The one global risk that won't go away

Every year the world faces new global risks.

From the global financial crisis in 2008 to the African Ebola epidemic in 2014-15 and the ongoing refugee crisis, these risks ebb and flow in response to global events.

While challenging and complex, we’ve become better at managing many of these issues and the risks they pose to our economic and social wellbeing. This doesn’t mean the problems have gone away or stopped devastating people’s lives, but it does mean that - in certain areas - we have made progress and the scale of the challenge has subsided.

However, there is one global risk that is not going away – the mismanagement of our global environment.

Globally, many environmental conditions are getting worse: 92% of people worldwide live in places where air pollution levels exceed suggested safety limits, at least 1.8 billion people still lack reliable access to a water source of good enough quality to be safe for human consumption, and 2016 was the warmest year on record – around 1.2°C warmer than pre-industrial levels.

It’s a similar story for our oceans, forests and biodiversity.

Perhaps this is why, since 2011, a cluster of interconnected environment-related risks – including extreme weather events, climate change, and water crises – has consistently featured among the top-ranked risks in the World Economic Forum’s Global Risks Report.

The persistent appearance of these risks suggests that we have not yet figured out how to manage them effectively. While many good initiatives are underway, they have not yet reached the systemic level – or the scale – needed to crack this challenge.

One of the reasons is that environmental issues still tend to be treated separately – often at the policy and decision-making equivalent of the ‘kids’ table’.

We need to start thinking about them and treating them as the economic, geopolitical, societal, and legal risks that they are.

At the macroeconomic level, the economic risks posed by environmental issues are significant. Climate change could cost investors upwards of $2.5 trillion, air pollution could cost up to $2.6 trillion a year, and average global flood losses in coastal cities could multiply to $1 trillion a year in 2050 if cities do not take steps to adapt. Individually, these are big numbers. Combined, they would make a serious dent in economic growth.

Recognising the scale of these risks, the G20 requested a new taskforce investigate the risks climate change poses to the global financial system and how those can be managed.

In addition to the risks from physical climatic changes, it also looked at how the shift away from fossil fuels could affect the financial system if it is mismanaged. The value of fossil fuel assets like coal deposits, oil fields, and power stations will likely be reduced – but by how much, and how quickly? These questions should also matter to everyone with a pension fund because many are invested in these industries.

The taskforce recommended a series of factors companies should disclose about the climate risks they face and how they are managing them. This would enable markets to more accurately reflect the true values of companies after factoring in risks from climate change.

It seems like a simple concept, but it’s currently not being done and could be a major step forward. Unfortunately, these recommendations are only voluntary. Unless companies and regulators adopt them, little will have changed.

Undisclosed financial risk is also a problem for other environmental issues. Most companies do not disclose risks from water shortages, policies to price pollution, or their exposure to deforestation in commodity supply chains. Some may have never even assessed these risks.

Disputes between communities – or even countries – over the water from shared rivers, forest ecosystems and atmospheric conditions can inflame existing tensions in fragile regions.

For example, in the disputed Kashmir region, water is a key point of tension. On one side, Pakistani officials blame India for water shortages in their country, while on the other side Indian stakeholders want to better use this ‘natural advantage’. Water in the region is governed by the Indus Water Treaty signed in 1960 but both sides claim it needs updating to reflect the impacts of climate change.

China’s announcement that it has blocked an upstream tributary to the giant Brahmaputra river has also inflamed tensions in the region. The 2,880km long river also flows through India, Bhutan and Bangladesh.

Elsewhere, communities from Alaska, Kiribati, and Fiji are planning to relocate – or already have – due to the rising sea level. In Southeast Asia, the toxic haze from Indonesian forest fires is also exacerbating regional tensions – particularly with Singapore. The fires have been caused by ‘slash and burn’ deforestation and reportedly caused 100,000 deaths in 2015.

Worsening environmental conditions like water scarcity, choking smog, and growing numbers of extreme heat days affect the way we work, interact with each other, and spend our leisure time. They may also make some existing communities unviable.

However, there is another societal risk that is less discussed but just as important – the societal impact of actions taken to address environmental issues.

At the policy-level, it is easy to talk about “re-skilling workforces” and providing “transition assistance” as old polluting industries are replaced with new ones. But we need to remember that these are serious, life-changing events for the people and communities directly affected by the transition.

In many communities, these changes will take place against an existing backdrop of increased economic inequality, fears that job losses are being accelerated by new technologies, and a pervasive feeling of a loss of identity and ‘being left behind’.

The transition to new clean technologies, industries, and operating models that replace old and familiar ways of doing things has the potential to exacerbate these feelings – leading to dramatic political and social backlashes like those seen in 2016.

To avoid this, a ‘just transition’ will be needed to deliver sustainable and inclusive economic systems. The challenge for decision-makers and environmental advocates will be to ensure that both the outcomes and the process of addressing environmental issues include those who are most affected.

We may also be seeing new legal risks emerge for both countries and companies. Companies can expect to face increasing regulatory risks as governments design environmental policies and set laws to implement their international commitments and address citizen outcry over issues such as air pollution, deforestation, and biodiversity loss.

Governments are also facing a new set of legal risks – several have already been sued for failing to adequately respond to environmental issues and protect their citizens. In the US, a group of teenagers is suing the federal government, while Norway is being sued over its Arctic drilling plans. Cases have already been tried in the UK and the Netherlands, with both ruling against the government.

It’s time for more leaders to stand-up and account for how these risks are managed in their businesses, industries, and portfolios. Environmental issues are critical ingredients for creating stable and sustainable societies and economies – we can no longer treat them as a side agenda.

The Global Risks Report 2017 is available here.