Top Risks Facing Organizations in Asia Pacific

Current Risks

After ranking second in 2021, cyber attack or data breach now ranks as the top business risk for Asia Pacific. This reflects the pervasiveness of cyber risk and mirrors a global trend of growing awareness of the expanding cyber threat landscape, as can be seen in the risk’s steady rise up the top 10 rankings over recent years. High-profile data breaches and ransomware attacks in the region, increased data protection review and enforcement by regulators, combined with greater underwriting scrutiny by the insurance market, are likely to have exacerbated cyber risk concerns.

Top 10 Current Risks: Asia Pacific

1. Cyber Attack or Data Breach
2. Economic Slowdown or Slow Recovery
3. Business Interruption
4. Failure to Attract or Retain Top Talent
5. Rapidly Changing Market Trends
6. Supply Chain or Distribution Failure
7. Regulatory or Legislative Changes
8. Increasing Competition
9. Failure to Innovate or Meet Customer Needs
10. Commodity Price Risk or Scarcity of Materials

Economic slowdown or slow recovery ranked as the region’s number two risk. Asia Pacific faces a challenging economic backdrop, with organizations and governments feeling the effects of tightening monetary policy. Cost of capital is increasing, and interest rates are likely to stay higher for longer. Nevertheless, inflation is expected to recede faster in this region than in others, falling to target levels by 2024 rather than 2025. Despite its challenges, Asia Pacific will likely remain the most active global region in terms of economic growth in 2023, with growth expected to rise 0.7 percent to 4.6 percent. China and India are projected to contribute half of global economic growth in 2023 and 2024, highlighting the power of the region, but an uncertain COVID-19 recovery and a slowdown in China’s property market will likely impact demand.

Failure to attract or retain top talent is also considered a key challenge for business leaders in the region, with the risk moving up five places, from number nine in 2021 to number four in 2023. Asia Pacific is a diverse region with advanced and emerging economies that have different labor markets. In an uncertain business environment, with new skills gaps emerging and employee preferences shifting, companies are under pressure to reimagine total rewards well beyond salary. Recruiting individuals with specific skills to accelerate companies’ transition plans can be challenging because many businesses are vying for a small pool of talent.

Many employees are seeking out increased pay or new roles because of financial pressure as well as a desire for career progression and alignment between their own and their employers’ values. Given that most employers can’t align wage increases with high inflation, organizations are looking for non-monetary opportunities or cost-saving tactics to support both employees and the business. This shift in dynamics means employers in the region—large organizations, in particular—are focused on retention, wellness and factors driving the global economy, including high inflation and pressures on the supply chain, as top-of-mind issues.

Rapidly changing market trends, while not in the region’s top 10 risks in 2021, is ranked number five in 2023. Combined with shifting geopolitical risk factors, fluctuating market risks—including slowdown in raising capital, fewer stock listings, lower mergers and acquisitions (M&A) activity, and organizations’ direct accountability for environmental, social and governance (ESG) and diversity, equity and inclusion (DEI) considerations—put enormous pressure on companies to keep pace.

Supply chain or distribution failure has also moved into the region’s top 10 risks, at number six. The inability of supply chains to keep pace with post-pandemic recovery has compromised growth and created significant cost pressures for survey respondents in Asia Pacific. The conflict in Ukraine, geopolitical tensions surrounding Taiwan, threatened shipping lanes in the South China sea, scarcity of labor and strained trading relations between China and its trading partners, such as Australia, have all heightened the awareness of supply chain disruptions. As supply chains begin to return to normality, many organizations will critically review their supply chain dependencies to ensure continuity in the event of another pandemic or similarly disruptive global event.

The uptick in awareness has helped to reshape supply chains because many international companies are exploring de-risking and de-coupling strategies to reduce their reliance on a single supply source and to help plan for future supply chain disruption. For example, because of growing expansion of Taiwan’s already dominant market share in silicon chip manufacturing—and the resulting potential disruption in semiconductor and high-tech sector manufacturing—Apple is investing heavily in India to grow its market share and spur manufacturing there as part of its supply chain risk mitigation strategy. Businesses are also engaging in strategic investments in Vietnam to reduce supply chain reliance on China. In Australia, net overseas migration has more than doubled since the pandemic and is a hopeful sign that the country’s streamlined skilled labor program will help alleviate its labor (and, consequently, supply chain) constraints.

Concerns in Asia Pacific are also growing around regulatory and legislative change, ranked at number seven. Geopolitical volatility is compounding uncertainty regarding regulatory actions related to climate change, DEI and corporate governance, keeping this risk top of mind for many leaders in this region.

Underrated Risks

Climate change, cash flow or liquidity risk, environmental social governance (ESG) or corporate social responsibility (CSR), and intellectual property (IP) risk are all notably absent from the top 10 risks in Asia Pacific.

Though climate change does not feature in the top 10 as a risk itself, it directly impacts four of the top 10 risks: business interruption, changing market trends, supply chain or distribution failure and regulatory or legislative changes. The regulatory and legislative changes on climate are causing great concern for companies in the region, which will be challenging for firms to navigate. The growing frequency and intensity of extreme weather events in the region raise the risk of business interruption and supply chain or distribution failure considerably, and the rapidly evolving net-zero transformation has myriad implications for market trends and mandatory climate disclosure across sectors. Supply chain failure goes beyond weather events; it can be caused by the need to measure Scope 3 emissions, so firms will need to think about contingency plans to work around suppliers who are not transitioning.

After several years of organizations in the region undertaking climate change scenario analyses as part of the Task Force on Climate-Related Financial Disclosures, the ways in which climate change impacts individual business risks are becoming better understood. As investors, stakeholders and regulators are increasingly looking to understand how organizations are addressing climate-related risks, it is critical that organizations are prepared to rise to the challenge of climate disclosures.

With the cost of capital increasing and interest rates likely to remain high for some time to come, it is surprising that cash flow or liquidity risk, ranked at number seven in 2021, has fallen out of the top 10 in 2023. As the economy slows, it is more important for organizations to have cash on hand to help meet financial obligations if revenues decline. Risk protection is critical to navigate threats of insolvency and the heightened geopolitical risk environment successfully.

In Asia Pacific, both regulatory requirements and ESG or CSR and DEI commitments are driving pay equity initiatives. Regulatory scrutiny is tightening in Australia, Japan and India and will become a pressing issue for organizations across the region. Aon’s 2022 Asia Pacific Corporate Governance and ESG Survey showed that 30 percent of organizations include diversity metrics in leadership key performance indicators and 15 percent monitor pay equity at the board level. We expect these figures to increase quickly as ESG becomes more pertinent to attracting and retaining new talent and securing investment.

Absenteeism and rising healthcare costs should be considered top risk factors directly associated with chronic medical conditions and physical health. Aging, genetics and environmental risks affect population health in the region, but chronic stress has a significant impact on healthcare costs and is driving absenteeism. The Asia Mental Health Index report conducted by Aon and Telus Health revealed that employees in Asia are under considerable stress, with 82 percent reporting a moderate to high risk of experiencing mental health issues. This has implications for overall costs to employers and employees, as well as for productivity due to low employee engagement and absenteeism. Increased staff turnover related to mental strain also adds to cost pressures for organizations.

Among the highly innovative and increasingly tech-dependent organizations in the Asia Pacific, intellectual property (IP) is becoming more valuable. Intangible assets now make up more than 90 percent of S&P 500 companies’ market value,¹ and Asia Pacific is part of the global shift from tangible to intangible assets. Offices located in Asia Pacific accounted for two-thirds or more of total filing activity for patents, trademarks and industrial designs worldwide in 2022,² highlighting the region’s global lead in innovation. IP is the only way to turn innovation into an asset stack, and companies must protect themselves against infringement and misappropriation while using IP to drive growth.

Future Risks

Cyber attack or data breach maintains its number one ranking in Asia Pacific’s future risk top 10, highlighting our respondents’ view of the strategic importance of managing cyber posture and increased awareness of the multiple drivers that will shape the region’s cyber risk outlook. These include geopolitical tensions, challenges associated with the reconfiguring of supply chains and the adoption of emerging technologies such as AI. Organizations must strengthen their cyber risk management strategies and governance frameworks, remain vigilant on security controls to mitigate ransomware attacks and frequently stress test cyber risk strategies against a broad set of complex scenarios to keep pace with evolving trends.

Top 10 Future Risks: Asia Pacific

1. Cyber Attack or Data Breach
2. Economic Slowdown or Slow Recovery
3. Failure to Attract or Retain Top Talent
4. Rapidly Changing Market Trends
5. Regulatory or Legislative Changes
6. Increasing Competition
7. Commodity Price Risk or Scarcity of Materials
8. Failure to Innovate or Meet Customer Needs
9. Business Interruption
10. Supply Chain or Distribution Failure

Failure to attract or retain top talent will become an even more important risk in the region, as illustrated by its rise from number four to number three in the region’s future risk rankings. Amid widespread workforce shortages, organizations are focused intently on efforts to attract and retain top talent. Understaffing is a consequence of the pandemic, and it is being exacerbated by a persistently tight labor market and an aging workforce. Companies in many industries are redesigning their workforce strategies to attract and retain talent and remain relevant as employers. These strategic efforts include organization design, location strategy, remote working policy, talent to fulfill requirements for the future world of work and plans to develop attract and retain people. Companies in the competition for talent that do not have a winning employee value proposition (EVP) are at high risk of falling behind.

Rapidly changing market trends has also moved up in the future risk ranking, from number five to number four. As with regulatory or legislative change, the concerns driving this risk include quickly shifting trends around ESG and DEI accountability, raising capital, initial public offerings and M&A activity, as well as geopolitical volatility and political risk.

How Can Organizations in Asia Pacific Mitigate these Risks Effectively?

Managing cyber, the region’s top risk concern today and in the future, is best approached with a holistic approach that comprises the full cyber risk lifecycle, with the goal of building and maintaining sustained cyber resilience. By taking advantage of robust platforms and reliable global data, organizations can properly identify, assess, mitigate and transfer cyber risk and quickly recover from attacks.

Defining and implementing a strong people strategy is vital to helping organizations hire and retain the workforce they need to deliver on their business goals. A clearly defined total rewards strategy can link directly to organizations’ business goals and people strategy and can align with their EVP. A compelling talent experience goes beyond monetary compensation and includes the overall culture, work environment, leadership, career opportunities and work-life balance. Retraining existing employees is just as crucial as recruiting new talent to ensure transition milestones are hit. To effectively navigate these issues, the right data is vital to provide clarity around decision making and demonstrate return on investment.

Supply chain or distribution failure’s rise in the 2023 risk ranking correlates strongly with an increase in supply chain reviews and supply chain risk maturity assessments requested across Asia Pacific. The cost of holding supply chain assets such as inventory and receivables will be a key component of supply chain strategy. Organizations should continue to assess capital efficiencies and alternative capital options as well as other protections against insolvencies and geopolitical volatility.

The use of parametric insurance is accelerating as risk managers and risk protection buyers focus on the need to increase resilience to unique risk exposures. Parametrics offer a complementary solution to traditional insurance and can be tailored to address coverage gaps and facilitate quick pay outs. Cash flow or liquidity risk is a key benefit of a parametric solution—for example, in the construction and building industry, where these solutions are helping companies stay afloat and deliver fast financial relief in response to project delays and liquidated damages. Parametric solutions also offer expanded cover beyond traditional insurance due to their broad definition of loss and fewer exclusions, and they can solve for losses that are not connected or related to property damage.

¹ Intellectual Property (IP), Aon, https://www.aon.com/insights/topics/intellectual-property.
² 2022 Intangible Assets Financial Statement Impact Comparison Report, Aon, 2022, https://www.aon.com/getmedia/544c9634-bcb7-4fb3-ad10-82afba01ee49/Aon-Ponemon-2022-Intangible-Assets-Financial-Statement-Impact-Comparison-Report.pdf.

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