Global risks ahead in 2022: Part 2CFOs need to have a wide range of emerging risks on their radar including those arising from regulatory change and geopolitical threats.
Editor's note: This is the second of two articles looking at the global risks facing finance professionals in 2022. To gain a full perspective, read the first article in the series.
Financial professionals, who have negotiated two very difficult pandemic years, can however look forward to what is likely to be another year of economic growth. After the 2020 slump and low growth in 2019, global GDP growth is expected to be 4.4% in 2022, down from around 6% in 2021, according to the International Monetary Fund.
According to research by International SOS, a global health and security services company, 68% of organisations expect risks, in terms of number and intensity, will increase or stay the same in 2022.
Managing and mitigating a wide range of emerging risks and costs will present management accountants with new challenges in 2022.
FM magazine spoke to experts to identify the emerging risks for 2022 in regulatory change and political instability.
New regulatory pressure
While inflation remains an area of uncertainty, financial professionals can be sure of increasingly tougher environmental, social, and governance (ESG) standards in many developed markets. The Biden administration in the US is expected to bring in new legislation pertaining to ESG in 2022, while the EU's new taxonomy regulation, designed to boost the union's move towards net zero, continues to move forward.
"Tougher ESG reporting requirements are increasingly coming into effect, and organisations are quickly ramping up capabilities to meet that moment," said Rob Fisher, KPMG US leader of IMPACT — KPMG's ESG advisory service. "CFOs, in particular, are increasingly taking ownership of ESG reporting, bringing together similar technologies, processes, and oversight that transformed traditional financial reporting."
"It's definitely a hands-on exercise as the new requirements require a level of rigour in processes, controls, and management of datasets that in many cases has never been applied before."
Fisher added that CFOs may need to consider adopting internal carbon pricing within their businesses to meet targets, helping guide them on how best to allocate resources on expenditures ranging from airline tickets to capital projects.
"We anticipate that the new legislation in the US may require disclosures on climate, human capital management, and cybersecurity," he said. "But we don't know where the disclosures will need to be made and [whether they] will require a number of complex risk quantifications. … The timing will ultimately depend on the final nature of the rules, but there is clearly an imperative to act now. Regardless, organisations will need time to set up these systems, processes, and methodologies. It's a really big project."
Tighter regulation will also require new investment: A recent report by UBS said the major index providers and market data firms are rapidly building or buying sustainability offerings, and demand for sustainability data "could drive the size of the related data and services market to more than $5 billion in the next five years". Yet not meeting the requirements will also be costly, both in terms of fines and other sanctions, and in loss of market share and investment.
Finally, as they look ahead, CFOs will be aware of a range of other macro and geopolitical risks that could rock the boat of the global recovery. Towards the end of 2021, it seemed that the Chinese government was able to manage the drop in the country's huge housing market, which accounts for around 30% of its GDP. Nonetheless, concerns about a property crash and a potential credit crunch in the world's second-largest economy are likely to remain in the background.
Eyes have also been on a potential geopolitical flashpoint in Ukraine, with Russia amassing an estimated 100,000 troops on its border with its southern neighbour. Since Russia forcibly annexed Ukraine's Crimea region in 2014 and Russian-backed separatists have taken control of large parts of eastern Ukraine, there are concerns that Russia will mount a new invasion of the country, possibly targeting the capital, Kyiv. Inconclusive talks between the Russian and US presidents in December 2021 did clarify the positions of both Washington and Moscow, but the risk of conflict escalation remains "very real", said Liana Semchuk, London-based lead analyst for Europe and Eurasia at strategic advisory firm Sibylline.
Semchuk noted that a mass escalation of hostilities would potentially have a substantial impact on the Ukrainian agricultural sector, affecting global supplies and food prices: Ukraine is the world's second-largest grain exporter.
Even without an intensified conflict, potential risks include a continued squeeze on gas supplies by Russia's Gazprom, and Russia being shut off from the SWIFT international payments system. The latter measure could have "profound and negative implications for the financial sector and banks in the US and Germany", Semchuk said.
Other sectors that could be affected include aviation — the EU has already sanctioned several Belarusian airlines over the Russian ally's involvement in the 2021 migration crisis — and technology, as Russia looks to clamp down on the digital space, potentially curbing online freedoms further for political and security reasons.
While continued economic growth should boost businesses, and COVID-19 appears to be in retreat in many markets, it is increasingly clear that 2022 will present CFOs with new challenges — not least regulatory and geopolitical uncertainty.
— 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.