Global Risks Report calls for a new approach in an uncertain world

We can no longer rely on global cooperation to tackle the short- and long-term crises we’re confronted with. A new approach to risk mitigation is needed.

By Peter Giger, Chief Risk Officer, Zurich Insurance Group

We have just emerged from a period of almost unnatural stability over the last 15 years when global risks manifested largely as isolated events. If we look at human history, the level of stability we’ve enjoyed is not the norm.

But the question I’m concerned with is, “Are we prepared for this uncertain world?” Signs suggest that we’re not addressing the need for risk mitigation to ensure we can navigate the current crises, both in the short and longer term

We have built a world that has generated significant wealth through connectivity, trade and openness. However, we are beginning to realize that the foundation supporting these benefits was not strong enough to secure them. Global cooperation is the glue that holds this together. If we lose this cooperation, then we face the potential loss of wealth that has been generated by globalization.

During the COVID-19 crisis, we witnessed some positive developments in terms of risk mitigation through global cooperation, such as the rapid development of vaccines. But we did not respond as well to the crises that followed: the supply chain issues that plagued us as economies were rapidly released from lockdowns; the Russian invasion of Ukraine that triggered an energy crisis, which fueled inflation in the G7 economies and, for the first time since the 2008 Great Financial Crisis, interest rate increases; and the stronger U.S. dollar, which had consequences for countries and businesses with dollar-denominated energy bills and debts.

Global cooperation needed to tackle climate change

The impact of increased fossil fuel energy prices has been a signal to citizens about the coming costs of the energy transition necessary to mitigate climate change. It seems that the target of achieving net-zero emissions by 2050 is often misunderstood, as many people have yet to accept that the era of cheap carbon energy will eventually come to an end. The basic question of how to reduce fossil fuel dependency and subsidies is a politically sensitive one and, at times, a topic used by governments to abandon net-zero commitments for short-term political gain.

It is only a matter of time before record-breaking temperatures, drought, wildfires and flooding will drive a recognition that the planet will pass at least one “climate tipping point” within the next decade. This is a topic covered in this year’s Global Risk Report from the World Economic Forum, which explores the consequences of irreversible and self-perpetuating changes to our planetary systems.

This is why we have always strongly advocated for meaningful carbon pricing and reductions in fossil fuel subsidies. However, the current reality is quite the opposite. Regulatory interventions and subsidies are being implemented to keep carbon prices low, which is completely counterintuitive and hinders progress toward sustainability goals. To effectively address these challenges, stable regulatory rules and predictable policies are of utmost importance.

Alternatives to global cooperation

Despite the obstacles, there is still hope. Many individuals possess good intentions and make decisions that align with their beliefs in doing the right thing. My concern lies in the fact that we are placing an excessive burden on a limited number of change levers, such as the financial industry. While it is commonly acknowledged that we need green finance, particularly for climate adaptation and for investment in new transition technologies, the ultimate success lies in the adoption of sustainable behaviors by consumers. There is no way around this, and it will entail some change that some perceive as painful, but the critical question is when we will be ready to accept this pain, and how many more years of continued warming we need to witness before we act? Nevertheless, I am optimistic that the undeniable signs and consequences of our actions will eventually lead us to the necessary conclusions and prompt essential policy actions.

Although the era we have gone through was relatively stable, the outlook for the future appears less certain due to a number of trends or, as the World Economic Forum prefers to call them, “structural forces,” such as climate change, demographic changes, technological acceleration and geostrategic shifts. While one may argue that it is a common human tendency for each generation to believe they are facing the most challenging headwinds in history, from the recent Global Risks Report we have learned that 92 percent of risk experts are pessimistic looking at the 10-year horizon.

We are living in a low-cooperation world that is struggling to agree on decisions to address the already known and emerging risks. More and more we need to rely on localized strategies by individual nations, businesses and people, each of whom play an important role in risk adaptation and mitigation. The actions of individual citizens, companies and countries, insignificant on their own, can move the needle on global risk reduction if they reach a critical mass. So, there are good reasons to remain optimistic facing all these challenges.