The 15th edition of the Global Risks Report (GRR) [note 1], published by the World Economic Forum (WEF) with support from Marsh & McLennan, has just been released. For the WEF's multistakeholder community, the top short-term risks are economic confrontations (geopolitical risks) and domestic political polarisation (societal). For Financial Institutions, especially multinational groups and those investing and managing assets globally, these risks can lead to increased volatility and additional margin pressure.
Loss data from financial institutions shows that it is when in a challenging economic environment that the corporate application of the internal risk controls and adherence to the board-set corporate risk appetite can face severe challenges. At these times, the risk control functions need to be firm but, there should be flexibility within those controls when implementing oversight. The same economic environment can result in centrally imposed corporate travel restrictions. This can impact the ability for the organisation's finance and risk functions to have "boots on the ground" providing oversight and audit of local risk controls, which can lead to red flags being missed.
History tells us that business operations in regions and countries facing the most severe challenges — especially new operations under pressure to break even or to move into profit — are the most likely to succumb to the pressure and be creative in their accounting and reporting. Both internal and external frauds against all financial institutions rise during times of increased economic confrontation and geopolitical risk. Again, adherence to the control framework and robust processes are key.
Environmental concerns dominate the report's top long-term risks by likelihood. Most financial institutions have focused on the financial impact of climate change for some time, in line with global and local regulatory groups, as well as investor pressure and changing consumer and societal perceptions. In the UK, since October 2019, the requirement under the Senior Managers and Certification Regime that the individual responsible for the financial impact of climate change be identified to the regulator has increased the focus on this area — and the potential personal liability of directors and officers.
Environmental, Social, and Corporate Governance (ESG) funds and investment strategies are also increasingly commonplace, and with ESG-compatible claims scenarios routinely being used in sales and marketing literature, this could create potential liability. Those organisations that have an embedded risk culture and involve the risk function early on in the strategy and product design process are expected to have better outcomes.
How can the GRR be used to drive risk discussions?
The GRR can be used in a number of ways within a financial institution, for example:
- Validation and audit of your strategic risk principal risk types.
- Challenging the setting of risk appetite.
- Discussion at Board and Risk Committee level around the strategic risks identified, what they mean for your entity, e.g. how they fit into your operational resilience and risk tolerance plans – and your incident response plans.
[1] The annual Global Risks Report examines the macro-level risk landscape and highlights the systemic threats that may cause disruption. It is built from a survey of nearly 800 business and government leaders, to provide a picture of the evolving global landscape looking at both long and short term horizons.
