In January, the 2022 Global Risks Report was published by the World Economic Forum. The Report highlights global risks, to reveal shared priorities where we can work to reduce risk and build a more secure and sustainable future.
In this year’s Report, the top 3 “most severe risks on a global scale over the next 10 years” are environment and climate-related:
- Climate action failure
- Extreme weather
- Biodiversity loss
2 more of the top 8 are also environment and climate-related:
- Human environmental damage
- Natural resource crises
The remaining 5 of the top 10 are also influenced by or connected to climate and environmental factors, and can be deepened by climate emergency and related resilience failures:
- Social cohesion erosion
- Livelihood crises
- Infectious diseases
- Debt crises
- Geoeconomic confrontation
What does this mean? In short, it means environmental degradation and the destabilization of Earth’s climate system are exacerbating global risks that threaten to destabilization nations, markets, and local community life, across the world. US financial regulators have found that climate emergency threatens to collapse the US financial system and its ability to sustain the wider economy.
The now two-year-old COVID emergency is just one example of how unsustainable interactions with nature create nonlinear compounding risks.
- Nonlinear means the next big challenge won’t always be apparent as we trace a line from where we are to what is most probable. Forces beyond our control bring new threats into our path, and we must face them with whatever background resilience we have.
- Nonlinear also means that rates of change aren’t arithmetical (4+4=8) but exponential (4 to the 4th power=256).
- Compounding refers to the fact that one risk heightens the probability of another; this is partly how we get to exponentially increasing risk. An example might be the frequency of major storms and flood events. What used to be “hundred-year floods” are now happening every few years.
- Nonlinear-compounding also means we have to think beyond isolated events. Damage from individual storms, floods, and fires, is one thing. The degradation of watersheds and ecosystems needed to make agriculture viable is risk of a far different magnitude.
There is serious and escalating risk that we will experience major crop failure in more than one major food-growing region simultaneously in the next two decades. Such a “multiple breadbasket failure” would create everyday food insecurity for billions of people and would induce shock mass migration—not only the mass migration of hundreds of millions of people, but at shock speed, within weeks or months.
No human institution has had to manage humanitarian crisis of such sweeping scale at any time in recorded history. No human institution anywhere is prepared for such an event. There would be major, fast-moving spillover effects, including the violent destabilization of nation states.
We are living in the age of nonlinear compounding risks, resulting from unsustainable industrial-scale interactions with natural systems.
As a result, when we talk about investing for “ESG” outcomes (environmental, social, and governance—which implies “good governance”, transparency, and accountability), we are not talking about a niche market for those who care enough to be do-gooders. We are talking about whether choices made today will create horrific catastrophes later on.
It is important that ESG ratings not make room for “greenwashing”—the PR effect of hiding bad practices in language and projections that suggest good practices are at work. This matters not only for the integrity of ESG systems, but because we need those systems, operationally, to save us from ourselves.
The point of sustainable finance and ESG ratings is to support the project of making financial and industrial engines of value creation smarter. The goal is to ensure these world-shaping systems work in a way that is not only good for some people now, but good for everyone, over time, and for natural systems without which no human endeavor is possible.
The Global Risks Report makes clear we need to avoid climate action failure, protect ecosystems and biological diversity, reduce human-caused environmental damage, and accelerate the race to zero emissions energy, industry, and transport. We are living with nonlinear compounding risk, but working intelligently from our present circumstances can protect us against sliding into an exponentially worse situation.
To achieve that, we will need to:
- Build far more sophisticated monitoring systems to gauge macrocritical risk;
- Begin eliminating carbon pollution from energy, industry, and transport without further delay;
- Eliminate at least half of all global carbon pollution by 2030;
- Transition to nature-positive regenerative food production, to protect and restore ecosystems and watersheds, and to absorb atmospheric carbon, to reduce future risk;
- Build circular economies where waste is minimized and downstream communities, ecosystems, and bodies of water are protected;
- Move forward on all 17 of the Sustainable Development Goals, in all societies, making sure all people are included in the resulting benefits.
This last point is critical. Though inclusion of marginal and vulnerable communities may seem less operational to some decision-makers, our ability to protect and serve vulnerable people is a measure of our ability to protect and serve planetary systems we have historically ignored. If we allow unabated harm and cost to fall on those who cannot prevent it, then we are simply repeating the same cycle that created our unsustainability crisis in the first place.
- Everywhere that pattern is repeated, it interferes with our collective ability to prosper sustainably.
- We need to act on all of the levers of societal stability and sustainable human wellbeing.
- If we are to enjoy a future that is prosperous, sustainable, and secure, we need successful businesses to be anti-pollution, and oriented toward routinely generating “positive externalities”—benefits to stakeholders who are not financially invested in their operations, but whose circumstances of risk and resilience can be shaped by them.
- And, we need regulations and incentives that shape those businesses to be fit for this purpose.
We need to stop pretending that businesses are “innovative” or “successful” if they require others to absorb unaffordable harm. That kind of pirate financing is dangerous, and has now imposed on the entire global community a level of risk and cost that cannot be tolerated. Whatever investors of the day might wish for, markets cannot structurally bear the costs that are now piling up.
Innovation in our time must:
- reduce macrocritical risks,
- generate benefits to stakeholders, society, and nature, and…
- build resilience against major shocks.
On both the risk and resilience sides of the equation, and across the action space in between, non-market cooperative arrangements invited by Article 6.8 of the Paris Agreement provide trading partners with ways to expand the reach of investment for healthy, stabilizing, sustainable outcomes.
Not working this way generates real-world risk and cost. Securing a livable future for humankind requires us to understand these dynamics and work to improve across all of the indicators that measure risk, resilience, and sustainable inclusive prosperity.
This is a Resilience Intel note on cascading and compounding climate risks. Learn more at ResilienceIntel.org
