Seeing the unforeseen: how financial services firms can better prepare for emerging risks

Imagine that something very unexpected has happened in the world. Maybe a massive natural disaster has devastated the environment and wiped out entire communities. Maybe a key world economy has collapsed, sending financial fallout rippling around the globe. Or maybe undersea cables linking North America and Europe have been cut, taking out communications and trading exchanges on both sides of the Atlantic.

If such an extraordinary event happened, would your business know what to do next? If you’re like most organisations, you’d probably find yourself in uncharted territory, scrambling for a way to steer through the crisis. That’s more than understandable – after all, it was impossible to have foreseen such an event and put together a plan. 

But was it really impossible to foresee? Could you have been more ready? Why do some of your competitors seem more prepared than you? 

The problem could lie in the way you plan for emerging risks

Emerging risks – which can be defined as risks that are entirely new to an organisation or previously known risks that re-emerge in a new or unfamiliar context – are difficult to pin down and plan for by their very nature. 

Yet, most frameworks that have been put forward for identifying and mitigating emerging risks tend to focus on specific, well-understood emerging risks – like climate, cyber, or model risk – that aren’t truly “unforeseeable”. If you really want to guard against being blindsided, you need to step outside the box and consider the totally unexpected.

What’s more, financial institutions often can’t help but approach such risks from a very self-centred, finance-focused lens. They’ll spend a lot of time thinking about how the event might impact their operations specifically and how much money they might lose. In taking this narrow view, organisations often miss the bigger picture – and that can leave them on the back foot when the unthinkable does happen. 

A new playbook for dealing with the unexpected

Having a crystal-clear view of emerging risks is impossible. But it is possible to gain a fuzzy view of the future to help you prepare for so-called “unforeseeable” events.

At Baringa, my team and I regularly advise clients on how to build a framework and playbook that allows them to react in an organised way to unexpected events. It’s not about identifying every plausible emerging risk, or having a detailed plan for 100 different scenarios. Instead, it begins with thinking big – about high-level events that could occur both locally and globally – then zeroing in on the likely impact on your firm and its value chain. This will allow you to start with a considerable advantage when you’re in incident response mode.

Here are some steps you can take to start building your own framework for identifying and addressing emerging risks:

1. Instead of specifics, imagine general types of events that could cause your organisation distress. Think big: Pandemics. Trade disputes and sanctions. Maritime security. Widespread communications outage. Environmental degradation. War.
2. Consider how, in the worst case, these categories of incidents could impact your organisation. Could they bring a direct financial risk? Might they cripple your operations? How would they affect your customers, suppliers, employees, and stakeholders?
3. Outline which territories you operate in could be affected, and which parts of your organisation could be worst hit. Consider the legal, regulatory, cultural, and political implications of each scenario.
4. “Wargame” the scenario and build a response playbook. Detail what parts of the organisation need to be part of the response, who the key decision makers are, and how you communicate your actions internally and externally. Identify what third parties need to be involved. Assign roles and responsibilities, define escalation procedures, and establish communication channels.
5. Test your playbook regularly and update it as needed. Simulate different scenarios and evaluate how well your framework works in practice. Identify any gaps or weaknesses and address them promptly. Keep track of any changes in the external environment that could affect your assumptions or plans.
6. Learn from your experiences and those of others. Review how you handled each situation and what outcomes you achieved. Seek feedback from your suppliers, employees, and other stakeholders on how they perceived your response. Bake in your learning to the next iteration of your planning, so that your response can grow more fortified over time. 

Your playbook won’t be perfect; it’s not intended to be. Think of it as step zero in your risk response plan. It’s meant to give you a head start, so you can sidestep the initial stages of panic and confusion and be on the front foot when faced with an unexpected event. By being prepared, you can focus on the specifics of your response and act faster – minimising the damage and maximising the opportunities that arise from such situations. 

If you’d like to set up your business with a stronger plan and playbook for managing emerging risk, Baringa is ready to help you get started. For more information, please get in touch with us.