World Economic Forum 2020 Global Risk Report

Guest Post by James Kline (first posted on CERM ® RISK INSIGHTS – reposted here with permission)

The World Economic Forum has conducted an annual survey of its members since 2007.  This piece looks at the results of the 2020 survey of 800 members.  For the first time the survey separately reports the results of 200 members of a “Global Shapers Community”.  This group is considered a younger generation of social entrepreneurs and leaders. By comparing the response of these two groups, one can see a divergence perspective on risk.  This piece will also discuss how survey results can be overtaken by events.

Top Five Global Risks 2020

The survey shows several things.  First, the times they are changing.  Second, as can be seen in Table 1, the dominant risks for 2020 are all environmental.

Likelihood of Global Risks

Table 1

Biodiversity Loss and Human Made Environmental Disasters displace Data Fraud or theft and Cyberattacks. The preface of the report states: “On the environment, we note with grave concern the consequences of continued environmental degradation, including the record pace of species decline.”  This is the first time in the history of the survey that a single class of risks, environmental, occupied the top five slots.

Environmental Concerns

The respondents’ environmental concern is extremely high. The attitude is that the “near-term consequences of climate change add up to a ‘planetary emergency’ the implications are catastrophic, wide-ranging and intersecting.  Worse still, the complexity of the climate system means that some impacts are still unknown.”

There are multiple aspects to this environmental concern. This is reflected in the top five short term risks listed by the Global Shakers (Younger Generation), as can be seen below in Table 2. The short-term risks are: Extreme heat waves, Destruction of ecosystems, Health impact by pollution, Water crises and Uncontrolled fires.  For the younger generation environmental risk are the dominate short term concern.

A second major concern is that today’s “risk landscape is being shaped in significant measure by an unsettled geopolitical environment – one in which new centers of power and influence are forming – as old alliance structures and global institutions are being tested.” The unsettled geopolitical environment creates uncertainty. Uncertainty increases risk.

The foundational geopolitical concern is with the United States trade policies. There is worry that the new policy is creating an environment which will not only decouple the world economy, but might force businesses to choose between the approach used by the United States and that used by China. This change in United States foreign policy, as far as respondents are concern, make it harder to know who will end up winners and losers. Seventy-eight percent of the respondents expect economic confrontation to increase in the short term.

The strength of the concern over these risks can be seen in Table 2 below.  But more importantly there is a substantive difference in the perceived immediate risks between the younger and older generation.

Global Shapers vs. Multi-stakeholders

Table 2 shows the top five risks by percentage for the younger generation (Global Shapers) and Older generation (Multi-stakeholders).

Table 2

As can be seen, the younger generations rank environmental risks higher than the older group. What is most striking is that Economic Confrontation, Domestic political polarization and Cyberattacks are among the top five risks for the older, but, not the younger generation. This is a major split in risk assessment. This split is even more dramatic in the view of the long-term risk of cyber-attacks. The older generation ranks cyber-attacks number seven in likelihood and number eight in impact.  The younger generation lists cyber-attacks ten in both cases.

Assessment

It is worth taking a step back from the survey results and ask, So what? Let’s start with the environment. Issues related to environmental risks first appeared among the top five in 2011.  What has been done over the past ten years?   It is one thing to recognize or prioritize a risk.  Unless action is taken to deal with the risk it is merely talk.  But what risk is to be delt with? The younger generation lists different environmental risks.  These are: Extreme Heat Waves, Health impact by pollution, Water crisis and Uncontrolled fires.  These risks are interconnected, but the management of the individual risk is different.  Thus, a general blanket approach to environmental risk is not likely to have much of an impact.

Overtaken by Events

Saying something is likely to happen, does not always mean it is relevant to current events.  For instance, neither group rated pandemics or infectious diseases among the top ten immediate risks.  Nor did they list Pandemics or infectious diseases among the likely long-term risks.  Both groups did, however, rate Infectious diseases among the long-term risk with high impact.  The older group ranked Infectious diseases number ten.  The younger group ranked it number nine.

Thus, the top movers and shakers in the world of business and politics did not rank Infectious diseases as a short-term risk and ranked it low on a long-term likely scale.  How do you square those rankings with the Coronavirus? This Infectious disease is not only a short-term problem, it is an immediate problem.  For instance, China has locked down 13 cities. No one is supposed to get in or out. The virus has spread to at least 30 countries, including the United States. Moreover, the number of cases continual to increase.  Because of the interconnected global economy, the economic impact of this pandemic is unknown.  But it will probably be extremely devastating, since the manufacturing centers for major product like I Phones, penicillin, Aspin and other products and medicine are in China and shut down.

It is easy to identify risks. It is hard to determine when a risk event will occur. It is harder to manage and have a significant impact on that risk.  It means that when assessing the results of a risk survey the reader needs to be aware of the focus of the survey.  The World Economic Forum Annual Risk Survey asks questions on broad global risks.  Another survey might ask risk questions different. For instance, North Carolina State University conducts an annual survey of CEOs. It granulates the questions.  It lists three levels of risk, macroeconomic, strategic and operational. The 2020 survey lists the following operational level risk.  “Uncertainty surrounding the viability of key suppliers, scarcity of supply or stable supply prices may make it difficult to deliver our products or services at acceptable margins.” This risk is rated number 2 in the 2020 survey. While pandemics are not specifically mentioned as a cause of the supply chain disruption, the concern over the viability of a supply chain can lead to a review of possible causes.

Therefore, it is important to understand the focus of the survey. In the case of the World Economic Forum risk survey, it shows the attitude of the world’s movers and shakers’ towards general risks. Consequently, it provides some insight on current thinking.  It also provides a sense of group think. This group think did not conceive of the possibility of a pandemic that would shut down much of the world’s supply chain. Somehow the movers and shakers could not see that, with so many products or parts were being manufactured in China, a choke point had developed.  The Coronavirus and the resulting quarantine of Chines cities has dramatically pointed out this flaw in the global supply chain.

Take A-ways

First, in evaluating risks, the focus of the survey and types of questions makes a difference. Second, the World Economic Forum 2020 Risk Survey indicates that there is a difference in risk perceptions among the younger and old participants.  This generational split may impact the way risks are prioritized and delt with going forward. Third, the Coronavirus is going to have a significant impact on future risk rankings.  Pandemics is likely to be rated higher as is risks to the supply chain.  Finally, global supply chains must be reorganized, to avoid dependence on one country. The current supply chain structure has a major coke point – China.  With little or nothing going into or out of China, due to the Coronavirus, the supply of major medicines and products is shut off.  That impacts the bottom line of a lot of companies worldwide and threatens the health and well-being of millions of people over and above the Coronavirus.

Bio:

James J. Kline, Ph.D., CERM, is the author of numerous articles on quality in government and risk analysis. He is a senior member of the American Society for Quality and Six Sigma Green Belt with experience consulting for the private sector and local governments. His recent book, Enterprise Risk Management in Government: Implementing ISO 31000:2018, is available on Amazon. He can be reached at jeffreyk12011@live.com.