Globalization of local risks through international investments and businesses: A case for risk communication and climate fragility reduction

Submitted by Robin Hocquet | published 6th Oct 2020 | last updated 7th Nov 2020
Businessmen in Japan

Consideration of climate change and disaster risks by businesses remains limited. Photo: Bantersnaps / Unsplash

Introduction

Developing countries in general and those in Asia, in particular, have become producers of goods and services for the rest of the world as a result of which investments in the region have grown significantly. Before the advent of global investments, the domestic risks that countries are prone to, including disasters, were largely confined to within their borders. With increasing global investments, there is a higher chance now for these local risks to spill beyond borders and to become global as the foreign investments taking place in these countries are exposed to these risks and they tend to bring international implications.

Some of the important questions for the Asian host countries are:

  1. What measures are put in place by the host countries to limit and/or mitigate the local risks affecting the international investments,
  2. To what extent the local risks have been communicated to the international investors in a transparent manner, and;
  3. What efforts have gone into understanding the uncertainty in the available information to fully understand and address the future risks.

The question for the foreign investing entities are:

  1. Are the investors fully aware of the local risks,
  2. What measures have to be taken, including the criteria employed in conducting risk assessments, to mitigate the local risks from spilling over beyond the boundaries of countries where investments took place, and;
  3. What it means for the risk assessments and risk communication?

In this paper, an effort has been made to answer some of these questions using a literature review and results from an online structured questionnaire survey of Japanese business entities.

This paper also presents a climate fragility risk index (CFRI) that helps assess a country’s suitability for investing from the point of view of the climate fragility risks the country has.

*This paper is a contribution to the 2019 edition of the Global Assessment Report on Disaster Risk Reduction (GAR 2019).
* Download the full publication from the right-hand column. The key messages from the publication are provided below. See the full text for more detail.

Methodology

The arguments made in this paper are derived from the review of literature, analysis of data sources on the trends of international investments into developing and vulnerable countries in Asia, and based on the results of an online survey questionnaire conducted with the business entities in Japan.

The questionnaire consisted of multiple-choice questions on details of the business entity, background on business partners, risks faced by the entity, its risk assessment, and risk management operations, views on the globalization of local risks, and background of the survey respondent. 250 responses were obtained.

An index to measure climate fragility risks faced by foreign investing entities has been developed using indicators that directly affect the fragility of states and institutions The purpose of this Climate Fragility Risk Index (CFRI) is to show the relative climate fragility of countries that may affect the investment outcomes, and to provide a simple guide to the investing entities on possible risks facing their investments.

Results and Discussion

The survey indicated several pre-requisite conditions that could result in local risks becoming global. In summary, the important factors appear to be a lack of sufficient understanding of risks in terms of how risks interact with each other, and how local risks can become global. Poor development of risk assessment methodologies, and poor risk communication among stakeholders appear to be important factors. It is evident that larger entities tend to have better risk assessments and better risk management strategies.

However, factors such as poor integration of climate change risks into their business risk assessments and severe oversight of globalization of local risks mean even the investments of bigger multinational enterprises are not far from being affected by unintended consequences of local risks. In addition, factors such as the emphasis on profits, protecting firms’ interests, and expand or perish are compounding the problem.

Conclusions

Many of international investments are in a way contributing to the globalization of local risks. There is a need for developing data sets that highlight the phenomenon of globalization of local risks and contribute to a better understanding of the issue. Better communication of risk appears to be an ultimate solution for a sector where secrecy and risk information (i.e. data) are valued commodities.

This research gives an important message that addressing the globalization of local risks is just not the business of the firms themselves but it is also the responsibility of governments and other participating stakeholders since all stakeholders are affected by this phenomenon. Similarly, the benefits of addressing the issue are not just limited to businesses but also to societies, governments, and institutions that are directly or indirectly affected by businesses beyond the boundaries of the country of investment.