Top risks that scare institutional investors

Nearly 8 in 10 organisations have very risk-aware culture.

Investment institutions are more acutely aware of the risks they face since the global financial crisis but many still need to improve the way those risks are communicated internally, according to new research by the Economist Intelligence Unit (EIU) commissioned by State Street Corporation.

The survey of global asset managers and asset owners found that more than three-quarters of respondents (78 percent) said their organisation had a very risk-aware culture today.

This compares with only 30 percent that made risk their highest priority in 2007. This shift represents a significant cultural change for investment institutions. The proportion of organisations placing risk management as their highest priority has more than doubled since before the 2008 financial crisis.

The survey entitled, “Closing the communication gap: How institutional investors are building risk-aware cultures,” was conducted in the first quarter of 2013. Respondents included nearly 300 executives of investment institutions –48 percent of which were asset managers, 35 percent asset owners and 18 percent intermediaries.

Approximately 39 percent of respondents were headquartered in the Asia Pacific region, 33 percent were from Europe and 19 percent from North America.

David Suetens, executive vice president and international chief risk officer at State Street said, “Investors and regulators will be reassured by the survey’s conclusion that asset owners and managers have improved their risk awareness ‘beyond recognition’ since 2008.

But a mindset shift still needs to occur at many organisations to improve levels of trust and dialogue between the business and risk functions and ensure they are developing a real culture of risk-awareness across the whole enterprise.”

Reputational risk is now seen as one of the top risks for institutions, the survey found. More than half of all respondents (56 percent) ranked reputational risk equally with risk arising from market volatility (market risk) as among their organisation’s highest priorities.

However, despite the greater awareness of risk, the study also found a disconnect between business and risk functions and differences of opinion about the role of the risk function at many institutions. The majority of non-riskstaff (52 percent) think the risk function exists primarily to fulfill regulatory obligations, while less than a third (30 percent) of risk professionals think this.

According to the report, these findings suggest that risk managers are not fully communicating their mission to the
wider organisation and also that the risk function itself is keenly aware of this.

“It indicates a certain amount of frustration from both perspectives, possibly hindering the development of risk awareness across the enterprises,” added Mr Suetens.