LUCY STANBROUGH: Hello and welcome to The Risk Circuit. I'm your host, Lucy Stanbrough from WTW's Research Network and today, we're going to be discussing a few key themes from the emerging and interconnected risk survey. This new study goes beyond the top risks to find out why, what's on the minds of organizations from the natural resources industry, what are the connections that they're seeing between those risks, and what actions, most importantly, are they looking to take, how are they going to be dealing with the complex risk landscape.
Our global survey took the thoughts and findings from 333 executives responsible for an estimated 1.3 million colleagues and $2.3 trillion in revenue. 10% of those responses came from the natural resources industry, and we're going to be diving into some of those thoughts and findings today. One of the top findings was that uncertainty around dealing with the emerging risk landscape.
Today, only one in two, 50%, believes that their organization is able to respond to that environment. And when they think about the next 10 years, 75% aren't confident that their business model and strategy will be fit for purpose. So that really is a lot of change, and that's a lot of action that needs to take place. So Steve, I want to come to you first. How do you see that from a renewables perspective?
STEVEN MUNDAY: Hi, Lucy. Thank you very much for inviting me to The Risk Circuit and very pleased to contribute. Some interesting questions. And I guess in terms of, I know 50% of the natural resources industry believing they're actually capable and they're responding to the current emerging risks. I suppose I see natural resources as an inherently risky area of the world and of business, slightly akin to aviation. And risk is inherent in what our companies do across the board.
And we've had risk in this industry for many, many years. And that's how our clients effectively made their business. I guess there is also the fact that a lot of natural resources companies manage risk. They see it, they manage it. They see it as a positive, not necessarily a negative. In the insurance industry, we tend to look at risk as being more of a negative factor. But they can see this as quite a positive factor if they can manage risk and increase profitability in different areas going forward.
But the fact that life is changing so quickly, that the world is so dynamic, I guess seeing 25% reducing quite quickly in the future is a very good indication that people don't know what's around the corner. It's very much the unknown unknowns and the recognition from our natural resources clients that things are changing. They're very dynamic. We've looked at in the report around geopolitical risks, supply chain, climate change, demographic issues, and what is next. And this is a very unknown landscape.
So I find the 50% at the moment positive, a little bit surprising. But actually when you think about the industry that we're in, which is a risk industry, technology, engineering industry, I can see why our clients believe that they're currently understanding where their short horizon is in their business. And they've got that with their planning. But you can see that changes going forward are going to make it very difficult to manage that risk landscape.
LUCY STANBROUGH: Really fascinating. How do you see that contrasting for you from a renewables perspective? Is it much the same as the global picture, or are you seeing, I guess, them embrace more risk or more opportunity?
STEVEN MUNDAY: I think renewable energy, again, it's inherent in the business model to take risk. We've been going through a technology evolution for 15, 20 years now. So the businesses understand that they have to move very, very quickly. They have to assess and test equipment. There's a major technological evolution that's ongoing globally. So I think there is the right measures and the right understanding. But the technology is evolving much quicker than it ever has done in the past, and that's creating some stress elements around the bringing it to market.
The challenge is around technology readiness and whether you've had the right level of trouble-free operating hours before bringing technology to a more commercialized position. And not only have we got the advancements in technology, we've also got the scale up of technology. As a good example of that is we're now looking at Mingyang bringing out technology of wind turbines over 22 megawatts, which in real terms is something the size of the Eiffel Tower.
So when we're looking at not just projecting but saying this is in the near term future, and how do we manage them? How do we deal with the magnitude of these risks that come from new technologies? We've also got a power generation market in renewable energy, which is moving to low carbon. But it's moving into an energy storage. It's moving into hybrid integration. And it's working on challenges with transmission and distribution systems as well.
So there are many, many factors as we know, risks, in a negative or positive, have banished to the right way can be a good thing for the business. But I think with renewable energy companies, we are seeing them looking forward to the technology revolution continuing, but wondering how far it's going to go. Where do you reach the efficient frontier? Where is the optimum position, and will you actually achieve a steady state relative to efficiency of technology and scaling of technology?
LUCY STANBROUGH: It's really fascinating to hear you talk through that, that all of those mix of risks and that balance of risk and opportunity is really what's coming through in all of the findings. I think I was running out of fingers to check off all of the different risks that you listed. And that's what we saw come through in the responses. I think we had something like 80 different emerging risks. The top three that were mentioned were cyber risk, environmental risks made up of largely climate change, regulatory change, and geopolitical risk.
And then when they were looking further forward on that two-year horizon and the 10-year horizon, we just saw increasing risks come into the mix. Like that need for workforce planning and effectiveness, all of that new technology that you've mentioned has to be staffed somehow. We need new knowledge and new skills. But then also all of those shifts around geopolitics, around trade and tariffs. So when we look at those perspectives that you mentioned, it's really clear that there's that mix of big macro trends and risks coming into play.
Climate and geopolitical risk really were important ones that came through. So Sergio, maybe we pull you in here. Given some of those opportunities that are available for you within LATAM as a region, how are you seeing natural resources organizations feel about climate as an emerging risk? Have you seen any innovation in handling these risks that other businesses can learn from?
SERGIO TORO: Hi, Lucy. Thank you for having me. I'm so happy to be here. First of all, I'll say that there are multiple definitions of emerging risks. But they can generally be described as a risk whose behavior, probability of occurrence, and impact are not yet fully understood. What is clear is that their potential impact can be severe. So say that natural resources companies in LATAM increasingly see climate change as both a critical risk and driver for transformation. The region has significant renewable energy potential, which has pushed many companies to integrate mitigation and adaptation strategies into their business model.
However, they still face challenges like regulatory uncertainty, infrastructure limitations, and the need for substantial investments in new technology. So to navigate these risks, we are seeing innovation in several areas. So companies are leveraging AI and advanced data analytics to enhance climate risk modeling. Other implement nature-based solutions, such as large scale reforestation and carbon capture projects to offset emissions and improve ecosystem resilience. In addition to this, financial innovation through green bonds and sustainability linked financing is enabling companies to align their growth with climate goals.
LUCY STANBROUGH: A real mix of actions that those organizations need to take place there.
STEVEN MUNDAY: We're definitely seeing-- and this is a global, as Sergio says, as well as what's happening in LATAM happens globally and all of the risks. And I think what we are seeing from natural resources is that there are the macro risks, cyber and AI and geopolitical risks that cut across all of our businesses and impact everything that we do. But there are additionally industry group risks, particularly in emerging technologies, emerging risks.
In renewable energy and natural resources, clients are specifically impacted by risks, new risks in their industry groups that are partly connected to the macro risks, but are sub risks on the business that they're doing. As Sergio said, with grid bonds, what's happening in the energy markets locally from a merchant and PPA perspective, all the things we're seeing and the pressures and dynamics from data centers and how that's impacting renewable energy and new energy power generation opportunities.
For us, it is so interconnected. It is impossible to put your finger on the one thing, but it is an absolute multitude of macro and sub risks that do impact our businesses. We are working through. And as we say, not all risk is insurable, but our clients need to work in a very informed way. They need to understand what the unknown unknowns are, and they need to factor that into the business so they can bring risk from a negative to a positive factor in their business and take advantage of it. And obviously, that's what we're trying to do with our clients in natural resources and particularly renewable energy which does tend to be at the sharp end of evolution around the world.
It's-- I would fully agree. Lots of micro risks, lots of macro risks, fully integrated. And I think, we certainly haven't seen all of the emerging risks coming through to our sector yet. And five years ago, we weren't looking at battery energy storage risks. We weren't even considering what was happening with the hydrogen new industry that is burgeoning around the world. We weren't seeing the scale up and the deployment of renewables in the way we are now.
And we weren't having the wider macro waves and the geopolitical waves that are around the world at the moment, impacting everything that does in an interconnected way. So it's a challenging environment. But obviously we're trying to negotiate and help guide our clients through that they become the most informed in dealing with that particular risk.
LUCY STANBROUGH: I'm really glad that you brought in geopolitics and those risk connections. For natural resources organizations, geopolitical risk was the most interconnected risk because it's so rarely a single risk that causes issues. It's so often combinations. And that can be really difficult to understand what to think about and what to do. So we gave people the opportunity to pick combinations of risks. I think globally we had something like 1,600 risk connections, 166 of those came from natural resources organizations.
And for them, geopolitical risk was that most interconnected risk across their landscape. And that probably will come as no surprise with the headlines that we finished the end of the year on and have really continued across 2025. So, Sam, what are you seeing successful organizations really do to manage that complex web of geopolitics, political risks and regulatory risks?
SAM WILKIN: So natural resource companies tend to have a bit of a advantage compared to other sectors when they're dealing with political risk. For most sectors, the idea that you're going to have a material loss from political risk is a novelty, something that's just become-- people have just become aware of following the conflict in Ukraine. But for the natural resources sector, of course, this has been a factor for a very long time. And most natural resource businesses that are still in business, we've had losses in Venezuela, Argentina.
Long before the Ukraine conflict there were huge losses for the sector in Russia for political risk reasons in the Niger Delta. I could go on. And so any company that's still in business, in the natural resource sector will tend to have a pretty sophisticated political risk management capabilities. As Steve said, it's a risk industry. We get answers on surveys, people saying things like taking political risk is part of my business model. And so it's inherent to the sector. We've seen in oil and gas, the companies pioneering lots of techniques to deal with political risk, including interconnected risks, things like scenario planning, obviously, pioneered heavily in that sector.
Many oil and gas companies will have an internal political risk management function, which is something very rare for other sectors. Mining maybe varies a little bit, but mining tends to be very good at FPIC, what's called Free Prior Informed Consent, where they're understanding what's happening in the local community, where they're operating in order to make sure they don't have local community opposition turning into a political risk event.
In the renewables sector, a lot of those companies are newer, but in some ways inherited the traumatic legacy of the renewables contract, sorry, the power purchase contracts in emerging markets that were signed during the 90s and around 40% of those went were either forcibly renegotiated by the host government or abrogated by the host government.
So there were just a tremendous political risk loss in that 90s round of emerging markets, power investment. And a lot of the renewables companies coming in now, they understand the lessons. They're talking to some of Steve's clients. They operate almost at the level of a development institution where they understand that in order to make it work. In order to be paid in the future, they are going to have to make sure the entire regulatory framework around the generation system is up to scratch, and that power is getting to customers, that customers are actually paying for this power. That's a level of capability around political risk that most sectors really can only imagine, and the natural resource for companies tend to have these capabilities already.
LUCY STANBROUGH: It brings me back to something that Sergio said earlier. Sergio, I feel like you've done my job as Head of Emerging Risks, giving that definition on emerging risk and the fact that it can be both brand new things, but also things that people might be really familiar with. So, Sam, talking about some of that institution that we've had with, scenario planning from the sector, there is that need to make sure that people are not just thinking about those brand new things, but also those long running risks where, where things are changing. And actually we need to go back and take another look. And it's that mix of new and familiar risks that can be really fascinating.
We've spoken about a lot of things that people might feel that fit on their regular risk registers. But for you what are some of those new things that maybe people aren't thinking about that actually, you think they might want to take a second look at?
SAM WILKIN: Natural resources companies tend to be good at managing the operational types of political risks, but like everyone else, they are facing all these new kinds of geostrategic or risks relating to geopolitical competition. I think they're struggling much more with these things like in renewables, the China supply chain and the risks there, the risks of gray zone attacks on pipelines and shipping, the bifurcation of the global energy market, the energy market being divided due to sanctions and the oil price caps.
These are all new risks. I think the risks that are probably struggling the most with is geopolitical realignment. Host countries are increasingly exiting the Western system, and when this happens, it tends to result in huge losses for natural resource investors. We've seen this in Mali, in Myanmar and most recently in Niger. That is a major issue for the industry, and I think it's only going to get bigger because the US administration is actively revisiting US foreign aid policy, and foreign aid is a major incentive for countries to stay within the Western system.
So if they are no longer receiving foreign aid from the United States, what happens to natural resource investors who are out there at the frontier in a lot of these countries that are now trying to decide whether they're aligned East versus West, and how are they impacted? I think that's going to be something that natural resource companies are going to have to look at really hard as US policy shifts a lot under the current administration.
LUCY STANBROUGH: Yeah, that concern about, where might we see future events? Definitely came through really strongly. I remember one of the risk managers for an upstream energy company, there, connected emerging risks, was uncertainty around the future scenarios as a result of future instability. But people are really concerned about what might happen next and where. So that need for imagination maybe in some cases stretching what you think might be feasible is really important. And Steve, I wonder if you've got any thoughts in that space as well.
STEVEN MUNDAY: Yeah, absolutely. And I totally agree with Sam here. And the geopolitical is becoming increasingly important factor for our natural resources, particularly renewable energy clients, and are planning on a short-term horizon of four years. We've had so many governments going to the polls this year trying to understand how that landscape is going to change relative to, as you say, Sam, power purchase agreements, which are quite frequently long-term agreements on agreeing the pricing for the sale of green electrons or electrons into the transmission system.
So how are they going to hedge that relative to contract frustration issues, potential challenges if they can receive more preferential revenue terms on a merchant basis. And, what's the stability of that asset, which there's a long-term investment? So geopolitically that is cutting right across long-term stability of asset investment and commitment of money into new territories, particularly.
And we have had obviously changes legislation and a lot of changes in the U.S. And there was a lot of concern about what might happen to the Inflation Reduction Act, which has been incredibly positive in the U.S. for a number of years under the Biden administration. And there was a scenario before inauguration that there was an option to buy A-level of insurance cover to protect revenues should the Inflation Reduction Act be changed detrimentally to the power producer.
But that's a good example of maybe how uncertainty of an emerging risk can actually be transferred to the insurance markets. But the changes around the world globally in terms of changing governments, subsidy mechanisms, rocks, renewable energy certificates and the value of the revenue and how it's supported by the governments is incredibly important on these projects to make them financially viable still. And there's only a limited amount of transfer that risk into the insurance market. So that does come as commercial risk to developers and operators, particularly of renewable energy projects.
So it's a substantial risk, very difficult to hedge against it. And it's incredibly dynamic because quite often with new governments, we don't always know what they're going to be doing until they do it. And then it has to be quite a reactive, dynamic response to a new and very emerging risk that's transpired.
LUCY STANBROUGH: Yeah, it can feel really difficult to think about all of those different events that might occur, where next? Time to get out a world map and maybe some markers and dust off your risk board game skills. But it's really important to remember that there are great resources available. I know we've got our Geopolcast but also, Sam, you've recently been involved in the Political Risk Index. It can be really difficult to think about what might happen next. But know that there are resources that you can call on. And thinking about those next actions to take. What can people do to practically respond? Was another really fascinating area of those responses.
I think when we think about the actions that people are taking today, the majority are horizon scanning, they're attending industry forums. But we also saw some interesting forward-looking actions, looking to put that emerging risk framework in place. And that's really essential because without a proper enterprise wide strategy, organizations really run the risk of not capitalizing on those insights and turning those into opportunities. And so, Sergio, maybe we bring you back in here. How do you think analytics can really help organizations put that framework together? How can they use that to pull all of these really complex risks together?
SERGIO TORO: Still, Lucy, I completely agree. Having a structured emerging risk framework is essential, particularly as a natural resources company due to the face many risks, not only climate related ones. Analytics plays a key role in risk management. Advanced data modeling and AI driven simulation allows companies to assess vulnerability across their portfolio, integrating climate data with financial and operational insights. Additionally, predictive analytics can help organizations anticipate disruption, optimize resource allocation, and enhance resilience planning.
So I say to conclude, a robust risk framework enables natural resources companies to shift from reactive risk management to proactive, data driven decision-making, ensuring long-term sustainability and competitiveness.
LUCY STANBROUGH: Steven and Sam, anything else on your mind that you'd like to add to that?
STEVEN MUNDAY: I would just comment in terms of supporting what Sergio is saying there, but risk analytics are incredibly important for our clients particularly renewable energy changing climate patterns and conditions. We don't really know from the history what sites are going to be at risk from what perils going forward. The history is not a good predictor going forward in terms of natcat events, and that creates additional risk. And we're able to model some of it. And we are able, with our climate quantified tools, also to model what we think is going to happen with the changing climate conditions, with risks if they're becoming less exposed or more exposed to natural perils in the future.
If we've got a Hydrow project that is marginal and in Africa, we can now predict with a reasonable amount of certainty over the next 10, 15, 20 years, what's going to happen in terms of the water resource for that Hydrow or maybe the solar or wind resource in an area in the US, and again, not just the physical risk to the assets, but with renewable energy projects, they rely on that natural resource of wind or sun or water. And that's incredibly important for those projects. What we don't want to see with long-term financing is projects that become distressed because they have more limited availability to the resource, which they are reliant on as a low carbon power generation.
LUCY STANBROUGH: I know that's a topic that our head of weather and climate, Scott Saint George's, who's been exploring with you recently. And I think there's a really interesting piece in the natcat review on that. I think, Steve, your mention of analytics is really important. It's a great one to align alongside that strong risk engineering knowledge, and that's incredibly important to tell that story out to the market, giving them confidence that your understanding your risks, that you know what that change is, is looking like or, being honest about those levels of uncertainty and that ability to really take action.
STEVEN MUNDAY: Absolutely no clients are therefore able to build in a level of overdesign or accommodate the changing climate patterns and the environment that they're going to be in over the next five, 10, 15 years of the asset. Obviously, if we're looking at a Hydrow project, potentially up to 50 years of the asset. So these are long term horizons for planning and execution of projects and changing climate conditions and patterns and exposures are incredibly important. And having a way to model some of that in a predictive way and accommodate it is very important for our natural resources clients.
LUCY STANBROUGH: Well, thanks very much for that, that discussion, Steve, Sergio and Sam, it was really great to hear all of your perspectives, and I know that our listeners will have appreciated that, and I'm sure that you'll be looking forward to their questions in your inboxes. So thank you, everyone for joining us. And we'll catch you again on the next episode of The Risk Circuit.
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