Italian listed companies face up to the big risk picture

The Global Risk Report, published every year by the World Economic Forum (WEF) in collaboration with Marsh & McLennan and Zurich, captures global businesses’ perceptions of major risks and their potential medium-term impacts. But what happens when we move from perceptions to actions, when organisations translate their intuitions and forecasts into concrete data? To understand this, Marsh elaborated with Risk Ready: Risks in Italian listed companies, a report recently presented during a webinar from the Italian risk and insurance management association Anra. As Carlo Cosimi, vice-president of Anra and head of insurance and risk financing at Saipem, an Italian multinational oilfield services company, pointed out, the financial statements are a snapshot of the economic situation of a company. They are an essential tool for understanding its health and its future prospects, its potential resilience to new crises and its ability to protect strategic objectives. The smartest investors today know that the ability of companies to compete and their future prospects will no longer be based only on elements such as turnover or cost structure, but increasingly on their ability to manage risks. The big question facing investors, leaders of the companies themselves and their risk managers is: how are these risks represented and communicated in the financial statements? Is the information transmitted sufficiently clearly for investors and stakeholders to understand what are the real exposures of a company and the levels of risk retention? Fabio Landriscina, risk management and specialties leader and managing director at Marsh, recalled that the Global Risk Report has been going since 2005 and is based on the risk perceptions of 12,000 executives from all over the world on a short-, medium- and long-term scenario. What the report does not say, however, is how these perceptions are translated into the financial documents and how they are communicated. It was from this standpoint that the Risk Ready analysis began. The report analyses the financial statements of more than 300 Italian listed companies drawn up between March and May 2020. This means, of course, that all the companies were affected by the consequences of the pandemic but only partially, as some scenarios were not yet foreseeable. Morena Orlando, one of the project leaders and client executive, risk management at Marsh, said the analysis was conducted among precisely 336 listed Italian companies operating in 13 product sectors. The largest segment represented in the survey is financial institutions, followed by manufacturing, technology, and media and communication. Some 29 risk categories were covered by the survey. It is important to remember that the disclosure obligations for Italian listed companies – not only the financial firms but also non-financial firms – are obligated by Legislative Decree 254 of 30 December 2016 (implementation of Directive 2014/95/EU) to publish annual non-financial declarations (the Sustainability Report). This includes information on the impacts of the company’s activities on the environment, society, human resources, anti-corruption and human rights. The report’s ranking finds that financial risks are in first place (credit 82%, liquidity 80%, interest rates 72% and exchange rates 63%). In second place are uncertainties about the macro scenario (45%), followed by legal and compliance (38%), and regulatory (34%) matters. Covid-19 was in fifth place with 33% and was, unsurprisingly, of particular concern to the infrastructure and construction, real estate and technology sectors. It will be interesting to monitor the evolution of the pandemic risk in financial statements, given the important update of 16 February 2021 by the Italian Commission for Listed Companies and Stock Exchange, which, following the European Securities and Markets Authority document of 28 October 2020, obliges listed companies to specify indications about the impact of Covid-19 on their activities in 2020 in their financial statements. Sixth place in the Risk Ready report ranking is occupied by risks related to human capital (31%), followed by those relating to competition (30%), business processes (30%), strategies (29%), health and safety and sustainability (27%). Risks related to human capital are in the top five for the fashion, healthcare and chemicals, technology and entertainment sectors. The ranking sees geopolitical risks in 11th place, followed by changes in commodity prices, dependence on suppliers, change in consumer habits, and cyber risk. Despite being only in 15th place overall, cyber is present in 24% of the financial statements and is up by nine percentage points compared to 2018. As Ms Orlando points out, the focus on financial risks in the ranking surely depends on factors such as the disclosure obligations to which companies are subjected, the context of global recession caused by the pandemic and the related economic instability. Three areas that are expected to grow in importance in the next set of financial statements are: Covid-19, which has an impact on all risks and sustainability, partly because of the obligation to disclose non-financial information and partly because the attention of stakeholders on these issues is rising; and cyber risk, largely because of the exponential growth in the adoption of digital and remote-working methods. Diego Montemurri, head of strategic risk advisory at Marsh Advisory, shared some important reflections, comparing Risk Ready and the WEF’s Global Risk Report. Considering a time horizon of zero to two years, the Global Risk Report sees a prevalence of risks related to pandemic impacts (infectious diseases, employment and livelihood crises, failure of cybersecurity measures, digital inequality), together with extreme weather events and prolonged economic stagnation. Shifting to the medium term (three to five years), the ranking shows really only economic and financial risks. These represent the realisation of those threats identified in the shorter period: asset burst in large economies, failure to stabilise price trajectories, severe commodity shocks, and debt crises in large economies. The only non-financial risk in the top five, actually first ex aequo, is the breakdown of critical information infrastructures, also a consequence of cyber risks identified in the short term. On a horizon of five to ten years, companies fear that the pressing trends of today, such as the adverse outcomes of technological advances, biodiversity loss and ecosystem collapse, natural resource crises, weapons of mass destruction and state collapse, will be felt. What then can we learn from the comparison between Risk Ready and the Global Risk Report? According to Mr Montemurri, companies should give greater priority in their financial statements to cyber risks and focus on the implementation and mitigation of technological risks. There is a further need for action on the risks associated with climate change and environmental impacts. It is also necessary to understand the great variety of social risks that will follow the pandemic, such as the erosion of social cohesion, mental health problems and changes in the way people interact. At the same time, the commitment of governance and control bodies will have to grow in order to improve the understanding of risks and optimise their communication. Major steps forward in the integration of risk management in the decision-making and organisational processes, accompanied by a greater dissemination of the risk culture at all company levels, will be needed.

Italian listed companies face up to the big risk picture

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