The World Economic Forum released it Global Risks Report for 2018 earlier this month

The World Economic Forum released it Global Risks Report for 2018 earlier this month

As the world's movers and shakers gather in Davos this week for the annual meeting of the World Economic Forum, Ben Cooper takes an in-depth look at the organisation's latest Global Risks Report. This year's report identifies environmental and cybersecurity issues, geopolitical tensions and economic inequality as predominant threats to global corporations, in spite of the global economic recovery now underway.

After a year that has witnessed the escalating impact from extreme weather events, the first rise in global CO2 emissions for four years and the withdrawal of the world's largest economy from the Paris climate change accord, it is no surprise to see environmental issues emerge as the predominating concerns in the 2018 WEF Global Risks Report. That said, there are a number of underlying issues that are offsetting the generally-positive global economic outlook.

  • Environmental concerns lead poll

The increasing importance attached to environmental risks is vividly reflected in the Global Risks Landscape, a matrix plotting responses to WEF's Global Risks Perception Survey of almost 1,000 decision-makers and experts from business, politics and civil society, regarding the likelihood and impact of some 30 global risks.

In fact, six of the nine risks appearing in the upper-right quadrant of the Global Risks Landscape - signifying they are rated higher than average for both likelihood and impact over a ten-year horizon - are environment-related. The other three are cyber-attacks, large-scale involuntary migration and inter-state conflict.

"All the environmental risks are considered as highly likely and potentially very impactful"

At the report launch earlier this month, Margareta Drzeniek Hanouz, head of economic progress at the WEF, said: "What's striking this year is that all the environmental risks are in the upper-right quadrant, so they are considered as highly likely and potentially very impactful, and this is a new finding this year."

Extreme weather events are rated as the highest risk in terms of likelihood and second in terms of impact, as was the case in last year's survey. Natural disasters rank second in terms of likelihood and third in terms of impact, while failure of climate change mitigation and adaptation is ranked fourth in terms of impact and fifth in terms of likelihood. The other environment-related risks scoring above average on both impact and likelihood are biodiversity loss and ecosystem collapse, man-made environmental disasters and water crises. 

  • Economic optimism constrained

Environment is one of four key areas of concern highlighted in the WEF report, along with the effects of inequality and unfairness, domestic and international political tensions and cybersecurity.

The report suggests concerns over risks in these four areas in particular are offsetting optimism created by the long-overdue global economic upturn. "Economic growth is picking up," the report states, "but 2017 was a year of widespread uncertainty, instability and fragility. The latest results of our annual Global Risks Perception Survey suggest respondents are pessimistic about the year ahead."

For the first time, the survey included a question specifically about expectations for the risk environment in the coming year. Only 7% of respondents said they expect reduced risk in 2018, with 59% anticipating an increase on 2017.

The survey also asked respondents to predict whether certain geopolitical risks would increase or decrease in the coming year, eliciting sobering results.

93% expect a worsening of "political or economic confrontations/frictions between major powers" in the coming year

Some 93% of respondents expect a worsening of "political or economic confrontations/frictions between major powers" in the coming year, while 79% see risks associated with "state-on-state military conflict or incursion" increasing, and 78% expect risks presented by "regional conflicts drawing in major power(s)" to be higher in 2018 than in 2017.

  • Multilateral institutions under threat

"Geopolitical risks are exacerbated by the continuing decline in commitment to rules-based multilateralism"

With Donald Trump set to address the WEF Annual Meeting in Davos today, what the report has to say about the risks of growing unilateralism has additional piquancy. "Geopolitical risks are exacerbated by the continuing decline in commitment to rules-based multilateralism," the report states, immediately referencing President Trump's decisions to withdraw the US from both the Paris climate accord and the Trans Pacific Partnership (TPP) trade deal.

Further underscoring its criticism of Trump's decision to follow through on "unilateralist campaign pledges", the report adds that agreements such as the Paris climate deal and TPP "remain in place and other states and non-state actors have sought to compensate for the waning multilateralism of the US".

Nowhere can this be more clearly seen than in the response to the US withdrawal from the climate accord last June. The report notes that several other major economies, notably China, reaffirmed their support for the Paris deal during the year. 

Meanwhile, many US businesses, cities and states publicly backed continued commitment to the Paris climate agenda. Among them were several beverage firms, including The Coca-Cola Co, Anheuser-Busch InBev and Molson Coors. "This kind of network of sub-national and public-private collaboration may become an increasingly important means of countering climate change and other environmental risks," the WEF report states, "particularly at a time when nation-state unilateralism appears to be ascendant."

However, in spite of the compensatory role companies can play, the majority of respondents expect further weakening of international alliances in relation to trade, security and climate change. 

Some 73% said they expect the risks associated with the erosion of multilateral trade rules and agreements to increase this year, while 67% anticipate a further loss of confidence in collective security alliances. Possibly reflecting the resolute response to the Trump decision on Paris, only 58% anticipate further erosion of global policy coordination on climate change in 2018.

  • Economic inequality an increasing risk factor

While economic risks have clearly declined in prominence in the survey, the report questions whether the declining scores for economic criteria are evidence of complacency. 

The report points to further economic pressures being created by intensifying patterns of automation, digitalisation and increasing protectionism

The generally-positive global economic outlook is not only offset by geopolitical and environmental risk factors but also by "underlying economic concerns", the report suggests. There are reasons to be cautious, it warns. In addition to certain ongoing economic risks, including potentially unsustainable asset prices and levels of debt, the report points to further economic pressures being created by intensifying patterns of automation, digitalisation and increasing protectionism. 

In particular, the report calls out economic inequality as a potentially disruptive risk factor. In fact, widening income and wealth disparity ranks third among the drivers of global risks over the next ten years.

Deepening economic inequality triggers other problems, such as high levels of personal debt and inadequate savings and pension provisions, but the report also emphasises its impact on social cohesion. "Norms relating to work are an important part of the implicit contract that holds societies together. If many people's hopes and expectations relating to employment are fraying, we should not be surprised if this has wider political and societal effects." 

Addressing rising inequality is a key topic in Davos too. "There are still serious concerns in societies about whether [global economic] growth is translating into broad-based progress in living standards. Inequality has been rising in the majority of countries over the last several years despite the fact that we have been on a positive trajectory in terms of growth," WEF Managing Board member Richard Samans said at the report's launch.

"We believe that society is telling us that there needs to be some rethinking and restructuring of our economic and growth model. In the global risks reports of the last couple of years, there has been a specific suggestion that there needs to be some structural improvements and reform of market capitalism to deal with some of the grumbling dissatisfaction in society about the failure of growth to diffuse as widely as it should in living standards."

At Davos, the WEF is launching a two-year global dialogue on the future of economic progress, which Samans described as "a clarion call" for thought leadership.

While it styles itself as a think-tank, gathering perspectives from diverse constituencies, the WEF is often characterised as an advocacy organisation with a defining aim of representing and furthering the interests of capitalists. Davos has been the scene of demonstrations and the organisation an attractive target for satirists, something its 'reforming capitalism' project may well ensure continues.

If the project were to be presented as the WEF's gift to the world, the humourists would indeed be kept busy. But, as a response to a raft of significant risks, the WEF's ambitious plans to rethink market capitalism have more credibility.

Click here for part II of just-drinks' review of the World Economic Forum's Global Risks Report 2018