For both financial services firms and corporates, risks are evolving fast. From operational to regulatory, climate and counterparty, each type of risk is unique and complex. But you can find ways to turn risk – and risk management itself – into a competitive advantage.

How can I benefit from managing risk?

Depending on your strategy, you might be trying to avoid risk or use it to generate revenue. Either way, you can certainly make the case that there is competitive advantage in having a strong reputation for risk management.

Climate risk is a good example of how managing risks can lead to a competitive advantage. Consider a large motor manufacturer that sells globally. It’s not only exposed to a lot of physical risks in its supply chain, dealer networks and manufacturing plants, but also significant transition risks driven by government policy and consumer preference in terms of what cars it produces and how environmentally friendly it is.

How do I start managing my climate risk?

As with any challenge, first you must understand the physical and transition risks (the impact of moving to a lower carbon economy) you’re up against.

Physical risk modelling is complex, but solutions exist to make it easier. By employing them, you can identify which assets are more susceptible to weather events in the future and put a financial impact on that climate risk, not just for your own operations but all the way through your supply chain.

You can find a competitive advantage here. When you understand where you have climate risks, you can start the process of managing and mitigating them. Getting ahead in understanding these risks will help with strategic management and planning and give those leaders a competitive edge.

Can I monetize risk?

Sometimes you can directly monetize risk. Let’s go back to our climate risk example.

You will need to disclose your exposure to different weather perils – for example, flooding of your offices. But you can also look at that risk and realize that, say, five specific offices are generating millions of dollars of risk on your balance sheet. If you can eliminate that risk through insurance, adaptation, relocation or other measures, then you can improve your business model.

What about the less tangible advantages of effective risk management?

The development of machine learning and artificial intelligence (AI) offers a great case study in how technology can manage risk and create advantages.

The first step is automation: rules-based sequences and robotic process automation. This helps with relatively simple tasks, such as checking against a list of bad actors to see who you can’t do business with.

Where the analysis gets more complex, there is demonstrated value in supervised models through machine learning, where you have controlled data sets. This approach is mature enough that some are starting to call it “traditional AI.” If you have good data scientists, high quality data sets and the ability to look for biases in the data, then this can be very effective.

The next piece is generative AI. Generative AI is good at organizing sequences of activity, smoothing processes, looking at large sets of data and generating concise language descriptions of a pattern. It can identify what changed in the last quarter so that people don’t have to look at 50 different spreadsheets. Sometimes it can also generate a draft of a report on that, which saves further time.

Of course, governance still applies: You need to have controls on the environment, on the data, on the models and on how you use the outputs. So, make sure you’re transparent that generated output is generated and consistent in attributing underlying sources if you’re using multiple data sources.

If you can measure and mitigate risks before you have to disclose them, then you can improve your posture in the market because you can show you’re making improvements and taking risk out of your business. Ultimately, reputation still counts, and that is driving a lot of the attention to risk management – and creating a lot of opportunities.