The Global Risk Network (GRN), an initiative under the World Economic Forum (WEF), released its Global Risk Report 2010 today. The report is produced annually in conjunction with the WEF Conference in Davos and 2010 is the fifth year of the report.
This year, the report emphasizes the “interconnectivity” of global matters and the long-term view needed to identify and reduce major risks. The report sets the stage by noting that
the increase in interconnections among risks means a higher level of systemic risk than ever before. Thus, there is a greater need for an integrated and more systemic approach to risk management and response by the public and private sectors alike.
In a contrast to previous years, today’s report underscored that a long-term view is critical to predicting major exposures. Previous Global Risk Reports have not been as careful to clarify the timeline of the discussed exposures. The report comments that:
the biggest risks facing the world today may be from slow failures or creeping risks. Because these failures and risks emerge over a long period of time, their potentially enormous impact and long-term implications can be vastly underestimated.
Further, the 2010 document seeks to provide more pragmatic guidance for companies to try to address the risks reviewed in the report. A few points brought forward by GRN/WEC include:
Typically, risk is considered in terms of “impact and likelihood” based on internal consensus, often involving very little external or expert input [emphasis added]. Corporate risk assessments rarely consider a time frame beyond two to three years, or explicitly examine the long-term volatility introduced by risks to strategies with a five to 10 year execution horizon. Decision-making is further skewed by necessary focus on the reporting of short-term results and known or recent risks affecting the current period.
Further, research shows that relatively few companies effectively apply tools, such as scenario analysis, or effectively integrate risk data into long-term strategic planning.
…. institutions and governments collaborate to:
- Take a long-term approach to global risk identification, analysis, tracking and mitigation
- Use frameworks that reflect risk interconnections rather than silo approaches
- Address the need for more robust data on key risks and trends to be collected and shared in a coordinated manner
- Conduct cost-benefit analysis on risk solutions to improve fund allocation and better understand the long-term benefits of investment choices
- Track emerging risks and educate leaders and the public about real, rather than perceived threats
- Communicate clearly and consistently about the nature of threats and about strategies to manage and mitigate them
- Understand the influence of behavioural aspects of risk perception
Our experience with various client HSE risk frameworks mirrors a number of GRN’s points. Among our common observations:
- HSE risk assessments frequently rely solely on internal senior management views. Unfortunately, these views are not always consistent with operational reality in the field or trends outside the company. To generate truly valuable information, a risk assessment process should include senior management perspectives that are benchmarked against middle management directions, operations in the field and external emerging pressures.
- Traditional financial and cost/benefit analyses do not adequately evaluate risk reduction benefits. We find there are two primary reasons for this. First, the complete array of relevant costs and benefits are not typically captured. Second, the traditional view of short-term financial benefits tends to conspire with the internal “behavioural aspects of risk perception” to drive investment away from HSE risk assessment/management needs. These findings lead to Elm’s development of our HSE risk reduction financial metric Return on Investment of Loss Avoidance (ROIa©). Read more here.
The Global Risks report is produced by WEF’s Global Risk Network – a partnership of Citigroup, Marsh & McLennan Companies (MMC), Swiss Re, the Wharton School Risk Center and Zurich Financial Services.