Global Risk Report 2020: Environmental Risks- Most likely, Most Impactful, Least Readiness

What can be more priority seeking than the fact that all top five risks identified in The Global Risks Report 2020, issued by WEF, are linked to environmental issues- beating Economical, Geopolitical, Societal, and Technological categories. 

As per the Report: 

Top five Risks in likelihood:  Extreme weather, Climate action Failure, Natural Disasters, Biodiversity loss and Human-made environmental disasters. 

Next five set of Risks: Data fraud or theft, Cyberattacks, Water crises, Global governance failure and Asset Bubble.

In terms of high impact, if materialized, although with relatively less likelihood: Weapons of Mass Destruction, Information infrastructure failure and Infectious disease spread.  

Climate realities are getting categorised as the planetary emergency for their known and unknown impacts across multiple areas of interests and with severe consequences:  Potential loss of life and immigration among those living in vulnerable low-lying regions, drop in crop-yields, water scarcity,  disruption in trade supply chains (with new options available through snow-melting in Arctic), increased insurance cost for assets build in vulnerable regions, and societal costs of inconvenience linked with extreme weather.

Decline in Bio-diversity may show-up in hard to predict sudden collapse, while not counting the loss of opportunity for human benefits on account of extinction of unexplored species.  At the same time, solutions suggested to stem bio-diversity loss may involve socio-economic costs: organic agriculture comes at the cost of poor yields, requiring more land to serve required produce.  Around 12 million hectares of tropical forest worldwide lost in 2018.  Disappearance of Amazon at rapid rate not only reduces the carbon absorption capacity of earth but also increases dryness in the atmosphere leaving ecosystem more vulnerable to fire and drought.  Wild forest fires further accelerate the loss of bio-diversity.

Insect decline may lead to flowerless world, with silent forests, a world of old dung and fallen leaves, and rotting carcasses accumulating in roadsides- as per David Wagner, entomologist at university of Connecticut.  Coral reefs, provides vital protection from coastal flooding and farm surge, facilitate breeding of fishes and contribute to US 36$ billion per year to tourism industry.  Even if global temperature stabilizes at an increased 1.5 c, coral reef could decline by 70-90%, as the ongoing estimates. 

Report suggests the need to recognize the economic value of nature, and natural capital stock movements to be counted as part of national economic health- so that economic benefits that comes at the cost of reduction in natural capital in the form of depletion in bio-stock and diversity are appropriately accounted for.

Governments, Central Banks and Corporates are examining the best ways to incorporate the financial risks of climate change and any disruptions that rapid shift of investments, policies and consumer preferences towards net-zero emission goals, in their assessments and disclosures.  

It is expected that such efforts would give enough impetus to make industries embrace circular economy features and encourage attempts to extract maximum out of natural resources through its revamp and reuse to extend its life-use than push for early replacement of half-used assets. 

If most of the climatic changes are linked to global warming, than movement to low-carbon consumption scenario becomes an attractive preposition. But transitioning towards low-carbon technologies would mean stranding assets, reduced investment returns, increased stress on pension funds stranded with investments in extractive industries, job losses, and shift in relative importance of minerals like iron and cobalt with technological innovation focus into areas like high-storage batteries and low-carbon alternatives to iron, glass and cement. 

Transition pains to low-carbon economy needs to be managed and spread over a protracted period, and we do not have much time, unless we start in right earnest, under comprehensive framework that allows for adjustments for the genuinely disadvantaged stakeholders.

In terms of Technological Risks, report brings out the concerns and issues coming out of increased fragmentation and incompatibility between cyber security regulations, framework and technology standards, which leads to higher transaction costs, greater cyber risks and sub-optimal investments in infrastructure and R&D. 

Ecological footprint of mass data generated for and by AI, for example, is considerable:  Training a single AI model can emit as much carbon as five cars in their lifetimes, MIS Technology Review, June 2019.  Quantum Computing can reduce the effectiveness of existing data security and critical infrastructure systems including military network, email and power grids, as it allows for higher capabilities and speed in solving mathematical problems which form the basis of mots encryption software today.

There is need for comprehensive, inclusive and agile global governance architecture to address the dynamic and intertwined security issues linked to 4^th Industrial revolution.     

The Economic risks highlighted in the report including rising trade tensions (decreasing trade volumes), lower investments (reduced levels of FDI inflows), weak confidence and high debt (both public and private), which could result in prolonged slowdown of the world.  In particular, US and China decoupling (and disentangling their economies and trade ) with each looking to design its own supply chain, 5G networks and investment institutions may also force other countries to decide which economic system to be part of or create redundancies to be part of both the paradigms.

Report, also recognizes the emergence of Narrower issue-specific, ad-hoc “coalitions of the willing” such as Franco-German Alliance for multilateralism, African Continental free-trade agreement, Quad, as poor substitute for truly global broad based multilateral institutions, whose effective in tackling truly global concerns is waning.

While the report has classified risks across five categories, each one of these risks when materialized can trigger other risks or acerbate their impact.   

Some of these risks would need action now for them to avoid their reaching tipping point of no-return.  Climate Action Failure could be one such risk!

MBA 101 in action: Running business - the HUL way!

Sudhir avers that it took him only 4 months to type the book although it took 20 years to write. In similar vein, it does not take long for most organizations to appreciate the advantages of running business in line with management principles taught in business schools- mostly under 101 courses, but most organizations may take lifetime to practice these  principles in letter and spirit. And this is the where Hindustan Lever has got the edge.

Most of the book lessons may not be new, but how Hindustan lever implements them come live through experience and practice sharing that Sudhir has brought out very effectively. Most companies, especially operating in developing economies, profess focus on growth, cost consciousness, meritocracy, differentiated workforce strategies implemented in sensitive and humane manner, grounded leadership, and importance of balancing character and competency while defining their definition of desirable talent.

Given the richness of experience Hindustan lever managers have in FMCG space- across all 4Ps of marketing, any conclusions or suggestions coming from their side merits deliberation. Defining marketing process as understanding customer needs and solving customer problems defined in-terms of Job to be done, is powerful way to differentiate it from its components, including publicity, advertisement or sales.

Some interesting insights that are worth reflecting, to understand their relevance in one’s business context includes:
1. Buyers are far more similar in behavior than you think- avoid over-segmentation
2. What matters is the quality the consumer gets and not quality designed in the laboratory
3. It is easier to get consumers adopt new category than to get them increase consumption
4. Price discounts do not recruit new consumers, encourage existing consumers to buy more
5. Lower price point is more important than cheaper price per kilo for low-income consumers
6. Build portfolio of brands at different price points to be resilient in times of crisis
7. Sales is a cost and not a revenue centre
8. Ensure availability of stock and not depth of stock- keep stock refilling cycle short.
9. Spend more on advertising deployment and not on advertising creation.
10. Look for reach than repetition in media plan- whisper to as many

Among my favorites is the practical suggestion of ensuring that decision has both the right and left brain backing – as Sudhir mentions that decisions are often created in inebriated state and validated and firmed up in sober state.

 Book full of insights that are real contradictions that become  obvious in hindsight!