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Â鶹´«Ã½app Risk Barometer 2024 -
Rank 4:ÌıChanges in legislationÌıand regulation

Expert risk article | January 2024
Companies face new rules and regulations in 2024 that will not only requireÌıa high administrative burden but could also impose real restrictions on theirÌıbusiness activities.
The most important corporate concerns for the year ahead, ranked by 3,069 risk management experts from 92 countries and territories.

Since the pandemic, the balance between the marketÌıand the state has shifted in favor of the latter, initiallyÌıout of sheer necessity, to cushion the economic standstillÌıduring the lockdowns. But since then, policymakers haveÌıincreasingly taken an active stance in steering economicÌıoutcomes in the direction they want. Reasons for this canÌıalways be found: the energy crisis or green transformation,Ìınational security, economic self-sufficiency, or systemicÌıcompetition with China.

“This development is a double-edged sword forÌıcompanies. On the one hand, they benefit from the subsidyÌırace between states to attract ‘strategic’ industries. OnÌıthe other hand, this activism is accompanied by a largeÌınumber of new restrictions on investment – protectionismÌıhas reached a new level,” explains Ludovic Subran, ChiefÌıEconomist at Â鶹´«Ã½app.

This is by no means only directed against ChineseÌıcompanies; recently, intra-European takeovers have alsoÌıbeen stopped. Even within the European Union (EU), theÌırules are not standardized, and companies are confrontedÌıwith a jungle of regulations and opaque decisions. DespiteÌıassurances to the contrary, it is unlikely that this jungle willÌıclear up in the foreseeable future; after the many electionsÌıin 2024, the signs may point to even more protectionism.

As is so often the case, these regulations have anÌıasymmetrical effect: while large companies tend toÌıbenefit from the subsidies, the investment restrictionsÌıare a heavy (cost) burden, especially for smaller andÌımid-size companies (SMEs), says Subran. When itÌıcomes to environmental, social, and governance (ESG)Ìıregulation, be it the EU’s CSRD (Corporate SustainabilityÌıReporting Directive) or CBAM (Carbon Border AdjustmentÌıMechanism) or Germany’s Supply Chain Act – the effortÌıinvolved in obtaining the required data is enormous andÌıalmost impossible for many smaller companies.ÌıBut it’sÌınot just the regulatee who is overwhelmed. In the case ofÌıCBAM, for example, the infrastructure for data processingÌıand verification is still lacking on the regulator’s side inÌısome cases. It is not only companies that are drowning inÌıregulation, says Subran.

But the decisive ‘regulatory battle’ is not due untilÌı2024: what is policymakers’ attitude towards artificialÌıintelligence (AI)? As a ‘general purpose technology’, AIÌıis the best chance of escaping the looming low-growthÌıregime through a sustained productivity boost. At theÌısame time, the risks are enormous, including in geopoliticalÌıterms. There is therefore a lot at stake when it comes toÌıregulating AI. Striking the right balance becomes a veryÌıdelicate act of regulation.

Despite all the vows to reduce bureaucracy, companies willÌıstill be faced with new rules and regulations in 2024 thatÌıwill not only require a high administrative burden but couldÌıalso impose real restrictions on their business activities.

“Companies need a strategic response to this that goesÌıbeyond monitoring the legislative process. A high levelÌıof uncertainty calls for scenario planning, strengtheningÌıresilience and open communication with internal andÌıexternal stakeholders,” Subran concludes.

Ìı Ranking history globally:

  • 2023: 5 (19%)
  • 2022: 5 (19%)
  • 2021: 5 (19%)
  • 2020: 3 (27%)
  • 2019: 4 (27%)
Ìı Top risk in:
Ìı
  • China
  • Morocco
  • Nigeria
  • Romania

Cyber, ‘green hushing’, wellbeing, and net zero rank as the pressing areas ofÌıconcern for businesses when it comes to environmental, social, and governanceÌı(ESG) strategies.

The repercussions of data breaches, systemÌıvulnerabilities, and the shapeshifting nature ofÌıthe cyber threat have ensured cyber securityÌıresilience retains its top spot in the ESG riskÌıtrends of most concern in the Â鶹´«Ã½app RiskÌıBarometer. Cyber incidents is also the #1 riskÌıoverall for businesses globally.

“Cyber security is an important ESG issueÌıbecause it affects people as well as companyÌıdata,” says Funké Adeosun, Global TransitionÌıSolutions Director, Â鶹´«Ã½app Commercial.

“Breaches of private data can affect people’sÌılivelihoods, mental health, and even their safety.ÌıFor individuals and companies, the loss can beÌıreputational and financial.”

Cyber resilience measures should includeÌımitigation and recovery plans for a dataÌıbreach, as well as cyber insurance and constantÌıadaptation to emerging threats.Ìı“It is vital thatÌıcritical information that can impact the runningÌıof societies is not lost to hostile external parties,”Ìısays Adeosun.
Ìı

Regulation and disclosure requirements are ofÌıincreasing concern, as companies join the driveÌıto net zero. “Organizations communicatingÌıa strong sustainability agenda can findÌıthemselves in a bind – they can be litigationÌıtargets for groups who believe they are notÌıdoing enough to meet their climate or societalÌıcommitments, as well as those who claimÌıthey are making commitments they can’tÌımeet,” says Gabrielle Durisch, Global Head ofÌıSustainability Solutions at Â鶹´«Ã½app Commercial.

“This has led to cases of ‘green hushing’,Ìıwhereby companies deliberately under-reportÌıor hide their ESG credentials from public view toÌıavoid scrutiny.Ìı

“The lack of transparency makes it harder toÌıunderstand the true impact of sustainabilityÌıstrategies and investments, which couldÌıinhibit the adoption of ESG activities byÌıother companies.”

Decarbonization and net zero strategy appearsÌıas an ESG concern in its own right. AdeosunÌısays this is not surprising: “With regulatoryÌıchanges, technological innovations, and theÌıpotential loss of investments in the picture,Ìıthere is a lot at stake. Companies are having toÌıshift decades-old strategies to align with newÌıESG and sustainability goals, which can leadÌıto skepticism or resistance from some quarters.

"It’s important to engage all stakeholders,Ìıset realistic targets, and provide adequateÌıinvestment. Getting to net zero will not beÌıcost-free.”
Ìı

The human factor – or the ‘S’ in ESG – is perhapsÌıthe hardest one for organizations to contend withÌıbecause it requires a broad focus on people, theÌıworkplace, and wider society. Company workingÌıconditions is an ESG issue (at #3) because, if bad,Ìıthey can create a culture of low morale, increasedÌıstaff turnover, and reputational damage.Ìı

“These risks can be minimized by prioritizing healthÌıand safety, fair wages, open communication, andÌıregulatory compliance,” says Durisch. “CompaniesÌıshould also adopt regular employee feedbackÌısurveys and take them seriously, especially if theyÌıare from marginalized society members. ThatÌıway, organizations can truly build a culture whereÌıwork-life balance and employee mental healthÌıare of paramount importance, which will help toÌıfuel their ESG journey. There is always more thatÌıcan be done to support local communities andÌısociety in general so this should also be a keyÌıconsideration in sustainability strategies.”

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Source: Â鶹´«Ã½app Risk Barometer 2024. Total number of respondents: 3,069. Respondents could select more than one risk. Top four answers.
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