Julien Haye

Jan 48 min read

2024 Risk Management Mega-Trends

Reflecting on the tumultuous year of 2023, the world of risk management remains anything but boring and certainly not for the faint-hearted! The risk management landscape has continuously undergone a dramatic transformation since I started working, shifting from a narrow focus on credit and market risks to encompassing conduct risk and non-financial risk in response to many crises, changing business, technological, and regulatory environments.

As risk management continues to evolve, it is crucial for Chief Risk Officers (CROs) and risk professionals to stay ahead of the game by identifying and addressing emerging risks, enhancing risk management strategies, aligning with stakeholder expectations, driving business resilience, fostering innovation and opportunity, and adapting to regulatory changes.

This proactive approach requires keeping a keen eye on the mega-trends, or overarching trends, that are shaping the future of risk management. By incorporating insights from these megatrends into their risk management practices, CROs can effectively manage risks and contribute to the overall success and sustainability of their organisations.

This article revisits the 2023 Risk Management Mega-Trends, taking into account recent developments and insights to guide risk management strategies.

1. Permacrisis

2. Cybersecurity

3. Increasing Complexity of Risks

4. Data-driven Risk Management

5. Operational Resilience and Business Continuity

6. Regulatory and Compliance Pressures

7. Emphasis on ESG (Environmental, Social, and Governance) Risks

8. Digital Transformation

9. Focus on Human Factors

Permacrisis

In recent times, the world has entered an era coined as "Permacrisis," a term encapsulating the profound and persistent challenges that organisations face on an ongoing basis. This era is marked by a continuous stream of crises that transcend traditional boundaries, testing the resilience and adaptability of businesses and societies worldwide.

Its main characteristics include:

Sustained Uncertainty: Permacrisis is characterised by a prolonged period of uncertainty, where organisations grapple with an array of challenges ranging from economic downturns and geopolitical tensions to public health crises and environmental disasters. The predictability of crises becomes increasingly elusive, requiring a dynamic and agile approach to risk management.
Interconnected Global Risks: Crises in the era of Permacrisis are not isolated events but are interconnected on a global scale. A disruption in one region can have cascading effects across industries and nations, emphasising the importance of a comprehensive understanding of the intricate web of risks.
Continuous Adaptation: Traditional crisis management approaches that focus on response and recovery are no longer sufficient. Permacrisis demands continuous adaptation and proactive risk management strategies. Organisations must evolve their risk management frameworks to anticipate, assess, and address risks in real-time.
Technological Challenges: The rapid pace of technological advancements contributes to the complexity of Permacrisis. While technology presents opportunities, it also introduces new risks, such as cybersecurity threats and digital disruptions. Organisations must navigate the digital landscape while ensuring robust safeguards against technological risks.
Global Connectivity and Information Flow: In the era of Permacrisis, the global interconnectedness of economies and information flow amplifies the speed at which crises unfold. Real-time communication and information sharing become critical tools for organisations to respond swiftly to emerging threats.

Cybersecurity

As organisations grapple with continuous uncertainty, dynamic challenges, and the rapid evolution of technology, the cybersecurity risk landscape undergoes unprecedented transformations. Cyber threats become not just isolated incidents but integral components of the multifaceted risks organisations face.

Continuous Threat Evolution: Cyber adversaries capitalise on the chaos and uncertainty inherent in Permacrisis. The threat landscape evolves continuously, with malicious actors adapting their tactics to exploit vulnerabilities exposed during crises. Organisations must contend with an ever-shifting digital threat environment that demands constant vigilance.
Digital Interconnectedness Amplifies Risks: The heightened global connectivity accentuates the impact of cybersecurity breaches. A single cyber incident can ripple across industries and regions, exacerbating the challenges already posed by other crises. Digital interdependencies require organisations to consider cybersecurity as a critical component of their overall business management strategy.
Technological Innovations Introduce New Risks: The rapid pace of technological innovations introduces both opportunities and threats / vulnerabilities. Emerging technologies such as artificial intelligence, Internet of Things (IoT), and cloud computing present novel attack vectors. Organisations must navigate the digital transformation landscape while safeguarding against cyber threats that could further complicate their resilience efforts.
Human Factor Vulnerabilities: In the context of continuous crises, the human factor becomes a significant vulnerability. The strain of prolonged uncertainties and evolving work environments may lead to lapses in cybersecurity hygiene. Social engineering attacks, phishing, and insider threats become more potent, requiring organisations to prioritie cybersecurity awareness and training programs.

Increasing Complexity of Risks

Risks faced by organisations are becoming more complex and interconnected, making risk management more challenging. Factors such as globalisation, technological advancements, and changing business models have led to increased complexity in risks, including cyber risks, geopolitical risks, supply chain risks, and regulatory risks. Risk management is adapting to address these complex risks through advanced risk assessment techniques, scenario planning, and end-to-end risk modelling.

In the face of this evolving risk landscape, several key elements demand special consideration:

Unpredictable Geopolitical Events: Dealing with unforeseeable geopolitical events necessitates a strategic approach. Organisations must establish frameworks that allow for flexibility and adaptability in response to sudden geopolitical shifts. This involves continuous monitoring, scenario planning, and engagement with geopolitical experts to anticipate and mitigate the impact of unpredictable events.
Change in Political Leadership: A change in political leadership in the UK and the US to name two introduces decision-making uncertainties, potentially affecting public sector prioritisation, spending, and the management of public sector debt. Risk management strategies should incorporate scenario analyses that account for different policy directions. Collaboration with governmental relations experts and policymakers can provide valuable insights to anticipate and respond to changes effectively.
Impact of Population Polarisation: The polarisation of populations, particularly evident in the United States, adds another layer of complexity to risk considerations. Organisations should assess the potential impacts of societal divisions on their operations, reputation, and stakeholder relations. Developing communication strategies that navigate polarised environments and fostering inclusivity in organisational practices become integral components of risk management.

Data-driven Risk Management

The availability of vast amounts of data and advancements in data analytics and artificial intelligence (AI) are transforming risk management. Organisations are leveraging data and analytics to gain insights into risks, identify patterns, and make informed decisions. Data-driven risk management approaches involve using predictive analytics, machine learning, and other advanced technologies to assess risks, monitor risk indicators, and enhance risk mitigation strategies.

Case Study: Incident and Breach Framework Integration

Operational Resilience and Business Continuity

Disruptions, such as natural disasters, pandemics, and geopolitical events, have highlighted the importance of resilience and business continuity in risk management. Organisations are increasingly focusing on building resilience by developing robust business continuity plans, diversifying supply chains, and enhancing disaster recovery capabilities. Risk management is evolving to incorporate resilience and business continuity as key components of risk mitigation strategies.

Regulatory and Compliance Pressures

Organisations are facing forever increasing regulatory and compliance pressures across various industries. Regulatory requirements are constantly evolving, and organisations need to adapt their risk management practices to comply with changing regulations. This includes areas such as financial regulations, data privacy regulations, environmental regulations, and industry-specific regulations. Risk management is incorporating regulatory compliance as a critical aspect of risk mitigation strategies.

Then, megatrends often reflect changing regulatory landscapes. By focusing on risk management megatrends, CROs can stay ahead of regulatory changes and proactively adapt risk management practices to comply with evolving regulations. This can help organisations avoid compliance issues, regulatory penalties, and reputational damage, and maintain a strong risk and compliance posture.

How to Establish a Sustainable and Sound Approach to Regulatory Compliance

Emphasis on ESG (Environmental, Social, and Governance) Risks

Organisations, investors, and regulators are increasingly focusing on Environmental, Social, and Governance (ESG) risks. These encompass diverse concerns such as climate change, social inequality, diversity and inclusion, and ethical governance.

In response to the challenges posed by the permacrisis and the potential impact on the social fabric in a high inflationary environment with elevated interest rates, risk management needs to undergo further evolution. This evolution involves integrating ESG risks into comprehensive risk assessments, monitoring protocols, and mitigation strategies. This adaptive approach is crucial to addressing stakeholder expectations and aligning with sustainability goals.

Particularly acute in 2023, the ramifications of a generation unaccustomed to high-interest rates and high-inflation bear significant implications, particularly in the context of the evolving economic landscape. This demographic, accustomed to a prolonged period of historically low-interest rates, is now confronted with the prospect of a shift towards higher interest rates.

This transition has multifaceted connections with ESG concerns, particularly in the realm of social impact and economic sustainability. As interest rates rise, the real estate market becomes a focal point, reflecting the interconnectedness of economic, social, and environmental factors.

Economic Sustainability and Real Estate: High-interest rates can influence the affordability of mortgages and financing, impacting the real estate market's dynamics. This, in turn, has broader economic implications, influencing housing demand, construction activities, and the overall health of the real estate sector.
Social Impact and Affordability: The social fabric is intricately linked to housing affordability. As interest rates increase, the cost of borrowing rises, potentially affecting the ability of the younger generation to enter the housing market. This can exacerbate social inequalities and contribute to disparities in access to homeownership.
ESG Considerations in Real Estate: Real estate practices increasingly fall under ESG scrutiny, with a focus on sustainable development, energy efficiency, and social inclusivity. The impact of interest rate changes on the real estate market intersects with ESG concerns, emphasising the need for sustainable and socially responsible practices within the industry.
Environmental Impacts of Real Estate Development: Higher interest rates may influence developers' decisions on sustainable and environmentally friendly construction practices. ESG-conscious real estate projects may face challenges or opportunities based on the economic landscape shaped by interest rate fluctuations.
Investor Perspectives: Investors, particularly those incorporating ESG criteria into their decision-making, may reassess their real estate portfolios in light of interest rate changes. This reflects the interconnected nature of financial decisions, social considerations, and environmental impacts within the broader context of ESG.

Digital Transformation

Digital transformation is reshaping industries and organisations, and it also has implications for risk management. As organisations adopt new technologies, such as cloud computing, internet of things (IoT), and automation, they need to assess and manage the associated risks, such as data privacy, cybersecurity, and technology disruption risks.

In adapting to this dynamic environment, risk management strategies must now encompass emerging trends, including artificial intelligence (AI), blockchain, and robotic process automation (RPA). These technologies introduce both challenges and opportunities, necessitating an evolution in internal audit functions to ensure effective risk management and control in these swiftly evolving domains.

Seizing the potential advantages of this technological wave requires organisations to proactively assess and manage emerging technology and digital risks. By doing so, they not only unlock the upside potential but also establish and sustain a competitive advantage in an environment characterised by opportunity and innovation across diverse sectors.

Focus on Human Factors

Human factors, such as culture, behaviour, and decision-making, play a significant role in risk management. Organisations are increasingly recognising the importance of human factors in managing risks effectively. Risk management is incorporating human factors considerations by promoting risk-aware cultures, providing risk management training, and incorporating behavioural insights into risk assessments and risk mitigation strategies.

Staying abreast of risk management megatrends is crucial for organisations to effectively manage the evolving risk landscape and achieve their strategic objectives. All businesses nowadays are being held accountable for managing a wide range of risks, and stakeholders have heightened expectations in this regard.

CROs and risk management professionals can leverage insights from megatrends to inform risk management strategies and capability build-up, facilitate innovation, and anticipate and address emerging risks.

By staying proactive and adapting risk management practices to incorporate relevant megatrends, organisations can effectively manage risks and ensure alignment with stakeholder expectations, regulatory requirements, and good corporate governance. This proactive approach can help businesses mitigate risks early and prevent potential negative impacts on their operations, reputation, and bottom line.