The Political Economy of Private Management of High Impact Low Probability Risks in Finance and the Environment

Abstract

An increasing number of sustainability problems involve the risks of transnational High Impact Low Probability (HILP) events. The Centre for Risk Studies at the University of Cambridge has usefully identified 12 categories of HILP events, which they label “macro-threats”: financial shock, trade disputes, geopolitical conflict, political violence, natural catastrophe, climatic catastrophe, environmental catastrophe, technological catastrophe, disease outbreak, humanitarian crisis, externality (such as an asteroid hitting earth) and an “other” category (Coburn et al. A taxonomy of threats for macro-catastrophe risk management. Draft of Working Paper 201307.20, Centre for Risk Studies, University of Cambridge. www.risk.jbs.cam.ac.uk. Accessed 30 Nov 2013, 2013). These risks are especially difficult to measure since the HILP events may have occurred very rarely, if at all. They are very difficult to manage since there is a tendency to postpone making costly investments now when these are intended to address uncertain future events, even if these future events will be catastrophic if they occur. All these profoundly involve sustainability, and in a distinctively challenging manner, since ongoing or frequently occurring reminders of threats to sustainability may not be sufficiently present to motivate responses. The severity and complexity of HILP events mean they usually affect all four types of sustainability discussed in the introduction to this volume: environmental, economic, social and cultural. HILP events are typically not restricted to any particular country, and thus have a transnational character (Lee et al. Preparing for high-impact, low-probability events: lessons from Eyjafjallajökull. A Chatham House Report. http://www.chathamhouse.org/publications/papers/view/181179. Accessed 1 Dec 2013, 2012).