Enterprise Risk Management (Preview)

8 Part 1 – Concepts and Methods Science and Technology Trends Innovation through science and technology provides an undeniable competitive edge for those taking charge. Organizations have the potential to displace competitors by creating new products or services that make others obsolete or non-competitive. The emergence of the Internet in the 1990’s resulted in major shifts in telecommunications, financial services and retail. Major transformations will continue in those industries for years to come, and other industries such as broadcasting and education may eventually be impacted much more than what is currently anticipated. Advancements in genetics, artificial intelligence and robotics are also driving change in many industries, including agriculture, pharmaceuticals, industrial production, national defense and professional services. Self-driving vehicles are an example of a technological advancement that will disrupt the automobile and insurance industries. They may also have important implications for public transportation and urban development. Economic Cycles Economic cycles are a fact of life. They create market and financial risks that have significant implications on the private sector and governments. Central banks and governments implement monetary and fiscal policies aimed at maintaining economic growth, inflation and employment within desirable targets. These policy decisions are made on the basis of forecasts, expert judgment and politics. They have short term implications on money supply, interest rates, commodity prices, property values, business investment, consumer spending, industrial production, global trade, etc. They also have many long term implications. For example, excessive borrowing by governments to stimulate the economy eventually leads to higher taxes, reduced services or currency devaluations. The use of unconventional monetary policies such as the buying of government debt by central banks, and the advent of negative interest in some bond markets may have consequences that are difficult to imagine. Social Trends Social trends are changes in how people and societies evolve and make choices about how they want to live. The sharing economy is an example of a disrup- tive social trend that has broad implications for the private sector and governments. For instance, companies like Uber and Airbnb enable individuals to provide transportation services and accommodations directly to other individuals. The sharing economy is forcing companies to reduce prices and differentiate in order to satisfy customers and maintain market share. Governments find it equally challenging to license, regulate and tax goods and services that are shared between individuals. In addition, governments worry about the safety of citizens, and they are concerned about public complaints. Many other trends may not be labelled as disruptive, but they can still be highly transformative. For example, changing attitudes regarding food consumption is a social trend that has major impli- cations on many industrial sectors including agriculture, food processing and retail. Observers refer to the healthy food trend as a “seismic shift” in what people want to eat. 1 Demographic changes such as population aging and the growth of the middle class in emerging markets are other transformative social trends. Environmental Sustainability Better protection of the environment and pollution reduction are great challenges for humanity. Governments and organizations around the world are pressured to reduce global warming. Without aggressive action, it is expected that sea levels will eventually rise to a point where many coastal cities will be threatened with frequent flooding. Global warming is also creating severe drought in some areas, and much greater windstorms in others. Some governments are beginning to