also anticipated to significantly deteriorate in the 10-year timeframe.

Saadia Zahidi, managing director, World Economic Forum’s Global Risks report 2023, stressed “Last year’s Global Risks Report warned that a divergent economic recovery from the Covid-19 pandemic risked deepening divisions at a time when collaboration was urgently required to address looming global challenges.

“Yet despite hard-learned lessons around the interdependence of global risks, few would have anticipated the extent of instability that would soon unfold, this time driven by a new war in Europe.”

She added that the health and economic aftereffects of the pandemic have quickly spiralled into compounding crises.

“Carbon emissions have climbed, as the post-pandemic global economy fired back up. Food and energy have become weaponised by the war in Ukraine, sending inflation soaring to levels not seen in decades, globalising a cost-of-living crisis and fuelling social unrest,” she said.

“The resulting shift in monetary policy marks the end of an economic era defined by easy access to cheap debt and will have vast ramifications for governments, companies and individuals, widening inequality within and between countries. As the conflict between Russia and Ukraine approaches one year, economies and societies will not easily rebound from continued shocks,” she feared.

“In this year’s Global Risks Perception Survey, more than four in five respondents anticipated consistent volatility for the next two years. The persistence of these crises is already reshaping the world that we live in, ushering in economic and technological fragmentation. A continued push for national resilience in strategic sectors will come at a cost – one that only a few economies can bear.

“Geopolitical dynamics are also creating significant headwinds for global co-operation, which often acts as a guardrail to these global risks. The world’s collective focus is being channelled into the “survival” of today’s crises: cost of living, social and political polarisation, food and energy supplies, tepid growth, and geopolitical confrontation, among others. Yet much-needed attention and resources are being diverted from newly emerging or rapidly accelerating risks to natural ecosystems, human health, security, digital rights and economic stability that could become crises and catastrophes in the next decade.”

Ms Zahidi concluded that “A low-growth, low-investment and low-co-operation era further undermines resilience and the ability to manage future shocks. In recognition of growing complexity and uncertainty, the report also explores connections between these risks. The 2023 edition of the Global Risks Report highlights the multiple areas where the world is at a critical inflection point. It is a call to action, to collectively prepare for the next crisis the world may face and, in doing so, shape a pathway to a more stable, resilient world.”

In response to the report South African risk and insurance consultancy Riskonet Africa has warned that the country’s open and fragile economy leaves it vulnerable to demand and price factors for primary commodities as well as the way economic policies are currently implemented by the major economies.

This, coupled with crippling and unending Stage 6 power blackouts, means South Africa’s vulnerability quotient has increased substantially.

Riskonet Africa was responding to the release of two global risk reports outlining the top global risks to watch in the next decade.

The WEF report lists the cost-of-living crisis as its number one risk, while Time magazine sees geopolitical factors – including the war in Ukraine and the effects of the Covid-19 outbreak in China – as the most significant risks.

Other significant risks ranked highly in both reports include the devastating effects of climate change, the rise of disruptive technologies and cybercrime, and water stress, as well as the erosion of social cohesion in the US.

“While South Africa will undoubtedly feel the effects of all of the risks outlined in these reports, we should be most concerned about the effects of geopolitical instability and rising inflation on our already fragile economy,” says Volker Von Widdern, principal of strategic risk at Riskonet Africa. He adds: “The cycle of increasing interest rates in the US and Europe forced South Africa to also increase interest rates to protect the value of the rand and to support our fight against inflation”

Mr Von Widdern also warns that geopolitical instability and constrained budgets are likely to substantially decrease the appetite for investment in South Africa by multinational corporations.

“South Africa should consider the top risk issues in terms of its sources of business, supply chain dependencies and potential disruptions in respect of market dynamics so that it can mitigate threats to its goals and stabilise its economic models,” he adds.

Mr Von Widdern says while South African companies need to be attuned to global risk factors, the power crisis coupled with deteriorating infrastructure rightly remains top of mind for many South companies that are feeling the negative consequences of no electricity for up to 12 hours a day.

“In risk terms this is a double whammy as managers need to consider day-to-day hardships as well as being aware of macro global issues. Clear risk management policies need to be constantly updated and evaluated as they have become the key to business survival in this time of local and global upheaval.”