It will hardly come as a surprise that a survey we publish today shows that institutional investors—that is, asset owners like insurers and pension funds, asset managers, and intermediaries like fund platforms and consultants—have become more risk-aware since the global financial crisis. Yet the extent of the shift in mindset is startling: whereas only 30% of investment organisations made risk their highest priority in 2007, today 78% of respondents say their organisation has a very risk-aware culture.
Another surprise is that despite this wholesale shift in attitudes, there remains something of a communication gap between the risk function and the business side of things at many institutional investors. For instance, whereas a majority (52%) of non-risk staff in the survey thinks the risk function exists primarily to fulfil regulatory obligations, only 30% of risk professionals think this. Moreover, less than two-thirds of all respondents (61%) think that their organisations’ business managers have a clear understanding of the role of risk managers, and just 16% strongly agree that they do. Those in the risk function are less confident that this is the case—just 56% agree (and only 12% strongly agree).
This communication gap is important, since regulators and shareholders have been putting increasing emphasis in recent years on building risk-aware cultures at financial services businesses. Risk cannot be relegated just to one function—it is now everyone’s responsibility. At the same time, this places greater onus on risk officers to communicate what they’re doing clearly and effectively, and for risk and other areas of the business to work in tandem. This is the ideal, but the survey suggests many investment institutions have a lot of work to do to reach it.
Happily, though, the survey also suggests some organisational measures that could help close the communication gap. One is a senior risk committee that brings together risk, compliance and business functions. The survey found that those institutions with such committees were more likely to give risk a high priority than those without one (83% vs 64%); more likely to rank internal information on risk as good (87% vs 63%); and more likely to report that the risk function in general helped produce better investment outcomes (68% vs 51%). While such correlations cannot prove causation, they nonetheless suggest senior risk committees can be the bedrock of better risk awareness throughout the organisation.
The survey, which was commissioned by State Street, also shows some interesting regional differences in risk awareness, and suggests that those institutions that incentivise their staff to meet risk targets (as opposed to just imposing such targets) are more likely to inculcate organisation-wide risk awareness. You can read the full results, and a breakdown of survey respondents, here.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of The Economist Intelligence Unit Limited (EIU) or any other member of The Economist Group. The Economist Group (including the EIU) cannot accept any responsibility or liability for reliance by any person on this article or any of the information, opinions or conclusions set out in the article.
