Organisations are not paying enough attention to emerging risks, preferring to focus on easier-to-manage visible risks, according to a report published by Airmic in association with Marsh at its annual conference in Harrogate. It argues that the challenges associated with emerging risks necessitate a new approach to how they are managed.
The world is increasingly volatile, uncertain, complex and ambiguous, the report notes. This context has triggered the need to recalibrate risk management and rebalance efforts between managing traditional risks and emerging risks.
However, organisations tend to focus on material threats where they have useful data sets and control over their choice of direction. "There is a danger that boards are spending too much of their limited time on more traditional risks, at the expense of emerging risks, which may be filed in the 'too hard' or 'less important' folder," it warns.
The UK Corporate Governance Code, which was introduced by the Financial Reporting Council last year, means boards are now required to specifically address emerging risks alongside principal risks in their annual reports, and to explain what procedures are in place to identify, manage and mitigate them.
Emerging risks are far harder to define, quantify and map and require a different, more imaginative approach, the Airmic report stresses. Formal assessments and heat maps should be exchanged for structured, creative discussions across business units. Boards and risk professionals need to "create space to think the unthinkable and speak the unspeakable."
The guide, Emerging Risks, New World, New Solutions, is designed to support risk professionals and provides practical advice, including a 12-point check list.
"No right answers"
"Consideration of emerging risks is often relegated to the backseat, even though they can result in the biggest shock waves," explains John Ludlow, Airmic's CEO.
“Three years ago, Brexit was an emerging risk that many ignored. Today in addition to Brexit, which remains top of mind for many businesses, there is an international rise in protectionism, trade tensions between China and the US, the impact of climate change, plus many more. There is no excuse for boards to say they did not see these risks coming, but it will require a change in mind set.
"While the approach for emerging risks should be analytical, it should also be creative and pragmatic reflecting the complexity of uncertainties to secure buy-in and actionable results. Often there are no ‘right’ answers."
Richard Smith-Bingham, director, Marsh & McLennan Insights, added: "Boards must be satisfied in knowing their firms possess the hunger to anticipate a multitude of surprises that could potentially erode long-term value, as well as the operational and strategic agility to enable them to move decisively in emerging crises and position their assets well for the future."
Download the report here.