Risk Roulette

14 January, 2016

Paul Druckman calls for a New Year’s resolution from company boards

I always look forward to the publication of the World Economic Forum’s (WEF) Global Risks Report, the 11th edition of which was published today.  It is fascinating to track the progress of the reports over the years, and in particular the growing importance of natural and human capital-related risks such as climate change and migration.

Two years ago, the report highlighted the growing interconnectedness between risks, emphasising that it is no longer possible to isolate risk management – instead, a holistic approach is needed.  Last year, water shortages emerged as the number one risk, the first time an issue outside the realm of “core financials” topped the table of global risks.  And in 2016, not only does a failure of climate change mitigation emerge as the most significant risk in terms of impact, but the report highlights the differences in recorded risks according to the time horizon in the respondent’s mind at the time.

In his preface to the 2014 Global Risks Report, WEF Chairman Klaus Schwab said that, “conceptual models are needed to define, characterise and measure the potential negative impacts of interconnected global risks”.  I would suggest that the multi-capitals framework we introduce to the lexicon and practice of corporate reporting is one such model.   I am encouraged by the number of businesses (and indeed countries) that are starting to think, plan and make decisions by reference to the International <IR> Framework, which gives parity to human, social, environmental and intellectual capitals alongside the traditional forms of capital that have dominated economic and business discourse for so long.   WEF shows, year after year, that managing the risks associated with each of the capitals is no longer an option; it is essential to the successful management of the business and will have a direct impact on its cost of capital and reputation.  Over the last year, investors and regulators have increased the volume of their demands for information in context and it is a trend I predict will only intensify in 2016.

This year, businesses will join forces with Governments to implement the 2015 global agreements on the Sustainable Development Goals and Climate Change.  I expect many boards will look to <IR> as a way of fast-tracking their reporting processes to meet the growing demand for holistic management and the insight it provides into how strategic decisions impact the allocation of resources over the short, medium and long-term.   Effective risk mitigation is an essential part of this process and businesses that do not take this on board are playing ‘Russian Roulette’ with their investors’ risk capital.

So as 2016 begins, every board has at its disposal the analysis, the backing of virtually every government in the world and a practical tool that will fast-track its corporate reporting to the front of the global pack in terms of quality.  If I could urge one New Year’s Resolution on businesses in 2016 it is to get on board with <IR> – let’s make this the game-changing year that starts to deliver the promise and high ideals of the World Economic Forum and the commitments our governments have made on all our behalf to secure the stability and sustainability of the global economy.