Risk appetite: no reverse for globalisation
Globalisation is not going backward; it is evolving. Enterprise risk management is a suitable process to support companies in decisions about their global risk appetite, starting with the risk management function. This was conclusion of the webinar, Setting up risk appetite in a more complex trade environment, co-organised by FERMA, ecoDa (the European Directors Association) and AIG, on 8 September.
Setting up risk appetite in a more complex trade environment was the theme of the webinar, co-organised by FERMA, ecoDa (the European Directors Association) and AIG, on 8 September. The main goal was to understand the current reshaping of trade relationships and the need for companies to revise their risk appetite for overseas operations.
Presentations from Fredrik Erixon, a Swedish economist and Director of the European Centre for International Political Economy (ECIPE), and Carolyn Spackman, Chief Economist of Country Risk at AIG, set the scene. They stressed that even if globalisation is no longer accelerating, it has not gone into reverse.
Patterns of trade have been shifting for the last five to six years. With increased connectivity, the potential for growth relies now more on trade in services than the trade in goods, according to Mr Erixon. The trade in services is giving rise to new forms of protectionism, no longer by tariffs and customs but with regulations and norms – what Mr. Erixon called the “21st century style of protectionism”. Rules on data localisation, for example, can give an advantage to local companies and create barriers to entry for others.
Ms Spackman argued there were reasons to be confident about trade, but also considerable uncertainty as a result of discontent, unequal distribution of wealth, technology and populism. She said that whatever President Trump’s rhetoric, he was most likely to focus on specific sectors, for example to protect US intellectual property. She stressed the connection between international trade and politics. “Trade war is one potential disruptor. Real war is worse. The potential is low but it is there,” she said remarking on the tensions with North Korea and China and in the Middle East.
For Jan Wesselijk, board member of ecoDa and the Dutch Institute of Directors (NCD), it is mostly the tone of the public discussion that has changed. Boards need to apply discipline as there is no easy choice, no fast way of responding to the new trends. He emphasised that only people’s attitudes are making the difference, and the change needs to start at home. Successful companies know how to work in harmony with their environment, including all sorts of stakeholders.
Sonia Cambier, Global Head of Insurance & Prevention, Solvay, recalled to the audience that risk managers are not predictors, with no crystal ball available. To help business leaders adjust to a new global trade environment, Solvay has the expertise of a risk management team composed of experienced professionals with diverse backgrounds in insurance, brokerage and ERM. They facilitate risk expertise and risk analysis, although they do not “manage” risks.
The risk culture is built on a constant anticipation of what can go wrong, where the communication of “bad news” is promoted and encouraged, and lessons are drawn from it. Ms Cambier explained how the understanding of the level of control over a risk is a priority in the Solvay’s ERM, more than assessing the level of probability of its occurrence.
Finally, she illustrated how a company could adjust its risk appetite in relation to a global change with Solvay’s clear commitment on climate change. This commitment, she said, could cause short term loss of competitiveness, in comparison to similar organisations still heavily relying on carbon generating activity, but as a science-based company where decisions were based on evidence, Solvay believes its strategic choice will pay off over the longer term. Adjusting to climate change in an orderly fashion appears to be the best choice for the resilience and sustainability of the organisation, said Ms Cambier.
Organized with AIG and the European Confederation of Directors' Associations (ecoDa).