Global climate, economic risks put spotlight on finance's role

A polarised and volatile business landscape could emerge in the post-pandemic economy, the World Economic Forum warned last week in its Global Risks Report 2021. In facing these challenges, experts say finance teams can play a proactive role in changing how risks are managed in organisations.

The report said that unless organisations take immediate steps to boost their financial and operational resilience, they will become increasingly vulnerable to looming economic and environmental risks. Widening social inequalities and livelihood crises also threaten to destabilise workforces in the next several years.

Small and medium-size enterprises need to ensure sustainability of their future operations by finding alternative markets and getting support for training and redeployment, according to the report.

“For business and finance leaders, building resilience to risk and investing for future sustainability has arguably never been as important as it is now,” said Peter Giger, group chief risk officer of Zurich Insurance Group, speaking at the virtual launch of the report in Geneva.

In the report, a “global risk” is defined as an uncertain event or condition that, if it occurs, can cause significant negative impact for several countries or industries within the next ten years.

“For the finance community, it is critical to begin to understand the limitations and trade-offs of existing accounting systems and models, and the incentives that these models provide,” Giger added. “Investing in more resilient processes might look like a waste of resources in the short term, but finance teams should also look at this with a ten-year horizon to appreciate that it is a far more cost-effective approach.”

He highlighted that technological and cybersecurity risks pose a significant threat to teams and organisations, given the worldwide shift to remote working and major dependence on connectivity for business continuity.

The report rated extreme weather, climate action failure, human-led environmental damage, infectious diseases, biodiversity loss, digital power concentration, digital inequality, interstate relations fracture, cybersecurity failure, and livelihood crises as risks with the highest likelihood of occurring in the next ten years.

In last year’s global risks report, the top five global risks in terms of likelihood were all environmental, showing that not much has changed when it comes to the long-term risk outlook. This year, infectious diseases replaced climate action failure as the highest-impact risk of the next decade, while biodiversity loss and weapons of mass destruction remained in the top five highest-impact risks for two consecutive years.

Investing for the long term

“We need to protect what we rely on, and we’ve seen that many organisations, for example, have invested heavily into cyber security, but not enough into backup and recovery if systems go down. Ultimately, it’s not about eliminating these risks, but rather learning to live with them — and this requires preparation, which comes at a cost,” Giger said.

For the first time, the report also rated risks according to when respondents perceive they will pose a major threat to the world.

In the short term — the next two years — the most immediate dangers are infectious diseases, livelihood crises, extreme weather events, cybersecurity failure, and digital inequality (unequal access to or ownership of devices, broadband connections, and skills). In the medium term — three to five years — the primary concern is that the world will be threatened by knock-on economic and technological risks such as asset bubble bursts, IT infrastructure breakdowns, price instability, commodity shocks, and debt crises. In the long term — five to ten years — existential threats dominate; they include weapons of mass destruction, state collapse, biodiversity loss, adverse technological advances, and natural resource crises.

“The sustainability discussion also needs to be much broader, and leaders should be asking, ‘Is what we are doing really sustainable?’ And if not, how can we begin to rebuild and reimagine the way things are done?” Giger added.

Pandemic an opportunity to boost risk management

Mark Beasley, CPA, Ph.D., professor of enterprise risk management and the director of the Enterprise Risk Management Initiative in the Poole College of Management at North Carolina State University in the US, said that finance leaders should embrace the heightened attention given to resilience and prioritise risk management across the organisation.

“As the central nervous system of every organisation, finance teams have to pay close attention to all of these global risks — particularly the technological and cyber risks — while striving to develop a more robust and proactive process for identifying emerging risks in the future,” he said.

“In many businesses today, risk management infrastructure is really thin, and conversations around business continuity have been siloed within various departments (most commonly in IT) with very little information sharing between them,” Beasley said. “This creates vulnerabilities, as businesses find themselves on the back foot when operations are disrupted, as we have so clearly seen.”

He said that CFOs and finance teams now have an opportunity to elevate risk management across the entire organisation and to lead a vital cultural change where risk and resilience are approached more openly and holistically.

“In the wake of the pandemic, we’ve seen many of the organisational silos breaking down as leaders and managers have been forced to have regular conversations and share information more readily,” he said.

“Finance leaders should now be looking to preserve and enhance this dialogue and increased transparency around risks, setting the tone for a culture in which everyone feels safe to share information and concerns without feeling vulnerable or threatened.”

To drive this cultural change, Beasley recommended that CFOs begin wearing a dual hat as chief risk officer and lead the way in ensuring that businesses are proactively thinking about risk and investing in risk management infrastructure where they can.

He added that a more proactive approach to risk management should be underpinned by the open and regular flow of communication, as this allows CFOs and other decision-makers to “connect the dots” and to understand the broader implications for sales, HR, brand, and reputation.  

“In essence, we all have to become chief risk officers and make sure that our eyes and ears are trained to perceive organisational risk. But for that to happen, someone needs to be leading the charge.”

— Jessica Hubbard is a freelance writer based in the UK. To comment on this article or to suggest an idea for another article, contact Alexis See Tho, an FM magazine associate editor, at Alexis.SeeTho@aicpa-cima.com.

Resources

CGMA report

• 2020: The State of Risk Oversight: A joint paper between the AICPA and the ERM Initiative in the Poole College of Management at North Carolina State University, this thought paper presents common practices used to communicate top risks to boards of directors.

FM articles

• “How Resilient Is Your Strategy?”: Among the lessons organisations can learn from 2020 is the value of a plan that can account for unforeseen events. Clearly defined strategy provides a strong base.
• “Pandemic Lessons Learned in Supply Chain Management”: Previous disruptions have paled in comparison to how COVID-19 changed supply chains. Take these considerations to manage the next crisis.