What a ‘Future Risks Ranking’ says about climate threats

Become a paying subscriber of Unpacking Climate Risk to read in full👇

Hollywood awards honor those stars who performed admirably the preceding year.  They are not referendums on the current performance of Tinseltowners.  This leads to some optically weird outcomes – like Will Smith receiving the 2022 Academy Award for Best Actor minutes after brutally smacking the awards host on the face. 

But hey, he was great in 2021’s King Richard – and that’s what the award is all about: past performance.

The same retrospective bias is true, I think, of the Axa Future Risks Report, the 2024 edition of which was published earlier this month.  These are annual rankings of global risks that aggregate the views of two groups: an expert panel of 3,000, and a 20,000 “representative sample” of the general population.  These people are to Axa what the Academy of Motion Picture Arts and Sciences is to the Oscars.

The surveyed individuals are asked to rank their top five future risks, “based on their potential impact on society over the next five to ten years.”  Axa presents them with a choice of 25 risks so things don’t get out of hand. 

Looking at the lists from the past few years, I can’t help but see a lot of recency bias in the results. For instance, “Pandemics / Infectious Diseases” was the top-ranked risk for 2020.  For sure, the world was in the grip of the COVID-19 crisis back then – but just two months after that year’s rankings debuted (October 2020), vaccines started to roll out, helping bring an end to the immediate crisis (although, lest we forget, COVID deaths in the US actually peaked in 2021). 

“Geopolitical Stability” jumped from fourth-ranked to second-ranked between 2021 and 2022.  Why?  Well, Russia’s invasion of Ukraine might have had something to do with it.  This year, “Geopolitical Stability” again gets the second spot, with the conflicts in the Middle East undoubtedly contributing to this result.  

Now I’m not contesting that geopolitical risks are high right now, but does this mean they are going to have a big impact on society over the next five to ten years?  Who knows, but the pattern of results from the Axa survey suggests respondents are weighting to the past and present rather than the future.  After all, why should “Pandemics / Infectious Diseases” be down in ninth place this year, barely four years on from a global pandemic that continues to shape economies, politics, and lives around the world, and at a time when anti-vaccine movements appear stronger than ever?

My theory would hold more water, though, if climate change wasn’t consistently ranked the top-most risk.  Indeed, from 2018 to 2024 it only missed out on the top spot once – in 2020.  Of course, recency bias may still be having an effect here.  Each of the last six years has borne witness to multiple climate-related extreme weather calamities that had a dramatic impact on the lives and livelihoods of those affected.  

I also wonder whether there isn’t some herding going on, particularly among the 3,000-strong expert panel.  Indeed, 87% of the expert respondents are drawn from Axa itself and 13% from its professional network, which skews towards the financial services sector.  For the property and casualty insurance-focused members of this group, climate risks pose an immediate and future threat to their business – just check the loss data for 2023 – so it’s perhaps unsurprising they would rank this highly. 

Another possibility links back to Tony’s recent article on climate indices.  Maybe these rankings aren’t measuring the potency of climate risk.  Maybe they are tracking awareness of it.  The Axa rankings kind of make the case for this interpretation, as it reports that 77% of the general public who selected this as a top five risk say they feel vulnerable to climate change in their everyday life, up from 73% in last year’s survey.  Interestingly, there’s no percentage breakdown describing how vulnerable they feel, or the size of their personal exposure to climate risks.  That would have arguably been more insightful, as it would have revealed the salience of climate risk to the respondents. 

But let’s say none of these biases and herding effects and methodological issues matter.  Let’s assume the risk rankings honestly reflect the respondents’ best efforts at ordering global risks over the medium term.  Assuming this frame, here’s the interesting thing: the dominance of “Climate Change” as the top risk does not appear to correlate with concerns about “Financial Stability Risk”.  Indeed, “Financial Stability Risk” barely scraped into the top ten this year, its lowest position since it entered the rankings in 2020.

This says, to me, that experts and the general public alike do not perceive a linkage between climate risk and financial system disruption.  And remember, most of the expert panel are insurance and financial services professionals who have likely been hearing about climate-related financial risk for six years or more now.  Even this group is not signaling a connection between the two.

They especially don’t seem to be doing so in the developed world – respondents from Europe and America did not even rank “Financial Stability Risk” in their top ten this year, while ranking climate change number one.  In contrast, the expert respondents from Africa placed “Financial Stability Risk” at number five and “Macro-economic Risks” at seven.  Asia Pacific and Middle East experts put “Financial Stability Risk” at five.  

Does this suggest smart folks in these regions are more sensitive to how climate change could feed financial disruption?  Meh, it’s possible.  As Tony has written before, climate-related financial risks certainly seem more plausible for the Global South than the Global North. Still, experts in these regions have plenty of other reasons for worrying about “Financial Stability Risk” besides climate change, not least the volatility of many developing country currencies and, of course, China’s financial woes.

I know I said to discount methodological issues for this, but just one more gripe.  The survey presented the 25 risks as organized in groups of five, which may have nudged respondents to think of the risks in each as disconnected from one another. “Financial Stability Risk” is housed in the “Economics, finance and business environment” category and “Climate Change” in the “Environment and energy” category.  Perhaps this encouraged participants to decorrelate them?

I’m probably thinking too deeply about this.  Let’s face it, rankings like this are not scientific, and are about publicity for the sponsoring organization – in this case, Axa – more than anything else.  But I do think two of my conclusions are worth taking forward in discussions about climate risks.

One, people do feel vulnerable to climate change – but the salience of this vulnerability vis-a-vis other risks is not so clear.  Two, they do not appear to link climate change with financial stability risks.  This is true even of experts, apparently. Six years of conversation about climate-related financial stability risks don’t appear to have moved the dial on this, either.

Food for thought.  Perhaps only after the financial system gets its metaphorical smack around the face from climate shocks will opinions change.