Walking a tightrope – reporting on systematic risks
We live in a fragile world, where it feels like there isn’t a week that goes by without some apocalyptic-like event that affects different countries, industries or communities and, in turn, the dynamics of the global economy. From wildfires and cyber-attacks to controversial political decisions, there are clearly large systematic risks all around us.
As trends show how the public and investors are paying more attention to companies’ operations and behaviours, companies should provide a sound disclosure on how systematic risks may impact their business model and strategy, as well as detail on how they plan to mitigate those risks.
The undeniable link between threat and opportunity
This year, the World Economic Forum published the 13th edition of the Global Risk Landscape report, shining a light on the main global risks that could have a catastrophic impact on the economy, with the ones that ranked as the most likely and the most impactful being extreme weather conditions, natural disasters, cyber-attacks, water crises and unemployment.
But whilst such events can threaten a company’s capital, they can also provide strong opportunities and it’s up to the company to explain what these are. For instance, whilst companies are increasingly being exposed to the risk of cyber-attacks and data theft, the integration of advanced IT infrastructure and increased dependency can result in operational efficiencies.
To be or not to be a risk? That is the question
It is important for companies to have a strong understanding of global risks and the potential impact these may have on operations, but it is also important to ensure they assess the materiality of each risk and report only on the ones that may be a specific threat to them. That said, the wider, key systematic risks cannot be ignored:
Environment: can companies ride the storm?
Environmental risks are considered a major threat to a company’s operability. Companies must disclose how potential environmental risks, such as flooding, draughts and climate change, can disrupt their business model.
Technology: a double-edged sword
Companies that work in labour-intensive industries should address how technological advancement could increase their competitors’ productivity and competitiveness, along with how they are monitoring these developments and employing them in their own operations.
There are several ways to disclose systematic risks in the annual report. One is in the market section, such as Halma (p.14 and 15), where companies can report on environmental and IT matters as macro trends and state their response to these developments. Another is in the viability statement, which could include scenarios that may address aspects of the environmental or technological risks and how these may have short, medium and long-term impacts on the business model.
More obviously, however, they can be addressed in the risks section, either with a dedicated paragraph, mentioning how these risks are monitored on an ongoing basis, or, depending on the industry the company works in, as a specific principal risk, such as in Petra Diamonds (p. 43).
What’s paramount, in order to provide a holistic view of the company’s outlook, is to show the connectivity between market trends, business model, strategy and risks. And although it may be daunting to report on systematic risks, it’s a great opportunity to demonstrate the company’s ability to transform potential threats into market opportunities.
If you would like to learn more about how you can improve your risk reporting, please contact email@example.com.