What Are the Top Five Risks the World Faces in 2014?

 

Extreme weather events. Climate change. Cyber-attacks. Mounting rates of unemployment and under-employment. Growing income disparities. More than ever before, corporations and governments all around the globe are deeply concerned about enacting strategies that address and mitigate the sorts of occurrences that can cause significant negative impact for countries and industries for as long as ten years.

 

To address their concerns, the World Economic Forum (WEF), based in Davos, Switzerland, issued its “Global Risks 2014” report this week. Two of the report’s contributors — Howard Kunreuther, Wharton operations and information management professor and co-director of the school’s Risk Management and Decision Processes Center, and Erwann Michel-Kerjan, the center’s managing director — offered Knowledge@Wharton their assessments of the report’s major takeaways and the challenges that lie ahead for global risk managers.

Both Kunreuther and Michel-Kerjan are optimistic that the 2014 edition of the annually published report — titled, “Understanding Systemic Risks in a Changing Global Environment” — will contribute to a steadily growing understanding of global risks. “We have found that, because of a whole series of events that have happened in recent years, corporations are paying much more attention to issues of global risk and recognizing that risk management is something that they have to put on the table,” Kunreuther says. “From that vantage point, this report is something that [executives] have found very useful because it highlights not only what they may be thinking, but also what a [number] of experts around the world are thinking” across various disciplines.

Perhaps not surprisingly, perceptions about what constitutes a major risk have transformed rapidly in recent years. For example, the top five global risks identified in the 2014 Report are entirely different from the top five risks identified by executives, researchers and other experts who were surveyed in 2007, Kunreuther and Michel-Kerjan note. This year, the most likely five risks, ranked in descending order, were income disparity, extreme weather events, unemployment and underemployment, climate change and cyber-attacks. In 2007, the five systemic risks rated most likely were, in descending order, the breakdown of official information infrastructure, followed by chronic disease in developed countries, oil price shock, China’s economic hard landing and, finally, asset price collapse.

This year, the most likely five risks, ranked in descending order, were income disparity, extreme weather events, unemployment and underemployment, climate change and cyber-attacks.

When ranked in terms of their potential impact — rather than likelihood — the five highest-ranked risks for 2014 were also completely different from those identified by respondents in 2007. In 2014, the five most impactful risks were fiscal crises, followed by climate change, water crises, unemployment and under-employment, and critical information infrastructure breakdown. Not one of these five risks was ranked as having the most potential impact in 2007. The 2007 top-five list began with asset price collapse, followed by retrenchment from globalization, interstate and civil wars, pandemics and, finally, oil price shock.

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According to Kunreuther, the disparity is “extremely interesting” because “it highlights one of the major challenges one faces as one begins to look at the likelihood and consequences” of various risks. On the likelihood side, there is the “broader challenge of short-term thinking and myopia” whenever a threatening event occurs, he says. At the time such events occur, there may be good reason to believe they will continue to have an impact, such as the prominence of an oil and gas price spike on the lists in 2008 and 2009. “It may be right that attention has to be paid [to these challenging events when they happen], but … over a period of time, as with asset price deflation, that [event] may not emerge as [a major risk] from the point of view of likelihood or even consequences.”

Other kinds of risks that may not always appear in the top-five lists are nevertheless widely recognized as “going to be around for a while” by experts despite their absence, Kunreuther adds. In 2011, climate change was ranked fifth for likelihood and second for impact, but dropped off the list entirely until 2014, when it re-emerged — in part because of the destructive power of Hurricane Sandy. “Climate change is recognized, in general, as a long-term problem, but it did not have a lot of salience in 2007 and 2010” in the absence of dramatic news events, he notes. 

Connecting the Dots
The 2014 report also highlights the critical issue of global interdependency. It includes a “Global Risks 2014 Interconnections Map,” which demonstrates that “the numerous and complex interconnections between [risks] can create consequences that are disproportionate and difficult to predict.” The map attempts to connect the dots by identifying and visualizing the underlying patterns between various risks and effects. The goal is to understand the impact of systemic risks in order to mitigate them “by identifying the transmission channels between risks and potential second- and third-order effects.”

Importantly, Kunreuther and Michel-Kerjan point out, these interconnections “do not represent direct casualty,” but are likely to represent indirect impact or mitigation trade-offs.

“Risks should not be considered in silos…. Just because you are an environmental [specialist], that doesn’t mean you should be unconcerned about fiscal issues.”–Erwann Michel-Kerjan

The report also distinguishes between the way male and female respondents view various risks. Studies show “that women are more likely to be concerned about environmental issues,” the report notes, while adding that “some argue this reflects a tendency for women to think more [about] the long term than men, and to have a more network-focused rather than linear approach to problem-solving.” Moreover, the report adds, “the younger generation” – identified as aged 30 or below – “is more concerned about the potential impact of global risks, while perceptions of likelihood show no such consistent deviation.”

Younger individuals also responded that an oil-price shock, the loss of biodiversity and collapse of the ecosystem, and the occurrence of various natural catastrophes were “more likely” than did those respondents who were over 30 years of age. Younger individuals also considered such events “more impactful” if they were to occur.

For his part, Kunreuther notes that “interdependency and the challenges that we face with interdependency” are a major theme of the 2014 report. For example, he says, “climate change is a global risk – everyone has to pull their weight. [Addressing it] requires the global community to try to take some steps, but [we] also have some real challenges with respect to doing that.”

Michel-Kerjan points out that in the case of systemic risks, such as asset price collapses, “whether it started in the U.S. or in Asia, everyone will be interconnected.” He adds that the 2014 report is hardly the first to stress that “risks should not be considered in silos…. Just because you are an environmental [specialist], that doesn’t mean you should be unconcerned about fiscal issues.” However, he concedes that such behavior requires a significant change in mindset. Numerous other reports have called for people not to “think in silos, but that is hard to do. People love boxes,” he says. 

Diverse Strategies
Every corporation has its own set of agendas, depending on what kinds of challenges it faces, notes Kunreuther. “They are going to treat this report differently because they focus on the things that are of concern to them. A company that might be involved in supply chain problems will think about interdependency in a very different way from a company that is more self-sufficient. There are companies associated with issues of carbon emissions, climate change and greenhouse gas reduction, for example, that are taking a leadership role in terms of [what] we should do” to address those risks.

Kunreuther adds that the 2014 report doesn’t “talk about exactly what these companies should be doing [to mitigate risks]…. It is not designed to be prescriptive.” Instead, it provides a high-level list of some of the strategies that companies have been pursuing, “guided by [the] firm’s risk appetite [and] the level of risk an organization is prepared to accept to achieve its objectives, such as profitability and safety goals,” according to the report.

According to the report, income inequality is “most likely to cause serious damage globally in the coming decade.” Kunreuther points out that the problem can’t be isolated: Developed as well as developing economies will need to take steps to deal with issues of income inequality and affordability. Because of the interconnected nature of the potential risks the report highlights, “firms are trying to take a much more forward-looking approach – and to develop long-term strategies for dealing with them, which they had not necessarily been doing five years ago,” Kunreuther says. “And so, we are more optimistic on two levels. First, we are hearing more about firms doing this. Second, we are also recognizing that – from other studies – firms want to be given some benchmarks as to how they could go forward.”

10 Sustainable Business Stories Too Important to Miss

by Andrew Winston

Somehow it’s already year-end, a time to look back and try to make sense of what’s happened. Creating any “top” list of stories from 12 months is nearly impossible. But as I’ve done for the last 4 years, I’ll attempt to summarize some of the latest stories about the big environmental and social pressures on business, and how some innovative companies are dealing with them.

This year, like recent years, saw some continuation of big trends: with a few exceptions, the international policy community keeps failing to come to a meaningful agreement on climate change; carbon emissions just keep rising; transparency is increasingly unavoidable and keeps gaining technology-enabled traction; pressure from big companies on their suppliers keeps going up.

So what’s really new this year? Let’s dive in.

The Big Picture

1. The science of climate change gets clearer: the IPCC lowers our carbon “budget.”
The Intergovernmental Panel on Climate Change (IPCC) issued its wonky, but readable, Summary for Policymakers (a precursor to the full 2014 report). The report expresses “near certainty” that humans are causing climate change and calculates how much more carbon we can “safely” put in the atmosphere and hold to the 2-degree warming threshold that the world’s leaders have agreed to (and some scientists are suggesting that even the 2-degree threshold is too high).

The short story is that we have less room than before. PwC’s annual Low Carbon Economy Index report concluded that we must lower global carbon intensity (the amount of carbon produced for every dollar of GDP) by 6% per year until 2100, a percentage point lower than last year’s report recommended.  On the upside, similar calculations from WWF and McKinsey suggests that this pace of change –they endorse a 3% reduction in absolute emissions per year through 2020 – will actually be very profitable.

2. The reality of climate change and pollution get scarier: Australian heat, Philippine devastation, and Chinese air pollution all break records.
The models and carbon budgets aside, the weather this year got even more extreme, helping make the case for action in a more visceral way. In January, Australia’s meteorologists had to add new colors to weather maps to deal with temperatures ranging up to 54 degrees Celsius (129 degrees Fahrenheit). And in November, after the Philippines faced the most powerful storm ever recorded to hit land, some climatologists suggested we add a “Category 6” to the top end of the storm scale.

While it’s impossible to tie any single weather event to climate change, the complicated correlation got clearer this year. The National Oceanic and Atmospheric Administration concluded that “high temperatures, such as those experienced in the U.S. in 2012, are now likely to occur four times as frequently due to ­human-induced climate change.”

In parallel, China’s air became, at times, dangerous and unbreathable. Several cities experienced days with small-particle air pollution running 25 to 40 times higher than the World Health Organization’s recommended limit.  This may seem like a regional story, but it has global ramifications for manufacturing, consumer goods, the energy industry, and much more.  The world’s most populous country is taking increasingly drastic action, such as slashing Beijing’s new sales quota for cars by 40%.

3. The clean tech markets keep growing fast: three of the world’s biggest economies — the U.S., Germany, and Walmart — add lots more renewable energy.
In October, 99% of the new energy added to the grid in the U.S. came from renewables (solar alone was 72%). Germany keeps breaking its own records, with wind and solar providing 59% of the country’s energy one sunny day in October. And America’s wind power has quadrupled over the last 5 years; wind is now generating enough electricity to power the state of Georgia.

In addition, electric and hybrid cars are about 4% of US auto sales now, a doubling of market share in the last couple of years. Companies are increasing investments as well. Walmart, already the largest private sector buyer of solar power in the US (with more solar capacity than 38 U.S. states), committed to a 600% increase in renewable energy by 2020.

4. Deep concerns about labor conditions, wages, and equity take root: From tragedies in Bangladeshi apparel factories to minimum wages in the U.S.
Travesties like the death of more than 1100 workers at the Rana Plaza apparel factory in Bangladesh are increasingly unacceptable to the buying public. And it’s getting harder to hide how connected we all are to these workers. When the news hit about the loss of life, front pages around the world included the names of major brands that depended on the factory to make their goods. A startup called Labor Voices is now collecting information on working conditions in Bangladesh and elsewhere in a shockingly simple way: by giving workers a number to call from their cell phones, which everybody now has.

European companies are doing more than U.S. peers, at least publicly, to commit to higher safety standards. Swedish retailer H&M recently said it would pay a “living wage” to 850,000 workers in its supply chain by 2018 – a somewhat vague, but important announcement.  And to be fair, while U.S. companies haven’t been as clear, Walmart has contracted with Labor Voices to gather data on its 300+ Bangladeshi suppliers and subcontractors.

On the other side of the ocean, though, Walmart, McDonald’s, and many others are facing increasing challenges about minimum wages. Watch this space, as it seems unlikely that this debate will go away.

5. Food and food waste gets more attention, debate, and innovation: Can cows save the world, or should we make meat in labs?
The level of concern about how we’re going to feed 9 billion people by 2050 is rising. Food waste also got more attention: a UN report estimated that the world throws out $750 billion worth of food annually.  Food is too big a topic to summarize, but a few stories grabbed my eye this year. Fenugreen, a smart startup that won the Sustainable Brands Innovation Open in June, sells sheets of paper made with natural ingredients that fight food decay – they can keep fruit and veggies from going bad 2 to 4 times longer than they would last normally.

On a different front, Biologist Allen Savory made a splash with a much viewed TED talk about how grazing cattle in a way that fertilizes land and sequesters carbon can fight desertification and climate change. His theory is under attack, at least to the extent that his method could make a significant dent in our climate problem. Wherever the science on this ends up, it’s an important discussion that brings more focus to systems thinking and to the nexus of food, energy, and water.  Finally, a quirky, totally different meat story was fascinating. Billionaires Bill Gates and Sergey Brin are funding experiments to grow meat in labs, a process that – once people get past any “ick” factor – could greatly reduce the footprint of producing meat-based protein.

What Companies Are Doing

6. (Some) businesses get off the sidelines in the climate policy fight: Hundreds of companies sign onto the Climate Declaration.
Started by the NGO Ceres, as part of its Business for Innovative Climate & Energy Policy (BICEP) initiative, the Climate Declaration is a broad statement of intent that acting on climate will be good for our economy and society.  A large range of leading companies have signed on including Diageo, ebay, EMC, Gap, GM, IKEA, Intel, Microsoft, Nestle, Nike, Portland Trailblazers, Starbucks, Swiss Re, Unilever, and many more.  The Declaration itself is directional and not as specific as what Ceres and a subset of these signatories advocate for as part of BICEP’s work (like pricing carbon and aggressive energy efficiency programs). But it’s a very good start and demonstrates that the business community is not against tackling climate change.

In related news, Accenture produced a fascinating survey of 1000 CEOs around the world, in which a surprising 83% agreed that government should play a critical role in enabling the private sector to advance sustainability. And 31% even supported “intervention through taxation.” In a world where business generally fights all regulations and government interventions, it’s astonishing that one third of global CEOs basically said, “tax us.”

7. Companies are aiming higher, for themselves and their partners: Dell, Coca-Cola, Lego, and many more set very aggressive environmental and social goals.
Goals are not the same as outcomes but they matter a lot – they set the bar within sectors, driving competition and performance.  As part of its 2020 Legacy of Good Plan, Dell said that it’s aiming to get a 10-fold multiple of good (reduced footprint, for example) from its technologies versus the impacts of making them (mimicking BT’s earlier 3:1 “Net Good” goal).  More specifically, the company pledged to reduce its greenhouse gases by 50% and product energy intensity by 80%.

Coca-Cola launched its own 2020 goals including reducing value chain carbon emissions by 25% (per drink), recovering 75% of bottles and cans, and replenishing 100% of the water the company uses. And Lego just announced its intention to use 100% renewable energy by 2016.  A few companies have already made incredible progress, including Diageo, which, I reported earlier this year, cut its North American GHG emissions by nearly 80%.

In fact, 75% of the world’s largest companies now have multiple environmental and social goals in place (see my new website, www.pivotgoals.com, a searchable database of 2500 environmental and social goals set by the world’s largest companies). In addition, my research shows that more than 50 of the top 200 companies have even set carbon goals in line with PwC’s 6% per year reduction recommendation.

A few companies have begun to extend their goals to their suppliers, a form of what I’m calling “de facto regulation.” Walmart is phasing out 10 toxic chemicals in the products on its shelves, and HP set a carbon reduction goal of 20% for its supply chain.

8. Sustainable companies are winning the talent wars: Unilever ranks 3rd in LinkedIn’s list of in-demand employers.
Just consider LinkedIn’s top 20 most in demand companies (in order): Google, Apple, Unilever, P&G, Microsoft, Facebook, Amazon, PepsiCo, Shell, McKinsey, Nestlé, Johnson & Johnson, BP, GE, Nike, Pfizer, Disney, Coca-Cola, Chevron, and L’Oréal. The tech companies make sense given the platform (and they’re cool brands). But the rest are perennially in-demand employers, such as big consumer brands and top destinations for MBAs (McKinsey) and engineers (Shell).

But what’s surprising is Unilever’s rank — for a company not nearly as well known as the others, it came in just behind two of the hottest, most valuable companies in the world, and ahead of much better known brands like Disney, Nike, and Coca-Cola. Executives at Unilever credit their ranking to the company’s known leadership on sustainability. It’s hard to argue the point.

9. Systems innovation starts to take root: NIKE, NASA, USAID, and the Department of State create LAUNCH.
LAUNCH is an initiative to identify and accelerate innovations that help solve global problems with water, health, energy, waste, and systems. This program is new so it’s unclear what the impact will be, but it’s an interesting and indicative story for two reasons. 

First, look at the partners — what a weird, wonderful mix of business, government, and scientific organizations. Second, the goal is really systems change, and if we’re going to solve the mega challenges in our midst, we need to work across value chains and traditional lines.

10. Better tools for companies to assess “materiality” get closer: SASB releases its first sustainability accounting standards.
The Sustainability Accounting Standards Board has been plugging away, drawing together executives from the world’s largest companies to develop the right sets of questions – specific to each sector – that will help leaders identify which environmental and social issues are really material to their business. We’re very early in this journey, but SASB produced the first set of guidelines for one sector (health care). Watch this space.

2014 and Beyond

• Will the divestment movement continue to gather steam and put significant pressure, either financial (unlikely) or moral (much more intriguing), on fossil fuel companies?
• Will all the talk about building a circular economy gain mainstream acceptance?
• Will we get better at valuing natural capital (and will companies and markets care)? It certainly garnered lots of attention this year, with new estimates of the damage the global economy does to natural assets (trillions), new tools to measure natural capital, and an important new book from former Goldman partner and CEO of The Nature Conservancy, Mark Tercek.
• Can challenges to our consumption-driven model go gain currency? Patagonia continues to launch programs like its Responsible Economy initiative and a backlash to Black Friday, “Worn Wear,” which suggests that we should enjoy what we already own.
• Will the resilience push take hold? New York City released a $20 billion plan to get the city ready for more extreme weather — will companies embrace the risk-reduction benefits of different thinking and planning?
• Finally, why haven’t more companies followed some of the recent sustainability leaders? Paul Polman at Unilever stopped providing quarterly guidance a few years ago so the company could focus on real value creation. And Microsfot and Disney remain really the only two big companies charging their own divisions a carbon fee (yes, as CDP recently reported, and the New York Times put on the front page, 29 large companies now use some kind of internal pricing for carbon. But most of these are “shadow prices,” in use for years, not actual fees. Why has the pace of change lagged the urgency of our mega challenges? Will more than a small number of companies embrace a much deeper change to business as usual?

So it’s been a mixed year, as I suppose all years are, but I remain optimistic that greater stories of change are coming. Have a very happy, healthy, and sustainable 2014!

Andrew Winston

Andrew Winston is the co-author of the best-seller Green to Gold and the author of Green Recovery. His forthcoming book, The Big Pivot, will be released in April. He advises some of the world’s biggest companies on environmental strategy.