In the rapidly evolving financial sector, non-financial risks—such as cyber threats, human capital risks, climate risks, and geopolitical uncertainties—have become crucial to organizational resilience. These risks, though harder to quantify and predict, have the potential to disrupt operations, damage reputations, and undermine financial performance. Therefore, effective management of non-financial risks is essential for financial institutions to remain resilient and competitive. Here are the key takeaways from a recent panel discussion on managing non-financial risks and building resilience in the financial institutions industry.
Key Takeaways
Collaboration Between Risk and HR Functions:
Expanding Skills and Talent: Financial institutions must enhance their ability to manage a rapidly changing risk environment by fostering collaboration between Chief Risk Officers (CROs) and Chief People Officers (CPOs). Closer integration between risk and HR can enable organizations to develop predictive analytics for non-financial risks, turning traditionally reactive risk management processes into more proactive ones.
Risk Culture: A strong risk culture is vital for resilience. The collaboration between risk managers and HR can help embed risk awareness at all levels, especially by involving employees in exercises and simulations (e.g., tabletop exercises) that prepare the organization to respond to risks in real time.
Human Capital and Predictive Analytics:
Utilizing Data: Human capital data, including employee location, demographic information, and performance data, can provide insights that help predict non-financial risks like cyber threats and geopolitical instability. By understanding where employees are located, financial institutions can anticipate disruptions caused by climate events, supply chain vulnerabilities, or geopolitical instability.
Cyber and Climate Risks:
Cyber Threats: Cybersecurity remains the top concern for financial institutions, as cyber attacks and data breaches are the number one risk. The increased frequency of sophisticated attacks, including those powered by AI, requires banks to strengthen their defenses. Remote working has compounded this risk, making it critical for organizations to adopt a proactive and adaptive approach to cybersecurity.
Climate and ESG Risks: The financial sector is under increasing pressure to meet net-zero commitments and to provide green financing. However, emerging technologies in this space can be difficult to evaluate and often lack historical performance data. Insurance companies can play a pivotal role in helping financial institutions assess and mitigate these risks, facilitating green lending by providing expertise and support for new technologies.
Insurance as a Risk Management Tool:
Insurance plays an essential role in quantifying and mitigating non-financial risks, especially in areas like cyber, climate, and regulatory risks. By working with insurers, financial institutions can gain a clearer understanding of potential consequences and tailor their risk management strategies accordingly. For instance, insurance can help institutions navigate the complexities of emerging technologies and new regulatory landscapes in ESG financing.
Enhancing Decision-Making with Risk Data:
The ability to make informed decisions is critical to building resilience. Financial institutions should leverage both internal and external data to gain a deeper understanding of their risk appetite. This data can inform strategic decisions about where to deploy capital, whether to approve products, and how to structure risk financing strategies.
Non-financial risks should be integrated into stress testing frameworks to ensure that financial institutions are prepared for a wide range of potential scenarios. Furthermore, aligning risk and reward, both internally (with employees) and externally (with vendors and partners), is crucial to long-term organizational resilience.
External Cooperation:
Collaboration with Industry Peers: Given the interconnected nature of risks like ransomware attacks or cyber incidents, financial institutions need to collaborate more effectively with their peers to strengthen defenses and share threat intelligence. By pooling resources and expertise, banks can better manage systemic risks that affect the broader financial ecosystem.
Building Organizational Resilience: A Collaborative Approach
To navigate the complexities of non-financial risks, financial institutions must recognize that resilience is not just about responding to immediate threats but also about creating systems and cultures that can withstand future shocks. Key strategies include:
- Bridging silos between risk and human resources teams to foster a holistic approach to risk management.
- Utilizing advanced analytics to predict and mitigate risks before they manifest.
- Leveraging insurance expertise to quantify and manage emerging risks in areas like cyber threats and ESG.
- Collaboration with other institutions to tackle systemic risks and foster industry-wide resilience.
Ultimately, a resilient financial institution will be one that continuously adapts to the evolving landscape of non-financial risks while maintaining a strong culture of risk awareness and collaboration across all functions.
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