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Ahead of Davos, WEF warns of dire environmental risks

Water crises, climate change and biodiversity loss are among the biggest threats facing the world. Why aren't businesses better prepared?

Editor's note: This article originally appeared at Business Green.

Water crises and extreme weather are among the greatest risks the world currently faces, according to the World Economic Forum.

The 2015 edition of the WEF's "Global Risk" report, published ahead of the organization's annual gathering of the world's most powerful business and political leaders in Davos this week, is an assessment by top executives of the likelihood and potential impact of 28 global risks over the coming 10 years.

The latest report confirms that environmental risks outnumber economic risks among the list of top threats identified by CEOs and senior business leaders. The WEF stated there has been a "marked increase in experts' negative assessment of existing preparations to cope with challenges such as extreme weather and climate change," rather than any receding of fears over chronic economic risks, such as unemployment and underemployment or fiscal crises, which have remained relatively stable compared to last year's report.

So, while the WEF identifies the risk of international conflict to be the most likely threat to world stability, extreme weather is next in line. An international failure to adapt to climate change is seventh on the list of most likely risks, just ahead of water crises.

However, in terms of impact, water crises are viewed as the greatest risk facing the global economy, outweighing the spread of infectious diseases, interstate conflict, energy price shocks and fiscal crises. Global water requirements are projected to be pushed beyond sustainable water supplies by 40 percent by 2030 as a growing population increases demand for food and power, the report warned.

"Decision-makers will be forced to make tough choices about allocations of water that will impact users across the economy," the WEF concluded.

Failure of to adapt to climate change, biodiversity loss and ecosystem collapse are also included among the top 10 threats in terms of potential impact. The WEF report coincides with research published last week suggesting the rate of environmental degradations is putting life on Earth at risk, and WEF warns the failure to include biodiversity loss among the top 10 most likely risks appears to "reflect a misconception" among executives as to the scale of the problem.

"The World Bank estimates that 75 percent of the world's poor, or 870 million people, make a living from ecosystems, including tourism and the goods they produce, while 350 million are affected by the loss of coral reefs," it stated. "Increasingly, decision-makers are realizing that biodiversity loss is not a second-order issue but is intricately linked to economic development, food challenges and water security."

The WEF also adds its voice to the flurry of business groups to castigate world leaders for failing to take action in the face of "strong evidence of the effects of climate change," including sea level rise, shrinking glaciers, warmer oceans and increasing frequency of extreme weather events.

"Even though all of these risks are well known, governments and businesses often remain woefully underprepared," the report stated. "At the heart of the problem is a risk-management approach based on responsive measures that assume things go back to normal after a crisis — an approach that falls short with complex or slowly evolving environmental risks, such as climate change. Stakeholders have been slow to address the underlying causes of environmental risks or to address their economic, social, political and humanitarian consequences."

The experts warned a "once in a generation opportunity to align the climate change and development agenda" will be lost if countries cannot reach agreements at the series of global summits on climate change, disaster risk reduction, financing for development and sustainable development goals scheduled for this year.

"Convergence among governments on these decisions could kick-start the next generation of sustainable growth and poverty reduction — through catalyzing private finance and scaling low-carbon, climate-resilient investment, especially but not only in developing countries," it stated. "However, the opportunity will be missed if governments continue to value narrow short-term concerns above the prospect of longer-term global prosperity and environmental security."

Significantly, the WEF's stance closely mirrors that of more than 1,000 civil society groups, which last week launched a new campaign similarly calling on world leaders to deliver ambitious new climate and development agreements this year.

Businesses no doubt will recognize these threats to their operations, while this week saw new research highlight how they also face reputational risks relating to climate change. A study by Axa Investment Managers, which manages more than $693 billion of assets, suggests that companies linked to fossil fuel investments face an immediate threat from the snowballing divestment campaign.

According to Luisa Florez, senior responsible investment analyst at Axa Investment Managers, climate risk is "becoming synonymous" with reputational risk.

"Undoubtedly, there are a number of factors behind the recent decline in oil prices, such as shale gas development as well as countries returning to the markets," she said in a statement. "Nevertheless, moral issues are also playing a growing role with the divestment movement steadily gaining traction amongst investors across the globe."

A shift to more sustainable finance is already taking place, with institutional investors transitioning away from carbon-intensive assets, albeit slowly, and new financial products gaining traction — for example, the green bond market is tipped to hit $100 billion this year.

Flores urged asset managers not to overlook the potential of the fast expanding clean tech sectors. "Climate risk, as with any other environmental, social, governance or financial risk which can impact a portfolio, needs to be assessed from a risk mitigation perspective but should also be considered as an investment opportunity, with the potential to offer good financial returns," she added. "On that basis, we believe that climate risk should not be neglected in the investment decisions that investors are making today."

With the WEF, leading investors, and numerous NGOs in agreement about the scale of the environmental risks the global economy faces, the pressure is mounting on those business and political leaders gathering in Davos to deliver a suitable response.

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