Systemic Risk

Systemic Solutions for an Increasingly Interconnected World

Risk is an ever-present fact of life. Yet as our world becomes more globalized and interconnected, we have inadvertently built systems which have not just the ability to transmit those risks across geographies and turn them from local into global phenomena, but which also have the ability to cause further global crises to materialize. Moreover, these crises are arguably more ‘existential’ in nature than ever before — have we ever knowingly faced a planetary threat as critical as the one climate change presents?

In the report that follows, we examine the nature of ‘systemic risk’, identifying a Global Risk Nexus of 10 key systemic risks, from climate change to biodiversity loss and natural disasters, through antimicrobial resistance, human and agricultural pandemics, to cyber risk and global governance failure, and ultimately global economic and financial crises. We also examine the interlinkages between those risks, for example, how climate change can drive biodiversity loss, with the potential to impact global food chains and financial and economic crises.

These risks can seem so overwhelmingly large and complex in their nature, it is easy to become resigned to our powerlessness to understand and quantify them, let alone to try to prevent them. Yet as John Dryden observed in the 17th century, ‘It is madness to make fortune the mistress of events, because by herself she is nothing, and is ruled by prudence.’ His words ring as true today as they did then — many of the issues facing us are not in fact unprecedented. With a prudent approach we can analyze and quantify them, predict their severity or frequency, and even prevent them.

This report has been written in conjunction with the Centre for Risk Studies at Cambridge University, with further contributions from thought leaders in the world of risk including Dame Inga Beale and Mark Carney. In the report we assess the quantum of systemic risks, their interlinkages, and by examining the barriers to addressing them, propose solutions for not just adapting to them, but to mitigating and even preventing them. We look at how individual entities from corporates and supranationals to sovereigns can analyze and address systemic risk via scenario analysis and stress testing, as well as proposing broader systemic solutions. The very feedback loops which make these risks systemic in their nature can be turned against them, providing positive feedback loops which, by preventing one, can reduce the probability or severity of another. We examine how vast pools of capital could be created and turned to the prevention of the very risks to which they seek to adapt, thereby reducing the probability and severity of those risks.

We identify $3 trillion per year of investment opportunities which could reduce the probability, frequency, and severity of these systemic risks — a vast sum to be sure, but one which pales into insignificance against the tens of trillions of dollars in liabilities which could potentially be avoided. If this argument in itself were not compelling enough, many of the prevention and mitigation measures have the ability to drive economic growth, with significant multiplier effects of up to 15 times. These would be attractive against any economic backdrop, but against the current global economic malaise of secular stagnation and ultra-low returns across all asset classes, it is surely an opportunity we cannot afford to pass up.

We can either worry about the future and deal with it when it comes — if indeed we can — or tackle these risks head on, embrace the very feedback loops which make them systemic, save trillions of dollars, and drive economic growth in the process.