SecDev: Resilience in a risky world
July 2022
The world is undergoing a global great power transition?and experiencing accelerated climate change?that are contributing to historic shocks, systemic risks and opportunities. Our sense of predictability is being upended by an increasing array of disruptions with cascading and compounding effects. Governments, businesses and non-governmental organizations need to build?strategic resilience?to survive, much less thrive, in a volatile and uncertain period.
The shocks are coming hard and fast. Over the past two years between?6?and?15?million people died from a pandemic. Associated lockdowns contributed to the worst?economic downturn?since the Great Depression. Add to this the war between Russia and Ukraine which has contributed to untold human suffering, the displacement of over?12 million people?and far-reaching economic effects on food and energy prices, and you have good reason to feel gloomy.
Some of the impacts of these shocks are more dramatic than others. Consider how the?market cap for crypto?fell from $3 trillion to $900 billion in a matter of months when inventors got spooked by high inflation and interest rate hikes. There are fears this could trigger disruptions across financial markets. The tech sector has also been given a jolt. Alphabet, Amazon, Apple, Facebook, Microsoft and Netflix?lost a combined $3.3 trillion?since the start of this year. Special purpose acquisition companies, IPOs and valuations are also all down.
Is there space for cautious optimism? SecDev believes there is. Disruption is hardly new and we’ve developed sophisticated ways to manage risks. During periods of global transition and realignment, such as the one we’re experiencing right now, there are opportunities to redesign our systems and build a better future.
Five global shocks driving systemic risk
But first the bad news. One reason we’re all feeling so unnerved is because we’re facing multiple and simultaneous shocks. Any one of them could overwhelm us. SecDev Principal Robert Muggah listed five during a keynote address to the World Angel Investor Forum in June 2022.
The first shock is the Russian-Ukraine conflict, a dangerous hot war. It is not only putting the nuclear question firmly back on the table, it is?profoundly upending?energy and food security worldwide. And bigger shocks are yet to come. Sanctions are also forcing the decoupling of Russia from the west.
The second shock involves the deepening tensions between the US-China and the emergence of a new Cold War. The potential for military miscalculation is high and while their economies are interconnected,?decoupling?on the technology and industrial fronts from microchips to rare earths is well underway.
A third slower-moving shock is the deceleration of globalization and the potential for trade wars.?After four decades of hyper-globalization we’ve?entered a period?of strategic autonomy and protectionism. Firms are building up precautionary inventories, adopting dual sourcing, accelerating onshoring and friend-shoring.
The fourth shock is the acceleration of technology and the accompanying revolutions and techlash. There are bewildering?transformations?underway ranging from advances in AI and quantum to the spread of biotech and IoT and internet adoption. More digital connection means more attack surfaces. Cybercrime alone will exceed $10 trillion in damages by 2025.
The final and most consequential shock is climate change and the increased intensity and frequency of global warming, sea level rise and extreme weather. Successive?IPCC reports?are spelling out the risks to atmospheres, oceans, biodiversity and human life as we know it.?Record-breaking heat waves from the Americas and Europe to Africa and Asia are a grim reminder of the new normal.
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SecDev Reflection on shocks, risks and resilience
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Each of these shocks are generating systemic risks for governments and businesses alike. One way governments and businesses are responding to systemic risk is by adopting very conservative postures. They’re reducing their exposure, trimming portfolios, localizing supply chains, throwing-up strategic safety buffers and building-in redundancies. But is this the right approach?
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Four megatrends reshaping the opportunity space
The most successful investors are not just minimizing their exposure to shocks and risks, but also actively looking for opportunities. They’re attuned to the big global transformations underway, diversifying their investments, and deliberately building resilience to navigate a dynamic environment. One way they’re doing this is by aligning investments with?mega-trends.?They are focusing on at least five unstoppable patterns.
The first megatrend is digitalization.?Today, about 5 billion people are connected to the internet. Another 2.7 billion people will soon come online. The?digital economy?already accounts for about 15% of global GDP and there are massive opportunities not just in optimizing and scaling services, but also building innovation ecosystems, improving digital skills and reducing digital divides - especially in emerging markets.
A second megatrend is aging.?Right now, there are more than 700 million people over 65 and this will?double?to 1.5 billion by 2050. As fertility rates decline, the share of older people is going to grow. This will affect productivity but also shake-up the market for real estate, healthcare, pharmaceuticals and services for a world of elongated life-spans.
A third megatrend is urbanization.?Over half the world’s population lives in a city and this?will grow?to two thirds by 2050 - with virtually all future urban growth occurring in emerging markets. About 65% of the infrastructure and services required to sustain this unprecedented urban transition have yet to be built and there are opportunities to design green, inclusive and digitally secure cities.
A fourth megatrend is the green transition. Climate financing was about?$630 billion in 2020?and should grow to around?$4 trillion by 2030. There are vast opportunities for investing in break-through technologies to mitigate and reduce emissions and power clean energy transition. While hydrocarbon prices are spiking now, this is what a global energy transition looks like and high prices will spur the shift to renewables.
In uncertain times, there’s a flight from risky assets, especially those that are overvalued and built on weak foundations. But the smartest impact investors understand is the value of patient capital. They’re balancing their portfolios and spreading their bets, including on solutions connected to megatrends.
Investing in strategic resilience in a risky world
Uncertainty creates opportunity. Systemic risks and unstoppable megatrends can help clarify priorities. They force a reframing of opportunity and can accelerate virtuous cycles of investment. Big shocks can also help us rethink and reinvent global and regional systems of risk management just as the 1997 financial crisis led to the creation of the G20. Seen this way, competition with China can be re-imagined as a way to accelerate post-carbon economies and more ethical and open technology.
There are multiple ways to build strategic resilience in an uncertain world.
First, start by crafting a vision and cultivating a culture for strategic resilience. Think of resilience as a comparative advantage. This makes sense. After all, companies that are more resilient typically generate more shareholder value.
Second, build a practical strategy to build strategic resilience. Think of this as fostering a “resilience muscle” - invest ahead, sense early, respond immediately, and pivot and accelerate out of disruption. This means creating capacity for foresight. This means investing in forecasting, running scenarios and stress testing.
Third, begin practicing resilient investing.?Short-term returns are tempting, but a key is to prioritize sustainable growth, lean into digitalization and accelerate investment in big megatrends. It matters less how your portfolio does tomorrow than how it performs a few years out.
Finally, strengthen resilience governance. Executive teams need to be playing a leading role. They need to signal a move away from reactive crisis-driven responses focused on minimizing risks and maximizing controls to a more proactive and forward looking approach that accounts for the total environment.
We are living in a more shock-prone and risky world. We need to evolve and build our resilience to navigate it.
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.About
SecDev is an agile research and innovation firm helping clients navigate digital-geopolitical, geospatial and geodigital risk. SecDev builds value through innovation in strategic foresight, data science and urban analytics. SecDev’s team is fluent in technology, global in scope and results-oriented. SecDev empowers clients, such as national governments, technology companies and international organisations, to make informed choices that deliver value in the digital-urban age.