Top Risks in 2020: Dominated by Environmental Factors

Environmental concerns are a frequent talking point drawn upon by politicians and scientists alike, and for good reason. Irrespective of economic or social status, climate change has the potential to affect us all.

While public urgency surrounding climate action has been growing, it can be difficult to comprehend the potential extent of economic disruption that environmental risks pose.

Front and Center

Today’s chart uses data from the World Economic Forum’s annual Global Risks Report, which surveyed 800 leaders from business, government, and non-profits to showcase the most prominent economic risks the world faces.

According to the data in the report, here are the top five risks to the global economy, in terms of their likelihood and potential impact:

With more emphasis being placed on environmental risks, how much do we need to worry?

According to the World Economic Forum, more than we can imagine. The report asserts that, among many other things, natural disasters are becoming more intense and more frequent.

While it can be difficult to extrapolate precisely how environmental risks could cascade into trouble for the global economy and financial system, here are some interesting examples of how they are already affecting institutional investors and the insurance industry.

The Stranded Assets Dilemma

If the world is to stick to its 2°C global warming threshold, as outlined in the Paris Agreement, a significant amount of oil, gas, and coal reserves would need to be left untouched. These assets would become “stranded”, forfeiting roughly $1-4 trillion from the world economy.

Growing awareness of this risk has led to a change in sentiment. Many institutional investors have become wary of their portfolio exposures, and in some cases, have begun divesting from the sector entirely.

The financial case for fossil fuel divestment is strong. Fossil fuel companies once led the economy and world stock markets. They now lag.

– Institute for Energy Economics and Financial Analysis

The last couple of years have been a game-changer for the industry’s future prospects. For example, 2018 was a milestone year in fossil fuel divestment:

• Nearly 1,000 institutional investors representing $6.24 trillion in assets have pledged to divest from fossil fuels, up from just $52 billion four years ago;
• Ireland became the first country to commit to fossil fuel divestment. At the time of announcement, its sovereign development fund had $10.4 billion in assets;
• New York City became the largest (but not the first) city to commit to fossil fuel divestment. Its pension funds, totaling $189 billion at the time of announcement, aim to divest over a 5-year period.

A Tough Road Ahead

In a recent survey, actuaries ranked climate change as their top risk for 2019, ahead of damages from cyberattacks, financial instability, and terrorism—drawing strong parallels with the results of this year’s Global Risk Report.

These growing concerns are well-founded. 2017 was the costliest year on record for natural disasters, with $344 billion in global economic losses. This daunting figure translated to a record year for insured losses, totalling $140 billion.

Although insured losses over 2019 have fallen back in line with the average over the past 10 years, Munich RE believes that long-term environmental effects are already being felt:

• Recent studies have shown that over the long term, the environmental conditions for bushfires in Australia have become more favorable;
• Despite a decrease in U.S. wildfire losses compared to previous years, there is a rising long-term trend for forest area burned in the U.S.;
• An increase in hailstorms, as a result of climate change, has been shown to contribute to growing losses across the globe.

The Ball Is In Our Court

It’s clear that the environmental issues we face are beginning to have a larger real impact. Despite growing awareness and preliminary actions such as fossil fuel divestment, the Global Risk Report stresses that there is much more work to be done to mitigate risks.

How companies and governments choose to respond over the next decade will be a focal point of many discussions to come.

The Implications of an Aging Population

The world is experiencing a seismic demographic shift—and no country is immune to the consequences.

While increasing life expectancy and declining birth rates are considered major achievements in modern science and healthcare, they will have a significant impact on future generations.

Today’s graphic relies on OECD data to demonstrate how the old-age to working-age ratio will change by 2060, highlighting some of the world’s fastest aging countries.

The Demographic Debacle

By 2050, there will be 10 billion people on earth, compared to 7.7 billion today—and many of them will be living longer. As a result, the number of elderly people per 100 working-age people will nearly triple—from 20 in 1980, to 58 in 2060.

Populations are getting older in all OECD countries, yet there are clear differences in the pace of aging. For instance, Japan holds the title for having the oldest population, with ⅓ of its citizens already over the age of 65. By 2030, the country’s workforce is expected to fall by 8 million—leading to a major potential labor shortage.

In another example, while South Korea currently boasts a younger than average population, it will age rapidly and end up with the highest old-to-young ratio among developed countries.

A Declining Workforce

Globally, the working-age population will see a 10% decrease by 2060. It will fall the most drastically by 35% or more in Greece, Japan, Korea, Latvia, Lithuania, and Poland. On the other end of the scale, it will increase by more than 20% in Australia, Mexico, and Israel.

Israel’s notably higher increase of 67% is due to the country’s high fertility rate, which is comparable to “baby boom” numbers seen in the U.S. following the second World War.

As countries prepare for the coming decades, workforce shortages are just one of the impacts of aging populations already being felt.

Managing the Risks

There are many other social and economic risks that we can come to expect as the global population continues to age:

• The Squeezed Middle: With more people claiming pension benefits but less people paying income taxes, the shrinking workforce may be forced to pay higher taxes.
• Rising Healthcare Costs: Longer lives do not necessarily mean healthier lives, with those over 65 more likely to have at least one chronic disease and require expensive, long-term care.
• Economic Slowdown: Changing workforces may lead capital to flow away from rapidly aging countries to younger countries, shifting the global distribution of economic power.

The strain on pension systems is perhaps the most evident sign of a drastically aging population. Although the average retirement age is gradually increasing in many countries, people are saving insufficiently for their increased life span—resulting in an estimated $400 trillion deficit by 2050.

Pensions Under Pressure

A pension is promised, but not necessarily guaranteed. Any changes made to existing government programs can alter the lives of future retirees entirely—but effective pension reforms that lessen the growing deficit are required urgently.

Towards a Better System

Certain countries are making great strides towards more sustainable pension systems, and the Global Pension Index suggests initiatives that governments can take into consideration, such as:

1. Continuing to increase the age of retirement
2. Increasing the level of savings—both inside and outside pension funds
3. Increasing the coverage of private pensions across the labor force, including self-employed and contract employees, to provide improved integration between various pillars
4. Preserving retirement funds by limiting the access to benefits before the retirement age
5. Increasing the trust and confidence of all stakeholders by improving transparency of pension plans

Although 59% of employees are expecting to continue earning well into their retirement years, providing people with better incentives and options to make working at an older age easier could be crucial for ensuring continued economic growth.

Live Long and Prosper

As 2020 marks the beginning of the Decade of Healthy Ageing, the world is undoubtedly entering a pivotal period.

Countries all over the world face tremendous pressure to effectively manage their aging populations, but preparing for this demographic shift early will contribute to the economic advancement of countries, and allow populations—both young and old—to live long and prosper.