We have featured underrated risks in many Global Risk Management Survey reports to date, and in this edition we would like to again explore the topic, as some of the risks we consider underrated in the 2021 survey are of vital importance to ensure the survival of not just organizations but also our entire planet.
While climate change has risen from number 31 in 2019 to number 23 in 2021, which is a significant improvement, it is still not a top 10 risk. Climate change is not an emerging risk — it is an urgent risk.
A growing number of stakeholders, including governments, regulatory bodies, shareholders, employees and consumers, are starting to hold organizations accountable for their roles in causing or combating climate change. As a result, climate risk has emerged as a prominent investment issue.
Climate risks include both physical risks, such as storms, drought and flooding, and transition risks, such as litigation, reputation and carbon pricing. The future-looking and long-tail nature of climate risks further complicates how businesses are expected to address them.
Some participants in this survey might have connected climate change to regulatory risk, environmental risk or weather and natural disasters because these have historically been common ways risk management audiences would have thought about it. However, climate change is a far, far bigger risk than previously assumed, and it is quickly becoming an imperative for boards and C-level executives to address.
The transition to net zero is a complex, global challenge. The world is facing a monumental challenge regarding increased volatility as we collectively strive to address the impact of climate change today and in the future. Organizations should employ a multi-pronged approach to ensure their long-term resilience. They should aim to reduce both physical and transition risk as they relate to climate change volatility, as well as to capitalize on the opportunities climate change will present. Further, and equally important, organizations are expected to move toward more environmentally friendly ways of doing business, setting targets to measure their progress.
Disappointingly, the only two countries where the risk appears in the current top 10 is the U.K., ranked eight, and Japan, ranked nine. However, it does feature across various countries as a predicted top 10 risk three years from now, ranking at number five in the U.K., six in Brazil and Japan, eight in Chile and nine in France.
However, even three years from now climate change is not predicted to be in the global top 10 in any region overall. We expect that the importance of this risk will grow between now and then and that we will see it in a more prominent position in the near future.
Climate Change’s Rank Now and in 3 Years’ Time by Region
Corporate Social Responsibility and Environmental, Social and Governance
Even though this risk was ranked in 31st place in 2021, up from 39th place in the 2019 survey, we consider it an underrated risk. At the same time, we predict this will become the next big focus for companies in the very near future.
While risk managers are often consumed with the results of topics related to environmental, social and governance (ESG) — such as climate change implications, regulatory risks and reputational damage — a simple explanation for its current ranking is that the risk function is often less involved in the development and management of their companies’ ESG strategies today. Hence, they don’t see these issues as top 10 risks because they are more focused on specific outcomes, such as cyber attacks, supply chain issues or workforce shortages. When thinking about the implications of a business having a sound, or not-so-sound, ESG strategy, risk professionals are often tuned in, but overall ESG risk will cover a spectrum that stretches beyond the core remit of the risk manager.
The question organizations and the industry needs to reflect on is “How do we take an issue that is 10 miles wide and 10 miles deep and generate value to the organization through the risk functions’ focus on the minimization of volatility?". As business leaders consider what ESG means for their individual firms, different roles and responsibilities for risk managers will emerge and in time influence the approach taken to corporate governance.
The risk of disruptive technologies was introduced in 2017 and landed at number 20 before rising to 14 in the 2019 survey. It was predicted to come in at number eight in Europe and number nine in North America in 2021, but it has dropped to 30. However, because the pandemic has accelerated technological advances in some industries, participants may see it more as an opportunity than a risk, hence its drop in rank.
Personal Liability (D&O Risk)
For a second time we see Personal Liability (D&O risk) come in very low on the global risk list. This is potentially a severely underrated risk ranking 45 despite real difficulties in placing affordable insurance and the volatility the exposure can present. In Aon’s Q2 2021 Aon Global Market Insights publication, which monitored market conditions around the time the survey data was captured we clearly see that D&O capacity is still constrained and often not available at all for certain risks a fact we feel warrants a higher rating.