”The World Is in Big Trouble.“

Our CEO Georg Winter shares his views on why geopolitical transformation is our focus this year and why it exacerbates existing risks and causes new risks to emerge.

Secretary-General António Guterres made this statement at the General Assembly of the United Nations on 20th September 2022 in New York.

We are undergoing times of permanent change, which many refer to as systemic transformation or multiple crises strung together. This change takes place in different fields and segments. They, in turn, are interlinked at various levels. HORIZON’s risk-oriented approach aims to define and outline the key areas of change affecting your company. In doing so, we take a close look at the systemic influences of ecological, geopolitical, technological and social transformation on your company’s risk landscape.

The 4 Risk Changers

The 4 Risk Changers

These transformation processes are very dynamic, they are often interdependent and thus characterised as complex processes. They also result in systemic risks. Managing them requires much more than traditional methods of risk management.

In terms of risk management, we refer to these systemic risks as “risk changers” that directly affect companies and categorise them as follows:

  • “Environment in danger” for ecological,
  • “Beyond globalisation” for geopolitical,
  • “Digital transition” for technological and
  • “Social disruption” for social transformation.

HORIZON – “Risk Thought » Fast Forward” is our platform for so-called risk thought leadership. It is based on our vision to detect the impact of these risk changers at an early stage and introduce risk management solutions that boost our clients’ resilience.

How do the 4 Risk Changers affect companies?

Companies are exposed to various kinds of risks. At the same time, systemic transformation exacerbates existing risks and causes new risks to emerge. These primary risks have a direct bearing on companies.

 How do the 4 Risk Changers affect companies?

Primary risks – Transformation leads to direct exposure

Ecological risks
When we look at climate change, we refer to climate risks. They are apparent in form of a changed or an increased exposure to natural disasters, such as floods, storms, hail as well as heat, drought or a rising sea level. As far as companies are concerned, these risks can cause anything from material damages to disruptions of transport routes, in energy, or raw material supplies.
 
Geopolitical risks
Geopolitical change, characterised by an economic bloc having been established between the USA and China, has put free world trade to the test. It also shows, by looking at Russia’s invasion of Ukraine, just how quickly a system conflict, which we thought had been settled between the democratic and autocratic world, can be reignited. All that, exacerbated by global events, like the Covid-19 pandemic, puts pressure on the availability of energy resources, disrupts supply chains and leads to a global wave of price hikes that challenge governments, businesses, and the civilian population alike.
 
Technological risks
Technological change has resulted in an over-dependence on data, software and IT infrastructure. All are targets of a rapid increase of cyber threats all over the world and are thus one of the biggest threats of the 21st century.
 
Social risks
The growing divide between rich and poor, the lack of equal opportunities regarding age, ethnic background and nationality, gender and gender identity, physical and mental abilities, religion and ideology, sexual orientation and identity as well as social backgrounds increases social tensions. The Club of Rome deems equality and justice as part of the ideal solution for a liveable future.

Companies cannot shirk their responsibility in this regard. For instance, social issues are becoming more and more important as we are facing an inevitable demographic change that has already resulted in a systemic shortages on the job market.
 
Correlation
The interdependency of these systemic risks is best demonstrated by the war in Ukraine: From a geopolitical point of view, it has led to an energy crisis. In terms of technology, it has led to an increasing number of cyber threats. On top of that, well-targeted campaigns are aimed at splitting society and disturbing social peace in our Western world. From an ecological perspective, however, there is hope that our efforts to reduce carbon dioxide emissions can finally be carried through.
 
Systemic change – Primary and secondary risks

Systemic change - Primary and secondary risks

Secondary risks – Adaption creates new chances and challenges

Besides these primary transformation risks, which affect companies as “pure risks” from the outside, systemic change leads to secondary transformation risks that are “speculative”. They derive from companies’ adapted business models that were developed in response to the systemic change and comprise both risks and opportunities.
 
Ecological adaption
In the fight against climate change, many companies have decarbonised their processes or have developed sustainable products. Saving resources and taking advantage of new opportunities are key focal points. However, new products and processes lead to new risks that must be identified at an early stage.
 
Geopolitical adaption
As a result of the geopolitical change, companies had to explore new markets and new sources for raw materials and find new ways of attracting both customers and suppliers, while keeping a watchful eye on possible dangers. Although the currently rising energy prices still paint a different picture, supply chains can be shortened through nearshoring. This could very well result in a wave of reindustrialisation in Europe.  
 
Technological adaption
Technological change enables us to pursue totally new paths. While the automation and digitisation of value chains is gaining importance, the full potential of mergers, transparency, big data, and metadata remains to be exploited. Manufacturers of previously traditional products and services are becoming system providers, goods are being replaced by data, and machines by platforms.
 
Social adaption
In the past, humans used to be regarded as resources. Now, humans with all their resources take centre stage. The concept of Industry 5.0. does exactly that. It places the human being at the centre to promote and foster diversity, different talents, and activities. Many companies have already initiated a transformation process because employees nowadays attach more importance on meaningful work. They believe that they can make a difference when it comes to resilience and sustainability.

Beyond globalisation – Geopolitical transformation in the spotlight

The upcoming release of HORIZON will concentrate on the geopolitical transformation and therefore looks at all its challenges from various angles.
 
New political world order
Does the war in Ukraine show us the dramatic face of a new political world order and how does this conflict at the very centre of Eastern Europe disrupt our economic basis?
How will the global trend of bloc formation between democratic and autocratic countries influence companies’ global business activities in the future?
What is the risk of technology being abused as an instrument of power and how could this affect companies?
How will the increasing conflict between the USA and China influence global economic relations?

Energy crisis
Blackout and a cold winter – how can we prepare for a total outage?
Will the current shortage of natural resources ruin Europe’s industry or will an ambitious energy transition turn Europe into a role model for a green global economy?

Supply chain dilemma
Will the geopolitical transformation result in a new era of offshoring, or will regional supply chains and increasing investments in circular economy boost independence and resilience?
How will China´s rise continue – considering its growing regional influence along the new silk road – and what will be the effect of its strategy of isolation as a result of its zero-tolerance pandemic policy?
Is the conflict over Taiwan’s independence a ticking time bomb for the global economy?

Loss of wealth
Will double-digit price increases lead to a decreased standard of living over the long term?
Does high inflation increase the risk of social riots in Europe?
How do these circumstances influence people’s work-life balance and their work attitude?
What does a new wave of migration mean for European companies and their DE&I (Diversity, Equity, and Inclusion) agenda?
 
It is indeed a difficult and challenging situation that raises many most pressing questions. We need to discuss them, their impact on the transformation of the risk landscape as well as possible solution scenarios.
 
Stay tuned!

Georg Winter

CEO

T +43 664 962 39 06

Related articles

HORIZON Risk Thought Platform

We have created Horizon, firstly as a print publication and now as a platform for sharing the latest insights about ongoing transformations. Our risk specialists will continue to provide their expertise and knowledge to shine a light on the challenges of the future.

The complexity of today´s risk environment is changing at an accelerating pace, making risk management even more challenging. We address these challenges by highlighting underlying systemic transformations and their implications for future risk and insurance management in various sectors. We are proud to announce the launch of HORIZON – “Risk Thought » Fast Forward”, our platform for sharing the newest insights regarding these risks.
 
The platform is based on our vision to detect the impact of 4 significant areas of risk changes early and introduce risk management solutions that boost our clients’ resilience. We created Horizon initially as a print publication and now as a platform for sharing the latest insights about ongoing transformations out of a belief that knowing our risks is the first way to mitigate them.
 
On the platform, you can read about ecological, technological, social and geopolitical transformations shaping the future. Our risk specialists will continue to provide their expertise and knowledge. Together with thought leading guest authors and clients we will shine a light on future challenges.

Visit our new HORIZON – “Risk Thought » Fast Forward” platform

Explore HORIZON – “Risk Thought » Fast Forward”

The Austrian road to organic farming

Organic farming in Austria

While agriculture in Austria remains at a very high level and is the world leader in organic farming, it is facing similar challenges to other farming economies in Europe. Challenges relate to a change in the EU’s common agricultural policy and external threats not influenced by farmers in Austria themselves.

Organic farming – overview

Austria has for many years been relying on environmentally friendly farming methods due to consumer expectations and the climatic and climate, and geographical conditions. Austria has consistently pursued a quality policy instead of promoting the highest possible yield per hectare.
 
At the top of such a defined agricultural policy is organic farming. Austria is recognized as an organic farming pioneer in Europe, and the first organic farms in the world were registered in Austria in 1927, i.e. almost 100 years ago. Austria also became the first country to establish national regulations on organic farming ten years before the European Union adopted similar solutions. The Austrian agricultural philosophy considers organic products much more than just a niche. Austria has already achieved the EU target set in the European Commission’s flagship strategy. Currently, 23% of Austrian farmers benefit from organic farming advantages, while more than 25% of all agricultural areas are managed according to high environmental standards. The main goal is to promote the most ecological use of land to maintain a good quality of soil, water and air for the next generations.
 
In 2020, more than 10% of supermarket turnover in Austria came from fresh, organic products. Compliance with the requirements for organic food forces the resignation from biotechnology. Austrian consumers do not accept chemical fertilizers, pesticides or genetic engineering (commonly used in other countries). This creates serious challenges for food producers, farmers and input suppliers. Despite the limitation of the use of chemical fertilizers and pesticides, average yields of, for example, maize in Austria are higher than in the United States. High average yields raise legitimate questions about the sense of using chemical growth enhancement. As the Austrian example shows, similar results are possible by increasing the use of organic substances, promoting crop rotation or caring for animal welfare. So far, as the pioneer, Austria has avoided the introduction of genetically modified crops into its agriculture and has managed to maintain sustainable production methods with quality and hygiene throughout the food production process, from the field to the table.

EU agricultural policy – new challenges?

Implementation of the new EU agricultural policy in Austria, according to the current assumptions, would entail significant restrictions on the operation of organic farms, constituting a significant share of the total number of Austrian farmers. This is now the main concern and point of contention in talks between farmers and the Austrian government.
 
Notwithstanding the above, Austrian entrepreneurs are currently facing the following challenges:

  • Ownership structure, based on small and medium-sized enterprises: This significantly hinders competitiveness in the European and global market, limiting development opportunities also in the internal market. The small scale of operations limits access to capital and qualified personnel, which results in lower expenditure on new ecological technologies.
  • Poorly developed network of connections between individual entrepreneurs: In Austria, there are several networks of entrepreneurs and clusters, but their cooperation is quite limited. Undeveloped connections hinder the exchange of experiences and the creation of a common research and development infrastructure.
  • Poor dynamics of development in the local market: While Austrian companies are dynamically developing on the international market, a result of a strong emphasis on the export of the ecology and environmental services sector, the local market for ecological services and products has lost its momentum and is not growing as dynamically as 10-15 years ago. Local markets reached a certain limit of growth at the current level of development of the general economy, potentially influenced by the decreasing price competitiveness of organic food. Changes in the global markets may have a further impact on household incomes, adversely affecting the growth in demand for green products and services.
  • Maintaining the profitability of farms after implementing the new EU agricultural policy: Thanks to the government’s agricultural policy, a robust organic farming sector has been built over the past few decades. Running such farms requires much more expensive than in the case of intensive farming, and a change in the method of financing organic farms may disturb their income levels.
  • Ensuring adequate animal welfare: Austria is one of the few countries in the European Union to have legal regulations regarding the welfare of farm and farm animals, adopted in 2004. Regulation and recommendation compliance requires additional effort and resources. Also, the epizootic disease occurrences in Austria and neighbouring countries raise concerns about maintaining livestock production levels in the coming years, especially for pigs.
  • Maintaining the yield of crops, especially with the limited possibility of using chemical fertilizers and pesticides on organic farms: While Austrian farmer productivity is currently comparable to intensive-agriculture farmers, the inevitable progression of climate change may impact growing conditions. On top of the climate change risks, there may be biological threats (new varieties of diseases) that will be difficult to combat due to the limited possibilities of using plant protection products in organic farming.

Overall, while agriculture in Austria remains at a very high level and is the world leader in organic farming, it is facing similar challenges to other farming economies in Europe. Challenges relate to a change in the EU’s common agricultural policy and external threats not influenced by farmers in Austria themselves.

This article is a part of our Foodprint publication focusing on issues and risks facing the Food & Agriculture industry. Read the publication and learn more about insurance solutions and the growing importance of risk management and alternative solutions like parametric insurance.

Related Insights

Georg Winter

CEO

T +43 664 962 39 06

Everyone wants to get back to nature, but no one wants to walk it …

… when it comes to the ecological footprint. The current question is: Can risk management contribute to more sustainability, and will the achievement of ESG goals even become a criterion of insurability?

Hardly any company today is not concerned with its ecological footprint. The decarbonisation of production processes and supply chains, the efficient use of energy and the sparing use of valuable resources such as land, water and raw materials are prominent topics on the corporate ESG agenda.

Transformation of the risk landscape

In addition to the challenges and consequences of climate change, other systemic risks are also changing our environment. The opportunities and risks of digitalisation, the effects of Covid-19 on the state, society and the economy, but also the demographic development with the resulting shortage of skilled workers in many industries, are leading to a fundamental transformation of the risk landscape of many companies.

The classic risks consist of tangible assets that can be reported on the balance sheet, such as factories, real estate, machinery and inventory. In 1975, according to an annual study by Ocean Tomo, 83% of the total market value of companies in the Standard & Poor’s 500 stock index was made up of tangible assets. To date, this share is steadily decreasing and was a meagre 10% in 2020. This means that the value of a company today is predominantly composed of intangible assets such as intellectual property, networks, brand values, data and customer relationships. These assets are now largely at risk. Sustainable risk management must take this shift in risk into account. Are domestic companies meeting the transformation of their risk landscape with the necessary attention? Are resources being used in a targeted manner and new solutions for managing and financing these risks being developed, or are they continuing to haggle over percentages at the insurance bazaar in order to pass on the (classic) risks that are receding into the background as cheaply as possible?

Does sustainability change risk?

Today, investments in sustainability are among the most important drivers of innovation. They generate additional growth opportunities and thus contribute to increasing value creation. But what does a company’s sustainability agenda mean for risk and insurance management?

Decarbonisation at the centre

It is clear that investments to achieve specific ESG goals have a direct impact on operational risks. A key issue in the fight against climate change is the decarbonisation of production processes and supply chains. The replacement of fossil fuels with alternative energy sources or carriers is creating new risks in industry. The use of green hydrogen instead of coal in the steel industry or the use of electricity to fire rotary kilns or tunnel kilns poses completely new challenges for business continuity management. The failure of the power supply after a supraregional blackout not only impairs the continuation of operations of many industrial plants, but in some industries also harbours a considerable property damage potential, for example due to the sudden shutdown of automated processes.

For many manufacturers, the recyclability and reusability of the raw materials and materials used is a top priority when developing new products. The sustainability of the supply chains plays a central role here. The requirements for quality management also change when secondary raw materials or completely new materials are used. The product itself and its use becomes the carrier of specific ESG goals. In the textile industry, for example, new materials or processes are introduced to change the properties of the products so that garments need to be washed less often, thus reducing water consumption.

Comprehensive business model

In order to survive in global competition, many companies have expanded their business model. New competences are integrated, and the company is thus positioned as a platform for holistic solutions. In addition, the involvement of suppliers in the implementation of ESG goals is essential. Producers therefore often act as consultants to their own customers in order to contribute their expertise in the area of sustainability along the supply chain. The paper industry, for example, supports its customers in the food sector with innovative solutions for recyclable packaging. All these developments bring with them changed risks in terms of operational and product liability. The expansion of a building materials producer’s value chain through additional services, such as consulting and planning in energy-efficient construction, also leads to new asset loss risks that must be considered in sustainable risk management.

Investments in sustainability can even be interpreted by the insurer as an increase in risk and thus as a disadvantage. Adequate risk and insurance management must make a significant contribution to managing negative risk changes.

The European Commission adopted an ambitious and comprehensive package of measures in April 2021, including the Delegated Regulation on EU Climate Taxonomy, to help channel more money into sustainable activities within the EU. This regulation will enable investors to invest sustainably and contribute significantly to Europe’s climate neutrality by 2050.

First measures by the insurance industry

The insurance industry is also taking the first steps towards climate neutrality. In the Net Zero Insurance Alliance (NZIA) initiated by the United Nations, eight of the world’s leading insurers and reinsurers have committed to individually convert their insurance portfolios to zero greenhouse gas emissions by 2050. Furthermore, due to better capital costs, a greening of underwriting can be expected, which will lead to an increased availability of capacities for sustainably operating companies.

Sustainable risk management

The idea that companies with ambitious ESG targets also represent a better risk for the insurance market is gaining traction. For this reason, there are already first announcements to provide capacity for ESG-performing companies. Statistics clearly indicate that climate change will lead to a significant increase in insured losses from natural hazards. The situation is similar for fire losses, where the share of insured losses from overlapping forest fires will increase significantly.

Conclusion

In a climate-neutral economy, sustainability-based risk management will be an important component of a future-oriented risk management strategy. As a risk specialist, GrECo develops progressive ESG models to increase the resilience of its clients and accompanies them with innovative solutions into a sustainable future.

What is ESG, please?

Environmental Social Governance (ESG) is the umbrella term for the new standard of corporate environmental, social and ethical responsibility. This topic has gained new momentum, especially since the introduction of the UN Sustainable Goals. The three letters ESG describe three sustainability-related areas of responsibility.

E stands for Environment. It refers to pollution, environmental hazards, greenhouse gas emissions and energy efficiency issues.

S stands for Social. This refers to occupational safety, health protection, diversity and social commitment.

G stands for Governance: This refers to corporate values, compliance, steering and control processes and risk management. Each company can determine and weight its ESG goals itself. However, due to the increasing importance of ESG for investors, public pressure on companies is also rising. In the meantime, ESG criteria are also being included in the analysis of securities.

Related Insights

Georg Winter

CTO GrECo International Holding AG
Risk & Insurance Technique

T +43 5 0404 335