Risks

Risks refer to the potential for events or conditions to affect objectives, usually through uncertainty that could lead to negative outcomes, but may also present opportunities. They arise when there is a gap between expected results and what may actually occur. Risk is often described by its probability of happening and the magnitude of its impact.

Common categories include financial risk (market or credit fluctuations), operational risk (system failures, process flaws), safety and health risk (injuries, illness), environmental risk (disasters, pollution), regulatory or compliance risk (legal changes, violations), geopolitical risk (conflict, sanctions), cybersecurity risk (data breaches, cyberattacks), and reputational risk (damage to public trust). Risks can be internal or external, predictable or surprising, and may affect individuals, organizations, communities, or ecosystems.

Risk assessment involves identifying risks, analyzing their likelihood and potential consequences, and evaluating their significance. Techniques include qualitative methods, quantitative modeling, and risk matrices. The outcome informs risk treatment, which may involve avoidance, reduction or mitigation, transfer (e.g., insurance or outsourcing), or acceptance. Establishing risk appetite and tolerance helps determine which risks require action.

Ongoing monitoring and review are essential, using indicators and reporting to detect changes in risk exposure and effectiveness of controls. Limitations include imperfect information, model assumptions, and the inherent unpredictability of complex systems. Effective risk management seeks to improve decision making by clarifying uncertainties and balancing potential costs and benefits.