Firms neglecting emerging risks; new approach needed

Organisations are not paying enough attention to emerging risks, preferring to focus on easier-to-manage visible risks, according to a guide published by Airmic in association with Marsh.

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 guide 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 for which they have useful datasets 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,” the guide 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 guide 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 checklist.

Richard Smith-Bingham, director, Marsh & McLennan Insights, said: “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.”