Risk accumulation and interdependence raise the bar for Portuguese risk managers

Jorge Neto, insurance manager at retail group Jerónimo Martins, said that inflation, cyber and geopolitical factors are the main risks faced by Portuguese companies today. Then there are all the other interrelated risks thrown up by those threats, he added. One example is reputation risk, which has been compounded by the abundance of risks faced by corporations today, said participants in the Portuguese leg of our Risk Frontiers Europe survey 2023. “We must always think about the interdependence of risks,” said Tiago Antunes, head of risk management at Metropolitano de Lisboa. “When we mitigate a risk, we may inadvertently boost another one. We must not isolate a risk.” This point has been illustrated by booming inflation, which has forced companies to raise prices in decisions that have been often poorly received by consumers and clients. “Companies are very much exposed to reputation risks today. Any piece of news, even if it is not substantiated, is quickly diffused via social and traditional media. Even if it later turns out that the news was not true, the initial impact is the one that public opinion retains,” Neto said. “Food inflation is a case in point. In Portugal, there is a view that retailers are raising prices to increase their margins, but in reality net margins have been lower than before. Our business is based on large volumes of sales with low EBITDA margins, not the other way around,” he added. Pedro Cupertino de Miranda, the risk, cyber security and data protection officer at Sonae, another retail group, said: “Reputation risks can be fatal to a company. If a consumer says to the media that an expired product harmed their health, it can be very damaging to the business.” Then there is the direct impact of higher prices on the ability of consumers to buy their daily groceries or other goods. “Inflation, the cost of living and its impact on discretionary spending are affecting purchase decisions. Consumers are downgrading their choices, moving down from premium brands to white brands,” Cupertino de Miranda said. “The fact that interest rates have gone up is making people stop paying their debts and banks may find themselves out of liquidity,” he continued. He added that inflation brings important consequences for operating costs too. “Energy prices are very important for us. Our operation relies much on cooling systems and energy prices have a significant impact on our costs,” said Cupertino de Miranda. Retailers are not alone in feeling the multi-pronged impact of inflation. “Inflation and energy prices are very relevant for us. Metro systems work with electricity, and there has been a huge impact on costs as a result of inflation,” Antunes said. “Also, higher costs of living have motivated a number of strikes that affect everybody and the economy too. There is pressure to raise wages in order to keep up with higher costs of living,” he added. Energy prices have risen because of the war between Russia and Ukraine, which caused oil and gas prices to surge. The conflict also helped fuel inflation by reducing the availability of food staples such as wheat and other grains, in another example of interconnection between apparently separate risks. And then there is the possibility of companies suffering a cyberattack, which has also increased as a result of the war. This escalating risk clearly has the potential to impact large swathes of the global economy. “Cybersecurity is not even an emerging risk anymore, it is a certainty that can happen any time with ever more devastating effects,” Antunes said. Regulatory burden André Rodrigues, who works for BNP Paribas in Portugal, highlighted another risk with a wide range of consequences: the excessive burden of regulation faced by European companies. “Compliance and legal risks are on the rise. After the GDPR, there was a perception that we had reached a level of regulatory schizophrenia, but it turned out that it was only the beginning. Several pieces of regulation that are even tighter are coming,” he said. “Beforehand, regulatory risks were a worry mostly for companies like banks and pharmaceutical groups. Nowadays, even smaller companies face compliance risks, at least within the European Union,” added Rodrigues. “On the geopolitical side, uncertainty is too high today, and it is on the rise, especially in Europe. And we must not forget environmental risks, which are among the top three risks for many organisations,” said the risk manager. Climate change is creating a whole extra set of concerns for risk managers. “Natural catastrophes are an issue as we live in a world of extremes. We have recently had a flood in Lisbon that hampered the workings of the metro system,” Antunes pointed out. “Those risks are increasingly a concern for companies and society as a whole. It is a matter of the public and private sectors working together. Companies cannot manage catastrophic risks alone,” he said. Once the far-reaching phenomena are considered, however, risk managers must also worry about the threats specific to their sectors of activity, or their communities. “In our particular case, the issue of attracting and retaining human resources into the company is very important and quite a challenge. It’s transversal, in all geographies, from less to highly specialised functions,” Neto said. The wave of discontentment fuelled by harder living conditions also creates incentives for governments to take populist decisions that can put companies at a competitive disadvantage, participants in the Lisbon roundtable pointed out. As if risk managers needed more things to worry about. “Overall inflation is giving out signs that it is slowing down, although not food inflation, so this issue will be present in the near future. Cyber is here to stay – there are always more attacks, and they are becoming more complex and better organised. Nobody had imagined that there would be a war in Europe, and there are other hotspots around the world. One year ago, no one would have been concerned about a possible Chinese invasion of Taiwan,” Neto said.

Risk accumulation and interdependence raise the bar for Portuguese risk managers

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