07 Jul The Risk Horizon 2025
Risk horizon scanning is on of the key roles that a Board needs to undertake. Given that the role of the Board is to ensure that a business achieves its goals and missions an remains sustainable, it is the events that might occur to future that are really important.
This is both a top down and a bottom up process. The governing grouping needs to undertake regular workshops seeking to identify the matters that they see on the risk horizon that need to be taken into consideration. This should involve both executive and non-executive management so that external views can also be taken into account. In doing this work the outputs of global surveys should be taken into account since this will stimulate conversation.
There is also a bottom up piece of work to be undertaken. Subject matter experts in business units will have greater familiarity with both the opportunities and challenges that they are likely to face within a single unit. Again workshops, facilitated by experts, should be undertaken to enable management to better appreciate the issues that are likely to be faced. This needs to be reported up from the individual business units to the governing body of the organisation.
In terms of the current issues that are likely to be considered, I mentioned that there are a range of reputable reports that could be accessed for current information. Here we consider the following reports:
- World Economic Forum Global Risk Report
- OCC Risk Perspective
- Allianz Capital Risk Barometer
World Economic Forum Risk Report
The World Economic Forum have issued the 20th edition of their Global Risks Report for 2025.
They rank the top 10 global risks as follows:
- State-based armed conflict
- Extreme weather events
- Geo economic confrontation
- Misinformation and disinformation
- Societal polarization
- Economic downturn
- Critical change in earth systems
- Lack of economic opportunity or unemployment
- Erosion of human rights and/or civic freedoms
- Inequality
Not all of these will have a major impact on your organisation. However it is important to appreciate what the impact of the risks is likely to be on the ability of your organisation to achieve its goals and missions. Some of these risks could have a major impact on supply chains whereas others could significantly impact logistics.
When considering armed conflict, there are those occurring currently of which your would be well aware. It is important for the governing grouping to consider which additional events might occur and what would be the impact on their organisation either direct or indirectly.
For a bank not lending directly to a participant in an armed conflict, it does not men that armed conflicts are irrelevant. You have to consider the impact that the specific event would have on the firms that you have lent to or are taking deposits from. Would the event impact their sustainable free cashflow, for example.
This could occur due to a change to the freight markets, or to underlying commodity prices increasing; or even due to an imbalance of supply and demand. It could also be caused by reduction in product demand internationally or locally due to the changing market conditions.
In terms of the impact on the organisation it will be necessary to identify those products that have price elasticity and those which do not, If there is price elasticity without an impact on demand there is unlikely to be a significant impact on sustainable free cashflow. However in the absence of price elasticity the firm is initially likely to experience margin erosion and potentially loss of market.
Each of the events needs to be considered in terms of its true impacts. An extreme weather event could damage infrastructure or supply chains. The governing body needs to identify critical elements of its supply chain and third arty risk to enable the resilience to be properly assessed taking into consideration the possibility of an extreme event occurring.
Other risk reports have very different outputs for the governing body to consider. Consider the recent OCC report:
OCC Semi-Annual Risk Perspective Spring 2025
Clearly a very different type of report based upon information garnered by the OCC, this will show the risks that are likely to have the greatest impact on the banking industry in the USA.
It says:
“Commercial credit risk is increasing. This is driven by growing geopolitical risk, sustained higher interest rates, growing caution among businesses and their customers, and other macroeconomic uncertainty. Pockets of risk remain for some commercial real estate (CRE) property types and vary by geographic market and product type. Refinance risk remains high for loans underwritten during a period of lower interest rates.
Operational risk is elevated. Banks continue to seek opportunities to gain efficiencies and respond to an evolving and increasingly complex operating environment. Failure to upgrade systems and digitize may result in loss of market share to competitors offering faster and cheaper payment alternatives. Criminals continue to exploit traditional payment methods. Fraud schemes commonly target checks, wire transfers, peer-to-peer payment platforms, and insiders. Evolving cyber threats by sophisticated malicious actors continue to target banks and their key service providers, emphasizing the importance of operational resilience. Recent disruptions across many sectors, including the financial sector, highlight the importance of sound third-party risk management.
Compliance risk remains elevated. This is due in part to Bank Secrecy Act/anti-money laundering (BSA/AML) and consumer compliance risks associated with elevated fraud levels, account access concerns, and evolving business models.
Adoption of new technologies, products, and services, and/or engagement with financial technology companies (fintechs) to deliver banking products and services, can offer benefits to banks and customers. These benefits can include, gaining efficiencies, furthering digitalization efforts, and meeting evolving customer expectations. That said, these engagements potentially introduce complexities to the operating environment, with implications for banks’ governance, change management, and risk management programs.
Global economic growth is forecast to slow in 2025 with uncertainty stemming from trade policy and geopolitical tensions. Moreover, asynchronous monetary policy decisions by global central banks could result in currency and bond market volatility.
The near-term economic outlook remains cautious as economic uncertainty has grown. Some forecasters note that consumers appear poised to slow spending as households have depleted much of their excess savings built up during the pandemic, wage growth continues to slow, and job gains have eased.”
By providing narrative and data explaining each of their key findings, the OCC providers the reader with a snapshot of the position of banks in the USA at the point of writing. There are some elevated concerns. Of course the concerns expressed by the OCC can be correlated directly with some of the messages from the World Economic Forum.
It is interesting that they mention expressly the impact of changing technology which is referred to by some commentators as being the 4th industrial revolution. Of these robotic process automation (RPA) and artificial intelligence (AI) and but two of the major developments. These changes will have major impacts on many organisations causing them to radically change their goals and missions to ensure sustainability.
This will radically change their sustainable free cashflow and result in a requirement for additional cash in the short to medium term as the organisation transitions to the new economy. The risks that these developments present are always balanced against opportunity, but are likely to remove barriers to entry in many industries, radically changing competition.
The governing group need to consider what a new entrant would look like both within their own industry and any customer, supplier, borrower or lender. A new entrant will not have the legacy technology or systems issues experienced by an incumbent firm, potentially massively impacting customer service, business agility and tailoring products. All of these matters need to be truly addressed and their impact on risk appetite considered.
Allianz Capital Risk Barometer
This report seeks to identify the major business risks for 2025 through a survey of more than 3,700 risk experts globally. As you will see these are more business focussed that the two previously considered reports. They rank the top 10 risks as follows:
- Cyber incidents
- Business interruption
- Natural catastrophes
- Changes in legislation and regulation
- Climate change
- Fire, explosion
- Macroeconomic developments
- Market developments
- Political risks and violence
- New technologies
Clearly there is some overlap to the other two surveys but by placing cyber incidents as the key business issue any board would need to seek to consider actively what the impact of such an event might be throughout its supply chain.
It is important to recognise that a cyber event does not need to directly impact your firm if it causes significant problems for an organisation that is critical to the delivery of services by your firm. This might include the power generation company, your cloud provider or your internet provider, for example. In looking through your organisational impacts it is important to consider those third parties that conduct services on your behalf and how an event might impact them. Firms need to consider available guidance on operational resilience and apply this to all key parties on whom the organisation is dependent.
Risk Reward’s Risk Priorities 2025
These are our views and ours alone. It is drafted taking into account the various other surveys but also considerations of the current environment. We would place he risks as follows:
- State based armed conflict
- Fraud and financial crime
- Cyber events and security
- AI and misinformation
- Economic terrorism
- Extreme environmental or weather events
- Terrorism including climate related actions
- Changing competition
- Changing employee engagement and motivation
- Changes in regulation and market expectations
I have left out climate change purely due to its impact in the short term being relatively limited compared to the other matters that are included in this list.
Basically every organisation needs to develop its own list, facilitated and challenged by experts in this industry. The economic cycle that 2025 is ushering in is likely to be one that will bring challenges. In the longer term interest rates will be much higher to be combined with high unemployment leading potentially to civil unrest, or event worse. However, that is in the longer term (out to 20 years, for example) and within such a period matters such as climate change and the transition costs associated with moving to a different consumption environment, are likely to be considerable.
If you wish to discuss any matters included within this article, please do contact me directly on dwc@riskrewardlimited.com. If you have challenges in these areas our trainers and consultants are always available to help you.
Wishing you the best for 2025 and 2026
Dennis Cox
CEO, Risk Reward Limited
