When it comes to risk in 2023, balance is key

Make no bones about it: Things feel donked up right now. Persistent, relentless, and unprecedented business risks abound in 2023.

To deal with an increasingly risky and complex world, finance professionals will need to step up and become more deliberate about aligning organizational risk management with strategic goals, according to Vikas Agarwal, financial services risk and regulatory leader at PwC.

“The CFO and business strategy need to be linked more closely together than they’ve ever been in the past,” Agarwal said. “You can’t use past indicators to predict the future.”

Sure, we could run through a laundry list of global risks with the potential to disrupt your business this year: rising cybersecurity threats, geopolitical instability and conflict, a possible recession, climate disasters, unpredictable interest rates and monetary policy, the pandemic that just won’t quit—the list goes on.

But rather than predicting what might go wrong in the global landscape, we thought it would be more useful to explore how finance professionals can best deal with risk management challenges this year.

These are the risk management tactics and trends that finance professionals should be paying attention to in 2023, risk experts told us.

Align risk and strategy. Before the Covid-19 pandemic, risk management was often seen as a siloed exercise separate from business strategy, but that is no longer the case, according to Valerie Nielsen, managing partner at Longview Leader Corporation.

For companies to effectively deal with risk, now they will have to communicate risk management and strategy in tandem across the organization, she said. Taken together, risk management and strategy gives organizations a tool for evaluating decision-making.  “You can use risks to look at how these things are unfolding and hopefully identify earlier, unintended consequences of decisions,” she said.

But enterprise risk management goes beyond the CFO, according to Agarwal. Organizations should create a “three-legged stool” of risk sharing, and include the CFO, chief risk officer, and the chief compliance officer to be most effective, Agarwal told CFO Brew.

Manage your money. According to Agarwal, CFOs are facing a variety of financial risks in 2023: volatile interest rates, a more challenging capital-raising environment, and unpredictable monetary policy. Effective financial management is going to be key in the face of these risks and CFOs need to create new financial management playbooks, he added.

“That definitely requires better tools, more coordination from finance and business teams and a playbook on how people are going to handle different rates scenarios, given no one [is] sure how the market is going to react,” Agarwal said.

The risk of a recession is also putting cost-cutting pressure on CFOs, but to make cuts indiscriminately—especially in technology investment—would be a mistake, according to Agarwal. Instead, organizations should look for capability-building, particularly migrating to the cloud.

“It’s about finding the right balance between investing in stronger risk management capabilities and containing costs,” he said. “To have more compute power, to be able to calculate risk, run scenarios, and have more deliberate allocation of capital and liquidity across business lines, is going to be even more key than [it] has ever been before.”

Incorporating and understanding the risks and impacts of cost cutting on areas like employee workloads or customer experience for example, could also be a helpful guide, said Nielsen.

“You have to figure out: How much are you really saving?” she said. “How is this going to change?”

Opportunity knocks. But CFOs shouldn’t discount the opportunities that a risky environment may offer. This is especially true for organizations that invest in digital technology to navigate risk and digital transformation, said Agarwal.

“Companies that are able to do that and embrace that are going to have a competitive advantage in the future and be able to understand the risks that they can take and the risks that they can’t,” he said.

And companies that are deliberate with understanding risk will also have a better chance of creating and planning effective strategies to mitigate that risk, Nielsen said. “It’s getting better with the information that they have and with what I call—and many will—triangulating risk.”

Agarwal also sees opportunities in the liquidity markets if organizations make the right investments in their balance sheets.

“Take advantage of the liquidity that’s out there,” he said. “Making the right bets on your balance sheet with that debt, we think that companies can definitely take advantage of that.”—DA

Correction 01/13/23: This story has been updated since it was published to correct Vikas Agarwal's name; we apologize for the error.