The World Economic Forum’s Global Risks Report 2016 rates the failure of climate change mitigation and adaptation as the risk that could have the greatest impact on business. In addition, Ben Cooper writes, the prevalence of climate change risk and the way it is expected to exacerbate other environmental, societal and economic impacts underlines the increasing interconnectedness of business risk, which is an overarching theme of the report.
Given its prevalence and the huge level of discussion and anxiety it now generates, it would have been surprising if climate change had not been ranked as “the most impactful risk” facing businesses in the World Economic Forum’s Global Risks Report 2016.
The report assesses 29 risks facing companies over the coming ten years – categorised as societal, technological, economic, environmental or geopolitical – based on a survey of 750 experts from business, government, academia, NGOs and international organisations.
The failure of climate change mitigation and adaptation has been in the top five risks in the previous three reports but this year was nominated as the most impactful risk for the coming decade, ahead of weapons of mass destruction and water crises, which were second and third respectively. The top five was completed by large-scale involuntary migration and severe energy price shock.
In addition to rating impact, the Global Risks Perception Survey also examines risk in terms of likelihood. Here, the top five were large-scale involuntary migration, followed by extreme weather events, failure of climate change mitigation and adaptation, interstate conflict and major natural catastrophes. The most notable examples of risks with both high impact and high likelihood are climate change and largescale involuntary migration.
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How risks are becoming interconnected
Another key overarching finding in the report is global risks are becoming more interconnected and climate change also scores highly in this regard.
When respondents were asked which risks were inter-related and could give rise to further “cascading risks”, the potential for climate change to exacerbate water risk emerged strongly. And while the interconnectedness of risks is a theme running through the entire report, arguably no risk area reflects this more than climate change, underlining not only its direct links with areas such as agriculture and food production and threats to ecosystems and biodiversity, but also the social and political challenges climate change has long been expected to bring.
Speaking at the press conference launching the report, Cecilia Reyes, chief risk officer at Zurich Insurance Group, which contributed to the report, said a “negative feedback loop” existed whereby climate change could exacerbate political instability – and by the same token political instability threatens to undermine global responses to climate change.
According to Reyes, climate change “is exacerbating more risks than ever before in terms of water crises, food shortages, constrained economic growth, weaker societal cohesion and increased security risks”.
The report also echoes concerns expressed by major food companies such as PepsiCo over the increasing threat posed by extreme weather events, rated as the number two risk in terms of likelihood. Water crises, also closely linked to climate change, in their own right are rated as the third biggest risk in terms of impact and in the top ten (ninth) in terms of likelihood.
Pointing to the forecast by the Organisation for Economic Cooperation and Development (OECD) that as many as 4bn people could be living in water-scarce areas by 2050, the report also stresses the links between water scarcity risk specifically and economic growth, involuntary migration and global security.
Based on current trends, the report states, water demand is projected to exceed sustainable supply by 40% in 2030. It warns: “Unless current water management practices change significantly, many parts of the world will therefore face growing competition for water between agriculture, energy, industry, and cities. Tensions are likely to grow within countries, especially between rural and urban areas and between poorer and richer areas, and also potentially between jurisdictions.” With forced displacement already at an unprecedented level, “failure to address climate change and water crises will forcibly displace more people”.
Food crises also appear as a specific risk, registering significantly above average in terms of impact and marginally below average in terms of likelihood, while the links between climate change and food security are also a key topic discussed in the report. The third section of the report identifies three “Risks in Focus” for in-depth analysis – the disempowered citizen, global disease outbreaks and food security – in the context of climate change.
The report concludes: “Climate change presents a profound threat to food security because biophysical stresses mean it will become increasingly difficult for agriculture to meet demand, and more extreme weather increases the risk of both local and systemic food crises. The poorest countries are most vulnerable, but crop failures in systemically important production regions will have global consequences that may extend beyond food systems.”
The critical issue of food waste
With what could be taken as admonishing words for the food production and retailing sectors, the report highlights the link between food waste and food insecurity, suggesting legislative reform will be among the interventions required to address the problem.
While the report concedes market incentives to reduce food waste are “minimal”, it states “maintaining supply chains delivering year-round uninterrupted supplies of produce are inherently wasteful because retailers depend on over-ordering and suppliers on over-producing”. But the report points out that the economic benefits of this model currently outweigh the costs.
“Exacting retail quality and presentation standards, consumer expectations and legislation governing food re-use all exacerbate the problem by rejecting perfectly edible but non-aesthetically pleasing produce,” the report continues. “Minimising waste will therefore require technical innovations, legislative reform and a recalibration of consumer expectations.”
At the World Economic Forum in Davos yesterday, 30 individuals from the world of business, governments and NGOs – including Nestle CEO Paul Bulcke, Unilever chief Paul Polman, Olam International boss Sunny Verghese and Dave Lewis, the CEO of Tesco, launched an initiative to try to reduce “global food loss and waste”.
Lewis said: “Reducing food loss and waste is a significant global challenge and it’s very important that business plays its part. This is an opportunity for businesses to work together.”
Alleviating impact of climate change on food security
The WEF global risks report also outlines three spheres in which action can be taken to mitigate the risk of climate change to food security. It suggests using big data to boost the efficiency and specificity of climate-risk information, where it suggests broad-based collaborative efforts including public-private partnership could be particularly valuable. It also points to the provision of insurance innovations to reduce risk to small farmers. And the report puts forward the incentivisation of climate-resilient, low-carbon investments.
That climate change tops the impact risk ranking for the first time – the report is now in its eleventh edition – reflects the gravity of the situation in which the global community now finds itself. Not only would it have been surprising but also arguably alarming had climate change not been so recognised.
That said, the prominence given to climate change in the Global Risks Perception Survey could also be said to reflect the greater attention the issue is now being given. At the end of the press conference, the panel of experts convened to explain the report’s findings was asked if there was any good news.
Espen Barth Eide, head of geopolitical affairs at WEF, told the audience that while failure of climate change mitigation and adaptation may now represent the gravest risk, the COP 21 climate change conference in Paris showed that there is “more willingness to deal with it”.
The report describes the Paris Agreement as a “major turning point” in the global fight against climate change and predicts COP 21 will be a catalyst for investment in climate-safe innovation. “For businesses, the Paris Agreement is a licence not only to implement climate-friendly practices but also to innovate and develop the next generation of solutions. The race is on for forward-looking businesses and governments alike to capitalise on these new business opportunities for growth and resilience.”
Echoing that sentiment, Reyes emphasised that “risk and reward are two sides of the same coin”, adding the building of infrastructure for clean energy and the transition to a low-carbon economy is a “huge opportunity”.
The WEF report also assesses the risk of cyber attack on business – and concludes the threat is rising. Click here to read our analysis of the WEF’s findings.
To read the findings at a glance, click here.