RiskOperational RiskRisk warnings coming home to roost

Risk warnings coming home to roost

The World Economic Forum says that global risks on which it has sounded the alarm over the past decade are now manifesting themselves, with often severe consequences.

The World Economic Forum (WEF), which has published an annual Global Risks Report since 2006, warns in the just-published 2016 edition that risks of which the Report has consistently warned over the past decade are starting to manifest themselves in new, often unexpected ways and to harm people, institutions and economies.

The new edition is issued ahead of this year’s meeting of global business leaders and heads of state in the Swiss ski resort of Davos, a four-day event commencing January 20. The forum was developed by German economist Klaus Schwab back in the 1970s to engage leaders in future forecasting and “the next big thing”.

Most recently, Schwab has developed a theory that the world is on the verge of a Fourth Industrial Revolution as a result of rapid technological advances, which will fundamentally transform society and the business world over the coming decades. This theme is developed further in the 2016 report.

The challenges

“Warming climate is likely to raise this year’s temperature to 1° Celsius above the preindustrial era; 60m people, equivalent to the world’s 24th largest country and largest number in history, are forcibly displaced, and crimes in cyberspace costs the global economy an estimated US$445bn, higher than many economies’ national incomes,” note the authors of the 2016 report. In response, they call for action to build resilience – what it calls the “resilience imperative” – and suggests ways in which it could be done.

With geopolitical concerns again cited by many respondents to the WEF’s global risks perception survey that presaged the report, the authors assess the international security landscape, what drives its evolution and how it might be affected by the Fourth Industrial Revolution and climate change. The three scenarios for possible futures developed in response could determine how resilience to security threats is developed through public-private collaboration.

The report also analyses how emerging global risks and major trends, such as climate change, the rise of cyber dependence and income disparity are impacting already-strained societies by highlighting three clusters of risks as Risks in Focus. As resilience building is helped by the ability to analyse global risks from the perspective of specific stakeholders, it reviews the significance of global risks to the business community at both national and regional level.

‘Global risks’ and ‘global trends’ are both defined, as follows:
Global risk: An uncertain event or condition that, if it occurs, can cause significant negative impact for several countries or industries within the next 10 years.
Global trend: A long-term pattern that is currently taking place and that could contribute to amplifying global risks and/or altering the relationship between them.

The Global Risks Perception Survey

The WEF drew responses from nearly 750 experts and decision makers in this year’s global risks perception survey. They were asked to consider 29 global risks – categorised as societal, technological, economic, environmental or geopolitical – over a 10-year time horizon, and rate each for the likelihood of it occurring and potential impact.

The failure of climate change mitigation and adaptation, which has featured in the ‘top five’ for the past three years is perceived in 2016 as the most impactful risk for the years to come, with weapons of mass destruction ranking second and water crises third. Large-scale involuntary migration and energy price shock (increase or decrease) make up the top five.

The risk rated most likely to occur is large-scale involuntary migration; with the environmental risks of extreme weather events ranked second and the failure of climate change mitigation and adaptation third. Fourth is last year’s top scorer – interstate conflict with regional consequences – followed by major natural catastrophes.

Global risks that remain serious because of their combined impact and likelihood involve some economic risks, including fiscal crises in key economies and high structural unemployment or underemployment. These are complemented by cyberattacks and profound social instability. “Their assessment reflects the potentially profound impact of the Fourth Industrial Revolution on the economy and society and emphasises the need for safeguarding future benefits,” states the report

Respondents were also asked which risks were related and could give rise to cascading risks: Three cited by many were:
• The potential for climate change to exacerbate water crises, sparking conflicts and more forced migration, and the need for improved water governance to adapt to climate change and accommodate a growing population and economic development.
• Addressing the global refugee crisis, adding emphasis to policies that can build resilience in addition to responding to the immediate crisis.
• The risks of failing to fully understand the risks around the Fourth Industrial Revolution and how the transition will impact countries, economies and people when global economic growth remains sluggish.

Risks in focus

With the stability of societies key to building resilience, the report examines three specific risks in detail

First is the complex dynamics of societies in the age of digitisation and the phenomenon of the (dis)empowered citizen, resulting from the interplay of varying dynamics. As technology empowers citizens to find information, connect with others and organise, those citizens feel disenfranchised by distant elites.

This opens up the possibility of social instability, if both governments and business embark on either repressive actions or non-action out of uncertainty about how to respond to a more informed, connected and demanding citizenry. The consequence could be an escalating downward spiral of broken trust and harsher response on either side. However, also examined are the benefits governments and business stand to gain by proactively looking for ways to engage and dialogue with concerned citizens.

Second is food security risk and how changing climate and weather patterns could jeopardise food security and agricultural production across geographies. The most climate-vulnerable countries often heavily depend on agricultural productivity to sustain economic growth and development. But the recent years have also shown the climate vulnerability of G-20 countries such as India, Russia, the US and other large industrial producers of agricultural commodities. The report examines how crops resilient to climate change and supply chain networks – as well as financing and insurance schemes – can help mitigate the social, economic and environmental aspects of food security risks related to climate change.

Third is global disease outbreaks and the lessons of the Ebola crisis. The report warns that population growth, rapid urbanisation and increasing transnational flows of commodities, people and animals intensify the risk of infectious transmission across geographies while also diminishing the ability to respond – all at a time of growing resistance of microorganisms to today’s most effective medicines.

Preparedness and response measures discussed range from the behavioural, such as fact-based communication and education campaigns, to the need to invest in diagnostic, drug and vaccine research and development (R&D) and in its enabling environment, especially advancing a regulatory framework. The suggested responses include public-private sector collaboration across areas such as data availability and analysis, a joint research agenda, regulatory frameworks, long-term financing and ways to promote responsible media engagement as part of effective crisis management communication.

Risks to doing business

Private sector respondents to the WEF’s survey were asked to identify their risks of highest concern for doing business in the next 10 years. The responses, from 140 economies, reveal patterns of concern at country and regional levels that can usefully inform initiatives to engage the private sector in building resilience to global risks.

Two economic risks – unemployment and underemployment and energy price shocks – are mentioned as the risks causing greatest concern for doing business in half of the 140 economies. These are followed by the failure of national governance, fiscal crises, asset bubbles and cyberattacks.

Economic risks predominate in responses from Europe, including fiscal crises, unemployment, asset bubbles and energy prices – the latter also being the top concern in Canada. US executives were most concerned about cyber-related risks and attacks. Respondents from Russia and Central Asia worried about fiscal crises and unemployment, along with the risks of unmanageable inflation and interstate conflict. Environmental risks worry business leaders in East Asia and the Pacific, alongside energy prices and asset bubbles.

In South Asia concerns also include energy prices, together with fiscal crises, unemployment and failure of national governance – which is the top concern in Latin America and the Caribbean – followed by energy price shock and unemployment. Executives in the Middle East and North Africa likewise worry about energy prices, together with unemployment, terrorist attacks and interstate conflict. In Sub-Saharan Africa, the business community’s top concerns include unemployment, energy prices, the failure of urban planning and the failure of critical infrastructure.

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