“Global risks do not manifest themselves in isolation, neither geographically nor in time…we are in a world with unprecedented levels of interconnectedness between all areas of risk.” So says Klaus Schwab, Founder and Executive Chairman of the World Economic Forum in the preface to its latest report, Global Risks 2010.
The report takes a high-level look at the global risks that face the global economy and should be required reading for governments and world leaders.
Whether they will take note is another matter, but certainly risk managers should find plenty to take note of.
Put simply, the report has three main themes:
The interconnectedness of risks: an increase in interconnections among risks means a higher level of systemic risk than ever before and therefore the need for an integrated and more systemic approach to risk management.
Creeping risks: while sudden shocks can have a huge impact, such as terrorist attacks or natural catastrophes, the biggest risks that the world faces today may be from slow failures or creeping risks.
Global governance gaps: the need for reform of global governance.
Speaking at the launch of the report, Raj Singh, Chief Risk Officer of Swiss Re, stressed that some of the biggest exposures that the world faces stem from what he called the ‘creeping risks’ associated with under-investment in infrastructure.
“This is particularly acute for agriculture and food security… billions of dollars need to be spent on water provision, energy supply, transport and climate change measures,” he said.
“Governments must work together with the private sector to make it happen,” added Mr. Singh.
But, with its focus on global macro risks, and risks at global and country level, what messages does the report have for risk managers?
Helpfully, the report in fact has an entire chapter entitled ‘How corporations can apply the findings of Global Risks 2010’ which is a good start.
It states that the report enables corporations to:
- Test assumptions in underlying strategic plans and capital investments;
- Understand and monitor the complex and changing interrelationships between systemic risks; and
- Identify emerging opportunities within the emerging trends or events.
One important area that the report highlights is the short term nature of corporate risk assessments and the need to take a longer view.
According to Daniel Hofmann, Group Chief Economist, Zurich Financial Services, and a contributor to the report, recent surveys, such as the annual PwC risk survey of CEOs, reveal that CEOs tend to focus on current risks and ‘things that happen to be on their plate that day.’ In other words, he says, risk managers and CEOs are very much concerned with short term events.
“They are what we call ‘risk myopic’”, he says. “They don’t have a long time horizon, and they tend to have a narrow framework in approaching risk, tending to look predominantly at economic and financial risks, or at risks that are very specific to their company or area of industry. They do not tend to look at the broader environment of risk, and that is the consistent picture that you get from surveys and reports.”
“The better risk management people, and those at the cutting edge of risk management, have recognised this and are trying to be a lot more holistic and that is precisely where the Global Risk Report is trying to alert people. We are trying to make people aware of the ‘creeping risks’ – those that slowly emerge, that may not be on your radar today or even tomorrow but certainly should be on your radar ten years from now,” added Mr. Hofmann.
Jeff Colburn, UK Head of Marsh’s Risk Consulting Practice, says that it may not impact corporations immediately, “but by monitoring these risks it can certainly help them as they start to do their strategic planning and capital investments in the long term. The report is, therefore, very relevant to corporate risk managers.”
The report also states that ‘research shows that relatively few companies effectively apply tools, such as scenario analysis, or effectively integrate risk data into long-term strategic planning.’ It adds that the report’s focus on the changing risk landscape can also be used to identify emerging opportunities in markets or sources that could provide the corporation with a competitive edge.
The message appears to be that risk managers need to be more involved in strategic planning. “I think it is a key thing that they need to do as their roles and responsibilities change and get more sophisticated,” said Mr. Colburn.
“The better they are integrated within their organisation, and the decision-making process, the better off they are, and the more value they can add. They will be challenged, and they will need to respond by providing good data and information that supports the business objectives of their organisation,” he continued.
Mr. Colborn also said: “There is an upside to risk. If you look at risks associated with certain projects, and understand the risk, and put in place the controls to manage that risk successfully, it can be an absolute competitive advantage.” He adds that looking at risk opportunistically, and being able to manage that risk going forward, can pay off handsomely for companies that do it well.
Mr. Hofmann believes that “firms that are at the cutting edge have really made risk management a part of their strategic analysis and their strategic development. Where there is risk there is also opportunity, you cannot disassociate the two.”
So how has the report been received by risk managers? Paul Taylor, Director of Risk Assurance, The Morgan Crucible Company and a FERMA board member, calls it a ‘thorough assessment of current and emerging risks that can impact us.’ He adds, “This is one of the key reports to provide a dashboard for risk managers and strategy teams to think about some of the current risks as well as focusing on risks that may impact business over the next 10 years.
“For a risk manager trying to support and challenge their organisation to proactively consider emerging and current risks, the WEF Global Risks Report provides a well-considered set of risks. While few individual risks are a surprise, there are a number of important messages,” added Mr. Taylor.
These include the quantification of risks in terms of impact and probability that, he says, can provide a useful guide for risk managers when adapting the analysis to their own organisation. Mr. Taylor also highlights the concept of systemic risk, the need to also assess the interrelationships of risks, and the fact that the changing risk landscape creates new opportunities for businesses.
Marie-Gemma Dequae, a board member of FERMA, pointed to the remark of the Executive Chairman Klaus Schwab where he urges the political and business leaders to ‘a consideration of the longer term, global implications of risk in areas beyond the immediate focus. These risks must be addressed collectively so opportunities can be found in their complexity.’ Ms. Dequae says these are ‘clear messages for enterprises and governments.’
“The high interconnection among risks and the globalisation of risk, call for a more integrated approach to risk management within a company. The WEF signals that the biggest risks facing the world today may be from slow failures or ‘creeping’ risks, with a long-term impact vastly underestimated, like global population growth and ageing,” she added.
Ms. Dequae added that corporations are currently experiencing these ‘creeping risks’, such as ageing of the workforce and shortening of product life cycles. Therefore, she said, it is very important to develop enterprise risk management and to build on ‘enterprise governance,’ with scrutiny throughout the business cycle, thus having a long-term focus rather than focusing on short-term financial reporting periods.
The report fundamentally addresses geo-political and economic issues at a global level. But is also has important messages about risk at all levels, from global to country and to individual organisations. Risk managers would be well advised to take a look.
The full report can be downloaded at http://www.weforum.org/pdf/globalrisk/globalrisks2010.pdf.