Risk management $110


The Oxford Institute for Energy Studies


As of early March 2022, Brent crude was trading above this figure for the first time since 2014.


first step towards mitigating them. Still, while such risks are many, risk managers’ budgets are finite. The best way to account for them is to prioritise, assessing which ones create a potential existential threat to a company’s core business.”


Beyond ERM


Standard enterprise risk management (ERM) practices are not typically set up to handle catastrophic risks – even when rigorous and focused. And when they aren’t, they will certainly fall short.


Tim Chadwick (pictured) says risk should be part of a company’s culture.


“ERM is a formalised process that many organisations use to show they have something called risk management,” says Professor Torben Juul Andersen of Copenhagen Business School. “It has its advantages but they are sometimes difficult to show. The basic concept is that you can identify and assess risk in advance and monitor exposures as you go along – which is difficult.” Tim Chadwick, the group chief risk officer at PIB, an insurance intermediary group, makes a similar point. “It’s critically important to have risk as a pillar of the organisation’s culture,” he argues, adding that having “strong emerging risks monitoring and risk communication” that helps executives make decisions fast is important too. Fair enough – yet it’s clear that effective risk management is easier said than done. For years, after all, a financial crisis was on the risk radar. But the extent of the economic damage after the 2008 crash still caught everyone by surprise. Be it unexpected results in elections, growing tensions between the world’s superpowers, or the more frequent emergence of highly contagious viruses, there have been signs that risk management must expand beyond its usual boundaries. The World Economic Forum’s annual risk report, for instance, put pandemics on the radar in 2019. Even so, the potential implications were not absorbed by business leaders and the likelihood of a Covid- like disaster was deemed too low for them to make serious plans.


Russia and Ukraine account for more than a quarter of the world’s trade in wheat and for more than 60% of global sunflower oil and 30% of global barley exports.


25% Deloitte 54


“Then we have a war very close to us in Europe, and though we have been observing Putin’s changing behaviour over time and saw the military build-up, we didn’t react,” says Andersen. “We don’t know how it will play out, but it has repercussions for economies, companies and societies. We are increasingly facing major events that we cannot predict and do not fit the nice framework of risk management. We need something else.” “While not easy, scenarios can help in assessing the impact such risks may have on a company, which then must decide which mitigating actions could reduce their potential impact to an acceptable level,” adds Ilardo. “The main goal of risk managers with regard to such catastrophic risks is to act so that their impact on the organisation will fall below the existential threshold.”


Scenario planning is a key tool for quantifying risk, and identifying a range of potential mitigating strategies – but it must be applied to specific events. In other words, risk managers still have choices to make. “I’ve benefitted from past scenario exercises looking at a potential pandemic and its implications, but I think it’s key to recognise the limitations of such exercises,” stresses Chadwick. “You can guarantee that the event in reality, while often sharing some similarities, will be different.”


The fog of war


Though increasingly likely since Russia annexed the Crimean peninsula in 2014, the invasion of Ukraine in February 2022 seems to have caught businesses and politicians off-guard. Even if a ceasefire were declared tomorrow, the economic implications will be deep and far-reaching.


The humanitarian crisis is the priority, no doubt, but the consequences of economic damage to both Ukraine and Russia are dire. Nor can the fallout of the conflict necessarily be contained. “With rising interest rates, inflation, fuel costs, commodity prices and challenges in relation to staff availability,” says Chadwick, “the global economy and management will continue to see significant challenges in the years ahead.” That’s particularly true given the deep sanctions against Russia, essentially a form of economic warfare against the Putin regime. Already, some Russian banks have been cut off from the SWIFT international payments system, and the Russian central bank’s foreign assets have been frozen. The rouble has crashed and Russian interest rates doubled to 20%. Sanctions are reducing Russia’s trade volumes, and international businesses – among them Amazon, Apple and Volkswagen – are withdrawing or scaling down local operations.


In the long run, sanctions could lead to the fragmentation of the global financial system. In the short term, gas and oil prices, as well as the price of agricultural commodities and base metals, will rise sharply. So how bad will sanctions be for businesses that must now rework supply chains in Russia and Eastern Europe? “Very bad,” believes Professor Kevin Dowd of Durham University, whose research focuses on financial risk management. “The big issue here is the ‘law of unintended consequences’. Sanctions are bad, period, and should almost never be used. When they are used, and especially so indiscriminately, they have all sorts of bad effects – boomerang effects – that no-one ever foresaw, at least not in time to duck.” “Going back historically, sanctions don’t achieve their objectives,” Dowd adds. “Sanctions against Mussolini in the 1930s didn’t stop his effort to conquer Abyssinia. Cutting off oil to Japan in the run up to Pearl Harbor put Japan in the situation where it had either to agree to US demands or go on the attack.”


Finance Director Europe / www.ns-businesshub.com


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