McKinsey on Risk & Resilience

McKinseyonRisk&Resilience Resilienceforsustainable,inclusivegrowth Number14,June2023 ThearticlesinMcKinseyonRisk&ResiliencearewrittenbyriskexpertsandpractitionersfromMcKinsey’sRisk&ResiliencePracticeandotherfirmpractices.Thispublicationoffersreadersinsightsintovalue-creatingstrategiesandthetranslationofthosestrategiesintocompanyperformance. ThisissueisavailableonlineatMcKinsey.com.Commentsandrequestsforcopiesorforpermissionstorepublishanarticlecanbesentviaemailto McKinsey_Risk@McKinsey.com. Coverimage: ©AlSimonov/GettyImages EditorialBoard: VenkyAnant,JasonAtkins,BobBartels,OliverBevan,RichardBucci,JosebaEceiza,MihirMysore,LucaPancaldi,ThomasPoppensieker,KayvaunRowshankish,SebastianSchneider,JohnWalsh,DavidWeidner,OliviaWhite ExternalRelations, GlobalRisk&ResiliencePractice: BobBartels Editor:RichardBucci,DavidWeidner Contributingeditors: RamaRamaswami,DavidSchwartz ArtDirectionandDesign: LeffCommunications DataVisualization: RichardJohnson,MattPerry,JonathonRivait,JessicaWang ManagingEditor: HeatherByer EditorialProduction: MarkCajigao,NancyCohn,RogerDraper,RamyaD'Rozario,GwynHerbein,DrewHolzfeind,LaShonMalone,PamelaNorton,KanikaPunwani,CharmaineRice,DianeRice,DanaSand,ReginaSmall,SarahThuerk,SnehaVats,PoojaYadav McKinseyGlobalPublicationsPublisher:RajuNarisetti GlobalEditorialDirectorandDeputyPublisher: LuciaRahilly GlobalPublishingBoardofEditors:RobertaFusaro,BillJavetski,MarkStaples,RickTetzeli,MonicaToriello Copyright©2023McKinsey&Company.Allrightsreserved. Thispublicationisnotintendedtobeusedasthebasisfortrading inthesharesofanycompanyorforundertakinganyothercomplex orsignificantfinancialtransactionwithoutconsultingappropriateprofessionaladvisers. NopartofthispublicationmaybecopiedorredistributedinanyformwithoutthepriorwrittenconsentofMcKinsey&Company. Contents Resilienceforsustainable,inclusivegrowth 5 Theresilienceagendaforsustainable,inclusivegrowth Thefirstcomprehensiveactionagendaforsustainable,inclusivegrowthwaspresentedatthe2023annualmeetingoftheWorldEconomicForum. Businessbuilding:Thepathtoresilienceinuncertaintimes 12 Inanuncertaineconomy,executives’firstinstinctmight betocutcostsandshoreupestablishedholdings.Abetterwayistobuildnewbusinesses. 19 Addressingtherevolvingdoorinrisk Asthefieldofriskmanagementevolves,thevaluepropositionforemployeeshastoevolveaswell. Survivalthroughpurpose:HowUkrainianbusinessesenduredamidextremeuncertainty 29 Ukrainianbusinessesthathavesurvivedandthrived inthefaceofanunforeseenRussianinvasionofferlessonsinresilience. Addressingclimateriskandsustainability 39 Managingfinancedemissions:Howbankscansupportthenet-zerotransition Banksfinancecarbon-emittingbusinesses,andtheyfinancedecarbonizationoftheeconomyaswell.Howeffectivelytheyaddressfinancedemissionscanmakeallthedifference. Adevilishduality:HowCEOscansquareresiliencewithnet-zeropromises 49 Amidturbulenceonthepathtonetzero,leaderswillhavetobemuchnimblertobalanceresiliencewithanenergyfuturethatissecure,affordable,andclean.Fiveactionscanhelp. Contents(continued) Managingriskinuncertainty 57 Atechnologysurvivalguideforresilience Resiliencemeansunderstandingthecriticalityofabusinessprocess,thecapabilityoftheunderlyingtechnology,thebusinessimpactifthetechnologyfails,andtheorganization’srisktolerance. Responseandresilienceinoperational-riskevents 66 Directlossesfromoperational-riskfailuresaremounting,andintoday’svolatileeconomicenvironment,consequentlossesinsharepricearemanytimesgreater. 73 RateresetpresentsbankswithIRRBBchallenge Byfocusingonsixkeyareas,bankscanmoreaccuratelymanagerisinginterestratesandcreditspreadriskacrossbusinesslines,meetregulatorydemands,andcreatecompetitiveadvantage. Navigatingeconomicuncertainty:Newguidanceforcreditriskmanagement 80 Amidpersistentcomplexity,bankleadershipteamsneedtourgentlyrevisittheirapproachestocreditriskmanagement. Theevolutionofriskorganizations 88 Riskandresiliencepriorities,astoldbychiefriskofficers Amidthestormofcrisesanddisruptions,leadingfinancialinstitutionsarerecognizingrisk’sstrategicandresilience-buildingrole. Thenextfrontierinriskefficiency 94 Asglobalrisksincreaseandeconomicuncertaintypersists,theriskfunctionswithinthefinancialservicesindustrymustcontinuetoevolvetalenttoensureorganizationalresiliency. 2 Introduction Today’suncertaintyanddisruptionofbusinessandsocietyischallengingleadersinunforeseenways. Theliquidityscareinbankingandaccompanyinginterestratesensitivityisjustthelatestinaseriesofconcerningdevelopments.Arangeofdisruptions,includinggeopoliticalconflictsandinflationintheshorttermandshiftsincustomerbehaviorandsupplychainstructuresinthelongterm,haveupendedtheconceptofriskandresilience.Wearelivingandworkinginaworldofriskscometofruition.Ever-presentcrisesandcontinuousexternalshiftsarethenewnormal. Itisamidthisenvironmentthatwiththis,our14thedition,wearechangingthetitleofourcornerstonepublicationto McKinseyonRisk&Resilience. Thischangeismoreofanacknowledgmentthanashift.Evenbeforethepastyear,ourwork,research,andanalysisonthesepageshadcometore