The future looks uncertain? - FEI Canada Documents/Global r… · The future looks... uncertain?...

The future looks... uncertain?The importance of understanding and managing emerging risksThe importance of understanding and managing emerging risks.

FEI Canada Vancouver Chapter Breakfast Seminar

February 28 2012February 28, 2012

Agenda

• Overview of Global Risks 2011 Sixth Edition

• Cross-cutting global risks

• Emerging risks to watch

• Key report features

• Risk management considerations

• Questions ??

© PowellDorian Services Inc. 2 © Management Development Associates (NA) Inc.

Global Risks 2011 Survey


Global risks landscape


Risks interconnection map


#1: Macroeconomic imbalances nexus


Source: World Economic Forum

Impact of macroeconomic imbalances

Sector Direct impacts Indirect impacts

Governments • Advanced economies: Tough budget • Lack of political will to address otherGovernments Advanced economies: Tough budget decisions in balancing stimulus and austerity; debt defaults, rescheduling or rescue• Emerging economies: Increased need to explore currency adjustment

Lack of political will to address other global challenges such as climate change

Society • Advanced economies: Low growth inface of severe austerity; inability to meetentitlement commitments• Emerging economies: Social adjustmentsth h hift t d d ti d d

• Welfare increases in China in thelonger term as a result of greaterreliance on domestic consumptiononce rebalancing takes place

through shift towards domestic demandrather than exports (need for redistributionand social security schemes to boostconsumption and lower savings)

Business • Protectionist (trade and financial) pressures • Realignment of business models asBusiness • Protectionist (trade and financial) pressures• Threat of collapse of banking system along with government finance; uncertainty

• Realignment of business models as global adjustments and retrenchment from globalization shift demand patterns


Levers to mitigate macroeconomic risks

Strengthening financial F ilit ti

• Better surveillance of the financial

Strengthening global

coordination

financial systems

Facilitating domestic

transitions

• Renewed leadership on promoting international exchange rate coordination

• Better surveillance of the financial sector, including systemically relevant players

• Tighter capital and liquidity ratios with higher ratios for systemically

• Advanced economies need to shift dependence from government-provided social i t i t i f• Cooperation on meaningful

growth policies that change the incentives for the use of income in both deficit and surplus countries

relevant institutions• Risk retention for securitization

(so-called “skin in the game”)• Improved transparency and

t t i k t i

insurance to private savings for pensions and healthcare services

• Deficit countries are required to take price and cost adjustments to enhance their competitivenesssurplus countries counterparty risk management in

“over-the-counter” derivative markets

p• Surplus countries need to

address weaknesses in private domestic consumption


#2: Illegal economy nexus



Impact of illegal economy activities


Governments • Weakened institutions/undermining and • Decreased regional investmentsGovernments • Weakened institutions/undermining andcorruption of the rule of law• Erosion of civil service function/capture ofstate institutions by corruption• Lack of continuity in policies affecting

• Decreased regional investments• Shift of power to disruptive groups

business• Small tax base/loss of revenue• Exodus of capital• Threats to political stability

S i E i f t t i bli i tit ti R d ti i t iSociety • Erosion of trust in public institutions• Potential for draconian responses that limiteconomic opportunity (stricter migrationpolicies)• Brain drain / skill depletion from emigration

• Reduction in tourism• Destruction of biosphere throughunregulated activities• Criminalization/marginalization ofsegments of the population

Business • Increased transaction costs• Lost legitimate sales• Deterred/appropriated investments• Exposure to threats, bribes and reduced

• Higher costs of capital• Pressure to participate in corruptpractices through perceivedcompetitive disadvantage


security of personnel

Levers to mitigate illegal economy risks

Increased d d id

Reducing idemand side

interventioneconomic disparity

• A greater understanding of the human and economic impact of engaging in illicit trade through ethics training and constructing

• Invest in universal education, equipping populations with the knowledge and skills to contribute fully to economic activitynew norms

• Reduction of profits on offer to organized crime by bringing trade within the framework of the law

activity• Make investments that attempt

to correct for structural unemployment should be investigated.law

• Reframing corruption from an issue of compliance to an issue of risk

investigated.


#3: Water-food-energy nexus




Impact of water-food-energy risks


Governments • Stagnation in economic development • Increased social costs linked toGovernments • Stagnation in economic development• Political unrest• Cost of emergency food relief• Significantly reduced agricultural yields• Threats to energy security

• Increased social costs linked toemployment and income loss asagriculture is negatively effected• National security risks/conflict overnatural resources

Society • Increased levels of hunger and poverty• Increased environmental degradation• Severe food and water shortages• Social unrestF d i ik

• Migration pressures• Irreparably damaged water sources• Loss of livelihoods

• Food price spikes

Business • Export constraints• Increased resource prices• Commodity price volatility as shortages

• Lost investment opportunities

• Commodity price volatility as shortagesripple through global markets• Energy and water restrictions


Levers to mitigate water-food-energy risks

Integrated and

Regionally-focused

infrastructure

• Multi-stakeholder coordination

multi-stakeholderresource planning

infrastructuredevelopment

Market-led resource pricing

• Development of high-level commissions that cut across government departments, stakeholders and country

on regional infrastructure investment could significantly enhance resilience with regard to food, water and energy security

• The cost of local impacts (eg, long-run social and environmental costs of resource exploitation) and global impactsstakeholders and country

representatives could improve public-sector-led governance, planning and information flows

security exploitation) and global impacts (such as climate change through carbon emissions) should be included in resource pricing

• Market prices may also attract private investment in infrastructure that can better preserve the scarce resources currently being depleted


currently being depleted

Levers to mitigate water-food-energy risks

Community-level Technological yempowerment and

implementation

gand financialinnovation

• Engaging, empowering and incentivizing local actors at the community level to ensure that those actually using core

• Continued research and investment in transformative technologies and risk management tools Ensuring that those actually using core

resources are also the guardians of their sustainable consumption

• Proper implementation of

such tools are locally appropriate and broadly adopted is key to their success

• Innovative financial risk management initiati es that arep p

policies which aim to manage food, energy or water resources

management initiatives that are integrated with technical solutions


Emerging risks to watch

Resource security Cyber security

Retrenchment from globalization

D hi

from globalization

Weapons of mass destruction

Demographic challenges


Key report features

#1: Interconnections between risks require us to better understand the systems behind risks as well as the risk context.y

#2: With global risks playing out both at the global and national levels and different stakeholders being affected in different ways theand different stakeholders being affected in different ways, the world faces a significant challenge in coordinating national and global responses.

#3: While in an increasingly turbulent global environment there is the temptation to always focus on the most recent risk event, it is important to take a long-term perspective to risk assessment andimportant to take a long term perspective to risk assessment and response.


Resilience to risk

COMMUNICATE INTENTIONSClarify corporate policyClarify corporate policy

Strengthen risk awarenessIntroduce risk management procedures

Risk control

DETERMINERISK PROFILE

verification ofresults

I f ti &

Prevent

Reduce

Information &communication

M i i f

Risk identificationand analysis

i k

Lay-off

Accept

Monitoring forearly warning

Risk assessmentResidual


Source: Resilience to Risk, Cleary & Malleret

Resources

Interactive website:• http://www weforum org/globalrisks2011http://www.weforum.org/globalrisks2011

Reading:R ili t Ri k (Cl d Thi M ll t 2006)• Resilience to Risk (Cleary and Thierry Malleret ,2006)

• “A Hidden Fiscal Crisis?”, Finance and Development (Kotlikoff, September 2010)

• Learning from Catastrophes (Kunreuther and Useem,2010)• The Future of the Global Financial System: A Near-Term Outlook and

Long-Term Scenarios (World Economic Forum, 2009)


Contact

Lisa Dorian, CA.CIA, CPA (IL), CRMA, , ( ),

[email protected]

(778) 588 ‐ 7265(778) 588 7265


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