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The Actuary The magazine of the Institute & Faculty of Actuaries

UK firms failing to register non-financial risks

Some of the UK’s biggest firms are failing to monitor non-financial business risks, according to research.

Only seven of the 20 most commonly monitored risks by FTSE 100, FTSE 250 and AIM 100 companies are non-financial, based on a study into their annual reports by Covalent Software.

The firm highlighted recent high-profile incidents such as the Toyota car recalls and closing of airports during the snow, and warns that companies need to monitor these non-financial risks in the same way they do things like the economic climate and inflation.

The research reveals that risks surrounding people, recruitment and employee security are some of the most widely monitored non-financial risks with 49 per cent of companies highlighting these in annual reports (52 per cent of FTSE 100, 60 per cent of FTSE 250 and 36 per cent of AIM 100).

Forty per cent also monitored health and safety risks and this was followed by environment and CSR-related risks which were monitored by 35 per cent of companies.

"Companies need to get better at monitoring non-financial risks as falling victim to these can have a huge impact in terms of reputation, working processes and staff, among other things, potentially impacting the company’s bottom line as well.

Other non-financial risks monitored include reserves and resources, litigation and legal risks and technology risks. However, these and all other non-financial risks are cited by just 33 per cent of companies or less, the firm says.

In contrast, there are a variety of financial risks that are much more widely monitored by FTSE 100, FTSE 250 and AIM 100 companies, with the top five risks monitored all focusing on financial measures. Risks covering global markets, the economic climate, inflation, tax and interest rates are the most prevalent with 88 per cent of FTSE 100 companies reviewed identifying these risks in annual reports, as opposed to 80 per cent of FTSE 250 and 60 per cent of AIM 100 companies.

The top risks for both FTSE 250 and AIM 100 companies, however, are risks focused around exchange rates and currency, with 84 per cent of FTSE 250 and 88% of AIM 100 companies identifying these risks, as opposed to 68% of FTSE 100 companies.

"The key here for private companies is to bring their risk management capabilities up to the level of many public sector organisations," said Covalent CEO Peter McHugh. "Organisations need to begin introducing a more holistic approach."