Regulations and strategies can only do so much to mitigate risks threatening businesses. Then there are threats that are too big for any regulation, company – or even some nations – to handle, the ones that keep corporate and government leaders up at night.
These larger-than-life global risks are outlined in a recent report from the World Economic Forum. Included in the data, which is based on a survey of more than 1,000 respondents from across the world, are the five most likely to happen in the next decade:
1. Severe income disparity. The income gap between the poorest and the wealthiest households has been widening in most advanced and many developing countries, affecting consumer demand, living standards, and social stability, according to the International Monetary Fund (IMF) and the McKinsey Global Institute.
In advanced economies, technological advances have increased demand for highly skilled workers, while many low-skill jobs have moved to low-cost countries. Low-income households also felt the effect of a fiscal policy that lessened social benefits.
In developing economies, incomes are rising in urban centres, but low tax rates tend to limit redistribution through public spending. According to the IMF, average tax ratios exceed 30% of GDP in advanced economies, while they are generally between 15% and 20% of GDP in developing economies.
2. Chronic fiscal imbalances. The financial crises that started in 2008 in the US and spread to Europe triggered a sovereign debt crisis in the euro zone that has brought about austerity measures, increased unemployment to record levels and slowed or decreased consumer demand and GDP growth.
The fallout from the euro-zone crisis is being felt around the world. US exports to Europe, a region that accounts for about one-quarter of all US exports, have slowed. Exports from China to the EU, China’s largest export market, also have slowed, contributing to a slowdown in China’s economic growth.
Research shows that borrowing more than about 90% of GDP seems to have a negative effect on a country’s economic growth, according to the Federal Reserve Bank of St. Louis. The US, Belgium, Iceland, Portugal, Italy, Japan and Greece exceed the 90% gross debt-to-GDP ratio, according to the IMF and the World Bank.
3. Rising greenhouse gas emissions. How fast and how much the climate is changing remains controversial, but worldwide greenhouse gas emissions have continued to rise for two decades, according to United Nations figures.
Investors are starting to pay attention as severe weather events are linked to increasing economic and human costs. A Mercer report projected the cumulative economic cost of worldwide changes to the physical environment, health and food security brought on by climate change to be $2 trillion to $4 trillion by 2030.
4. Water supply crises. Increased use of the world’s finite water resources is already affecting water supplies. About 700 million people in 43 countries do not have enough water, and that is projected to increase to about 1.8 billion people in the next decade, according to the UN. By 2030, almost half of the world’s population could be living in areas of high water stress.
Without enough water, production methods, customer requirements, investor sensitivities and capacity levels can shift, potentially threatening multiple industries. Water-intensive industries such as beverage and agricultural producers are at particular risk, but also others. Forty per cent of Fortune 1000 companies said water shortages would have catastrophic or severe effects on their business.
5. Mismanagement of population ageing. The world’s population is ageing quickly. By 2050, the number of people age 60 or older will for the first time in history exceed the number of younger people, according to the UN. This reversal has already taken place in some advanced economies.
The trend towards a greying world population is largely irreversible and its far-reaching effects will include economic growth, savings, investment, consumption, labour markets, pensions and taxation.
In the coming decade, demographic trends are expected to create a surplus of college-educated, skilled workers in countries such as India, Indonesia and Brazil, business consultants Oxford Economics and Towers Watson projected. Countries with aging populations, such as Japan, Germany, Australia and the US, will face talent deficits.
Risks that warrant particularly close attention
The World Economic Forum survey also collected data on the risks to which respondents wanted leaders and policymakers to pay the most attention:
- Major systematic financial failure topped the list of economic risks.
- Failure of climate change adaptation came in first among environmental risks.
- A lack of water supplies was the biggest societal risk.
- Global governance failure was the biggest geopolitical risk.
- Critical systems failure still topped the list of technological risks.
The survey responses reflect shifting priorities in three of the five categories compared to the previous year. For example, a year ago respondents feared chronic fiscal imbalances most. But a more stable euro zone had more respondents worried about a systematic financial failure a year later.
The worst environmental risk shifted from rising greenhouse gas emissions a year ago to dealing with greenhouse gas emissions and adapting to climate changes. And concerns about unsustainable population growth that topped societal risks a year ago, became more specific, zeroing in on water supplies a year later.
Economic risks. The global economic recovery remains fragile despite improvements in the third and fourth quarter of 2012, according to the International Monetary Fund. The sovereign debt crisis in the euro zone has become less volatile, but debt-to-GDP levels in many developed economies, including the US and Japan, remain high. And 2013 economic growth in developing and emerging economies is expected to remain below the high rates of 2010 and 2011. Survey respondents believed Switzerland would prove most resilient should global economic risks materialise. China, Germany, Brazil and the US followed close behind.
Environmental risks. Widespread fears of financial failures and chronic sovereign debts don’t bode well for investments that are necessary to adapt to long-term effects of climate change. More survey respondents this year were worried about whether the world will make strategic infrastructure improvements to prepare for more extreme weather events and address the continued migration into urban centres.
Given the pressures on public finances, “[i]t is likely that many of the preparations to weather the colliding economic and environmental storm systems will be found in private-sector initiatives to reinforce critical assets and shield them from potential future risks and liability,” the World Economic Forum report said.
The countries that survey respondents believed would be most able to recover should global environmental risks materialise were Switzerland, Germany, the US and China.
Technological risks. The internet is a wonderful tool to share information instantaneously, but it can also be used to enable massive digital misinformation, or what the World Economic Forum report called “digital wildfires”. They include fake social media messages that boosted crude oil prices and a video by an unhappy airline customer that went viral and caused the airline’s stock to decline.
A survey of US executives, including many at multinational companies, found social media is one of the top five risks organisations face. The Deloitte report Aftershock: Adjusting to the New World of Risk Management said that 27% of survey respondents predicted social media would be among the most important risk sources over the next three years.
Fear of massive digital misinformation was high amongst survey respondents, and 20.9% worried about cyber-attacks, up from 18.1% a year ago, according to the World Economic Forum. To address these risks, government policies and business strategies will have to take into account issues such as freedom of online speech, privacy and intellectual property.
A global project supported by Oxford University has begun to develop a framework that focuses on collaboration among stakeholders and attempts to address different regional values and cultures and the context in which governmental or business intervention could be effective.
Related CGMA Magazine content:
“Risk Lessons From Natural Disasters”: Economists and businesses around the world are paying closer attention to risks related to extreme weather. New storms and statistics serve as a reminder for businesses: It’s a mistake to think that disasters only strike somewhere else, and it never hurts to plan for the worst.
“Cybersecurity: 2013 Is Already ‘The Year of the Hack’ ”: Emerging, relentless cybersecurity threats pose a significant danger to organisations that are unprepared to detect and deter them, according to a new global survey. Known as advanced persistent threats, these attacks are not easily deterred by traditional controls.
“Companies Plan to Pump Up Enterprise Risk Management”: New regulation and severe weather events in the past few years are driving companies around the globe to pay more attention to enterprise risk management. Find out what threats worry executives the most and how existing ERM programmes could be improved.
“What Worries CEOs Most?”: Global economic uncertainty, government response to debt and deficit, and overregulation are among the most worrisome things to CEOs these days, according to PwC’s annual global CEO survey. Find out what strategies they’re employing to protect their companies from the effects of each.
—Sabine Vollmer (email@example.com) is a CGMA Magazine senior editor.
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Tips for building resilience
In this ever-evolving economic climate, in which uncertainty is the order of the day, businesses are seeking ways to become less reactive to short-term economic shocks.
A recent survey of more than 1,300 CGMA business experts asked for opinions on whether reaction to economic uncertainty is proportionate to the true risks involved. Respondents were asked to assess the reaction to the US debt crisis, with 60% reflecting that business is too sensitive to economic crises. Despite widespread doom and gloom during the US fiscal cliff saga at the end of 2012, only 31% of respondents believed that the US debt issue would ultimately push the global economy towards recession, suggesting that fears were overplayed.
Meanwhile, 57% agreed that their organisation must seek new ways to be resilient and less susceptible to macro-economic volatility of this kind.
The Chartered Institute of Management Accountants, which partnered with the American Institute of CPAs to create the CGMA designation, suggested that organisations adjust their risk radar and anticipate the impact of various events on investment and future growth, offering these tips and reminders:
1. Understand your business model. What creates, and could potentially destroy, value in your business?
2. Harness the power of transparency. Create a line of sight between capital sources and how it will be invested in the sustained success of the business, beyond the short term.
3. Ensure robust information flows. Build confidence in the right information that drives investment and risk-mitigation decisions.
4. Go beyond defining a risk appetite. Have a risk attitude that empowers all in the business to take appropriate risks that drive growth and opportunity.
5. Be clear on the skills and talents you need now for tomorrow. Identify and close potential skills gaps you may have when considering your future business model, markets and innovation agenda.