Emerging Risks in Finance
ERIC recognizes emerging risks as interconnected phenomena. However, in the interest of providing better clarity of some of the topics on which we work, we have divided our research areas thematically. For each topic, we provide a brief description, examples associated with the risk, a review of how the financial sector is affected, and suggestions how the financial and policy sectors can react.
Climate Change
The increase in global temperature caused by humans that compromise living conditions, threaten ecosystems, and cause extreme weather.
- Examples: CO2/methane emissions, pollution, deforestation, and industrialized agriculture resulting in melting glaciers, disruption to ocean currents, the disappearance of animal species, and the increased severity/frequency of extreme weather events/extreme temperatures.
- Financial Sector: Negative effects on economic infrastructure, real estate values, economic efficiency, asset production systems, and regulatory/policy frameworks.
- Solutions: Regulatory policies that move towards/finance a zero-carbon economy, climate change-based risk analysis, climate stress testing, divestment incentives, punitive financial measures for exceeding emissions quotas, and investment in clean energy.
Water Scarcity
The decrease in the availability of fresh water due to changing hydro-meteorological conditions and increased stresses on the demand of water for agricultural production and human consumption.
- Examples: Droughts, temporary restrictions of water use, decrease in ground water reservoirs (soil water), drying of soil leading to difficult agricultural production, political aggression rising from shared water resources, scarcity as a cause of migration.
- Financial Sector: Loss in revenue from agriculture, disruptions to water-intensive industries such as mining, rising costs of drinking water, stranded assets due to water risk.
- Solutions: Financing water infrastructure for water circulation and distribution as well as the creation of water derivatives as a means of hedging.
Natural Catastrophes
Unexpected disruptions that either occur naturally or are aggravated by human activities and result in major damages.
- Examples: Earthquakes, seaquakes, hurricanes/typhoons, tsunamis, wildfires, floods, droughts, heatwaves, and tornados.
- Financial Sector: Disruptions to the financial system associated with the cost of damages, infrastructure destruction, the devastation of local economies, and job losses.
- Solutions: Developing insurance products tailored to natural catastrophes, fostering cooperation between banks and insurance providers, providing increased funding for protective infrastructure and relocation costs, and managing the reallocation of labor capital.
Digitalization
Digitalization is an information technology-based process that addresses the replacement of manual activities by electronic systems, and the development of artificial intelligence. It encompasses, among other things, trends such as fintech, blockchain technology, cryptocurrencies, robotization, digital interfaces for human-to-system or system-to-system communications, neural networks, and social credit systems.
- Examples: Risks associated with digitalization such as privacy concerns and job losses.
- Financial Sector: Over-reliance on technology, business and regulatory challenges associated with the digitalization of businesses and business-consumer interactions, vulnerability to willful or accidental technological disruptions.
- Solutions: Regulatory policies intended to enhance safety in digital transactions, establishment of task forces to reduce the illegal use of cryptocurrencies, and digital safety consumer awareness initiatives.
Cyber Risks
Unauthorized access to information systems leading to the misuse of data and the malfunction of the associated systems.
- Examples: Ransomware, malware, hacking, phishing.
- Financial Sector: Costs associated with loss of data and work interruptions, ransom costs, reputational damages, damages to the relationship with clients/partners.
- Solutions: Cyber-insurance, constraints on the IT system and its systemic financial risks, fostering of digital safety awareness initiatives, limiting data redundancy.
Mass Migration
The extensive and/or widespread movement of people across or within national and regional borders.
- Examples: Relocation, displacement, and forced or involuntary movement as a result of natural disasters, extreme weather, armed conflicts, or persecution.
- Financial Sector: Stresses on the financial resources of the receiving countries as well as those from which migrants depart.
- Solutions: Anticipative risk assessment and vulnerability mapping, analyses and reviews of legal frameworks, collaboration with Indigenous and other marginalized populations for needs assessments.
Political Extremism
The political power granted to extreme ideologies and radicalism.
- Examples: Populism, fake news, terrorism, culture wars, nationalism, racism, xenophobia.
- Financial Sector: Historical interconnectedness of financial crises and the rise of far right-wing/left-wing politics and authoritarianism.
- Solutions: Media literacy awareness initiatives, promotion of representation in the political sphere, championing of equitable taxation schemes, promotion of inclusion and equity across society.