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Corporate Risk Management: Climate change risk has greatest potential impact in 2016 - World Economic Forum

Source: Asia Insurance Review | Feb 2016

An increased likelihood for all risks, from the environmental to society, the economy, geopolitics and technology, looks set to shape the global agenda in the coming year, the World Economic Forum’s Global Risks Report 2016 has found. The risk with the greatest potential impact in 2016 was found to be a failure of climate change mitigation and adaptation.
 
   This is the first time since the report was published in 2006 that an environmental risk has topped the ranking, and was considered to have greater potential damage than weapons of mass destruction (2nd), water crises (3rd), large-scale involuntary migration (4th) and severe energy price shocks (5th).
 
Unprecedented broad risk landscape 
Looking at risks in 2016 in terms of likelihood, large-scale involuntary migration topped that list, 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). 
 
   Such a broad risk landscape is unprecedented in the 11 years the report has been measuring global risks. In this year’s annual survey, almost 750 experts assessed 29 separate global risks for both impact and likelihood over a 10-year time horizon. 
 
   For the first time, four out of five categories – environmental, geopolitical, societal and economic – feature among the top five most impactful risks. The only category not to feature is technological risk, where the highest ranking risk is cyber attacks, in 11th position in both likelihood and impact, but it could be a black swan event.
 
   This diverse landscape comes at a time when the toll from global risks would appear to be rising. According to the WEF, the 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 59.5 million according to UNHCR, the UN’s refugee agency, almost 50% more than in 1940. 
 
   Data from the report appears to support the increased likelihood of risks across the board, with all 24 of the risks continuously measured since 2014 having increased their likelihood scores in the past three years.
 
Interconnections among risks
Examining the interconnections among the risks is important in helping leaders prioritise areas for action, as well as to plan for contingencies. Data 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. At the top end of the scale, 2016’s two most interconnected risks – profound social instability and structural unemployment or under-employment – account for 5% of all interconnections.
 
Risks for doing business
Country-level data on how businesses perceive global risks in their countries found that unemployment and under-employment appears as the risk of highest concern for doing business in more than a fourth of the 140 economies covered, and is especially featured 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. 
 
   An energy price shock is the next most widespread risk, featuring in the top five risks for doing business in 93 economies. Cyber attacks feature among the top five risks in 27 economies, indicating the extent to which businesses in many countries have already been impacted by this rising threat. 
 
   The WEF Global Risks Report 2016 was developed with the support of strategic partners Marsh & McLennan Companies and Zurich Insurance Group, with the collaboration of its academic advisers: the Oxford Martin School (University of Oxford), the National University of Singapore, the Wharton Risk Management and Decision Processes Center (University of Pennsylvania), and the Advisory Board of the Global Risks Report 2016.
 
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