Emerging risks: preventing a nightmare headline becoming reality

No deal Brexit confirmed. Server failure hits bank’s share price. Catastrophic data breach affects millions of customers. Company director becomes latest #MeToo casualty.

Which of these front-page headlines would be the worst for your organisation? Most (if not all) of them would likely keep you awake at night. Indeed, these were just a handful of the worst-case scenarios that risk managers recently dreamt up when asked what their nightmare headline would be if their organisation were to appear in the press.

The question was part of an Airmic and Marsh report exploring emerging risks and the unique challenges they present to business. By their very nature, emerging risks are difficult to predict and manage because they represent new and unknown risks or existing ones that have gained in significance or arisen in unfamiliar contexts.

But how dangerous are these risks to organisations? What is the best way to tackle them? And which skills must professionals learn or improve upon to better position themselves in an ever-evolving risk landscape?

A new focus on emerging risk

Emerging risks have taken on increased significance recently. They are specifically mentioned in Provision 28 of the 2018 UK Corporate Governance Code, which states:

“The board should carry out a robust assessment of the company’s emerging and principal risks.”

Furthermore, the Code recommends that assessments should be confirmed in an organisation’s annual report, including what procedures are in place to identify emerging risks and an explanation of how they are being managed or mitigated.

Many businesses focus mainly on principal risks; these are well known, easier to measure and have often produced sufficient data to reliably analyse.

According to Airmic and Marsh, however, few organisations have formal processes in place for identifying emerging risks because these issues are harder to detect and often have sparse data. The tools and techniques often used to manage traditional risks may not be as effective for emerging threats for these reasons.

In a recent report, EY acknowledged that a comprehensive discussion of principal risks is going to encompass some emerging risks, but it’s also likely that many emerging risks simply won’t be on a board’s radar at all. So, how are organisations expected to tackle these ‘unknown’ risks?

Expecting the unexpected

The Big Four regularly publish predictions of the future risk landscape. For example, KPMG released a report in December specifically addressing emerging risks in the banking industry.

EY has also identified four key areas where businesses can focus their resources in order to optimise emerging risk management:

1. Deploying effective monitoring systems: Mechanisms such as Key Risk Indicators (KRIs) can provide advance warning of potential emerging risk exposures.
2. Horizon scanning: Addressing the ‘unknown unknowns’ of emerging risks should involve looking outwards at the external forces that affect the environment and potentially create new risks.
3. External insights: Many businesses use trusted third parties and specialist consultants to expand risk analysis beyond known industry risks. However, this approach also requires robust third-party risk management in-house.
4. The role of culture: Emerging risk identification often requires a proactive risk culture to be embedded within organisations. Escalation protocols should be clear and acted upon quickly.

The Airmic and Marsh report suggests a three-pronged response action plan to emerging risks, covering strategy, operations and finance.

On the strategic side, businesses should consider rethinking their strategic purpose and aligning products, processes and talent with the newly revised vision accordingly. Embedding flexibility and agility into the organisation and changing investment allocations may also be prudent.

Tightening business controls and limits; strengthening environmental, social and governance capabilities; and adopting new technologies for digital transformation are among the operational tactics that companies can implement. Meanwhile, from a finance perspective, businesses may wish to reduce costs, boost hedging, reinforce financial buffers and adapt their risk appetite.

Sourcing the right talent to tackle emerging risk

The prevailing theme from the research is that stakeholder expectations are on the rise, and boards require agile risk professionals who are proactive in helping the organisation prepare for problems potentially on the horizon. 

What does this mean? The good news is that risk professionals won’t be expected to predict the future, but they will be tasked with challenging entrenched assumptions and taking a more holistic view of how the risk landscape evolves.

Risk managers who feel comfortable handling patchy data and translating this into actionable intelligence will also be highly sought-after, as well as the ability to clearly communicate relevant insights to senior executives.

Identifying and managing emerging risks therefore requires a strong mix of both technical and interpersonal skills. However, our research shows 42% of employers found sourcing candidates with the right technical capabilities was their most difficult recruitment challenge last year. A further 28% claimed hiring professionals with essential soft skills was the biggest hurdle.

Great candidates are rarely on the market for long, which means businesses with lumbering recruitment processes can miss out on top talent. A significant rise in operational risk hiring means the candidate pool is also struggling to keep pace with demand. It’s perhaps unsurprising, then, that 50% of risk departments feel inadequately resourced to tackle the challenges they face.

Both employers and candidates can benefit from working with a partner who understands the emerging risk environment and can navigate the recruitment market effectively. Please contact me on 020 7936 2601 or via email at ab@barclaysimpson.com to discuss your risk recruitment plans for the future.

Our 2019 Market Report combines our review of the prevailing conditions in the risk management recruitment market with the results of our latest employer and candidate surveys.

Image credit: Markus Spiske via Unsplash