Global temperature change has been ranked the greatest extreme risk that could have the worst impact on economic growth and asset returns.
Willis Towers Watson’s Thinking Ahead Institute listed and rated the top 15 extreme risks for investors in its Extreme risk 2019 report and ranking paper, which has a new top three this year: climate change, global trade collapse and cyber warfare.
The report noted climate change is drawing significant attention among asset owners, savers and regulators.
However the group queried whether temperature change could still be considered an extreme risk, given it is looking increasingly likely and may thus need to be perceived as a mainstream risk.
“Over the last six years the world, has continued to emit increasing amounts of greenhouse gases that exacerbate the risk of rising global temperature,” Thinking Ahead said.
“The passage of time, with no meaningful action taken, means we are six years closer to the point of no return. For that reason, we decided to lift the likelihood rating for this particular risk, boosting its ranking to the top as a result.”
Cyber warfare along with biodiversity collapse and abandonment of fiat money made the list for the first time this year.
Infrastructure failure rose in its ranking by eight places, while the collapses of global trade and currency both moved up three positions.
Tim Hodgson, head of the Thinking Ahead Group said the extreme risks ranking had seen a general trend emerge of non-financial risks overtaking financial dangers in significance.
“Global temperature change becomes the highest ranked risk due to our assessment of higher likelihood coupled with significant impact – in the extreme this would mean mass extinction,” Mr Hodgson said.
Following the top three risks was a shortage in food, water and energy, along with economic depression, a banking crisis and sovereign defaults.
Unlike other years, deflation, insurance crisis and terrorism were not the top concerns for 2019.
Stagnation was seen as less of a threat than in 2013, as well as resource scarcity, which fell from the top spot.
The research suggested there are three hedging strategies available to institutions: hold cash, the use of derivatives and holding a negatively correlated asset.
“A complex world can and will deliver extreme outcomes that are hard to imagine when working with a normal distribution. That means extreme events are much more likely than previously thought,” Mr Hodgson said.
“To navigate through this complex world, we suggest investors need to be open-minded, avoid concentrated risks, be sensitive to early warning signs, constantly adapt and always prepare for the worst.”
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].
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