WEF Global Risk Report: The Risks of Today and Tomorrow

A lot of the clients that I have worked with during my time at Polestar have been consulting companies within the business services sector, specifically political risk and business intelligence. Our clients’ jobs are to anticipate risk of all kinds, be it political, economic, social, etc. They spend a great deal of time researching sectors and geographies, giving advice to multinational corporations and governments.

We do a very similar thing here at Polestar. Our job is to also anticipate risk for the transactions we support, whether it is an exchange rate affecting the value of the deal, issues coming out in DD that could end the deal, or a buyer pulling out of a deal last minute. Our job is to think ahead and find solutions to problems that our clients might not even know exist yet.

When reading through the World Economic Forum’s Global Risk Report for 2023, it got me thinking that no matter what sector you work in, or part of the world, there are certain risks that affect everyone in some sort of way. Whether recessions, war, famine – we need to be able to anticipate these problems and find solutions ahead of time.

What risks are we facing today, and what can we do to mitigate them? The report breaks down risk into three sections: current crisis, short-term, and long-term.

Current Crisis: The World in 2023

The world we live in today deals with two major issues: the economic aftereffects of COVID-19 and the Russian invasion of Ukraine. Both these issues have left us dealing with inflation. As governments and banks try to deal with this through monetary and fiscal policies, we have started a low-growth, low-investment era. We outline a lot of these cause and effects in our recent 2023 End of Year Valuation, which you can check out here.

This, in part, will lead us towards the first short-term risk, the cost-of-living crisis.

Upcoming Short-Term Risk

The cost-of-living crisis is ranked as the most severe global risk over the next two years, peaking in the short-term. Costs increased in 2022 due to disruptions in energy and food supply chains coming out ofRussia and Ukraine. Although these supply chains have adapted since the chaos of COVID-19 lockdowns last year, price shocks to core necessities, such as food and energy, have significantly outpaced inflation. According to the report, energy prices are estimated to remain 46% higher than average in 2023 relative to January 2022 projections.

Additionally, global mortgage rates have reached their highest in more than a decade in many parts of the world. According to the report, some estimates suggest that the increase in rates amounts to a 35% increase in mortgage payments for homeowners. As a result, rent prices followed suit and, in the US, it is estimated to peak at over 8% in May. This will disproportionately affect lower socioeconomic groups who are more likely to rent but least able to afford rental price hikes.

The higher costs of food, energy and housing will cause most household to feel a pinch, resulting in worsening health and wellbeing for communities. Due to the rising price of fuel prices alone, 92 countries faced strikes and industrial action, with some having political upheaval and fatalities. According to the report, the impact of insecurity will continue to be felt most acutely in already vulnerable states – including Somalia, Sudan, South Sudan and the Syrian Arab Republic – but may also exacerbate instability in countries facing simultaneous food and debt crises, such as Tunisia, Ghana, Pakistan, Egypt and Lebanon.

Anticipating Long-Term Risk

Today’s actions will end up being the consequences of tomorrow. The top four long-term issues we will face over the next 10 years will related to climate change. “Biodiversity loss and ecosystem collapse” is viewed as one of the fastest deteriorating global risks over the next decade, and all six environmental risks feature in the top 10 risks over the next 10 years.

According to the article, biodiversity within and between ecosystems is already declining faster than at any other point in human history. The biggest cause of this is global warming. If we are unable to limit warming to 1.5°C or even 2°C, the continued impact of natural disasters, temperature and precipitation changes will become the dominant cause of biodiversity loss.

The collapse in biodiversity will be detrimental, considering over half the world’s economic output will be dependent on nature. The report estimates we will see an increase of zoonotic diseases, a fall in crop yields and their nutritional value, growing water stress exacerbating potentially violent conflict, loss of livelihoods dependent on food systems and nature-based services like pollination, and ever more dramatic floods, sea-level rises and erosion from the degradation of natural flood protection systems like water meadows and coastal mangroves.

We are seeing more and more transitions to clean energy to reduce the carbon footprint from many corporations and governments. However, this may not always be as “green” as we think.

According to the article, renewable energy technologies are also reliant on non-renewable, abiotic natural capital (metals and minerals). Mining of rare earth elements in Myanmar and the Democratic Republic of the Congo have already caused widespread deforestation, habitat destruction of endangered species and water pollution, and have been linked to human rights abuses and the financing of militia groups.

Four Emerging Futures

Both the short-term and long-term risks can interact with one another to create a “polycrisis” a cluster of related global risks with compounding effects. This year, the WEF focused on “Resource Rivalries” – a potential cluster of interrelated environmental, geopolitical and socioeconomic risks relating to the supply and demand for natural resources.

Resources will become scarce for most people. The most basic necessities – such as food, water and energy – are in crisis. According to the article, an additional 200 million people faced acute food insecurity last year compared to 2019, and the number of people worldwide without electricity rose to an estimated 774 million, the equivalent of pre-pandemic levels.

Population growth, anticipated to reach 8.5 billion by 2030, is one of the factors contributing to this. According to the report, global food consumption is projected to increase by 1.4% annually over the next decade, concentrated in low-to-middle-income countries, versus a 1.1% per annum increase in production. In terms of water, the gap between water demand and supply is estimated to be 40% by 2030, with a dramatic and unequal increase in demand between countries.

Additionally, as we transition into “green energy”, the demand for metals and minerals will increase. Annual demand for these resources, such as graphite, lithium and cobalt, is anticipated to hit 450% of 2018 production levels by 2050.

All the finite supply of these critical resources should raise an alarm. The report lists two critical factors that will scale the polycrisis: 1) the degree of global cooperation that allows the flow of resources across national borders, and 2) the impact of climate change on the supply of natural resources and speed of the low-carbon transition.

These two factors will lead to four hypothetical outcomes for 2030, which I will include from the report below:

1. “Resource collaboration-the danger of natural scarcity: effective climate action measures and flexible supply chains enabled by global cooperation largely absorb the impacts of climate change on food production. However, shortages in water and metals and minerals cannot be avoided. Persistently high commodity prices slow climate mitigation – despite ambitions- and add to inflationary pressures in broader value chains, while water stress leads to a growing, but comparatively contained, health and humanitarian crisis in developing nations.”
2. “Resource constrains-the danger of divergent distress”: current crises draw focus and slow climate action, exposing the most vulnerable countries to hunger and energy shocks, even as countries cooperate to partially address constraints. In the absence of intervention, the water and mineral shortages experienced in the Resource collaboration scenario act as a multiplier to broader risks. A multi-resource, humanitarian crisis emerges in developing markets as food and water resources are impacted by the physical consequences of climate change, alongside global disruptions to trade, political stability and economic growth.”
3. “Resource competition-the danger of resource autarkies: distrust drives a push for self-sufficiency in high-income countries, limiting the need for rivalry over food and water to a degree, but widening divides between countries. State intervention is centred on the resource most exposed to a concentration in supply – critical metals and minerals – leading to shortages, price wars and the transformation of business models across industries. Resource power shifts, driving the formation of new blocs as well as wedges in existing alliances between mineral-rich and -poor countries, while the potential for accidental or intentional conflict escalates.”
4. “Resource control-the danger of resource wars: alongside the weaponization of metals and minerals explored in Resource competition, geopolitical dynamics exacerbate climate induced shortages in food and water. This results in a truly global, multi-resource crisis, with widespread socioeconomic impacts that exceed those faced in other futures in both scope and scale, including famine and water scarcity refugees. Geoeconomic warfare is widespread, but more aggressive clashes between states become one of the few means to ensure supply of basic necessities for populations.”

Conclusion: How Does This Relate to Corporate Finance?

If you haven’t already, I highly recommend reading the WEF report. It goes in depth into each short-term and long-term risk, and what actions are being implemented today to tackle those problems.

As we enter 2023, we have found ourselves in a low-growth, low-investment era. There will be risks we need to solve in the short-term, such as the cost-of-living crisis. However, we should all be doing our part in preparing ourselves for long-term risks such as climate change.

So, how does this relate to Polestar and what we do in corporate finance? The recent rise in the ESG market shows us that businesses are heading in the right direction.

We examined one of the key themes for this year will be ESG in our 2023 Sector Valuation. From our report, “ESG will become increasingly important as governments seek to decarbonise their economies, stronger regulatory and reporting regimes drive compliance needs and social media platforms force corporates to put genuine focus on being a “Good global  citizen”. The COP27 summit concluded that $4-6 trillion needs to be invested in renewables and decarbonisation solutions every year until 2030 – including investments in technology and infrastructure – to allow us to reach net zero emissions by 2050. In America, the Inflation Reduction Act (“IRA”) approved by lawmakers in August includes a record $369 billion in spending on climate and energy policies.”

Just last year, Polestar supported the transaction of Bridges Fund Management, MSCI and Farview Equity backing Evora Global to advance sustainable development goals in the global real estate industry (read our press release here).

With the rapid demand in this space, this could be a good time to explore your options for raising funding or securing a valuable exit. If you want to get in touch about anything ESG related, don’t hesitate to do so. Like always, if you have any interest, please reach out!