Topics:   ESG,Risk Management

Topics:   ESG,Risk Management

January 20, 2022

Global Risks in 2022: Refresh Resilience Thinking to Navigate the Uncertainties Ahead

January 20, 2022

There is much talk in the financial press of renewed optimism, but the world is entering year three of the COVID-19 pandemic with deeper fissures and in a markedly more disorderly state.

People are beyond weary of social and travel constraints, critical systems and processes are experiencing discontinuities and disruptions on a regular basis, and governments are struggling to maintain the goodwill of both their own citizens and counterparts on the international stage.

Economically, too, some countries will likely struggle in the coming years: emerging market economies (apart from China) are projected to be 5.5 percent below their pre-pandemic growth path by 2024, with Latin America and sub-Saharan Africa likely to show the weakest performance. At the same time, though, advanced economies are projected to surpass their pre-pandemic growth path by 0.9 percent. (Notably, much will depend on the trajectory of current and future variants of COVID-19.)

The thread that runs through the Global Risks Report 2022, prepared by the World Economic Forum in collaboration with Marsh McLennan, is “divergence.” This is underscored by the differentiated capacities of countries and local communities to recover from the damage caused by the pandemic over the past two years, the aggravation of schisms between global powers, and the exacerbation of friction between underlying, secular forces of global change.

Boards of directors will need to ensure that their organizations are alert to four key challenges:

  1. Economic volatility and uncertainty. A rapid rebound to growth in some countries has entangled and disrupted supply chains, sent commodity prices soaring by nearly 30 percent since the end of 2020, and driven inflation in the United States to the largest year-on-year increase in 40 years. Higher prices and more expensive debt will affect lower-income households especially hard. This is compounding government struggles to “level up” societies and “build back better” in economic recovery programs—even before factoring in the consequences of major industrial changes from accelerating digital and green agendas.
  2. Divided societies. The pandemic has deepened socioeconomic inequality in many countries, with the poorest suffering most where health systems have been overloaded. Globally, migration challenges will generate more flashpoints as harder borders conflict with a greater impetus to escape economic, environmental, and political insecurity. With political polarization as intense as ever, democracy remains a fraught enterprise. Some national governments are eroding the rule of law and consolidating authoritarian powers; elsewhere, trust is in short supply and coordinated dissent the norm.
  3. Ambitions outpacing governance. While many businesses have strong decarbonization imperatives, national targets for net-zero emissions are often not adequately underpinned by concrete policies and strategies. Companies pursuing major digital agendas do so against an evolving cyber-threat landscape where the average cost of a data breach is at a two-decade high. As Internet 3.0 comes over the horizon, there is little sign of much-discussed tech industry regulation or a clear plan to address systemic challenges related to decentralized finance and cryptocurrencies. And owing to ever-cheaper space launch systems and greater prizes to be obtained, a rapid increase in orbital and suborbital activity from different national and private-sector players is likely to stretch the utility of decades-old international treaties and protocols.
  4. Geopolitical fractures. With economic globalization in retreat, nations of all sizes are deepening core alliances and reinforcing spheres of influence, while global powers are adopting stronger postures and hardening “red lines” on core ambitions. The security lens for national industrial strategies is sharpening, with governments not only wary of foreign investment ambitions but also seeking greater scrutiny of systemically important companies. Broader international coordination efforts struggle to gain traction—the distribution of COVID-19 vaccines to low-income countries, for example, remains far behind schedule.

Interrogating Resilience

In anticipation of a bumpy 2022 and fresh shocks barely over the horizon, boards of directors should reexamine the resilience of their organizations, asking not only how they fared over the past couple of years but also what they learned and how they have evolved.

Since the next crisis will likely be very different from the pandemic, any review of resilience arrangements should take a fresh look at the operational flows and capabilities that are critical for delivering core business goals—and the different ways in which they might fail. This requires looking not just at one’s own assets and processes but also at the vulnerabilities of other organizations in one’s ecosystem—suppliers, utilities, other service providers, and even customers—as their tolerance for disruption may not align with one’s own.

Rather than overseeing a list of tools (such as risk scenarios, financial buffers, and business continuity plans), directors should look at how their organizations have sought to build “suppleness” by deploying a diverse range of resilience strategies in concert with each other—blending structural “hardening” with greater agility in a crisis. Moreover, the pandemic has illustrated that supportive employee behaviors, especially when empowered by good leadership and effective communication, are a vital lubricant for any resilience strategy.

Indeed, a dynamic resilience culture will ensure firms are alert to changing circumstances, vigilant in challenging themselves about blind spots and shortcomings, and continually looking to adapt response strategies to better achieve critical goals. They will likely find that resilience efforts align well with other agendas, such as environmental, social, and governance (ESG) ambitions.

Every organization should seek to protect itself, but is that enough? When it comes to really large, complex risks, it is important to think more in terms of industrial and local ecosystems. This may shed new light on the role that larger organizations (in particular) might play in supporting systemic or societal resilience.

Some already consider it incumbent on them to take more responsibility for their supply chains, their workforce, and their customers; others, in responding to the pandemic, have deepened their engagement with local communities. This reflects growing momentum within many corporations to place their commitment to all stakeholders in the foreground, blending profit and purpose for sustainable growth. Indeed, those stakeholders (customers, employees, and investors) are already holding companies to an ever-higher bar regarding not only their ESG ambitions but also their actual performance in pursuing them.

Additionally, an increasing number of companies are pursuing a more active role in addressing large-scale public policy challenges that affect their business but can’t be resolved by government alone. Opportunities are proliferating for non-competitive alignment and collaboration between companies and with the government on cross-cutting challenges, such as cyber risk, climate change, artificial intelligence, diversity and inclusion, and the circular economy.

Now is not the moment to ease back on resilience. It’s the time to explore and consolidate new practices. After all, resilience is a journey—not a destination.

Richard Smith-Bingham is an executive director of Marsh & McLennan Advantage and a key contributor to the Global Risks Report 2022.


NACD: Tools and resources to help guide you in unpredictable times.

Become a member today.

Comments

Read Related Content