WEF foresees widening risk landscape during 2016

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Failure of climate change mitigation and adaption is regarded by the World Economic Forum (WEF) as the greatest potential global risk during 2016, although all risks – from the environmental to society, the economy, geopolitics and technology – are expected to shape the worldwide agenda in the coming year.

Unemployment and underemployment are cited as of growing concern when it comes to doing business in many regions of the world with the level of risk regarded as particularly high in two regions, sub-Saharan Africa and the Middle East and North Africa

The judgment is offered in the WEF’s newly-published Global Risks Report 2016, in which almost 750 experts assess 29 separate global risks for both impact and likelihood over a 10-year time horizon. The report is developed with the support of the WEF’s strategic partners Zurich Insurance and the broking and risk advisory group Marsh & McLennan in addition to various academic advisers.

The report has appeared annually since 2006. This year’s edition is the first time than environmental risk has been placed above all others in having the greatest potential impact, surpassing the damage that could result from weapons of mass destruction (2nd), water crises (3rd), large-scale involuntary migration (4th) and severe energy price shock (5th).

A separate assessment of risk in terms of likelihood finds large-scale involuntary migration has moved to take top position, followed by extreme weather events (2nd), failure of climate change mitigation and adaptation (3rd), interstate conflict with regional consequences (4th) and major natural catastrophes (5th).

The WEF notes that “such a broad risk landscape” in the 11 years the report has measured global risks. For the first time, four out of five categories – environmental, geopolitical, societal and economic – feature among the top five most impactful risks. Only technological risk lies outside the ‘top five’, where the highest ranking risk is cyberattack, in 11th position in both likelihood and impact.

Climate change and interconnection

The toll from global risks appears to be rising, say the report’s authors. Warming climate 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. The number of people forcibly displaced in 2014 stood at 59.5m according to the United Nations High Commissioner for Refugees (UNHCR), almost 50% more than in 1940.

Data on interconnections among the risks suggests a convergence may be occurring, with a small number of key risks wielding great influence. All five of the most interconnected pairs of risks in 2016 accounted for more interconnections than in 2015; in particular profound social instability and structural unemployment or under-employment, which account for 5% of all interconnections.

“We know climate change is exacerbating other risks such as migration and security, but these are by no means the only interconnections that are rapidly evolving to impact societies, often in unpredictable ways,” says Margareta Drzeniek-Hanouz, the WEF’s head of global competitiveness and risks. “Mitigation measures against such risks are important, but adaptation is vital.”

While environmental risks take precedence this year, others continue to develop. Income disparity, highlighted by the 2014 report, is this year reflected in the growing interconnections involving profound social instability and both structural unemployment and underemployment and adverse consequences of technological advances.

“Events such as Europe’s refugee crisis and terrorist attacks have raised global political instability to its highest level since the Cold War,” says John Drzik, president, global risk and specialties, Marsh. “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.”

Geopolitical risks, one of which – interstate conflict with regional consequences – was last year’s most likely risk, are also present: while interstate conflict has dropped to fourth in terms of likelihood, weapons of mass destruction ranks as second most impactful risk, one place above 2015 and its highest ranking ever.

“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,” says Cecilia Reyes, Zurich Insurance’s chief risk officer (CRO). “Meanwhile, geopolitical instability is exposing businesses to cancelled projects, revoked licences, 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.”

The report highlights a potential ‘black swan’ event, in the area of technological risk. While cyberattacks rises slightly in terms of likelihood and impact in 2016, others, including failure of critical information infrastructure, appear to be declining as a risk in the eyes of experts.

Technological crises have yet to impact economies or securities in a systemic way, but the risk still remains high, something possibly not fully priced in by experts. This appears to be the view of a growing number of business leaders; the WEF’s separate survey of business leaders assessing risks for doing business finds cyberattacks to be the top risk in eight countries, including the US, Japan, Germany, Switzerland and Singapore.

The report also considers how global security might evolve in future, exploring three areas where global risks have the potential to impact society. These are the concept of the “(dis)empowered citizen”, the impact of climate change on food security, and the potential of pandemics to threaten social cohesion.

Risks for doing business

Another section of the report offers country-level data on how businesses perceive global risks in their countries and reveals patterns among both advanced and emerging economies.

Unemployment and under-employment appears as the risk of highest concern for doing business in more than a quarter of the 140 economies covered and is identified as the top risk in two regions, sub-Saharan Africa and the Middle East and North Africa. The only region where it does not feature in the top five is North America.

Energy price shock is the next most widespread risk, featuring in the top five risks for doing business in 93 economies. Cyberattacks feature among the top five risks in 27 economies, indicating the extent to which businesses in many countries have already been impacted.

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