The World Economic Forum Identifies Global Risks

Stephen DeAngelis

February 5, 2014

The World Economic Forum, in collaboration with Marsh & McLennan Companies, Swiss Re, Zurich Insurance Group, National University in Singapore, Oxford Martin School (University of Oxford) and the Wharton Risk Management and Decision Processes Center (University of Pennsylvania), recently released the Ninth Edition of it Global Risks series (Global Risks 2014). In the Preface to the report, Klaus Schwab, Founder and Executive Chairman of the World Economic Forum, writes:

“Our lives are changing at an unprecedented pace. Transformational shifts in our economic, environmental, geopolitical, societal and technological systems offer unparalleled opportunities, but the interconnections among them also imply enhanced systemic risks. Stakeholders from across business, government and civil society face an evolving imperative in understanding and managing emerging global risks which, by definition, respect no national boundaries. … Moving from urgency-driven risk management to more collaborative efforts to strengthen risk resilience would benefit global society. Together, leaders from business, government and civil society have the foresight and collaborative spirit to shape our global future.”

The underlying sentiment of Schwab’s call for more collaboration reflects the reality that in our journey into a complicated future we are all in this together. The more cooperation and collaboration that takes place, the more likely we are to overcome challenges we encounter along the way. The report maps “31 global risks according to the level of concern they arouse, their likelihood and potential impact, as well as the strength of the interconnections between them.” Of the 31 mapped risks, the ten global risks of highest concern identified by the report are:

 

1. Fiscal crises in key economies
2. Structurally high unemployment/ underemployment
3. Water crises
4. Severe income disparity
5. Failure of climate change mitigation and adaptation
6. Greater incidence of extreme weather events (e.g., floods, storms, fires)
7. Global governance failure
8. Food crises
9. Failure of a major financial mechanism/institution
10. Profound political and social instability

 

The report goes on to state:

“The risks considered high impact and high likelihood are mostly environmental and economic in nature: greater incidence of extreme weather events, failure of climate change mitigation and adaptation, water crises, severe income disparity, structurally high unemployment and underemployment and fiscal crises in key economies. Female respondents perceived almost all global risks as both more likely and more impactful than did males, especially in the environmental category. Younger individuals gave higher scores for the impact of almost all of the risks, particularly environmental risks, such as water crises, greater incidence of natural catastrophes, the loss of biodiversity and greater incidence of extreme weather events.

“The risks perceived to be most interconnected with other risks are macroeconomic – fiscal crises, and structural unemployment and underemployment – with strong links between this macroeconomic risk nexus and social issues, such as rising income inequality and political and social instability. The failure of global governance emerges as a central risk that is connected to many different issues. Mapping perceived interconnections between risks helps to understand the potential transmission channels between them.

“The decline of trust in institutions, lack of leadership, persisting gender inequalities and data mismanagement were among trends to watch, according to survey respondents. Experts added further concerns including various forms of pollution, and accidents or abuse involving new technologies, such as synthetic biology, automated vehicles and 3-D printing.”

The report was developed with a 10-year horizon in mind. Rather than attempting to prognosticate about what will occur over the next year or next decade, the study identifies the global risks identified and prioritized by respondents. It should also be remembered that there is a difference between a risk and a threat. If you live on the Gulf Coast of the United States, you know that there is a risk of hurricanes. Unless one develops, however, that risk doesn’t present a threat. The benefit of a document that identifies risks, like the Global Risks report, is that it can assist in risk management planning and exercises. Many of the risks identified in the WEF report are macro-events, but the implications of those events can be assessed for particular locations and refined to determine the impact on specific locations, operations, and/or activities.

 

In the Executive Summary of the report, it states, “Of the many conceivable ways in which possible interconnections and interdependencies between global risks could play out systemically over the 10-year horizon considered by this report, three are explored in depth.” They are: Instabilities in an increasingly multipolar world; generation lost; and digital disintegration. About the first topic, the report states:

Instabilities in an increasingly multipolar world: Changing demographics, growing middle classes and fiscal constraints will place increasing domestic demands on governments, deepening requirements for internal reform and shaping international relations. Set against the rise of regional powers, an era of greater economic pragmatism and national self-protection might increase inter-state friction and aggravate a global governance vacuum. This may hinder progress on cross-cutting, long-term challenges, and lead to increased inefficiencies and friction costs in strategically important sectors, such as healthcare, financial services and energy. Managing this risk will require flexibility, fresh thinking and multistakeholder communication.”

You have to remember that the report’s focus is global risks, not global opportunities. As a result, it can come across as a bit extreme. For example, the above paragraph talks about the how the growing global middle class can be disruptive, but it doesn’t also point out that a growing middle class is a clear sign of strong global economy, decreasing levels of poverty, and a huge opportunity for businesses. I agree with the assessment that members of the growing global middle class will expect a lot more from their governments, including a lot more freedom, and that could be very disruptive in some countries. Conspiracy theorists may focus on the remark about “a global governance vacuum,” but I don’t believe anything nefarious is intended. Cooperation and collaboration requires agreement on goals and standards (i.e., governance). Those standards are why international flights can be flown, international mail can be sent, and international telephone calls can be made. Standards imply governance of some kind; but, not necessarily, the political kind. Concerning the next topic, generation lost, the report states:

Generation lost? The generation coming of age in the 2010s faces high unemployment and precarious job situations, hampering their efforts to build a future and raising the risk of social unrest. In advanced economies, the large number of graduates from expensive and outmoded educational systems – graduating with high debts and mismatched skills – points to a need to adapt and integrate professional and academic education. In developing countries, an estimated two-thirds of the youth are not fulfilling their economic potential. The generation of digital natives is full of ambition to improve the world but feels disconnected from traditional politics; their ambition needs to be harnessed if systemic risks are to be addressed.”

I agree with everything in that paragraph. One of the greatest tragedies currently facing the world is its inability to provide opportunities for up and coming generations to excel. People need jobs, jobs require skills, and skills are developed through education and training. Remove any one of those factors from the equation and the result is anger rather than opportunity. That’s why I agree that “their ambition needs to be harnessed if systemic risks are to be addressed.” By harnessing their ambition, the world will also benefit from their intellect. Concerning the final topic, digital disintegration, the report states:

Digital disintegration: So far, cyberspace has proved resilient to attacks, but the underlying dynamic of the online world has always been that it is easier to attack than defend. The world may be only one disruptive technology away from attackers gaining a runaway advantage, meaning the Internet would cease to be a trusted medium for communication or commerce. Fresh thinking at all levels on how to preserve, protect and govern the common good of a trusted cyberspace must be developed.”

The recent breach suffered by Target that affected up to 100 million people is a clear demonstration of the type of risk discussed above. With more and more activity moving to the cloud, the risk only mounts. According to Bruce Schneier, the Internet of Things will only exacerbate the situation. “We’re at a crisis point now with regard to the security of embedded systems,” Schneier insists, “where computing is embedded into the hardware itself — as with the Internet of Things. These embedded computers are riddled with vulnerabilities, and there’s no good way to patch them.” [“The Internet of Things Is Wildly Insecure — And Often Unpatchable,” Wired, 6 January 2014] With the Internet of Things predicted to connect over 50 billion things over the next decade, serious consideration needs to be given to making both the traditional Internet and the Internet of Things more secure. The Executive Summary concludes:

“Collaborative multistakeholder action is needed. Wide variance in how risks are identified and managed still exists. Businesses, governments and civil society alike can improve how they approach risk by taking steps such as opening lines of communication with each other to build trust, systematically learning from others’ experiences, and finding ways to incentivize long-term thinking. By offering a framework for decision-makers to look at risks in a holistic manner, the Global Risks 2014 report aims to provide a platform for dialogue and to stimulate action.”

There is a lot of information contained in the 60-page report that should be of interest to anyone involved in risk management. An email I received from the Wharton School about the WEF report states:

“This year, the report includes a special section on ‘Strategies for Managing Global Risks’ based on findings from a Wharton research project that interviewed over 100 high-level executives in S&P 500 companies to examine the variety of ways in which firms identify and manage risks. Based on these preliminary findings, the GRR 2014 suggests strategies for firms and governments to build resilience to shocks from systemic global risks that, through interdependencies, may impact them in unexpected ways. This inclusion is important as the community of risk thought leaders moves beyond the tasks of identifying risks, increasingly focusing on building resilience capacity that creates measurable value for firms and countries. A critical component in preparing for disasters is to create incentives that encourage risk managers to engage in long-term deliberative thinking. Techniques such as scenario analysis, stress tests and ranking/scoring metrics can help overcome myopia, inherent in human decision-making. This new mindset is entering the boardroom in a much more significant way today than when the Global Risks initiative began almost 10 years ago.”

Long-time readers of this blog know that resiliency has been a common theme in many of my posts. The Global Risks report is an excellent tool for the kit of anyone involved in risk management and I highly recommend they take time to read it.