By their nature, global risks do not respect borders. The world’s “hyper-connectedness” requires an increasing international response to tackle unpredictable global threats. But the planning needs to start with collaboration among stakeholders from governments, business and civil society at a national level.The World Economic Forum’s (WEF) Global Risks 2013 report highlights wealth gaps (severe income disparity) and unsustainable government debt (chronic fiscal imbalances) as the top two most prevalent risks, in a survey of over 1,000 experts and industry leaders. Respondents rated rising greenhouse gas emissions as the third most likely global risk overall, while the failure of climate change adaptation is seen as the environmental risk with the most knock-on effects for the next decade.
John Drzik, CEO of Oliver Wyman Group, a part of Marsh & McLennan Companies, said: “Two storms – environmental and economic – are on a collision course. If we don't allocate the resources needed to mitigate the rising risk from severe weather events, global prosperity for future generations could be threatened. Political leaders, business leaders and scientists need to come together to manage these complex risks.”
The report describes 50 global risks and groups them into economic, environmental, geopolitical, societal and technological categories. The evaluation of the 50 risks also focused on their linkages, given their interdependent nature.
The report analyses three major risk cases of concern globally:
1. Health and hubris
Huge strides forward in health have left the world dangerously complacent. Rising resistance to antibiotics could push overburdened health systems to the brink, while a hyper-connected world allows pandemics to spread.
2. Economy and environment under stress
Urgent socioeconomic risks are derailing efforts to tackle climate change challenges. Inherent cognitive biases make the international community reluctant to deal with such a long-term threat, despite recent extreme weather events.
3. Digital wildfires
From the printing press to the internet, it has always been hard to predict how new technologies might shape society. While in many ways a force for good, the democratisation of information can also have volatile and unpredictable consequences.
Overall, the survey revealed a slightly more pessimistic outlook than in previous years. At a press briefing in London, David Cole, Chief Risk Officer and Member of the Group Executive Committee, Swiss Re, said: “Compared to the 2012 results, respondents viewed global risks to be more chronic than acute, in the sense that they may not manifest themselves immediately but they recognise the interconnectedness of these risks, which can amplify the effects. These are the same issues as in 2012, but now the likelihood and impact has increased.”
He added that recognising the level of complexity shouldn’t lead to the conclusion that nothing can be done to intervene. “Our responsibility as leaders is to leverage awareness into action,” he said, adding the old adage that an ounce of prevention is worth a pound of cure.
Special Report: National Resilience to Global Risks
In a special report on national resilience, the Global Risks 2013 report laid the groundwork for a new country resilience rating, which would allow leaders to benchmark their progress. It is based on the notion that no nation alone can prevent exogenous, global risks occurring, which makes national resilience a crucial first line of defence.
Within that context, Axel Lehmann, Chief Risk Officer, Zurich Insurance Group, argued that countries need to take more of a corporate approach to risk management: in the same way that risks don’t stop at the door of a company, they also don’t stop at national borders. Corporates’ adoption of enterprise risk management (ERM) should be a beacon to national leaders.
Lee Howell, the editor of the report and Managing Director at WEF, proposed creating the role of country risk officer, similar to a chief risk officer. The idea was first floated as early as the 2007 Global Risks report. “The challenge is global risk is exogenous but manifests itself in a country context. The question is how to build a national response – shocks will happen but it is about planning the recovery. Governments should nominate a country risk officer from their cabinet who will have an overall view of a nation’s risk and can work internationally with others at that level,” he said.
The national resilience rating would enable such officers and other decision-makers to benchmark and track a nation’s level of resilience, understand the balance that needs to be struck between resilience and other goals, and identify areas that may require further investment.
However, even in the corporate world the role of a chief risk officer is not as yet universal, despite growing risk awareness. Many are moving in that direction, according to Accenture’s 2011 Global Risk Management Study, which found that the chief risk officer owns risk management in almost half (45%) of the companies surveyed, up from only 33% in 2009. A higher proportion of financial services and insurance firms have chief risk officers – 59% and 54%, respectively.
Encouragingly, the presence of chief risk officers is not limited only to large companies. Indeed, higher percentages of companies with revenues of $500m to $1 billion (73%) have a CRO in place, compared with 63% of companies whose revenues exceed $5 billion.
X Factors from Nature
The final section of the Global Risks report looks at “wild card” risks. Developed in partnership with the editors of Nature, a science journal, the chapter on “X Factors” looks beyond the landscape of 50 global risks to alert decision-makers to five emerging game-changers:
- Runaway climate change: Is it possible that we have already passed a point of no return and that earth’s atmosphere is tipping rapidly into an inhospitable state?
- Significant cognitive enhancement: Ethical dilemmas akin to doping in sports could start to extend into daily working life; an arms race in the neural ‘enhancement’ of combat troops could also ensue.
- Rogue deployment of geo-engineering: Technology is now being developed to manipulate the climate; a state or private individual could use it unilaterally.
- Costs of living longer: Medical advances are prolonging life, but long-term palliative care is expensive. Covering the costs associated with old age could be a struggle.
- Discovery of alien life: Proof of life’s existence elsewhere in the universe could have profound psychological implications for human belief systems.
First published on www.treasurytoday.com