How can I navigate my risk environment strategically?

If the last year and a half has demonstrated anything, it is that the broader sweep of global politics, economics, social change and the environment can have profound effects on companies and their ability to generate value now and in the long term. Losing sight of these ‘big picture’ issues is a risk global organisations can ill afford, but it can, and does, happen due to day-to-day commercial pressures, shifting balance sheets and the need to demonstrate positive quarterly results.

So, how do companies stay ahead of the curve and ensure these issues remain firmly on the corporate radar?

In our experience of working with some of the world’s most forward-looking multinationals, a comprehensive ‘horizon scanning’ assessment of the risk landscape can enable businesses to forecast potential vulnerabilities, develop mitigating strategies and identify previously unseen opportunities.

We undertake horizon scanning assessments for clients across different sectors. Multiple projects have revealed key trends and have enabled us to identify some of the most material dynamics businesses will have to navigate over the coming years. The primary issues include:

• Climate change, the low-carbon economy and a changing physical environment – as well as growing efforts to link long-term financial performance with companies’ ability to manage climate change risks and opportunities;
• The expansion of social and environmental responsibilities beyond an organisation’s operations – either because of stakeholder pressure or legislative changes;
• Societal change, the diversity agenda and growing cultural polarisation – including changes in the intergenerational values of workers and consumers; efforts to redress historical gender inequality; and blurring lines between the public and commercial space;
• The stalling of the internationalist, liberal, free-market consensus – and its implications for international trade, crossborder labour flows and business planning; and
• The erosion of US hegemony, the re-emergence of China and the resetting of international geopolitics – as well as the potential for companies to be drawn into sovereign disputes or to benefit from national foreign policy strategy.

Each of these issues has the potential to materially undermine company value – or to raise opportunities for businesses ready to prepare for the future in a proactive, flexible way. Horizon scanning identifies potential risks that can lead to business model disruption, ethical dilemmas and brand erosion, but it can also help companies to identify emerging higher-risk/ higher-reward markets, develop more sustainable products and services, and align business strategy with changing societal values and expectations. Let's see how it can work in practice.

Using data to drive strategic decision making

Horizon scanning is further buttressed using quantifiable risk data to provide a more layered understanding of the operating landscape. Where many businesses are reactive and rely on publicly available, qualitative analysis, our data driven approach provides a more comprehensive and forward looking view.

Through leveraging extensive, multi-thematic data sets, business leaders are provided with unique insight into risks and opportunities that help determine their ability to preserve and drive value in the long term. For example, we worked with a multinational company that was incurring millions of dollars in extra costs due to disruptions in their supply chain, prompting senior managers to look for ways to reduce the likelihood of issues flaring up in key ‘hot spots’. With strikes and other labour-related incidents increasing in major sourcing countries, notably China and Vietnam, senior managers were concerned about the impact on operations
and the corporate brand.

The assessment collated data on suppliers, including historical strikes, number of employees, size of shipments and length of relationship, and layered it with exposure data on environmental, social, and governance risks.

Machine learning was utilised to develop a model to forecast the likelihood of disruptions at supplier factories. Outcomes were accompanied by explanations and potential next steps for embedding the model in workflows.

The company was able to identify highrisk factories and take steps to understand drivers of labourrelated incidents. Moreover, savings accrued by implementing the model far surpassed the cost of its adoption.

These examples underscore the importance of developing a holistic and forward-looking understanding of key external risk dynamics. Horizon scanning can help identify concrete measures companies can take in response to future challenges, especially when the assessment forms part of a continuous management process. By embedding advanced analytics into operational decision making, potential areas of exposure – both financial and otherwise – can be curtailed before a negative event occurs.

Data-driven horizon scanning not only helps to safeguard brand and reputation, it can also identify strategic opportunities that support long-term growth. Short-term commercial exigencies will continue to shape corporate strategy, but companies must maintain focus on the big picture in the context of an ever more complex and shifting external risk environment.

Improving boardroom strategy on climate change risk

We partnered with a multinational bank seeking a comprehensive analysis of their operating environment. Read the case study here. Although mitigating reputational risks was the bank’s chief concern, findings from the assessment helped identify long-term strategic investment opportunities.

Following a deep-dive into the legislative and regulatory landscape, significant gaps were identified in the bank’s approach to climate change risk. The board was failing to adequately incorporate climate risk exposure – exposure to both physical climate change and the transition of investment and lending practices into low carbon areas.

By highlighting climate change risk as a material strategic imperative, a number of new investment opportunities were actioned. These included supporting funding for projects that contributed to a low-carbon economy, assisting with the establishment of voluntary carbon markets and financing green bonds.