Risk 2.0: Are we ready?

Risk is increasing to a whole new level. That’s not news; we are inundated with daily media blasts that continuously confirm risk’s rising tide. It’s a global, multi-front phenomenon, and the bad news is that it’s not going away anytime soon. It’s quite clear that just holding onto the sales we now have is going to mean taking on more risk; growth beyond that is going to require a whole lot more risk appetite. What are the major shifts to look out for?

Regulatory risk is a big one. Caught by mismanaged technology and runaway greed, the global financial system just about tipped over the edge in 2008 and 2009. Desperately wanting to avoid a rerun, regulators got busy building iron-clad rules that have produced a few key consequences:

1. They have increased the cost of providing financial services, which is likely being passed onto customers.
2. The barriers to entering the financial services industry are now higher, an advantage for the well-heeled and a limitation on competition.
3. Access to financing is more constrained, particularly on the higher end of the risk spectrum. In general, it has become more difficult to access financing, especially for businesses trying to get off the ground and those that are selling to risky places.

Policy risk is relatively new, costly and unpredictable. Years of substandard global growth have created a cynicism about post-war institutions that is electing leaders promising to do something about it. The current tide of anti-trade policies and threats of more to come are the tangible manifestation of this movement. The world is now in danger of a prolonged episode of policies that will roll back the trade clock. This only adds to the vulnerability created by the fiscal overextension that occurred with lightning speed in the recession’s aftermath, a brief episode that we’ll be paying back for a generation or two. Add in the less-known future fallout of protracted, ultra-loose monetary policy.

If that weren’t enough, there’s also diversification risk. That sounds counter-intuitive, as diversification is often touted as a risk mitigant. It is, but in this case, faster growth in higher-risk emerging markets is increasing their share of global GDP over time, clearly increasing the risk profile of total GDP. Exporters who want to keep pace with this evolution of growth will see a natural increase in the risk profile of their business and will increasingly need to manage and develop solutions and mitigants over time or risk falling behind.

Digital risk is also rising. Disruptive technologies tend to give rise to ”winner-take-all” enterprises. Higher corporate concentration evidenced in the rise of Amazon, Facebook, ride-sharing services and the like have increased the risk of technological displacement, and the need to protect against that possibility. In this case, the cost implications come from the need at the enterprise level of technological development and deployment of off-the-shelf solutions. There’s no longer such a thing as a low-tech company or industry.

In tandem with this is scale risk. Economies of scale are far more achievable in a globalizing world, and also more necessary. Growth of emerging market demands and the scale of those demands themselves demand large-scale solutions. Smaller economies are naturally disadvantaged in this game; the cost for them of achieving higher scale is that much greater.

Cycle risk is less-discussed, but potent. Globalization and the reach of technology have arguably stretched out this planet’s business cycle. That means longer longs, higher highs, lower lows and protracted recovery periods. If so, larger swings have increased the risk of getting wiped out in a downturn. Protecting against this is—again—an added cost to business.

More risks could be added, but this list is alarming enough, for at least two reasons:

1. None of these are momentary blips; these are all now pretty permanent fixtures that will continue increasing.
2. We Canucks are naturally risk-averse; we’d rather see risks disappear than actually have to deal with them.

Risks aren’t going into reverse anytime soon. They’re on a long-term, upward trend. Canadian exporters who want to survive and thrive will increasingly need risk-mitigating solutions, including the ones we provide here at EDC.