86
Citi GPS: Global Perspectives & Solutions
April 2021
Conclusions The world of risk is changing, and the major risks facing sovereigns, supranationals, corporates, and individuals are perhaps greater than ever before, having evolved into so-called ‘systemic risks’ by virtue of the ever-more interconnected nature of our modern world, which while an undoubted force for good, can also create a vicious cycle of magnifying feedback loops. We have also learned that much as they might seem so, these risks are not unprecedented, and we can to an extent predict them, analyze them, and in many cases even prevent them. The use of taxonomies and analyzing the interconnections and feedback loops, as in this report, can help us to identify and classify these risks, which in combination with scenario analysis and stress testing, can enable us to quantify the scale of the risk, and the exposure of individual entities to it, both in economic and human terms. These micro-level approaches enable us to assess risk, and essentially help us to adapt to it or deal with it, but do not provide solutions per se. To find solutions to systemic risks, we unsurprisingly have to look at systemic solutions. The first stage in developing these solutions is to understand what the barriers are which are holding us back from dealing with the risk, such as their scale and complexity, the tragedy of the commons, the lack of appropriate insurance products, and systemic governance failures. There is light at the end of tunnel though, and this is provided by the fact the very feedback loops which create systemic risk, can be used as a tool to leverage investment to actually prevent those risks occurring in the first place. With the correct policy signals from government and the provision of strictly limited backstops, we can create a functioning insurance market for systemic risks, which has the potential to create vast pools of capital, in addition to for example the $11.4 trillion of capital which currently exists in the European insurance industry alone. If we then combine that with the $40 trillion and counting of ESG-screened assets which want to invest sustainably, we have the capital to address many of the solutions proposed in this report. Moreover, it creates a ready-made version of blended finance, which can itself overcome many of the barriers to investment in emerging markets, which is so often where that capital needs to be deployed for maximum efficacy against systemic risk. COVID-19 isn’t an existential crisis, and is one we will overcome. Perhaps one positive which may come from it is it will focus our attention on the extraordinary magnitude of systemic risks, and that when the chips are down, we do have the ability to come up with vast sums of capital ($15 trillion and counting) which in the normal course of business we say we couldn’t possibly afford. In hindsight, how much easier might it have been to find a few tens or even hundreds of billions of investment to prevent it occurring in the first place? Would we have argued collectively about who should have put how much in, if the choice was to each spend multiples of that investment in adaptation? If we extrapolate this chain of thought onto the vast liabilities which could result from climate change or biodiversity loss — each close to $50 trillion alone, let alone in combination — then the $3 trillion of investment opportunities to prevent and mitigate the occurrence of systemic risk seems like the sort of bargain which we might repent missing at our leisure – especially as for many of these risks there are defined tipping points beyond which we will not be able to reverse the effects. For example earlier this year, scientists found that a massive ice sheet in Antarctica known as the “doomsday glacier” is melting faster than previously believed, which has huge implications for global sea level rises. © 2021 Citigroup
