Financial and economic crises are no longer the world’s biggest threats. In 2015, geopolitical tensions and societal instability dominate the World Economic Forum’s list of top global risks.
Multinational companies especially are likely to factor the shift in the global risk landscape into their forecasts, annual operational objectives, and strategic plans, said Jim Traut, CPA, CGMA, an enterprise risk management consultant and president of Traut Consulting.
As former head of enterprise risk management at a Fortune 100 company, Traut regularly distilled the WEF’s annual list of top global risks into a briefing for the multinational’s board of directors. Boiling down the 2015 list in a similar way, Traut zeroed in on how he sees the changes affecting business.
“In 2008 and 2009, the world was unified; certainly the central banks [were]; everybody was working together,” Traut said. “Now, it feels like a lot of individual countries. [The US] is doing what we want to do. The Canadians are doing what they want to do. The Russians do what they want to do. It’s worth thinking about [enterprise risk management] from the level of instability that’s out there.”
The global risk landscape the WEF lays out for 2015 shows interstate conflict as the most likely global risk and also one of the five risks with the biggest potential impact. The four other most likely global risks are:
- Extreme weather events.
- Failure of national governance.
- State collapse or crisis.
- Unemployment or underemployment.
Except for water crises, which the WEF determined is the global risk with the biggest impact, much of what threatens the world most in 2015 could trigger central bank policies specific to individual countries, Traut said. For multinationals with international supply chains, he said, that means fluctuating costs of currencies is a big risk.
Case in point: the Russian rouble
Renewed fighting between pro-Russian rebels and Ukrainian military forces in eastern Ukraine ended a cease fire and prompted NATO ambassadors to meet. The long-simmering interstate conflict flared up at a time when falling crude prices had already helped lower the sovereign credit rating of Russia, a country heavily dependent on oil and gas exports and vulnerable to energy price shocks, the WEF’s sixth biggest risk by impact this year.
Russia’s central bank recently changed regulations and decided to use lenders’ credit scores and securities from before March 1st 2014, a date that precedes Russia’s incursion into formerly Ukrainian Crimea. That regulatory change made it easier for Russian lenders to meet capital requirements when Standard & Poor’s downgraded Russia’s sovereign credit rating to below investment grade. Still, the rouble fluctuated heavily following the downgrade.
Considering that the euro has been dropping in value and the US dollar has been getting stronger, Traut said, “if you’re an international company, you’ve got to be thinking [whether you are] sourcing in roubles, [US] dollars, [British] pounds, or euros.” The decision could mean significant changes in the cost to manufacture, he added.
Six ways to manage potential threats
Several of the WEF’s top global risks, which leaders from business, academia, and politics helped establish, overlap with the highest global concerns executives voiced in a 2014 WEF survey.
Fiscal crises in key economies topped the list of highest concerns for doing business, followed by failure of a major financial mechanism or institution. The effects of an oil price shock on the global economy ranked third. Liquidity crises came in fourth, and profound political and social instability was fifth.
To manage potential threats, companies worldwide use the WEF information to:
- Develop scenarios.
- Prepare crisis exercises.
- Assess vulnerabilities and their potential for cascade effects.
- Inform “sense-making” exercises in crisis situations.
- Train top decision-makers.
- Model risk external to the direct business environment.
Related CGMA Magazine content:
“Five Likely Threats That Should Keep Global Leaders Up at Night”: Threats that were keeping top experts and high-level leaders up at night in 2013 were the risks that are beyond any one company or even one nation to handle. A report from the 2013 World Economic Forum listed the most likely threats with the biggest damage potential.
“Five Ways to More Effectively Manage Supply-Chain Risk”: Most companies consider managing supply-chain risks important, but that doesn’t mean they’re all good at it. Here are five ways to boost your company’s supply-chain risk management.
—Sabine Vollmer (email@example.com) is a CGMA Magazine senior editor.