Creating Insight on External Risk Management

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On this week's blog post, we're inspired by our interview with Susanne Katus, Brand & Business Development and Corporate Secretary at
Datamaran. Datamaran is the only software platform in the world that identifies and monitors external risks, including ESG, which is Environment, Social and Governance trusted by blue chip companies and top tier partners. It brings a digital and data driven business process for external risk management in house at any time. We're happy to present you a few key points from this interview.

Accessibility of External Risk Insight for High Level Executives

To be an authentic and trustworthy Corporate leader in today’s modern age, you really need to have a wider viewpoint on Risk and opportunity in the landscape. You also need to consider a wider group of stakeholders, beyond traditional shareholders, and look at your employees, your customers and business partners. This is a crucial step to understanding what it means to mitigate risks, but more importantly, unlock opportunity and create value.

Especially just about a decade ago, the CFO or the CEO, or even the chief risk officer rarely engaged in understanding external risks and opportunities. These were usually led by a specific team within companies that traditionally has been called such as the corporate sustainability team, the corporate ESG team or even corporate social responsibility team. A corporate leader just didn’t have access to useful Risk insight into these environmental, social corporate governance risks. Especially last year the market has caught up, and we can see, for example, in the World Economic Forum Global Risk report, that there is a call for C-suite leaders, Risk experts, CFOs to become more authentically engaged on these issues and understand what types of risks and opportunities are attributed to them.

Measuring External Risk and Technology

Nowadays, with the use advanced technology, as well as data analytics, it is more than possible to provide useful insights into these types of risks and opportunities, but beyond providing insights and data also provide a more structured and systematic business process through which companies could continuously identify, prioritize, and monitor how these issues evolve over time - especially with the help of companies like Dataraman, which provide unique solutions to measuring external risks. 

First step to managing any type of risk is to source the right information. In a traditional sense, risk assessments are more internally, operationally or financially focused and it is easier to acquire such information when you have one source to look at- your own company. However, for external risks and systemic risks, you have to look at the external landscape to really assess the likelihood, impact and velocity of them. This can be done by looking at publicly available information to understand competitive, regulatory, both short-term and long-term as well as reputational risks tied to these types of issues and compiling them into more objective and comparable information. 

As this requires a very wide approach, it is not possible to manage through more ad hoc processes, like manual desktop research, surveys, asking for a specific group of individuals' opinion on really what are the most important risks or opportunities. You need data, you need facts, you need an audit trail and the best way to access these are by the help of technological advancements - namely specific softwares designed for these processes. For example, you need a platform that can provide things such as a diagnostic report, tracking an comprehensive amount of risk factors including economic risks, environmental risks, employee risks, social risks, innovation, and technology risks, governance risks. And ultimately through that diagnostic report, you’ll see what are the blind spots, the areas that you may have missed, but also what are the opportunities for your company to differentiate yourselves in the market and showcase your leadership and speak more authentically to certain issues. 

This can help you assess the key risk drivers and get down to that source data to better understand how other companies are actually tackling this risk, how they are positioning themselves on that information as well. Diagnostic analysis can also be used to update your annual reporting, financial reporting, ESG reporting, proxy reporting and you can monitor how these issues change over time. 

Ultimately technology is there to advance and support where we as humans, have our boundaries. We're very good creative thinkers and strategists, but at the end of the day, our time is better spent not trying to source this information and make sense out of it, but really to understand what we are going to do with this information. Technology provides companies and risk analysts, and officer’s in particular with an ability to optimize efficiency and effectiveness, increase their agility. But more importantly, it provides a type of insurance policy. This is especially what we see with external risk management. It’s a new type of insurance policy to ensure essentially that you haven’t missed anything in the wider spectrum, simply because of the human capacity to look at information, analyze information, and monitor information in a consistent and structured way. 

 

Major Trends In the  External Risk Management

One major change we can see, especially during this pandemic, is the highlight of opportunities and value creation. According to Susanne, there’s an awakening happening in the risk landscape where people realize that risk management is not just about minimizing risk, but ultimately a key objective is really about gaining a wider understanding of both the risk and opportunity tied to certain issues.  Which is a great change in our opinion, and that is one great thing the pandemic has taught us - caring for others and thinking of it from a perspective that helps others and minimizes the risks for everyone and adds value to yourself and others. 

ESG traditionally is treated as a separate category. In reality, it’s just a label that is used to describe certain types of issues that either present risk and/or opportunity and ultimately the company needs to have information to make that proper assessment to determine their risk mitigation strategy. With this awakening, and this understanding, there’s a broader horizon of risks that companies need to be attuned to, and use a wider set of external data sources to have a really good understanding of those types of risks and opportunities.

ESG related risks and opportunities have always existed in some form of another. We could argue that cybersecurity was within that bucket, and for a long time, we didn’t understand the real financial and wider implications of that risk, but in the past decade, obviously it’s become quite clear. 2020 was another prominent example of unpredictable and global-wide changes and these types of risks and opportunities that have just gone into acceleration mode now. We can’t ignore the fact that ESG type risks and opportunities present real financial and wider implications for companies. I think the biggest challenge there has been just the time horizon associated with these types of risks and opportunities. They tend to be in the longer term horizon in terms of playing out and impacting a company. But what we see now is that obviously things can change. What companies might think as a material risk today can change tomorrow.

It is also important to consider the major trends could shift with changes such as political changes, for example the new Biden administration, and we may see new effects on companies and interesting initiatives or legislations. There’s already a lot of technical groundwork for regulation and policy in the U.S. and now it’s just a matter of essentially pulling that trigger. What we’re seeing is that’s really making chief risk officers, CFOs CFO CEOs aware that they can no longer be reactive. And that’s not just from a regulatory standpoint, that’s also thinking about access to capital and engagement with your investors. The Biden administration is essentially turning up to the heat on the problem that a lot of companies face, which is that they generally don’t have a process to really effectively understand these types of risks and opportunities. We’re better prepared for this type of regulation when it does hit, which will likely happen in the next couple of years.

Thoughts on Major Misconceptions About Risk

The common misconceptions such as relying predominantly on a subject matter expert opinion to assess risk or opportunity, as well as considering risk management only to minimize risk. These tend to come from executives having a very internal focus on risk at a company level and not having the wider understanding of risk management. Those are quite common misconceptions and it’s understandable because especially when we think about the types of risks that we’re thinking, we’re talking about climate change, employee wellbeing, corporate culture, public health, they’re complex, and they’re hard to measure and they’re hard to manage.

Another misconception is that risk needs to be quantifiable. It needs to be measurable, but really, it’s about understanding what has the potential likelihood and impact of a risk or opportunity from as many different angles as possible. This allows you to make more confident decisions about how you’re going to ultimately treat that type of a risk or opportunity and the type of policies that you’re going to put in place at a company.

Closing Words

For now, this sums up the key points of our interview. As the Global Risk Community team, we once again thank Susanne Katus for her insight on external risk management. More information about this topic is available in our original interview, which is accessible here:

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