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Executive Perspectives

EXECUTIVE PERSPECTIVE: Global Environmental Risks Are Keeping Davos Leaders Awake at Night

Source: WRI

The answer? Mounting environmental threats.

2 Takeaways from the Global Risks Report

First, a majority (five of eight) of the risks respondents said were both most impactful and most likely to happen were environmental risks. These were extreme weather events, failure of climate change mitigation and adaptation, man-made environmental disasters, biodiversity loss and ecosystem collapse, and natural disasters. A sixth, water crises, is labeled by the WEF as a societal risk, but it can also be considered an environmental risk. In other words, even while geopolitical and cyber risks are increasing and domestic politics in many countries are in turmoil, the leading decision-makers in business and government remain most concerned about the cluster of risks connected to the environment—many of them related to climate change.

One could argue that this is just a fluke, the product of a terrible 2017 of Biblical storms, droughts, wildfires and floods, combined with the “Trump effect” that rattled global climate diplomacy. But that’s the second interesting insight that emerges from this year’s report: Concern about environmental risk has been growing steadily and consistently for the last several years, and it has now reached a new high.

Although the Global Risks Report has been produced every year for more than a decade, environmental risks didn’t register at all in the top-five rankings of either impact or likelihood until 2011. After that, something in the music changed. Water crises have been named as a top-five risk in terms of impact every year since 2012; climate change has been a top-five risk every year since 2013. In terms of likelihood, extreme weather events have been a top-five risk annually since 2014. And this year, for the first time, environmental risks are a majority of the top-five risks in in both the impact and likelihood categories.

To be sure, this is not a scientific survey. The nearly 800 people surveyed represent the WEF’s idiosyncratic network, which is primarily male (70 percent), heavily European (43 percent) with a strong dose of North Americans (22 percent), and concentrated in the private sector (49 percent). However, the Global Risks Report does get plenty of air time, and it helps color the debate in Davos and beyond. Also, more than most other gatherings, Davos brings together leaders that are uniquely influential in terms of helping tackle many of these risks.

Rethinking Financial Risk

The Global Risks Report findings are consistent with other trends in financial markets. For example, in its 2017 ESG Trends to Watch report, the market index and investment analysis company MSCI noted that investors are beginning to pay more attention than ever to physical risk – the risk that environmental shocks disrupt supply chains, power plants and productive activity in general, causing massive losses for companies and investors. Water risk, in particular, is blinking red in many investors’ dashboards. For instance, recent research from WRI shows how water stress is already disrupting power generation in India, imposing losses as power plants shut down temporarily for lack of water.

Central bankers, some of whom will likely be in attendance at Davos, are also increasingly worried about environmental risk. The Bank of England documented its concerns about climate risk posing a challenge for UK insurers. The Dutch central bank has called on financial institutions in the Netherlands to factor climate risk into their thinking.

In sum, even though cyberattacks, nuclear weapons, terrorism and superbugs weigh on the minds of Davos decision-makers, environmental risks have become firmly nested at the center of their nightmares. Perhaps more than his antipathy for global trade and finance, it is his dismissal of environmental risk that will most isolate Trump from his Davos colleagues.

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