Corporate Governance,Risk Management,Strategy,Technology
January 27, 2020
New Report Finds Confrontations, Urgency in the 2020 Risk Environment
January 27, 2020
The 2020 Global Risks Report was released earlier this month, setting the scene for the annual gathering of political and business leaders in Davos. The flavor of this year’s edition, prepared as ever by the World Economic Forum in collaboration with Marsh & McLennan and other partners, can be summed up in two words: “confrontations” and “urgency.”
This comes through the findings of the survey of 800 global
risk experts that informed the report and also from the deep-dive analyses of
key concerns. In particular, seven broad messages stand out from this year’s
- Fractious domestic politics, anger with governments, and unrest on the streets are set to continue through 2020. National politics has become even more divisive in many countries, spurred by—and also encouraging—stronger societal polarization. This year’s presidential election is likely to intensify such sentiment in the United States; variants will be seen elsewhere. Pronounced and sustained outbreaks of popular instability across the world are likely to continue (recall the signature protests of 2019 in Hong Kong, India, Venezuela, Chile, Bolivia, France, Spain, Germany, Algeria, and Iraq) as the issues underpinning unrest—longstanding economic inequality, political governance shortcomings, and a desire for societal freedoms—are a long way from being resolved.
- Current economic confrontations between countries should be seen in the context of secular geopolitical shifts. The recent signing of a Phase One trade deal between the United States and China has gone some way toward relieving near-term tensions between the world’s two largest economies. But key areas of dispute remain unresolved, and this interim rapprochement should be seen against a backdrop of slowing global trade growth, enduring economic protectionism, and more hesitant foreign direct investment. Fresh conflicts are on the horizon as the United States, China, and the European Union adjust market priorities and pursue new regions of strategic influence as they seek to reduce dependence on long-standing, but less trusted, partners. Nearly four-fifths of survey respondents expect a deterioration in international economic relations in 2020.
- Familiar technology governance challenges are being exacerbated by global geopolitics. Governmental initiatives to find solutions to endemic privacy abuses, the promotion of fake news and extremist content, and cyber breaches continue to face obstacles in light of persistent meddling and attacks by foreign state-affiliated actors, as well as unresolved institutional vulnerabilities. In addition, from a different angle, increasing concern in many countries about future national security and geostrategic competitiveness is beginning to constrain cross-border technology investments and market opportunities.
- Procrastination in stepping up climate change responses is increasing the chance of disorderly transitions to a low-carbon economy and postponing overdue investment in resilience and adaptation. This was regarded as the top long-term threat for the world by respondents to the report’s survey. With the world currently on a pathway to warm 3.5°C by 2100 (versus the 2°C or even 1.5°C ambitions of the Paris Agreement of 2015), delayed government commitments may result in higher costs and greater economic disruption as companies and markets are forced to adjust more rapidly. Not dissimilarly, a failure to properly anticipate physical impacts will result in greater damage and more drastic contingency plans in the future.
- The dire consequences of accelerating biodiversity loss and ecosystem collapse are not appreciated enough outside the scientific community. The multitude of research published over the last year in particular has shed new light on the scale of destruction already occurring on different continents and the urgency of the response required. Not only is the devastation threatening food security and human health, but the destabilization of tipping points in nature could exacerbate the social and economic consequences of the climate crisis.
- Stretched national health systems are a drain on societal well-being and economic productivity, and are facilitating disease spread. Changes in longevity, lifestyle, and climate are transforming the disease burden, and health care spending is soaring to unsustainable levels. But health systems in many parts of the world are failing to adapt regarding the infrastructure, resources, and skills needed. New technologies, medicines, and insurance on the horizon could vastly improve the reach and quality of health care, but these breakthroughs also bring new risks and trade-offs for health systems and societies.
- The global economy appears more fragile, with key indicators pointing in the wrong direction. Global economic growth forecasts are being revised downward, while national and corporate debt continues to rise. Business confidence in advanced economies as a group has steadily weakened since the end of 2017. This gives rise to two critical questions. First, do central banks and government policymakers have sufficient firepower to mitigate the impacts of a significant downturn? Second, how does a weakening economic outlook affect our collective ability to find solutions for the key concerns mentioned above, ranging from social instability to health care to climate change?
What lens should boards of directors apply to these seven
First, they should review whether they are receiving and
engaging with good strategic advice on political risk. Companies should see
themselves as in the crossfire and also as possible collateral damage as
commercial activity—both within countries as regimes change and between
countries—is weaponized for political ends. Some countries in which firms are
operating may be developing new industrial policies, tax initiatives, and
regulations; companies may also be caught up in trade disputes. Political
entanglements have become more dangerous, with businesses running a higher risk
of being linked to bad behavior and corruption exposures. Moreover, by virtue
of their business focus or affiliations, organizations may be targets of more
vociferous protestor action.
Second, directors should ensure they have the right oversight arrangements with respect to emerging technology risks. Understanding cyber risk governance is one thing, but being confident in safe, reliable, and ethical deployment of artificial intelligence to avoid commercial and reputational mishaps is another. Does the board have the right expertise to examine this? It is also going to be of increasing importance for directors to have a clear view of technology partnerships, providers, and supply chains to ensure their organizations are on top of new exposures and vulnerabilities in a more challenging environmental and technological climate.
Finally, directors should recognize that organizations,
especially companies, are going to come under intense pressure from different
directions regarding climate change—and that the obligation to make material
adjustments to business practices may come over a shorter time horizon than
anticipated (especially for those with significant assets abroad). Notwithstanding
the federal government stance, states, customers, and investors are becoming
more demanding in their expectations of companies, with the stances of each of
those groups hardening the others’ positions.
Getting on the front foot with these macro-level risks requires the strategic adaptive governance that the NACD set out so clearly in its 2018 Blue Ribbon Commission report. The nexus of big-picture challenges facing organizations today means that all those capabilities and behaviors should be honed and deployed with vigor.
Richard Smith-Bingham is the executive director of Marsh & McLennan Insights and a key contributor to the 2020 Global Risks Report.