Permanent escalation in global military tensions leads to greater allocation of public funds to defense spending and cuts to entitlement spending.
Popular unrest over job losses in the wake of automation leads to a political and regulatory backlash against technology.
The merging of policy, finance, and technology cannot keep pace with the negative effects of climate change.
Increased nationalism shuts down borders, limiting the migration of workers and adversely impacting both skilled and unskilled labor markets.
The use of alternative energy pushes down the price of oil creating civil unrest and halting economic growth in states that rely on hydrocarbon revenues.
Opportunities from Escalating Uncertainty
Rapid advancements in solar energy production and storage enables vertical farms to develop in urban areas.
Fossil fuel pressures and ESG motivation spur the expanded use of renewable energies and improve technological efficiency at a much faster rate than previously assumed, decelerating the rate of climate change.
Transportation technology advances, such as the Hyperloop, allow for much faster field-to-table times, reducing the need for artificial preservatives and allowing for the transportation of fresh food in hours.
Climate change opens up new shipping corridors and access to the natural resources of the Arctic.
Technological advancement, industrialization, globalization, the spread of democratic tenets, and the rise of the middle class have created significant benefits for global society, but these forces have also put massive strains on our environment, created a chasm of income disparity, and raised the long-term specter of permanent job loss. We can envision a future where these forces of change go parabolic, making our present concerns seem quaint, heightening uncertainty, and expanding the list of threats and challenges posed to the world’s nations, institutions, and corporations.
“Unpredictable instability is the new normal.”
- Director of National Intelligence James Clapper
We have already seen the shoots of violent extremism and economic and political nationalism as nations react differently to shifting societal realities. As we look forward, we see the potential for two paths – an adherence to the post-war tenets of globalization, inclusion and joint solutions, or a hard turn towards nationalism and isolation in all its forms.
These uncertainties create the opportunity for innovative solutions to global conflicts and resource allocation, but equally increase the potential for a fragmentation of global institutions, military and economic threats, and a chasm between the haves and have-nots.
Here we present the highlights from ‘Escalating Uncertainties: The Beginning of the Beginning’ from Imagine 2025 – Themes, Opportunities & The Law of Accelerating Returns, an examination of the global drivers of parabolic change.
Brazil trucker strike: The massive strike of Brazilian truckers in summer 2018 was an example of income inequality backlash. It also showed the network impact of social media—the entire strike was organized on WhatsApp. The strike halted the Brazilian economy and had a global impact as soybeans, sugar, coffee and iron ore supplies were affected. Companies with a global presence, like Unilever, missed sales goals.
Cambridge Analytica Data Scandal: When it came to light that the personally identifiable information of more than 80 million Facebook users had been used to influence the 2016 US elections, it shone a harsh light on tech companies’ growing use of data and their obligations to users. In the immediate aftermath, Facebook’s stock fell more than 15%. Future conversations about data privacy and protection at the government level will be framed by the Facebook scandal and other documented data breaches
Trump Tariff Policy: US President Donald Trump’s decision to impose tariffs on a vast array of imports from China and other trade partners, as well as his rhetoric around the NAFTA renegotiations have escalated economic nationalism to new levels. The moves have ratcheted up international tensions and will ultimately end up costing US consumers.
One of our biggest cross-border challenges pertains to the intertwining implications of climate change, energy and the environment, and their effects on natural resource-based economies and the consumer. These forces may introduce new challenges ranging from energy uncertainty, to fossil fuel resource management, hydro-politics, the need for climate mitigation frameworks, renewable resource development, and adaptations to life in changing climates through innovation and regulation.
It will be 4°C warmer than it was before the Industrial Revolution if our greenhouse gas emissions continue to increase at the rate they have been over the last 50 years.
There has been an 8-inch global sea level rise in the last century. The rate of increase in the last two decades, however, is nearly double that of the last century.
Carbon dioxide levels today are higher than at any point in the past 800,000 years. The amount by which atmospheric carbon dioxide increases each year has approximately quadrupled since the 1960s.
We have seen an equally unfortunate rise in the amount of pollution and waste produced globally. Americans today produce on average 130 pounds of trash a month and at this rate, we are on pace to globally produce 11M tons of waste daily by the year 2100.
The impacts of climate change and pollution are already being felt today and their severity is set to grow. One million people die a year in China due to the effects of air pollution, and by 2050, it is estimated that there will be more waste plastics in the sea than fish. Meanwhile, extreme weather events are escalating, with increasing frequency and intensity of heatwaves and wildfires in the west, flooding in the east, and droughts in the southwest. The cost of protecting homes, businesses, infrastructure and travel against extreme weather is prohibitive, but the repair bill is also mounting.
Both sea level rises and the escalation in extreme weather events caused by climate change could result in mass displacement of people from their homes and migration towards areas with a more stable climate. A recent report on the impact of rising sea levels on real estate prices by the Union of Concerned Scientists finds that across the Continental US, about 311,000 homes are at risk of being inundated with seawater by 2045, or about $135B of assessed property. The strength and frequency of hurricanes have increased in the past 30 years with an uptick in Category 4 and 5 storms. In 2017, 10 hurricanes formed over 10 weeks, matching a record that was last set in 1893. The total cost of weather and climate disasters in 2017 set a new record in the U.S., topping $300 billion.
The level of mass migration and displacement has already dramatically increased and we do not expect that to resolve in the near future. Since 2010, the number of displaced persons has almost doubled from 33.92 million to 67.75 million as of 2016.
This movement of people can amplify existing conflicts and create new sources of unrest. Before the civil war in Syria, for example, the country had faced its worse drought in 900 years. Farmers whose crops failed moved en masse to the cities, heightening economic pressures and resource shortages.
As pressures mount to combat the effects of global warming and pollution, it is easy to imagine a future where alternative energy sources play a more prominent role. This trend, however, will be difficult for businesses located in petro-dependent economies in the Middle East, Africa and Latin America. Many of these states experienced significant economic, political and social challenges when oil fell between 2014-16.
There are petro-states that have used this wake-up call as the impetus to revamp their economies, particularly those in the Gulf Cooperation Council (GCC). Saudi Arabia’s Vision 2030 program, for example, aims to increase the private sector contribution to GDP from 40% to 65% and increase non-oil government revenue from SAR 163 billion to SAR 1 trillion. The states that don’t diversify their economies away from hydrocarbon revenue, will risk being left behind.
In a world powered by renewables, water stress may become the primary resource challenge. Hydro-politics could become an important issue for a number of the world’s states. Dam building, industrial water pollution, and potential neglect of water cooperation agreements could threaten geopolitical security.
A National Intelligence Council report highlights that around 50% of the world’s 263 international river basins do not have a management agreement. Without clear guidelines on water management and cooperation, it is likely that more regions will be incubated for future conflict.
Even as weather patterns create supply concerns, demand driven by population growth and a rising middle class is exacerbating the issue. Water demand globally is expected to increase globally 55% between 2000 and 2050.
In recent years, the world has witnessed a growing disillusionment with globalization as the gap between the rich and the poor widens and rapid technological change causes upheaval in labor markets. This has led to a retreat in the spread of democracy and a rise in authoritarianism, as well as a turn towards isolationist and protectionist policies.
This will pose a challenge to future business leaders. As the National Intelligence Council notes, democracies are generally more likely than autocracies to have predictable economic policies and produce steady economic growth and political liberalization is associated with higher subsequent quality of life. Democratic states are also less likely to go to war and generally tend to support one another.
In their “Freedom in the World 2018” report, Freedom House finds that 2017 was the 12th consecutive year of decline in global freedom. Seventy-one countries registered net declines in political liberties in 2017, with only 35 states posting gains. China and Russia have taken advantage of this trend to export their influence to other countries.
Even within steadfast democratic states such as the UK and the US, there are widening schisms in political attitudes leading to unforeseen election results such as Brexit and the election of Donald Trump.
Political scientists believe that the current level of income inequality is directly incompatible with democracy and the gap is only widening. By 1970 the wealthiest 10% of the population in all five countries had fallen to a range of 25% to 35% of total income. However, the trend since 1980 has completely reversed, moving back towards deepening inequality. Today in the U.S., the top 10% in terms of wealth take home almost half of the national income.
Future trends, particularly the rise of automation and robotics, are unlikely to reverse this trend.
20% of CEOs’ activities hold the potential to be automated using current technologies.
$2 trillion in annual U.S. wages could be affected by automation, putting even highly compensated occupations on the chopping block.
1.7M robots are already in use around the world – largely in industrial settings.
Nationalism and dissatisfaction with “the system” are on the rise across the world and the evidence is in political backlashes, uprisings and movements whose outcomes are highly uncertain. The Brazilian trucker strike, the Arab Spring, protests in Iran and Brexit all have their roots in people’s unhappiness with the status quo and concern about the future. We believe countries facing the combination of youth unemployment, growing populations, and resource scarcity are the most vulnerable to prolonged unrest.
A lack of transparency about the economic future has lead to a rise in isolationist and protectionist policy. Witness President Trump’s imposition of duties on $50bln worth of Chines imports, his bruising renegotiation of NAFTA, and pointed rhetoric on immigration. The rising costs of imports and tighter constraints on international flow of labor may be felt by businesses through higher wages and input costs. These will ultimately have to be passed along to the US consumer…
The world’s superpowers are once more in contention as the US’ star wanes and the influence of Russia and China increases. The Trump administration has identified China and Russia as the two greatest threats to the US and it is proposing to answer those threats with increased defense spending. The focus on this “Great Power” competition should drive a shift in defense spending towards investment in readiness and equipment modernization, particularly the high-end equipment that can act as a deterrent.
The nuclear triad: This is the primary deterrent for conflict between the superpowers and the US currently favors modernizing all three portions – sea, air and land.
The final frontier: Space is the new arena as Russia and China develop anti-satellite capabilities that will require the US to look at refreshing its own assets for resilience against potential disruption.
Advanced capabilities: The superpowers will continue to focus on new tools like cyber, electronic warfare, artificial intelligence and hypersonics.
Cyber attacks aren’t just a military problem. There’s also political and commercial ramifications to our reliance on networks and connected devices and systems. The Cambridge Analytica Facebook scandal is a prime example of how technology can be used to promote influence. But cyber operations can also be used for espionage and infiltration.
The threat facing businesses isn’t new, but it is growing. Research firm Gartner forecasts worldwide enterprise security spending will total $96.3 billion in 2018, representing a +8% Y/Y increase, and expects 60% of organizations to invest in some form of cybersecurity by 2020, up from roughly 35% today.
Starting in 2013, the Director of National Intelligence named cyber threats as the number one strategic threat to the US, the first time anything ranked ahead of terrorism since the 9/11 attacks.
A growing number of corporate bellwethers have recognized the broad societal and environmental issues we are collectively facing and taken steps to make proactive, positive changes to their operating models. Investors are increasingly interested in backing these types of environmentally and socially conscious companies and the expectation for businesses to adopt sustainable practices has risen. These trends have led to a growing market for environmental, social, and governance (ESG) investing, which is graining traction globally.
A United Nations supported-initiative, Principles of Responsible Investing (PRI), introduced a voluntary framework in 2006, outlining six principles to promote awareness of ESG-related issues among global investors. PRI now counts almost US$70 trillion in assets under management (AUM) amongst its signatories, including asset owners, investment managers, and service providers, with a 24% CAGR in signatory AUM since the framework was introduced over ten years ago.
“Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.” BlackRock founder and CEO, Larry Fink
Corporate bellweathers such as Home Depot, Best Buy and Walmart have already started initiatives to tackle issues like energy usage, waste and carbon emissions. Overall, we believe this mindset is becoming increasingly important for companies not only in the assessment of investment value, but to remain competitive with rapidly changing societal preferences.