WEF tackles global risk and raises doubts over Kyoto

World Economic Forum (WEF) questions attitudes to risk management climate change, and emissions trading schemes


What are the big issues that risk managers worry about, and are the world’s leading organisations capable of dealing with them? A new study provides some useful answers to the first question, but raises worrying doubts about the second. According to a study by the Federation of European Risk Management Associations, top of the list of concerns for the leading risk managers working in Europe are a breakdown of critical information infrastructure, crime and corruption, terrorism, and catastrophic flood. FERMA asked its members to pick the most worrying items from a list published by the World Economic Forum (WEF) in its recent Global Risks Report. The WEF highlighted what it called “a growing disconnect between the power of global risks to cause major systemic disruption, and our ability to mitigate them.”

It gave a list of 23 core global risks and said they had worsened over the preceding 12 months, despite growing awareness of their potential impacts. FERMA members said the second most important group of core risks includes energy price and supply shocks, catastrophic windstorm and earthquake, and pandemics. A third group of risks, named in less than half the responses, covers climate change, war, loss of freshwater services and nanotechnology.

It may be surprising that only 17 of the responses said climate change is a significant risk for their organisation, but Franck Baron, a FERMA official, explains: “It is not that risk managers are not concerned about climate change, but we do not yet know how it will affect individual companies operationally, and this is the province of the risk manager.”

He also points out, as does the WEF report, that many of these risks are inter-dependent. “This is why we need a holistic approach to risk management to create sustainability for the business. We need to identify and manage not just individual risks but the way they interact.”

That is a view endorsed by Jesse Fahnstock, global leadership fellow for the WEF global risks programme. “The survey really shows how the relationship between global risks and corporate risk management is evolving,” he says. “Risk managers are clearly looking hard at the interconnected, non-business issues that define the global risk landscape. But translating the understanding of these issues into the world of operational, financial and regulatory risk management remains a big challenge. Priority is still being given to well understood, insurable risks, but managing exposure to complex, currently uninsurable global risks will be a key competitive advantage in the coming years.”

Specific industries
Some of the risks mentioned reflect specific industry worries. In relation to freshwater services and nanotechnology, for example, it is possible to see concern from specific industries, such as a UK company that owns paper mills and a multinational food and drink company for whom continuity of supply of fresh water is important. But overall the survey is a useful indicator, as it included responses from a mix of multinational corporations, businesses operating only within the European Union, and national companies.

Asked what the most significant risks are now and in the next five years, respondents most frequently mentioned supply chain and business interruption risks. Other important ones were regulation and compliance, political risks, availability of a choice of insurers and capacity, a shortage of people skills, and age discrimination.

Restrictions on carbon dioxide emissions and more extremes of weather were the most commonly mentioned corporate concerns in response to a changing climate. One risk manager who said climate change was now a concern represented a multinational company in the infrastructure, environment and energy sectors. He said that the company was doing an inventory of its CO2 emissions and had created a position for a company specialist to keep management updated continuously about the consequences in general and for the business. The survey gathered similar views from other managers. The risk manager for a multinational food and drink group commented, “climate change does not affect us now, but we are monitoring effects.” His company’s concern is that higher temperatures could create pressures on water resources and lead to civil conflicts.

An airport and shopping mall operator said government action on CO2 emissions might lead to decreased demand from passengers and airlines for airport services. A multinational retail company risk manager said climate change was not having an impact on its business yet, but it could foresee pressures from restrictions on CO2 emissions from transport, water and energy consumption and the associated price changes.

More severe and less predictable weather is another possible consequence of global warming, which comes up in the responses of two risk managers from multinational companies in the construction sector. “We see much more frequent extreme weather phenomena, such as heavy snow in one of our Chinese plants where there had been no snow for more than 50 years. This has important consequences for construction planning,” said one manager.

An airport operator and a logistics and stevedoring company both mentioned the risk of more severe weather conditions. The airport operator said it might lead to more flight cancellations and an increase in the number of interruptions to the revenue stream, albeit short-term. “But that’s an industry-wide risk that cannot be diversified away,” he commented. The logistics company said more frequent and severe windstorms could increase property losses.

Greater extremes
A Russian risk professional says a warmer climate could reduce demand for the oil and gas industry in his country, and much of the country’s economy depends on the sector. He believes that greater extremes of weather and more variability will increase demands on risk management. A multinational energy company is concerned about possible increased volatility in supply and demand for power “since electricity cannot be stored,” while a company that produces energy from renewable and natural sources is also concerned about future demand.

According to a Polish risk manager, there will be contractual risks for travel companies that depend on a cold climate in winter, such as those offering skiing holidays. The risk manager of a UK company whose business includes paper mills said climate change could affect the water supply it needs, while a food and drink company said demand for drinks might be affected.

What would help organisations to tackle their big risks? The WEF called for two changes that would improve global risk management efforts: the appointment of Country Risk Officers and the creation of flexible “coalitions of the willing” around specific global risk issues, which it said would provide crucial momentum to mitigation efforts.

The first of these changes would provide a focal point in government for mitigating global risks across departments, learning from private-sector approaches and escaping a “silo-based” approach where risks are dealt with in isolation, it said. The second would allow efforts to tackle risks to “emerge from dynamic interplay between governments and business, achieving a balance between inclusiveness and decisiveness.”

The large majority of respondents to the FERMA survey thought the appointment of country risk officers was a good idea. But some were sceptical and several questioned how practical it would be. “Very impractical,” was the response from a Polish risk manager. “It’s going to be driven by politics and politicians. It should be practical. That’s why it’s not going to happen,” was a Swiss response.

Another FERMA member pointed out it would depend on governments’ ability to use collected information, while an Italian risk manager commented, “I think the state system is not ready today to make a correct risk assessment.” One Swiss risk manager says the approach should be less parochial. “They should rather look at the global perspective and start a coordinated international effort on risk mitigation in respect of the mega trends and risks, such as global warming, aging society, water shortage and distribution, as well as alternative energy resources.”

Managing public risks
Another Swiss risk manager says he would like to see the government creating a clear definition of competences, structures, organisation and resource allocation ahead of a crisis situation like earthquake, terrorism, pandemic or civil commotion. A similar view came from a risk manager based in Portugal. The government should pay more attention to managing public risks like pandemics, natural catastrophe, terrorism and crime and corruption, he said.

Several responses asked governments to give clearer and stricter requirements for risk management in listed companies, and suggested that some regulations for unlisted companies could also be considered. A Swiss risk manager said that the risk reporting requirements of corporate governance frameworks such as Germany’s Kontrag did not exist in many countries. From Bulgaria, came the comment that it would be good if essential risk management standards were adopted and widely publicised, and a Russian risk professional said he would like to see the government build up national standards of risk management.

“It would be very practical to map risks,” said a UK risk manager. “It could be useful in managing the population’s perception of risk. It should educate the population to understand risks and take responsibility to manage them, instead of the state making legislation.”

Above all, there is a need to take a more comprehensive view of global risks. “Risks are often still viewed and dealt with in isolation. However, in today’s world global risks are tightly interwoven,” says Jacques Aigrain, Chief Executive Officer of insurer Swiss Re. “To address our contemporary risk landscape, governments and enterprises need to take a holistic approach to overcome silo-thinking and acting. We need to prioritise risks effectively, improve preparation and strengthen public-private partnerships to mitigate risks and to finance economic losses.”

In part, that means being more proactive. “There is continued evidence of a disconnection between risk and mitigation,” says Mike Cherkasky, President and Chief Executive Officer of Marsh & McLennan Companies, the insurance and risk group. “The focus of government and corporations must not only be on reacting to events, but on utilising effective enterprise risk management to set priorities, increase business focus, allocate resources and maximise efficiency.”

“Catastrophic natural disasters in recent years have demonstrated that our ability to confront emerging risks depends more on the choices we make before a disruption, than the actions we take during a crisis,” he adds. “Only a systematic planning approach will ensure that countries and companies are prepared for the risk environment we presently face.”

Tackling global risks
The World Economic Forum says four big changes would help to address global risks:
– Linking energy security with considerations on climate change;
– Urgently beginning work on a successor to the Kyoto agreement on climate change, which needs to include the US, China and India;
– Renewing terrorism insurance schemes that are due to expire this year; and
– Checking supply chains are resilient against a pandemic illness, such as Avian Flu.