The Global Risks Report, now in its 13th edition, has become the vehicle for an international discussion of risk linked to the Davos World Economic Forum (WEF) the following week. Its findings in 2018 are generally unsurprising. The overall picture is of increasing uncertainty, especially related to the natural environment and conflict, with somewhat reduced anxiety about the economy.
The risk rankings have a tendency toward availability bias or saliency: they tend to reflect recent or novel events, based on a risk perception survey of 1000 or so members of the WEF stakeholder community. The composition of the respondents to the survey who gave their personal details are also worth noting: 49% come from business, 70% are male, and 59% are between 40 and 59 years old. Forty-three percent are in Europe; 22% in North America.
The risk analysis is, indeed, global, and it is difficult for organisations to translate that into management action. “The clarity of the ranking in the Global Risk Report is important in recognising the systemic threats that the business, social and physical environments are subject to,” says Professor Danny Ralph at the University of Cambridge Centre for Risk Studies. “But this is just the first step. There is growing need – in fact pressure – for organisations, especially publicly listed firms, to quantify and declare their exposure to risks including those from global shocks and trends.”
Public bodies and businesses will have to use considerable effort to identify and measure the specific implications from the report and devise effective mitigation strategies. This is especially the case for the interconnections among risks, which are an important feature of the report. Professor Ralph comments on a way that organisations can undertake these tasks, “Scenarios provide a powerful approach for describing and then quantifying risk impacts. The Centre for Risk Studies has applied scenario analysis to across a wide variety of macro threats, to measure economic losses while respecting global interconnections in trade, geopolitics, etc.”
This year, the Global Risk Report spotlight falls on environmental issues such as extreme weather, geophysical disasters and failure of climate change mitigation, all among the five top risks for probability and potential impact in 2018. Cyber attacks, which did not feature among the top five for frequency or severity in 2017, do so in terms of probability for 2018. By contrast, large scale involuntary migration, which was among the most probable risks in 2016 and 2017, has disappeared from the top five.
One of the most striking findings this year is reduced anxiety about the global economy. The report argues, however, there should be greater attention paid to the risk of another financial crisis. It draws attention to high levels of debt and strains of inequality in more developed economies, likely to be exacerbated by the Fourth Industrial Revolution.
The report itself highlights the risks generated by: (1) persistent inequality and unfairness, (2) domestic and international political tensions, (3) environmental dangers and (4) cyber vulnerabilities. A specific question about geopolitical risks shows, for example, that 93% expect that the risks presented by political and economic friction between major powers will grow in 2018.
Cyber worries intensify
This year, following attacks like WannaCry, concern about cyber risks intensified. The number and cost of attacks have been steadily rising, and there is still a considerable “protection gap” between corporate exposure and risk transfer capacity. The biggest risk, however, is what we do not know as the result of interconnectivity and the potential for attacks that cause not isolated and temporary disruptions, but systemic shocks.
The Centre for Risk Studies is far from sanguine about cyber threats. “From malware to malfeasance, the dark side of digital is emerging just as quickly as the sunny side of cyber. Given that there are more smart devices than people on the planet, hyper-connectivity describes the bewildering array of bot-to-bot and cyber-to-human and human-to-human interactions with consequences that we struggle to anticipate,” says Professor Ralph. “Beyond that, it’s a concern that the platforms which deliver hyper-connectivity, though seemingly public goods, are largely owned by corporations like Alibaba and Google, an issue which the Global Risk Report does not address.”
WEF emphasises the importance of multi-lateral action in respond to these threats, across countries and between private and public sector organisations, and calls for the application of a lens of resilience to deal with complexity when a traditional risk management is insufficient. It says that the prospect of strong economic growth in 2018 presents leaders with a golden opportunity to address signs of severe weakness in many of the complex systems that underpin our world.
Professor Ralph adds, “To understand developing economies it is particularly important to consider more holistic measures of economic development than GDP. The WEF’s Inclusive Development Index is a forward step, and will improve our ability to assess the potential economic and social impact of catastrophic risks.”
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John Stroughair
The WEF risk report should not be taken seriously as a risk analysis. It is intended as a marketing document by the organisations that sponsor it. This is not idle cynicism but based on first hand involvement with the production of previous documents.