COVID-19 shows that we need to think afresh about how we govern and manage risk – Deputy Governor, Ed Sibley

• COVID-19 has increased focus on the levels of preparedness and thinking on emerging risks such as climate change and technological innovation
• Lessons need to be learned from the pandemic on how organisations and leaders think about and manage risk and apply the recent learnings to future challenges
• Improvements are required in how regulated firms are being governed and how they recognise and manage risk

Speaking at a virtual Lunch Bites webinar at the Institute of Directors webinar today, Deputy Governor, Ed Sibley, outlined the implications of uncertainty on how organisations are governed, led and managed and how the approach to governance and risk management needs to be improved.

In his remarks Deputy Governor Sibley noted “We are living through a time of great uncertainty – uncertainty over the short term path of the pandemic and its longer term effects; uncertainty regarding the pace and extent of technology and related behavioural changes; uncertainty about the timing of the effects of climate change; and much more besides. This uncertainty has implications for how we think about risk and probabilities, and importantly how we govern, lead and manage our organisations.”

As progress is made in tackling the pandemic and as the focus shifts to economic recovery, Deputy Governor Sibley said “There is an opportunity for us all to think afresh of how we govern and manage risk and how we work to meet not only the current challenges but also to recognise and face into emerging ones too.”

Deputy Governor Sibley spoke about the Central Bank’s strategic priorities in financial regulation in 2021, which include:

1. maintaining supervisory focus on financial and operational resilience of firms and markets to ensure they continue to support households and business through the economic disruption caused by COVID-19;
2. focusing on strong governance and risk management capabilities in firms and markets to improve culture and decision-making and ensure that risks are identified and effectively mitigated,
3. seeking to ensure that detrimental consumer outcomes are identified, prevented or mitigated, such as business interruption insurance, where extensive supervisory engagement continues to ensure firms pay valid claims
4. resolving both pandemic related and longer term distressed debt in the system.

The effects of the pandemic have heightened focus on regulated firms being well governed and having appropriate cultures and effective risk management to address current and emerging challenges. He cautioned that now is the time for firms to recognise known risks and prepare for future challenges: “It is worth asking ourselves, is it possible that the COVID-19 pandemic is not just a seismic and tragic event, but a stark warning too? It is worth us reflecting on how we think about future events that have a near certainty of occurrence over time, but with some doubt about precise timing and impact. In other words, how well do we prepare for predictable surprises.”

Deputy Governor Sibley specifically addressed the risks from climate change: “The financial system has a role to play in addressing climate change risk through moving away from financing governments, firms and projects that are environmentally damaging and moving into financing actions that support the transition to a more sustainable economic model.” He noted that “firms will need to understand the impact of climate related risks on their business environment, their business models and investments.  This requires lessons to be learnt from the pandemic, changing how we think about risks and probabilities over the longer term.”

On the challenges and opportunities associated with innovation in the financial system, Deputy Governor Sibley said “Innovation in financial services has the capacity to bring many benefits for consumers, the economy and society in general. It is essential to the effective functioning of a competitive economy.” Deputy Governor Sibley noted that the pandemic had accelerated firm’s use of technology but warned “As firms take advantage of technologies and further embed them into their processes, it is important to highlight the importance of IT risk management. Digital transformation can, without proper oversight, increase vulnerabilities in firms’ IT operations, with increased risks around IT failures, outages and cyber-attacks.”

Deputy Governor Sibley’s full address can be read here.