Grave new world: global business risks in 2022

April 2022  |  COVER STORY | RISK MANAGEMENT

Financier Worldwide Magazine

April 2022 Issue

The doomsday clock – a symbol created by a group of atomic scientists in 1947 to represent the likelihood of a man-made global catastrophe – is set on a semi-regular basis, a metaphorical action poised to be taken once again as a result of the global risks manifesting in 2022.

And these risks are considerable and constantly evolving. In terms of the business world, 2022 offers up a multitude of risk scenarios, headlined by the third year of the coronavirus (COVID-19) pandemic, the effects of climate change – the latter viewed by many as the biggest long-term threat facing humanity – and the escalating impact of the Russia-Ukraine conflict.

As far as the short term is concerned, the outlook appears grave. According to the World Economic Forum (WEF’s) ‘Global Risks Report 2022’ – which highlights the results of the latest Global Risks Perception Survey (GRPS) – the majority of respondents (84 percent) expect the coming year to be characterised by either consistent volatility and multiple surprises or fractured trajectories that will separate relative winners and losers.

Overall, the WEF report (published prior to recent events in Ukraine), suggests five key risk areas: (i) the scars of COVID-19 – societal scarring compounds the challenges of effective national policy-making and reduces international cooperation; (ii) looming debt crises – debt burdens are high and public budgets will continue to be stretched after the pandemic; (iii) climate action failure – deepening societal fractures and economic risks are undermining the world’s ability to contain climate change; (iv) connectivity blind spots – cyber security failure will continue to test the world’s digital systems due to new forms of human interaction and remote work; and (v) growing rivalries – geoeconomic confrontations will emerge as a critical threat to the world and one of the most potentially severe risks.

“Governments’ struggles to contain the pandemic and a lack of global collaboration offer a sobering view of the prospects for managing future global risks,” states the report. “When it comes to business and industry, even enterprises with the financial room to manoeuvre sometimes struggle to deliver on environmental, social and governance (ESG) commitments.”

The report also notes that businesses are under increasing pressure to strengthen the resilience of their supply chains, adapt to social and technological change, and remain vigilant to growing threats such as cyber attacks.

“We currently face multiple, interconnected and immediate crises,” says David Williams, chief executive and founder of Impact. “To be able to respond to the relentlessly volatile landscape businesses currently face, agility is the order of the day; that is, the ability to react quickly and positively in response to change – cultivating a sense of urgency to tackle the risks we face as a global community.”

At the same time, it should be noted that while the challenges facing businesses in the early months of 2022 come from a variety of sources, many, such as inflation, have been accelerated by the COVID-19 pandemic, rather than primarily triggered by it.

“Many factors combine into the manifestation of rising prices and inflation,” notes Clive Webb, head of business management insights at ACCA Global. “We have seen energy costs rise rapidly during 2021, with both oil and gas prices reaching record, or near record, levels. Political instability is also having an impact on prices. Additionally, talent shortages remain a significant factor, as many in the workforce have changed their expectations, not just in financial rewards but in lifestyle choices.”

Additional risk scenarios

While common ground exists with the WEF report, in its analysis of the global risk landscape – ‘Risk Map 22: Top Risks’ – Control Risks puts forward a number of scenarios, outlined below, as its take on the risks that businesses need to plan for and mitigate in 2022.

First, grand geopolitical repositioning. In 2022, the world will start to spin differently. Countries and companies will begin to form – and be formed by – a new global geopolitical order. This transition will take time, but will drive considerable disruption as countries, blocs and hemispheres begin to interact differently. The uncertainty to which we have uneasily adjusted in recent years will persist as we leave the geopolitical comfort zone of decades past.

Second, the rise of dysfunctional, fragile and vulnerable states. The rising number of dysfunctional, vulnerable, and fragile states across the globe is the overarching security risk for business in 2022. The critical driver of this risk has been the COVID-19 pandemic, which has further diminished these states’ capacity to absorb and manage external shocks and internal challenges.

Third, COVID-19 and terrorism. Terrorism in 2022 and beyond will be shaped by two major developments: the pandemic and the Taliban takeover of Afghanistan. These two developments pose different kinds of threats, but both are contributing to an increasingly diverse threat landscape. Businesses must use lessons learned to effectively monitor and mitigate terrorism threats in 2022.

Fourth, business versus a world of unchecked cyber threats. In 2022, escalating cyber threats globally are set to become a matter of survival for businesses. States are failing to deter aggressive behaviour, as offensive cyber capabilities proliferate among rising numbers of state and non-state actors. Insurers are questioning the viability of offering coverage for disruptive cyber events.

Fifth, the cutting edge of climate change. While COVID-19 continues to pressure business operations globally, climate change and its associated impacts – extreme weather events and natural disasters – will disproportionally influence politics, economic policy, urbanisation, infrastructure and capital investments in 2022, as well as compound impacts on business continuity, global supply chains and duty of care considerations. 

Finally, the ESG stampede. In 2022, businesses will be under pressure to intensify their activities on climate leadership and responsible citizenship, as governments cascade ESG commitments to the private sector. Investor pressure, activist shareholders, regulatory action, consumers and governments scrambling to make up for lost time on climate action are all hitting businesses hard.

“As economies being to rebound post-pandemic, the global risk agenda has diversified away from COVID-19 toward a broader range of threats,” observes Caroline Das Monfrais, a senior managing director and global resilience lead at FTI Consulting. “Surging energy prices and global energy shortages, intertwined with climate change issues, are two of the clearest challenges now facing businesses.

“Businesses are facing geopolitical disruption as a result of the devastating invasion of Ukraine,” she continues. “In addition to the tragic humanitarian cost, companies are now having to deal with significant economic disruption as well as complexity in relation to sanctions. Just before the invasion, according to our ‘Resilience Barometer’, 23 percent of G20 business leaders were worried about sanctions impacting their companies in 2022; this figure was 31 percent for Russian executives. The situation is constantly evolving, requiring agility and a greater emphasis on preparedness.”

Risk management

As countries and their economies rebound from COVID-19-related disruption, global concerns will begin to diversify away from the pandemic toward identifying and mitigating the major threats that pose a risk to business resilience and growth.

“Pre-pandemic stability is being replaced by post-pandemic uncertainty,” opines Mr Webb. “The decisions that businesses need to take to place themselves on the path toward net-zero, for example, need to be taken in the coming months. Having flexible and adaptable business strategies is essential.

“And while it may be counterintuitive in times of inflation, having the courage to invest in the right programmes is essential for business survival, no matter how large or small the organisation,” he continues. “Robust scenario models and utilising data and analytics are essential in helping to understand the changing risk landscape.”

That said, not all risks will affect businesses in the same way. “It is advisable for businesses to identify threats for themselves,” suggests Michele Wucker, founder of the strategic advisory firm Gray Rhino & Company. “Being aware of broader top risks and forecast lists is important, but relying on them without doing your own customised risk analysis is too big a risk.”

Thus, for businesses, a robust risk management process is key. “Understanding how to address the challenges of this uncertain business environment is essential,” says Mr Webb. “Effective risk management requires investment in skills and capabilities. Data is the lifeblood of every organisation, so effective use of data-driven decision making is another important aspect in business continuity.”

Business models

As well as having to deal with increasing vulnerabilities and risk, businesses have an opportunity to transform their business models, based on flexibility, future planning, innovation and new technological tools, among other elements.

In its ‘2022 Resilience Barometer’, FTI Consulting advises businesses to adapt to new realities while maintaining the discipline and resilience that builds sustainability – growing and thriving regardless of external headwinds. The most successful businesses, suggests the report, are the ones that are most resilient, tackling uncertainty with new business models designed to anticipate future risk scenarios.

“Global threats undoubtedly necessitate the transformation of business models,” asserts Ms Das Monfrais. “According to our survey, nearly one in five businesses reported that their business model became outdated in the last 12 months, with workforce-related issues in particular driving many businesses to completely revise their operations.

“In terms of proactivity, 37 percent of businesses say they are mainly reactive rather than proactive when it comes to addressing outdated business models,” she continues. “However, 88 percent of businesses stated that they are planning on adjusting their approach to retain and attract top talent. Businesses are also increasing their use of analytics to help understand and mitigate risk.”

Another issue is that many risks play out over multiple timescales. “All boards and executive teams have to balance things that are urgent against things that are important,” says Stephen Sidebottom, chair of the Institute of Risk Management (IRM) (an organisation that regularly contributes to the WEF’s global risk report). “For example, the response to the pandemic crisis has been extraordinary, and businesses now generally understand the associated risks as the world undergoes recovery.”

Supply chain risks

Among many significant impacts, the risk landscape has caused major disruption to supply chains around the world, testing the ingenuity, resilience and flexibility of businesses as they seek to maintain essential operations.

“Supply chains, along with outdated business models, workforce issues and the need to digitalise, have become a key vulnerability for businesses in 2022,” affirms Ms Das Monfrais. “Indeed, our research shows that more than 10 percent of the turnover lost by G20 companies surveyed was caused by disruption to supply chains – the highest proportion after shortage in workforce and skills, and cyber attacks.

“We are on the cusp of a new energy supply crisis as Russia, the largest exporter of gas and second largest of crude oil and petrol, is subject to unyielding sanctions,” she continues. “This has activated C-suite concerns about supply and global energy prices, which are already at an all-time high. Among G20 companies, 36 percent cite a surge in energy prices as a concerning resilience scenario.”

As a result, certain supply chains are likely to continue to be challenged during 2022 and possibly into 2023. “As the impact of climate change continues to be felt, we cannot expect the disruptions from supply chains from these factors to diminish,” suggests Mr Webb. “Society may well learn to accommodate the virus, however the complex nature of supply networks will always see fault lines appear. Businesses need to learn to live with these challenges and utilise robust risk management techniques to understand and seek to manage or mitigate the risks.”

Risk and volatility

Today’s volatile global environment is resulting in a more challenging risk landscape, with new risks emerging to augment existing ones. These threats, in many cases, have the capacity to become more severe during 2022 and beyond.

In the view of Mr Webb, businesses need to be agile in order to survive a shifting risk landscape. “Many have appreciated this during 2020 and 2021 and the need for that agility will likely continue into 2022,” he says. “At the core of this agility is the culture of the organisation – how it can innovate rapidly to provide solutions to issues and thereby create opportunities. Having the data and technology infrastructure is essential.

“While 2022 may well prove to be challenging, it is important not to forget that 2030 and 2050 net-zero targets will continue to get closer,” he continues. “Having the longer-term view of how to address net-zero in the context of their business and their industry with its full supply chain is also essential.”

According to the FTI Resilience Barometer, while systemic disruption, social upheaval, a worsening climate emergency and growing government intervention will continue to perturb businesses in 2022, leaders are better prepared to manage future crises.

“Our data shows that businesses now place a greater focus on planning for unknown risks, and those that take a proactive approach to risk management, and have tried and tested tools in place to protect their reputation, will be most resilient,” concludes Ms Das Monfrais. “Moreover, as the Russia-Ukraine crisis unfolds, we are seeing an increasing number of chief executives making public statements, reinforcing their businesses’ social values.”

So, given the current scale and gravity of the global risk landscape, businesses need to react quickly and innovatively to a relentlessly volatile environment – a response that tackles challenges as and when they emerge and future-proofs the business against the worst possible outcomes.

© Financier Worldwide

BY

Fraser Tennant