Environmental, social and governance (ESG) issues topped the list of risk managers’ concerns followed by cybersecurity and credit matters in the 12th edition of Deloitte’s biennial survey – “A Moving Target: Refocusing Risk and Resiliency Amidst Continued Uncertainty.”
The survey canvassed the views of chief risk officers or their equivalents at 57 financial institutions globally, including banks, investment managers and insurers. Conducted from March to September 2020, the institutions polled have total combined assets of $27.2 trn
The report found that 47% of respondents said improving their ability to manage ESG including climate change will be an “extremely important or very high priority” for their institutions over the next two years.
“For financial firms, it’s harder to adapt to changes in the ESG environment because it’s not only about their own carbon footprint or other impact, but they also have to look at their clients’ footprint, social impact,” said J.H. Caldwell, head of the financial services risk advisory group at Deloitte and the principal author of the survey.
It is unsuprising that cyber security threats continue to be a major threat as many people continue to work remotely due to the pandemic. However, only 61% of respondents considered their institutions to be extremely or very effective at managing cybersecurity risk.
This is why 87% said that improving their ability to manage cybersecurity risk will be an “extremely or very high priority” over the next two years.
The pandemic and depressed economies also highlighted the issues with credit risk. Around 20% of the chief risk officers highlight it as increasing in importance for their business over the next two years. This is a sharp increase from 3% in 2018.
More specifically, 62% said that credit risk measurement will be either an “extremely or very high priority” for their institutions over the time period.
Credit risk management is defined as the practice of mitigating losses by understanding which potential clients may come at too high a risk and above an institution’s pre-identified risk tolerance at any given time.
The areas that are identified as particularly challenging to measure include collateral valuation, commercial credit, commercial real estate, unsecured credit, leveraged lending and middle-market lending.
“Financial institutions are seeing more risk from more sources than ever before,” said Caldwell. “The COVID-19 pandemic has changed the risk management environment and presents an extraordinary set of new challenges for financial institutions — everything risk-related has been pressure-tested and challenged.”
He noted that 66% of banking executives surveyed believed that credit quality deterioration would be one of three macrotrends having an impact over the next two years.
Caldwell added that, “the rapid economic downturn, coupled with abrupt changes in consumer and business behaviour, may mean that systems, programmes and models based on pre-COVID-19 data may no longer accurately reflect the post-COVID-19 reality,”
He said, “Institutions will need strong risk management governance while having the agility and willingness to rethink their traditional approaches in a fundamentally altered business environment.”
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