Adapting to Nonfinancial Risks: Lessons from Corporates

In today’s rapidly changing business environment, corporate organizations are evolving their approach to risk management by developing resilience strategies that go beyond traditional methods. As a result, executive teams and boards are grappling with key questions related to nonfinancial risks.

Four Key Questions in Nonfinancial Risk Management

Companies are seeking answers to the following critical questions:

1. Identifying Blind Spots

• Boards are demanding timely reporting on their risk profile, including:
  • Risk drivers
  • Evolution of these drivers
• This proactive approach helps organizations stay ahead of emerging risks and capitalize on opportunities.

2. Managing Transformations

Companies recognize the risks associated with transformations of all kinds:

• Cost or lean transformations
• Growth programs
• Fundamental changes in business models due to:
  • Digital technologies
  • Artificial Intelligence (AI)
  • Other emerging technologies

These transformations require a strategic approach to risk management, ensuring that organizations are prepared for the potential outcomes.

3. Derisking Strategy

Strategies must be stress-tested against shorter timelines and scenarios that account for a broader set of potential outcomes:

• This involves considering multiple scenarios and adapting to changing circumstances.
• By doing so, organizations can better navigate uncertainty and stay ahead of competitors.

4. Creating Strategic Options

Companies are looking beyond downside risks to capitalize on upside opportunities that can provide competitive advantage:

• This proactive approach enables organizations to seize new markets, technologies, or business models before competitors do.

Lessons from Corporates for Banks

The experience of corporates provides valuable lessons for banks in adapting to nonfinancial risks and developing effective resilience strategies. Key takeaways include:

1. Embedding Risk into Strategy

• Incorporate risk management into overall business strategy.
• This holistic approach helps organizations make informed decisions that balance risk and opportunity.

2. Improving Overall Resilience

• Develop dynamic capabilities and structural assets that enable organizations to adapt to changing circumstances.
• By strengthening resilience, banks can better navigate uncertainty and stay ahead of competitors.

3. Rethinking Risk Appetite

• Reassess risk appetite in light of changing business conditions.
• This involves considering multiple scenarios and adapting to changing circumstances.

By following these lessons from corporates, banks can develop effective approaches to managing nonfinancial risks and staying competitive in today’s rapidly changing business environment.

Conclusion

In conclusion, the current economic environment requires organizations to take drastic actions, and understanding the implications of these actions for their institution’s risk profile is crucial. By learning from the experience of corporates, banks can adapt to nonfinancial risks and develop effective resilience strategies that enable them to stay competitive in today’s rapidly changing business environment.