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Resilience Winning with risk www.pwc.com/resilience 01 06 12 14 18 Introduction Dennis Chesley Dealing with the fallout Michael Storck & Folker Trepte Gearing up for protests Jamie Hepburn Preparing for the payback Craig Scalise Central and Eastern Europe: Moving up the value chain Otilia Simkova 26 30 36 38 Reaping the benefits of a greener China John Barnes The rise of SAAAME: Rethinking risk in a multipolar world Andrew Dawson Creating the future we desire: Reflections on Rio+20 Richard Gledhill Anticipating disruption: Reflections on PopTech Scott Williams October 2012 Issue 2 A quarterly journal Special focus on Eurozone

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Resilience Winning with risk

www.pwc.com/resilience

01 06 12 14 18

IntroductionDennis Chesley

Dealing with the fallout Michael Storck & Folker Trepte

Gearing up for protests Jamie Hepburn

Preparing for the payback Craig Scalise

Central and Eastern Europe: Moving up the value chain Otilia Simkova

26 30 36 38

Reaping the benefits of a greener China John Barnes

The rise of SAAAME: Rethinking risk in a multipolar world Andrew Dawson

Creating the future we desire: Reflections on Rio+20 Richard Gledhill

Anticipating disruption: Reflections on PopTech Scott Williams

October 2012 Issue 2

A quarterly journal

Special focus on Eurozone

38 I Resilience: Winning with risk

A remarkable gathering occurred in June 2012: PopTech Iceland: Toward Resilience. The PopTech conference is a ‘global community of innovators working together to expand the edge of change’ (poptech.org). The ambitious goal of this event was to develop an understanding of why some people and systems are more resilient than others.

It is not difficult to see why resilience is so important in the upheaval and uncertainty of the modern age. But, as PopTech Iceland highlighted in one of its central themes, we are failing to grapple with these challenges. The clearest instance of this failure to prepare for our future may be the thin, patchy ice at the top of the planet. The last great ice melt ushered in the current era of human civilisation. Will the current melt usher in the next?

The question is no longer whether this is happening, but why is this happening? The current resource-intensive model of perpetual growth in a closed system, failure to internalise externalities1 and mispricing of ‘extreme’ risks’2 has resulted in a world where no country is achieving the minimum criteria for sustainability (see Figure 1), that is to say, achieving the minimum human development threshold within the ecological boundaries of our single, inhabitable planet. The challenge is amplified by the forecast population increase by mid-century to more than 10 billion people, which will reduce the available ecological footprint from around 2 hectares per person to just over 1.3 The acceleration of urbanisation, with up to 75% of all people living in cities by mid-century,4 places even greater stress on resources. People in cities use

Anticipating disruption: Reflections on PopTech By Scott Williams

In a world of disruption, why do some organisations, communities and people break down and others bounce back? Earlier this year, a global gathering of innovators came together to share tools and perspectives on what could help us to build a sturdier and more resilient future.

1 Experts estimate that the financial value of the goods and services provided by ecosystems represents approximately 26,000 billion euros per year, i.e., almost twice the annual value of the goods and services produced by humans. This contribution to the global economy is not formally priced into investment or consumption decisions. (Source: PwC, Développement durable, aspects stratégiques et opérationnels. Editions Francis Lefebvre).

2 There are many recent examples, including BP’s Deepwater Horizon incident in 2010 and the Fukushima Dai-ichi nuclear reactor incidents in 2011.3 There are approximately 13 billion hectares of land area on earth. With the current population of 7 billion people, the available per capita is 1.9 hectares,

and with population at 10.6 billion (the high estimate in the UN Departement of Environmental and Social Affairs ‘World Population to 2300’ report) the per capita available land drops to 1.2 hectares.

4 UN HABITAT: State of the World’s Cities 2010/2011 report.

more resources because of increased supply chain dependency. At the same time, the ageing of society reduces the drive, creativity and passion needed for the necessary transformation to a more adaptive society.

At its heart, the problem is a fundamental challenge to ‘modernity’, to the very notion of what it means to be ‘developed’ as it ushers in the era of ‘bounded growth’. As Simonetta Carbonara, an expert on consumer psychology and strategic marketing, eloquently stated in her presentation at PopTech; ‘We must overcome our nostalgia for solidity and target a new liquidity to undermine the rigidity of antecedent, and current, global systems development. Solutions to these transitional challenges are needed now, and they require new thinking’.

Resilience: Winning with risk I 39

Figure 1: Human Development Index, 2010 and ecological footprints, by country, 2007

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0

Human development index

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3

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Sources: Human Development Report 2011; Global Footprint Network; United Nations Population Division; Finance Biodiversity and Ecosystems, Dr. Genevieve Patenaud, 2011; PwC analysis

Defining resilienceAndrew Zolli,5 the PopTech Iceland curator, opened the event by defining resilience in the context of ‘systems + people’ and the need to decouple our structures and systems from scarcity. To achieve resilience, Zolli argued, we must be capable of listening to our collective cultural memory, our experiences of past suffering and learn from them to avoid repeating mistakes and use them to anticipate

the disruptive events to come. His example was particularly relevant for me given my personal experience of the triple disaster in March 2011 in Japan. He spoke of the thousand-year-old tale of caution told by the stone tsunami markers along the Tohoku coastline in Japan—a tale that fell on deaf ears among those pursuing rapid economic growth in the early 1960s. The failure to heed this warning is currently fuelling the biggest protests in Japan in some 40

years. The demonstrations have forced the Japanese government to consider terminating nuclear power in the country by 2040 in a recent update to the nation’s revised energy policy.

A contrasting system capable of anticipating disruption and maintaining functionality and performance was highlighted by another speaker, Steve Lansing,6 who used the Water Temple networks of

5 Andrew Zolli is PopTech Executive Director & Curator and a futures researcher who studies the complex forces at the intersection of technology, sustainability and global society that are shaping our future. He has served as a Fellow of the National Geographic Society, and his work and ideas regularly appear in dozens of leading publications and media outlets. Andrew’s book Resilience: Why Things Bounce Back was published in 2012 by Free Press.

6 Steve Lansing is an external professor at the Santa Fe Institute, a professor of Anthropology at the University of Arizona, with a joint appointment in Ecology and Evolutionary Biology, and a senior fellow at the Stockholm Resilience Centre. His recent research is centered around long-term dynamics of coupled social-ecological systems. One of his current projects explores emergent properties of Balinese water temple networks and he’s currently assisting the Indonesian government to create a new UNESCO World Heritage site to help preserve the temple networks.

40 I Resilience: Winning with risk

Bali as an illustrative example of a highly functional, complex social-ecological adaptive system.

The Balinese Water Temple networks are perfect examples of systemic resource optimisation through ‘glocalisation’—where local neighbourhood cross-checks are critical to achieving regional (or even global) optimum states.7 The invisibility of economic and social systems, such as the Water Temples, operating in harmony, both in time and space, with natural systems gives rise to a key question repeated in various forms during the PopTech event: ‘How do we make effective, natural systems more visible in post-crash paradigms to understand and better prepare pre-crash?’ The answer lies in the alignment of the different time signatures of natural, social and economic systems achieved by the Water Temple networks. Or possibly, as emphasised by Dr. Geoffrey West,8 the idea of ‘bounded growth’ is critical to understanding how to manage and anticipate systemic risk.

West clearly demonstrated that unbounded growth requires accelerating cycles of innovation to avoid collapse, something familiar to businesses in industries ranging from electronics to automotive to fashion. He provided evidence supporting a universal scaling law, which demands an end to growth to achieve resilience and sustainability. From ‘cells and ecosystems’ to ‘cities and companies’ the scaling law holds true. The super-exponential growth experienced in many of the world’s critical systems in the past decade leads to an inevitable and predictable systemic collapse, sometimes referred to as the ‘great deceleration’.

power at the turn of the 20th century, and then again from the ruins of the second world war to become the world’s second-largest economy by 1968). I explained the 5Ds of Japan’s cultural balance sheet (demography, debt, declining competitiveness and lack of diversity balanced by discipline). I also emphasised the urgent need for strong, diverse leadership to unlock the power of the business monoculture and better

7 Lansing and colleagues developed computer simulation models to calculate theoretical optima for rice production in the areas where the Water Temple network continues to operate and demonstrated that the network approach achieved close to the theoretical maximums. The modelling demonstrated that ancient, social-ecological systems can outperform modern scientific approaches in complex ecosystems. For further information refer to www2.econ.iastate.edu/tesfatsi/LansingKremer.BaliWaterTemples.pdf.

8 Geoffrey West is a theoretical physicist whose primary interests have been in fundamental questions in physics and biology, ranging from the elementary particles, their interactions and cosmological implications to the origins of universal scaling laws and a unifying quantitative framework of biology. His research in biology has included metabolic rate, growth, ageing and mortality, sleep, cancer and ecosystem dynamics.

A perspective on resilience from JapanAt PopTech Iceland, I spoke about Japanese resilience and how the nation has the latent capacity to once again emerge from the current crisis, having successfully transformed twice in modern times, and on both occasions in less than 30 years (from an isolated, agrarian economy in the 19th century to a modern, industrial

Resilience: Winning with risk I 41

anticipate and respond to disruptive events. I argued that there is significant latent power in the unity, the so-called kizuna spirit, and the discipline built into the DNA of Japanese corporations to trigger a ‘state shift’ in the future of Japan. But strong leadership characterised by a shared vision, a willingness to challenge narrow industrial-era thinking and a climate of real trust is required, just as it was in the transformations of the past. The difference today is the need to embrace complex interdependencies and diversity, rather than eliminate them, to achieve multi-dimensional national development. Listening to the past, embracing transparent networked communities, focusing on a post-growth or ‘bounded growth’ strategy and releasing the human potential of Japan underlined by a new wave of liquidity, flexibility and creativity could unleash the third great transformation of modern Japan.

Scott Williams has dedicated his life to catalyzing massive, global change to build systemic resilience. He is a Global Sustainability Board member for PwC and the Sustainability Leader for PwC Japan. Williams works to articulate the information asymmetries and perverse incentives that currently inhibit the transformation needed to achieve global sustainable development and systemic resilience. He focuses on improving education and understanding the impact of systemic risks and changing measurement and valuation frameworks used by investors to value inputs and outputs. He has developed a practical framework to build organisational resilience—the EVIT framework. Williams is currently based in Tokyo with his wife and two young children and has worked for PwC for 15 years in Sydney, London, New York and Tokyo.

Diversity spurs resiliencePopTech Iceland highlights the value of diversity in creating dynamic systems. The value of diverse expertise applied to all aspects of the resilience challenge allows ideas and innovations from one sector or discipline to be applied to others at speed and at scale—a message that was reinforced by the business leaders assembled at the UN Rio+20 conference in June 2012. The urgency is well understood. The willingness, in the form of strong leadership, is presently lacking. A renewed emphasis on education—at all levels of business and government—about the increasingly clear links between scientific theory, scientific observations, social instability, environmental degradation, systemic interdependencies and economic performance is the critical first step to accelerate innovation and embed ideas such as those presented at PopTech Iceland.

This is an important step on the pathway to a resilient future.

www.pwc.comPwC firms help organisations and individuals create the value they’re looking for. We’re a network of firms in 158 countries with close to 169,000 people who are committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at www.pwc.com.

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

© 2012 PwC. All rights reserved. Not for further distribution without the permission of PwC. ‘PwC’ refers to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of any other member firm nor can it control the exercise of another member firm’s professional judgment or bind another member firm or PwCIL in any way. DT-13-0033

Resilience: Winning with risk

Authors

Publishers Dennis Chesley, Miles Everson and Juan Pujadas

Executive Editors Robert G. Eccles Professor of Management Practice Harvard Business School

Christopher Michaelson Director, Strategy and Risk Institute, PwC Global Advisory Associate Professor, University of St. Thomas Opus College of Business

Managing Editor Rania Adwan +1 (646) 471-5116 [email protected] PwC US

Production Editors Angela Pham and Shannon Schreibman

Layout US Studio—Victoria Waranauckas Web Specialist— Gautam Verma

Special thanks to the following parties for their production and editorial assistance: John Ashworth, Chris Barbee, Ashley Hislop, Sarah McQuaid, Malcolm Preston and Alastair Rimmer

Photography credit Peter Hilz/Hollandse Hoogte/Redux

John Barnes+852 2289 [email protected] China

Andrew Dawson+44 (0) 207 804 [email protected] UK

Jamie Hepburn+44 (0) 207 212 [email protected] UK

Craig Scalise+1 (312) [email protected] US

Richard Gledhill+44 (0) 207 804 [email protected] UK

Otilia Simkova+44 (0) 207 553 [email protected] Group

Michael Storck+49 89 5790 [email protected] Germany

Folker Trepte+49 89 5790 [email protected] Germany

Scott Williams+81 80 3158 [email protected] Aarata