A year on, businesses are looking beyond Covid-19 and beginning to plan their next steps in a recovering world. But how have the lessons of the pandemic shaped the way businesses think about other risks? Has it made them more prepared to face economic instability, geopolitical turmoil and the climate crisis?
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The World Economic Forum (WEF) Global Risks Perception Survey – based on the input of more than 600 business, government and society leaders in the WEF network – scored the likelihood and potential impact of key global risks that could have a “significant negative impact” across multiple countries and industries in the next decade. They found that, along with infectious diseases, climate risks were seen as posing the greatest threat.
This year, the WEF also asked respondents about the timeframe within which they thought risks were likely to occur. In the immediate term, they found the knock-on effects of the pandemic – economic stagnation, youth disillusionment, social cohesion and digital inequality – were of greatest concern. In the longer term, existential, environmental and geopolitical threats still loom large, says Emilio Granados Franco, head of global risks and geopolitical agenda at the WEF.
Franco says the most pressing issues following Covid-19 are those of digital inequality and “the emergence of a digital underclass”; the experience of young people who suffered most economically; and the knock-on effects to geopolitical stability, all of which he says will severely test the global social fabric.
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“The immediate concern was, of course, with protecting lives, and now economies are restarting, concern is shifting towards sustaining livelihoods,” he says. “In the longer term, what should concern governments, businesses and society is that of societal fragmentation.”
A renewed urgency
But how can businesses prepare for these kinds of global risks? Stella Nunn, a director specialising in operational resilience at PwC, says that even large companies that had pandemic plans in place found they weren’t sufficiently prepared. “I had one insurance company who told me that they picked up their pandemic plan in January and ripped it up and just started again,” she says.
Nunn has seen a noticeable shift in the appetite for risk management from businesses now that they have actually experienced a global mega-risk. Franco says he hopes this will drive companies and governments to invest in resilience.
“It’s in our nature that we often respond when the crisis becomes our reality and not so much when it’s still five or 10 years from now, even though the warning signs have been there,” he says. “But this crisis, I think, is going to drive fundamental action going forward. The cost of installing and maintaining sprinklers is always going to be lower than the damage of the entire house burning down. And I think that change in mindset is a reality now.”
It’s all connected
Covid-19 has highlighted how important it is to understand the interconnectedness of risks. Those businesses that had pandemic plans may have taken into account some of the impacts of Covid-19, yet still failed to imagine the scale of economic turmoil, the disruption to supply chains, or the transition to remote work and its impact on everything from cyber security to employee well-being.
“More often than not, the medium- to long-term damage is actually more costly or more severe than the immediate impact,” says Franco. “[With] the financial crisis [of 2008], the real economy is still, 12 years later, suffering from some of the effects. Many decades after the Second World War, arguably the immediate impact of that has been overcome, but the effects right now are still being felt.”
This means that risk management cannot be solely the responsibility of a company risk officer – it needs to be on the radar of every executive and everyone across the organisation.
Although there is a risk that some businesses will become complacent after emerging from the pandemic, Nunn says she has seen a huge shift in the willingness of senior staff to discuss long-term risk planning and resilience. This is crucial when it comes to the discussion of climate risks, which many see as an isolated issue.
Those working in climate risk governance tend to divide climate risks to businesses into three key channels: first, the physical risks of extreme weather events causing damage to property or infrastructure or disrupting trade; second, the liability risks when those suffering climate losses seek compensation from the companies they see as responsible, and by extension their insurers; and, third, transition risks, as the fight against climate change prompts changes in technology, policy and regulations.
You don’t need to be a climate scientist to see this in action. In the 1980s, the US averaged three billion-dollar-disaster weather events per year, costing $17.8bn in average annual damages. In the past five years, there has been an average of 16 events a year, and an annual bill of more than $120bn.
For those working in climate risk management, it’s clear that the threat is not just imminent, but already here.
Ellie Mulholland, director of the Commonwealth Climate and Law Initiative, a non-profit organisation focusing on climate risk governance, says she has been surprised that Covid-19 did not push climate risk management on to the back-burner. In fact, the opposite proved true.
“Momentum was building and then a pandemic happened and climate risk management was momentarily put to one side,” she says. “But climate really came back on the business agenda so much quicker than we expected.”
Not only has the appetite for climate risk management been renewed by the urgency and feeling that we could see another extreme event, but the extreme debt racked up by government and businesses over the past year means that they have “lost slack” and need to be managing their resources much more carefully, says Mulholland.
She believes it is likely that any government’s focus on investing in infrastructure and “building back better” is likely to be coupled with a heavier focus on sustainability, which will have a knock-on effect for businesses. If they invest without thinking about the green impact now, they may find that new regulations, carbon taxes or rising energy costs down the line put them in a worse position than before.
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Western countries may be keen to focus on their own recovery, but ultimately, while the pandemic continues anywhere in the world, its effects will still be felt everywhere – both from an epidemiological standpoint and in terms of the impact on global business and supply chains.
Mulholland says the same is true of climate change. It is unlikely Europe will feel extreme weather events and global warming the way places like South Asia will, but the interconnectedness of the global economy means it can’t ignore the problem. Wealthy nations and major businesses alike need to invest in the global resilience of the whole world if they want to be stronger for whatever global crisis comes next.
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