Global Risks and Risk Management - Connexis · Peloponnesian War, Greek city states requested military assistance from Sparta, a leading city state that had provided the leadership

Global Risks and Risk Management

Copenhagen

September/October 2014

1

EKF Strategy Development WS 1Copenhagen Sep/Oct 2014

Slide 2

Table of Content

EU Environmental Policy….3

WEF Global Risks….14

IRGC Emerging Risks….21

IRGC Systemic Risks….26


EU Environmental Policy

Slide 3


EU Vision, Policy and Targets

Vision: In 2050 we live well, within the planet’s limits.

Our innovative, circular economy

wastes nothing

manages natural resources sustainably

protects, restores and values biodiversity

to enhance our society’s resilience, integrating

environment, society and economy1.

Policy Priorities2:

Climate Change

Biodiversity Loss

Sustainable Resource Use

Environmental Pressure on Health

EU 7th Environmental Action Program3

Slide 41….. SOER 2015, p.7 2… SOER 2015, p.10 3….SOER 2015, p.14 4… SOER 2015, p. 14

4


Systemic Nature of Many Environmental Challenges

Despite many successes of EU environmental policies since the 1960, “we struggle with addressing long-term, systemic environmental challenges.1”

1….. SOER 2015, p.11 2… SOER, p.10 3… SOER 2015, p.18

1. Directly & indirectly impact human health & well-being (e.g. harmful substances, floods/droughts)

2. Linked with our own Consumption & Resource Use (food, water, energy & materials i.e. construction, rare earth, fiber, wood, chemicals & plastics): use is essential for human well-being. Over-use damages the eco-systems that provide them

3. Evolution depends on Global and European Trends (demographics, economic growth, trade patterns, technological progress, global governance systems)

Characteristics of Systemic Environmental Challenges3:

Slide 5

2


Our Own Consumption Drives The Challenges

EU Consumption Patterns Impact EU & Global Environment1:

Production Pressures: Resource use, emissions & ecosystem degradation within EUConsumption Pressures: Resources & manufacturing emissions embedded in production outside of EU

Example GHG-Emissions: Production emissions decrease substantially (1995-2011)Consumption emissions increase!

Three Primary Consumption Groups Drive Impact2

(54% of GHG emissions, 63% of acidity emissions, 61% of materials consumption)

• Food (incl. Agriculture, Fishing)• Housing & Construction• Mobility, Transport

Additional Drivers: Electricity, Trade, Maintenance & Repair, Forestry

Slide 61….. SOER 2015, p.23 2… SOER, p.24 3… SOER 2015, p.18


Three-Tier Response

Consequence: EU Policy Packages with Three-Tier Response

1. General Quality Standards for coherent policy approach

2. Corresponding Overall Targets

3. Specific Policies for Sectors and Drivers

1… SOER 2015, p. 11

2… EU Target:20% less GHG emissions compared to 1990, 20% renewable energy share, 20% better energy efficiency

3… http://ec.europa.eu/clima/policies/transport/vehicles/cars/index_en.htm

1

2

Examples for Three-Tier-Response

Slide 7

3

http://ec.europa.eu/clima/policies/transport/vehicles/cars/index_en.htm


Short, Medium & Long Term Targets for EU Environmental Policy

Slide 81… SOER 2015, p. 13


10 Global Megatrends

Global Megatrends as seen by the EU1

Slide 91… SOER 2015, p. 20


10 Global Megatrends And Their EU Impact1

Slide 101… SOER 2015, p. 23


WEF Global Risks 2014

Slide 11


Systemic Risk

Slide 12

Definition

Systemic risk is the “risk of breakdowns in an entire system, as opposed to breakdowns in individual parts & components1”.

Characteristics2

– Modest tipping points, combining indirectly to produce large failures

– Risk-sharing or contagion, as one loss triggers a chain of others

– “Hysteresis”, or systems being unable to recover equilibrium after a shock

1… WEF, p. 12

2…. WEF, p.12


Challenges From & Measures Against Systemic Risks

Slide 13

Challenges From System Risks

“The biggest challenge in making systems resilient to systemic risk is managing their

growing complexities & interdependencies 2”

1… WEF, p. 26

Measures Against Systemic Risks

― Understand, measure & foresee evolution of complex systems

― Develop globally coordinated, locally flexible procedures & institutions

― Implement simple & flexible regulation 1


WEF Global Risks 2014

Slide 14Source: WEF p.13; Global Risks Perception Survey 2013-2014. Note: From a list of 31 risks, survey respondents were asked to identify the five they are most concerned about.


Global Risk Landscape 2014

Slide 151… WEF, p. 16


Evolving Risk Landscape 2007-2014

Slide 161… WEF, p. 17


Slide 17

Global Risk Interconnections Map 2014

1… WEF, p. 21


UPDATE: Additional* Risks/Trends to Watch by WEF Survey Participants

Version: FINAL Slide 18

• Rapid Population Growth

• Ageing

• Migration

• Overpopulation

• Energy Crises

Demographic Trends• Social Structure Breakdown

• Trust in Institutions Declines

• Lack of Leadership

• Gender Inequalities

• Extremism (religious/political)

• Youth Education & Unemployment

Societal Concerns

• Marine Plastic Waste Pollution

• Endocrine Disruptors

Environmental Trends• Monetary Policy

• High Inflation

• Asset bubbles

• New Modes of Payment (Bitcoin)

• Money Laundering

• Corruption

• Volatility

• Manipulation

Economic Trends

• Cost of Living Longer

• Retirement Financing

• Long term care

• Healthcare

• Overweight & Obesity

Societal Concerns

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Source: WEF, p. 23

• Data Mismanagement

• Loss of Privacy

• Increase in Surveillance

• Abuse of new/complex IT

Technological Trends

Ex-post Update

*… Participants were asked to identify additional risks that were not specifically surveyed (see. Slide 14)


Catastrophic Risks – Existential Threats

Slide 19

Tsunami + Nuclear Power in Japan

Natural Disaster + Technology

Nano-/Bio-Technology

Error/Terror in Emerging Science

Breakthrough in unexpected directions

Artificial Intelligence

Antibiotic resistant bacteria + Travel

Pandemics

New self-reinforcing, run-away phase

Climate Change

1… WEF, p. 24


WEF Sustainable Competitiveness Index (SGCI)

Slide 20

WEF’s SGCI aims to assess

“the set of institutions, policies and factors that make a nation

remain productive over the longer term while ensuring social and

environmental sustainability” 1.

The central idea is to measure how sustainable the productivity

level of an economy is with respect to environmental stewardship

and social sustainability.

http://www.weforum.org/content/pages/sustainable-competitiveness/

Systemic Risks

• Pollution

• Biodiversity Loss

• Climate Change

• Resource Scarcity…

… can undermine competitiveness!

http://www.weforum.org/content/pages/sustainable-competitiveness/


IRGC on Emerging Risk

Slide 21


Managing Emerging Risks

Slide 22

“In the aftermath of catastrophes, it is common to find • prior indicators, • missed signals, and • dismissed alerts

that, had they been recognized and properly managed before the event, might have averted the undesired event.”

1…Accident Precursor Analysis & Management, J. Phimister, V. Bier, H Kunreuther, editors, Washington, D.C., National Academy Press, 2004. www.nap.edu/catalog.php?record_id=110612…IRGC: Assessing and Managing Emerging Risks, 2010, p.8

US National Academy of Science (2004)1:

Radar Process2:

1. Detect Something is wrong

2. Filter Determine “signal” from “noise” (pattern recognition)

3. Prioritize Threats and Actions

4. Communicate

On December 7, 1941, the US had an operating radar system. Two privates watching the radar screen saw a large number of “blips” – the approaching Japanese planes. The supervisor, a lieutenant recently transferred to this assignment, dismissed the signal as that from six US B-17 bombers that were scheduled to arrive in Hawaii from the U.S. mainland. The lieutenant did not learn of the large number of blips, and for security reasons the lieutenant did not disclose to the privates the information he had about the scheduled arrival of the bombers. As a result of the miscommunication between the privates and the lieutenant, no warning was issued before the Japanese planes attacked.

Noise or Signal: Pearl Harbor

http://www.nap.edu/catalog.php?record_id=11061


Pattern Recognition: Signal Or Noise?

Slide 23

The Challenger Accident: Data as presented to management before launch

1…IRGC: Assessing and Managing Emerging Risks, 2010, p.10


Graphical Presentation Can Support Pattern Recognition

Slide 24

The Challenger Accident: Alternative display of information1



Emerging Risks: Early Warning

Slide 25

Early Warning is a process from1

1. Assessment of a situation that was initially regarded as highly improbable

2. Recognition that the probability of ‘signal-versus-noise’ has increased

3. Something is wrong

4. Others need to be warned

5. Further evaluation and decisions are needed


Organizations often block upward communication of unpleasant information!

Alternative: Coach System or Advisory Board During the period leading up to the Peloponnesian War, Greek city states requested military assistance from Sparta, a leading city state that had provided the leadership that defeated the invading Persians. Sparta responded not by sending an army or weapons, but by sending one highly skilled and experienced person – a “coach”.


IRGC on System Complexity & Systemic Risks

Slide 26


Complex Systems and Systemic Risks

Slide 27

Types of System Complexity2:

1. Structural Complexity Internal combustion engine, clockwork

2. Dynamic Complexity Freeway traffic, pedestrian zone

3. Algorithmic Complexity Computer resources needed for simulations

scale w/ system size

Complex systems 1

• Characterized by a large number of interacting

(mutually coupled) system elements

• Interactions are non-linear

• Dynamic behavior (not static)

• Probabilistic (not deterministic)

• Difficult to predict & control

• Human perception often over-simplified or biased Freeway traffic constitutes a dynamically complex

system, as it involves the interaction of many

independent driver-vehicle units with a largely

autonomous behavior. Their interactions can lead to

the self-organization of different kinds of traffic jams,

the occurrence of which is hard to predict.

Socio-economic systems are dynamically complex!

1…IRGC: Systemic Risks in Society & Economics, p.3


Complex Systems and Systemic Risk

Slide 28

Non-linear Interactions1:

Causes and effects are not proportional

Schematic illustration of one of the typical behaviors of

complex systems: In regimes 1 and 2, a “cause” (such as

a control attempt) has essentially no effect on the

system, while at the “tipping point”, an abrupt (and

often unexpected) transition to a different system

behavior occurs.

Examples

• Changes in public opinion (smoking, gay/lesbian rights,

war/peace, banking secrecy/transparency,…)

• Product revolutions (Nokia/RIM vs Apple iPhone)



When system components interact strongly, the normally

distributed behavior of separated system elements often becomes

(approximately) power-law distributed. As a consequence,

fluctuations of any size can occur in the system, and extreme

events are much more frequent than expected. Note that power

laws are typical for a system at a critical point, also known as a

“tipping point”.

Power Laws and Heavy-Tail Distributions

Slide 29

Strong Element Interaction (i.e. Dynamic Complexity)

• Leads to heavy-tail distribution (rather than normal distribution)

• Extreme events occur much more frequently than expected

• Predictions become more difficult

• Systems become difficult to control



Complex Systems and Systemic Risk

Slide 30

Network Interactions & Failure Cascades

• Local risk becomes systemic through

• Feedback loops/vicious circles

• Knock-on effects

Examples

• Spreading of epidemics

• Interbank market during a financial crisis

• Spreading of traffic congestion

• Blackout of an electric power grid system

Example of a blackout of the electrical power grid in Europe: To allow for

the transfer of a ship, one power line had to be temporarily disconnected

in Northern Germany. This triggered an overload-related cascading

effect, during which many power lines went out of operation. As a

consequence, there were blackouts all over Europe (see black areas). The

pattern illustrates how counterintuitive and difficult to predict the

behavior of complex systems with network interactions can be.



Systemic Failures

Slide 31

Systemic failures are usually triggered by

• Parameters determining system stability reach tipping point/critical point or

• Metastable system (robust to small shocks) destabilized by one over-critical shock

• Metastable system destabilized by re-enforcing smaller shocks


Schematic illustration of a networked system

which is hit by an over-critical perturbation (e.g.

a natural disaster). The problem of feedback

cycles is highlighted. They can have

autocatalytic” (escalation) effects and act like

vicious circles. Bottom: Illustration of cascading

effects in socio-economic systems, which may

be triggered by the disruption (over-critical

perturbation) of an anthropogenic system. A

more detailed picture can be given for specific

disasters.

Note that the largest financial damage of most

disasters is caused by such cascading effects,

i.e. the systemic impact of an over-critical

perturbation.


Illusion of Control

Slide 32

When a complex system is changed (e.g. by external control

attempts), its system parameters, stability, and dynamics may

be affected. This figure illustrates the occurrence of a so-

called “cusp catastrophe”. It implies discontinuous transitions

(“regime shifts”) in system dynamics.

Complex systems are difficult to control

• Principle of Le Chatelier:

Systems counteract control attempts

• Small changes cause sudden regime shift (slow

relaxation is an early warning sign)

• Delays lead to failure of control

• Phenomenon of ‘unknown unknowns:

hidden factors that influence system behavior, but

have not been noticed yet


Typical System Failure Scenario

Slide 33

Cascade of Failure

1. Decision maker tries to change a social system

2. Measures taken have no effect

3. Decision maker intensifies the measure

4. Effects not as expected

5. Decision maker tries even more forceful control attempt

6. System undergoes ‘sudden regime shift’ and

7. System organizes itself in a different way

8. Decision maker tries to re-gain control & counteracts the unexpected change (7)

9. New measures are delayed, leading to oscillatory or chaotic system dynamics


Influencing Complex Systems

Slide 34

Right approach

• Support & strengthen

• Self-organization and Self-control through

• Good mechanism design

“Coordination and cooperation in a complex system will appear by

themselves, if the interactions among the system elements are well

chosen. That is, regulations should not specify what exactly the

system elements should do, but set bounds to actions (define “rules

of the game”), which give the system elements enough degrees of

freedom to self-organize good solutions. If the interaction rules are

suitable, such an approach will usually lead to a much more flexible

and adaptive system behavior. Another advantage is “systemic

robustness”, i.e. the ability to cope with challenges from external

perturbations.

Note however, that everything depends on the interactions of the

system elements. Unsuitable interactions can, for example, cause the

system to behave in a dynamically unstable way, or to get trapped it

in a suboptimal (“frustrated”) state.

Hence, finding the right rules of interaction is a great challenge for

decision makers, and complex systems scientists are needed to

address them properly.”

Documents

Global Risks and Risk Management - Connexis · Peloponnesian War, Greek city states requested military assistance from Sparta, a leading city state that had provided the leadership