Editor's note: This is the first of two articles looking at the emerging risks facing finance professionals in 2022. To gain a full perspective, read the second in the series.
A year, 2021, that began with such hope that the COVID-19 pandemic might be coming to an end closed with rising concerns over a new variant — as well as mounting worries over inflation, a potential Russian invasion of Ukraine, continuing concerns about China's economy, and a new wave of regulation for businesses.
Global GDP growth is expected to slow in 2022 to 4.4%, from around 6% in 2021, according to the International Monetary Fund. This comes after the 2020 global recession and growth of just under 3% in 2019. The surge of economic activity seen as the pandemic and associated restrictions eased in most major markets will taper down, though growth is still likely to remain above trend levels. This momentum should broadly be good news for businesses after a gruelling period, but headwinds and downside risks loom large.
Financial professionals, who have negotiated a very difficult pandemic period, can, however, look forward to what is likely to be another year of economic growth. Managing and mitigating a wide range of emerging risks and costs will present them with new challenges in 2022. Those able to invest in their organisations' employees and technology are likely to weather these challenges all the better.
FM magazine spoke to experts to identify emerging risks for 2022 and beyond in the labour market and supply chains.
Complex risk landscape
According to research by International SOS, a global health and security services company, 68% of organisations expect risks will increase or stay the same in 2022.
"As we near the third year of the pandemic, finance professionals everywhere must remain mindful of the complex risks they face," said Baptiste Vaissié, Group CFO at International SOS. Alongside the pandemic, organisations have multiple security concerns, including civil unrest, terrorism, natural disasters, and geopolitical crises, which can cause potentially severe and costly disruption to businesses' operations. These issues should all be on the finance director's radar, Vaissié said.
Evidence has shown that the COVID-19 omicron variant is considerably more transmissible than the earlier delta variant, yet it can also be less severe, with a smaller proportion of those infected needing hospital treatment. However, experts are warning that a highly transmissible but milder variant could still overwhelm health services and require further lockdowns.
"It's in the early days of dealing with this new variant, but we're not back at square one as we were in March 2020," said Johanna Kyrklund, London-based group chief investment officer and global head of multi-asset investments at asset management company Schroders. "I don't think it's time for investors to be shying away from risk entirely. But the uncertainties are too great for this to be called a buying opportunity."
Vaissié said that finance professionals and particularly CFOs will need a grasp of the comprehensive risk environment and be prepared to make investments in health, safety, and communications processes and systems. These will meet the needs of employees who have increasing health and security concerns and expect greater support from their employers. He said that those companies that prioritise investing in physical and mental health support for employees stand to benefit from greater productivity and staff retention.
Skilled worker shortages are a major risk factor for businesses currently, and the tightness in the labour market is particularly acutely felt in finance departments.
"There's a war for talent in every single major developed market," said Rob Fisher, KPMG US leader of IMPACT — KPMG's ESG advisory service.
He explained: "There's been a 'great resignation' during the pandemic, and many are not returning to their jobs. Talent management will probably be the top risk for 2022. More specifically, there simply aren't enough finance professionals, and clearly that makes it harder to manage organisations."
Fisher said that striking the right balance of hybrid working — allowing employees to work remotely when needed, while still building a strong and healthy workplace culture — is crucial for businesses.
"Many CFOs adapted incredibly quickly to accommodate remote working and the challenges of the pandemic, showing calmness and compassion," he said. "Businesses with nimble processes set up and the lessons from the pandemic top of mind will do really well."
Supply chain vulnerabilities
Experts agree that COVID-19-related supply chain issues will also remain a challenge in 2022, even if they ease towards the end of the year. Bottlenecks in supplies of goods essential to the functioning of the modern global economy — including natural gas and semiconductors — have had an impact across a wide range of sectors. A survey conducted for Coupa Software found that retailers in the UK alone expect total losses of 5.4% due to supply chain disruptions, while automakers worldwide may have lost as much as $210 billion for the same reason.
The worldwide semiconductor shortage seems likely to be sustained into 2022 and potentially beyond, having a particularly acute impact on industries such as automotive manufacturing. More broadly, COVID-19-related lockdowns and travel restrictions, as well as the UK's departure from the EU, have caused supply shocks that are still unwinding.
The pandemic has highlighted vulnerabilities in global supply chains, and too many businesses have not reacted to address these, Fisher argued. "There is still work to be done across sectors to improve supply chain resilience." he said. "In particular, leaders across organisations should engage procurement to understand strategy, processes, and talent to accelerate efforts to manage the multitude of risks — including operational resilience, cyber, emissions and waste, ethics and social equity, regulatory, and quality — that challenge supply chains today."
The inflation challenge
These issues have clear implications for CFOs, with production delays costing businesses money and shortages pushing up prices. Indeed, they are feeding through into the broader challenge of inflation, which has become a hot topic across developed markets for the first time in over a decade. Inflation in the US hit 7% in December 2021, the highest level since 1981. Also in December, inflation in the euro zone reached 5%, the highest since the euro was launched in 2002.
The surge in prices seen in 2021 was bigger and more sustained than many central banks anticipated and is already leading to monetary tightening — including interest rate rises in the UK and some European countries. CFOs who have become used to operating in a low-inflation, low-interest-rate environment must now prepare for a period in which neither is a certainty.
"While some say this is temporary, some accountants say we are getting into a wage and price inflationary cycle," Fisher said. "The vast majority of financial departments around the world have been operating without the usual inflation cycle. … Who inside the organisation has the skills and understanding of what inflation will mean for their business? What levers are there to pull, and are you ready to pull them?"
Many well-run businesses are already responding to the inflationary challenge with a range of measures, from increasing prices to the consumer where possible, to reducing costs through larger order sizes and squeezing logistics costs. Longer-term solutions include investing in process improvements and equipment that can boost productivity, and automation that helps ease the impact of labour shortages.
Indeed, with looming risks ranging from COVID-19 surges through supply chain and labour shortages to soaring prices, the companies that can prepare the best and equip themselves for an uncertain business environment will be those best placed to get through the year in good shape — and capitalise on any upside.
— Andrew MacDowall is an independent consultant and writer based in France. To comment on this article or to suggest an idea for another article, contact Oliver Rowe at Oliver.Rowe@aicpa-cima.com.