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News round-up: May 2023 A&R magazine May Jun 23

CEOs rank climate change as fastest growing risk

Exposure to climate change risk is the fastest growing threat to businesses, according to European CEOs in a report by professional services firm PwC. Nearly a quarter (24 per cent) of respondents believe their companies will be highly or extremely exposed to the impact of climate change within five years and that this will lead to “certain” or a “high probability” of significant financial loss.

In response, CEOs have stepped up their efforts to mitigate the impact on their businesses and are now leading the way globally, with 75 per cent implementing initiatives to reduce their company's emissions, and 71 per cent introducing new climate-friendly products or processes.

Just 16 per cent of EU-based CEOs said they will be only minimally exposed to the impact of climate change over the next five years.

The report found that climate change now ranks alongside macroeconomic risk, geopolitical conflict, inflation and cyber security risks as the most significant concerns facing senior business leaders over a five-year period. 


Equip teams to think the unthinkable about geopolitical risk

The Chartered IIA and Airmic have published a report called “Navigating geopolitical risk: building resilience demands collaboration in a challenging world”. It urges organisations to be agile as “once-in-a-generation events” start to occur regularly, and it highlights the importance of scenario planning and horizon scanning.

The report adds that both internal auditors and risk professionals need more education to balance interpersonal and technical skills, so they are equipped to “think the unthinkable” and warn organisations about possible geopolitical scenarios. 

Strikes and riots threaten global operations

Five factors are increasing incidences of violent political risk around the world, according to risk and insurance organisation Allianz Global Corporate & Specialty. Its report, “Strikes, riots and civil commotion outlook 2023”, identifies the ongoing cost-of-living crisis, distrust of governments and institutions, increasing political polarisation, a rise in activism, and climate and environmental concerns (especially against businesses seen to profit excessively from fossil fuels). 

EC publishes good-practice handbook on ways to combat corruption

The European Commission has published a series of good practices that internal auditors can use to help their organisations to combat corruption. The guide, called The Handbook of Good Practices in the Fight Against Corruption, is composed of 27 ideas, initiatives or practical advice – one from each European Union (EU) member state – to prevent bribery and corruption and improve transparency, accountability and good corporate governance.

These include a Finnish data analysis tool that helps law enforcement agencies to process large quantities of data and identify cases for investigation, a Slovenian system that merges databases to create a “one-stop shop” to combat economic crime and make public information more accessible, and Slovakian measures to improve transparency about the beneficial owners of companies.

The guide includes well-established practices as well as innovative solutions to new and old problems. It is split into eight categories, including transparency and open data, promoting integrity, managing conflicts of interest, and better detection and investigation of corruption.

The Commission plans to introduce a directive on combating corruption and hopes the handbook will help government agencies and companies to overcome challenges and identify weak spots in anti-corruption measures and policies, as well as allowing them to see the progress other countries are making. 

Tips for effective enterprise risk-management strategies

Many risk managers take too narrow a view of the systemic risks facing their organisations, according to a survey by artificial intelligence (AI) firm Dataminr. It argues that business risk will become more complicated to manage in the future and, while risk strategies have significantly advanced in the past few years, many still have a long way to go.

The researchers found that organisations with a risk management champion at C-suite level were more likely to have highly effective enterprise risk management strategies, however only a third of respondents had one of these. It pointed to cyber security and real-time alerting capabilities as vital areas to develop in the future. 

FS firms under pressure from increasing ESG expectations

ESG and sustainable finance regulations are causing the most intense regulatory pressure on financial services firms, according to the second edition of big four consultancy KPMG’s biannual Regulatory Barometer. The research, which examines regulatory pressures faced by financial services firms in the UK and EU, found for the second time that greater disclosure requirements and regulators’ expectations of better practice put these areas at the top of the list.

The Barometer also maps where regulations in the UK and the EU diverge, highlighting the greatest differences in governance expectations, customer protection and access to markets. 


NCSC issues new advice on mapping supply chains

The UK National Cyber Security Centre (NCSC) has produced guidance entitled “Mapping your supply chain to improve organisations’ resilience to supply chain shocks and security risks”.

Its aim is to help organisations to understand their network of suppliers so they can manage cyber risks effectively and carry out due diligence. 

Bank failures raise red flags for CFOs

The recent failures of Silicon Valley Bank and Signature Bank have highlighted the importance of financial risks in organisational resilience, according to consultancy Gartner.

When reviewing how organisations are responding to threats to banking facilities and fears these could spread to banks globally, researchers found that chief financial officers (CFOs) were focusing on educating boards about current risk exposures and assessing the risk and viability of their current funding sources.

More than one in four CFOs in Gartner’s survey of 250 CFOs and senior finance leaders said they plan to spread their deposits across more banks after the recent collapses, while 85 per cent expressed concern about the impact of bank failures on their current operations and 18 per cent said they had some level of exposure to one of the failing banks.

Gartner says the crisis has brought concentration risk back into the spotlight. Some companies kept more than 25 per cent of their cash reserves in a failed bank. The report advises leaders with a concentration of funds in any one institution to prioritise diversifying their deposits. 

Chartered IIA advocacy strengthens internal audit in energy firms 

The Chartered IIA has welcomed the new Financial Responsibility Principle published by energy regulator Ofgem. In November, the institute wrote a letter to Ofgem’s chief executive highlighting concerns regarding the lack of any requirement for energy suppliers to have internal audit. The letter pointed to Chartered IIA research which showed that none of the 30 energy suppliers that recently collapsed had internal audit functions. This included Bulb, which had been the UK’s seventh largest energy supplier. The letter was reported on the front page of the Financial Times website.

This led to a meeting with Ofgem, in which the institute advocated that the Financial Responsibility Principle should be strengthened in terms of internal audit provision as part of a statutory consultation Ofgem was running at the time. The Chartered IIA made the case that Ofgem should use the Corporate Governance Code as a benchmark and should, at the very least, ensure that the Principle aligned with the Code’s requirements. They went on to suggest ways in which internal audit provision could be included in the terms of the Principle.

The final version of the Principle, published in April, broadly adopted the institute’s suggestions. The final text makes it implicit that energy suppliers should have an internal audit function.

“We are delighted that Ofgem has decided to strengthen its Financial Responsibility Principle regarding internal audit provision,” said Gavin Hayes, head of policy and external affairs at the Chartered IIA. “This should increase the profile, influence and standing of internal audit across the energy sector. Importantly, it should also strengthen the corporate governance of energy suppliers and help to enhance their financial resilience going forwards. This is a great advocacy win for the Chartered IIA and our members.”

This article was published in May 2023.