For the first time, an environmental risk has topped the World Economic Forum (WEF)’s Global Risks Report ranking, with the greatest potential impact since the report was published in 2006. “Failure of climate change mitigation and adaptation,” was considered to have greater potential damage than weapons of mass destruction (which ranked 2nd), water crises (which fell from 1st last year to 3rd), large-scale involuntary migration (4th), and severe energy price shock (5th). Failure of climate change mitigation and adaptation also ranked third in terms of likelihood, behind large-scale involuntary migration (1st) and extreme weather events (2nd).
The ranking was informed by survey responses from nearly 750 experts, who assessed 29 separate global risks for both impact and likelihood over the next 18 months and over a 10-year time horizon. The results demonstrate that the risk landscape is broadening, the impact of global risks is rising, and a small number of risks wield great influence.
Also for the first time, four out of five categories – environmental, geopolitical, societal and economic – are featured among the top five most impactful risks, implying a broader risk landscape than in the previous decade. The only category not featured is technological risk, where the highest ranking risk was cyber-attacks, in 11th position in both likelihood and impact. Cyber-attacks were, however, perceived as the most likely risk in North America, followed by extreme weather events (2nd) and data fraud or theft (3rd). It is perhaps worth noting that North America was the only region to select technological risks among the top three most likely risks. Understandably, Europe is most concerned about large-scale involuntary migration (1st), unemployment or underemployment (2nd), and fiscal crisis (3rd). Failure of national governments were among the top three risks for likelihood in nearly every other region, including Latin America and the Caribbean, Sub-Saharan Africa, Central Asia including Russia, the Middle East and North Africa, and East Asia and the Pacific. (This regional perspective is conveyed in the main image for this article; view the full version.)
“Events such as Europe’s refugee crisis and terrorist attacks have raised global political instability to its highest level since the Cold War. This is widening the backdrop of uncertainty against which international firms will increasingly be forced to make their strategic decisions. The need for business leaders to consider the implications of these risks on their firm’s footprint, reputation, and supply chain has never been more pressing,” said John Drzik, President of Global Risk and Specialties at Marsh.
The World Economic Forum suggests that the toll these risks pose seems to be rising. The organization provides the examples of the warming climate, which “in 2015 is likely to raise the global average surface temperature to the milestone of 1°C above the pre-industrial era for the first time,” and an unprecedented number of involuntary migrants, noting that “the number of people forcibly displaced in 2014 stood at 59.5 million according to UNHCR, almost 50% more than in 1940.” Furthermore, all 24 of the risks continuously measured since 2014 have increased their likelihood scores in each of the past three years.
The Global Risks Report 2016 also examines the interconnections among the risks, which can help leaders prioritize areas for action and plan for contingencies. The five most interconnected pairs of risks in 2016 accounted for more interconnections than in 2015, meaning these key risks are highly influential. Climate change and rising income and wealth disparity are the primary “trends” driving these risks, with other major influences from the rise of cyber dependency, increasing polarization of societies, aging populations, and other factors.
“Climate change is exacerbating more risks than ever before in terms of water crises, food shortages, constrained economic growth, weaker societal cohesion and increased security risks. Meanwhile, geopolitical instability is exposing businesses to cancelled projects, revoked licenses, interrupted production, damaged assets and restricted movement of funds across borders. These political conflicts are in turn making the challenge of climate change all the more insurmountable – reducing the potential for political co-operation, as well as diverting resource, innovation and time away from climate change resilience and prevention," Cecilia Reyes, Chief Risk Officer of Zurich Insurance Group, told the World Economic Forum.
Climate change adaptation is clearly a pressing priority. An Oxfam report released late last year estimated that developing countries will need $270 billion each year to adapt to the impacts of climate change if the commitments made at COP21 fail. Unfortunately, though, the business opportunity presented by adaptation is estimated at just $2 billion. Meanwhile, only 45 percent of business leaders believe that climate change and resource scarcity will transform stakeholders’ expectations of their business. We may need to prepare for more of the status quo despite the significance of these impending risks, unless attitudes begin to change more rapidly.