Global Risk Institute Global Risks And Trends Frameworks October 3, 2018 Lois Tullo Executive-in-Residence 1
GRAFT helps addresses the question of: “How do we make sense of our changing world?” Climate Change - Rising CO2 levels Inflation Migration Continues US Governance Uncertainty Asset Bubble Russian Ukraine Conflict N. Korea Weapons Testing Cyberattacks Syrian Conflict Increasing National Sentiments Aging Population Income & Wealth Disparity Increasing Polarization of Society Japanese Earthquakes South Sudan Drought / Conflict Increasing Urbanization Yemen Crisis South China Sea Conflict Fiscal Crisis/ Sovereign Debt Illicit Trade Extreme Weather Events Increasing Global Cyber Dependence 2 22
Global Risks and Trends Framework (GRAFT) What is it? GRAFT is a new approach designed to help organizations identify, assess and respond to global risks and trends. Used in order to avoid pitfalls that could threaten an organization’s • long-term survival or conversely to leverage for the benefit of the organization. A method that: • Compares the assumptions supporting your strategic plan with the correlations of prioritized Global Risks and Trends to identify Key Insights for the organization; • Promotes a shared understanding of the implications of Global Risks and Trends on your organization’s strategic plan; and • Enables directors to make more informed decisions. 3 3
Overview of Global Risks and Trends Framework Organizational Vision & Strategy Risk Appetite Statement Geopolitical GRAFT T r e Economic Societal n d s Impact Global Risks R i & Trends s k s Key Strategies Environmental Technological Urgency & Strategic Assumptions Key Insights New and profound insights regarding the interplay of risk and trends to enlighten and enhance strategic decision making 4 4
How to Apply the Global Risks and Trends Framework Organizational Strategy 1.Articulate 9. Adjust the Key Organizational Vision & Strategy Organizational Strategies Risk Appetite Statement Strategies Key Insights 2. Identify 8. Compare Key Strategic Insights to Assumptions Strategies Key Strategies & Strategic Assumptions 3. Review & 7. Challenge Understand Challenge Rankings Ranking Global Risks and Trends Global Risks and Trends Economic, Environmental, Geopolitical, Societal 4. Rank Technological 6. Identify and Correlations, Prioritize Geopolitical Scenarios and Global 5. Map Key Insights Risks and Global Economic Trends Societal Risks and R A N K Global Trends on Risks & to GRAFT Trends Environmental Technological 5 5
Step 3 Collective Understanding of Global Risks & Trends A “ Global Risk ” is an uncertain event or condition that, if it occurs, can cause significant negative impact for several countries or industries within the next 10 years . A “ Global Trend ” is defined in the World Economic Forum’s Report as a long-term pattern that is currently taking place and that could contribute to amplifying global risks and/or altering the relationship between them . Unlike risks, trends are occurring with certainty and can have both positive and negative consequences. Trends can alter how risks evolve and interrelate, and they inform efforts at risk mitigation. Global Risks and Trends are summarized into 5 risk clusters that include: Economic, Environmental, Geopolitical, Societal, and Technological. 6 6
Step 3 Collective Understanding of Global Risks & Trends Geopolitical Geopolitical Concerns Political Uncertainty Risks 1. US uncertainty 1. US election 1.Terrorist Attacks 2. Syrian War 2. Taiwanese election 3. Russia and Crimea 3. Irish election 2.Interstate Conflict 4. China and the South Sea 4. Brazil election 3.Failure of national governance 5. Brexit 4.Weapons of Mass Destruction 6. North Korea missile firing in Japan Sea 5.State Collapse or Crisis 6. Failure of Regional or Global Governance Trends 1. Increasing National Sentiments 2. Changing Landscape of International Governance Fragile State Map 2016 7 7
Step 3 Collective Understanding of Global Risks & Trends Societal Risks Trends 1.Large-scale involuntary migration 1. Increasing polarization of societies 2.Water Crisis 2. Aging Population 3.Food Crisis 3. Rising Urbanization 4.Profound Social Instability 4. Rising Geographic Mobility 5.Spread of Infectious Diseases 5. Rising Chronic Diseases 8 8
Step 3 Collective Understanding of Global Risks & Trends Economic World Unemployment 4.Failure of Financial Risks Trends Mechanism or Institution 1.Unemployment and 5.Illicit Trade Underemployment 1.Rising Income and Wealth 6.Energy/Commodity Price 2.Fiscal Crisis/Sovereign Debt Disparity Shock 3.Asset Bubble 2.Growing Middle Class in 7.Deflation and Inflation Emerging Economies 9 9
Step 3 Collective Understanding of Global Risks & Trends Technological Risk 1. Cyberattacks Trend 2. Data Fraud or Theft 1. The Rise of Cyber Dependency 3. Failure of Critical Infrastructure/Information Breakdown Seven Hours of Screen Use on Average Daily 4. Adverse Effects of Technical Advances Daily Screen Use Minutes DDOF Peak size and frequency of Attacks have 0 100 200 300 400 500 Smart Phone TV Laptop Tablet increased dramatically in 2016 https://pages.arbornetworks.com/rs/082-KNA-087/images/12th_Worldwide_Infrastructure_Security_Report.pdf 10 10
Step 3 Collective Understanding of Global Risks & Trends Environmental CO2 levels dangerously high Climate Change Effect Trends 1. Climate Change 2. Environmental Degradation Flooding Risks 1. Extreme Weather Events 2. Natural Disasters 3. Failure of Climate-Change Mitigation and Adaption 4. Man-Made Environmental Disaster 5. Biodiversity Loss and Ecosystem Collapse https://www.ipcc.ch/ipccreports/tar/wg1/088.htm 11 11
Step 4 & 5 – Financial Institution: Rank, Prioritize & Map Global Risk and Trends Urgency 12 12
Step 6 – Identify Correlations 13 13
In Class Exercise: Identify Correlations RISK & Correlation 14 14
Step 7 - Example Identify KEY INSIGHTS - Events or Primary Correlated Magnitude of Correlation and Potential Events Stemming Correlation, Risk or Risk or Implication from Correlation of Trends Trend Scenario and Key Trend and Risks Insights Increasing inflation could lead the • Bank of Canada to continue increase interest rates. Even if Canada’s inflation While inflation has been low, Q2 • remains low, the Bank of Canadian GDP increased by 4.5% Canada may continue to and September gasoline prices increase rates (to increase by 10 – 20 cents per litre. Inflation/ Inflation/ encourage continued Each 25 bp rise in the lending rate • Rate Hikes Rate Hikes investment in Canadian equates to approximately $50 debt securities) as a result increase in interest payments on of rate hikes in other the average Canadian mortgage. countries. 30% of borrowers cannot afford • even a 1% increase in interest rates, increasing likelihood of loan payment arrears or defaults. 15 15
Step 7 - Identify KEY INSIGHTS - Events or Primary Risk Correlated Magnitude of Correlation and Potential Events Stemming Example or Trend Risk or Implication from Correlation of Trends Correlation, Trend and Risks Scenario and Housing prices have increased by • over 30% in the last year in major Key Insights markets. A recent foreign buyers’ tax is cooling the Greater Toronto Negative equity combined Inflation/ Asset Area market, and is increasing the with inflation-driven interest Rate Hikes Bubble risk of the housing bubble bursting. rate increases that strain High ratio loans extended in the last overextended borrowers’ • year are at risk of negative equity if capacity to make payments prices fall by more than 10%. could result in higher loan Canadian Debt to GDP levels are at losses. • Sovereign Inflation / all-time highs. Debt/ Asset Increasing inflation may lead to • Mortgage Bubble increased interest rates, straining Debt repayment capacity. 16 16
Step 8 & 9 - Apply Key Key Strategies Examples of Key Insights Insights and Strategic Assumptions Competitive Strategy Timing Business Landscape Advantage To be a leader in the Grow assets under Expand footprint in Enhanced Customer Canadian Residential management by 15% Alberta. experience for all mortgage market by 2019, maintain Maintain and grow Canadians, provided (prime and and manage a strong deposits by 15% by through a fintech subprime) with liquidity position of 2019, to over $2B. interface, and expansion into over $2B. Maintain NPL ratio supported by a risk provision of under 0.30%. management mortgages with a Increase LLP by 15%. foundation. fintech AI interface for adjudication. 17 17
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