How Non-Financial Risk Indicators Can Improve Credit Risk Due Diligence
“Credit risk is more than just financial models. There’s a whole series of non-financial data points that can be used to help make those decisions better.” – Ian Howard, Neotas
Managing and mitigating post pandemic risk
For financial institutions, managing and mitigating risk has become an increasingly difficult task following the implications of the COVID-19 pandemic. Ongoing uncertainty has made forecasters’ and risk managers’ jobs more difficult than ever and new due diligence methods are being adopted constantly to help evaluate risks more clearly.
Credit risk in particular has faced distinct challenges and implications through the crisis – with a lack of pertinent data on crisis conditions, changes in credit worthiness and a “large wave of non-performing exposures” needing to be addressed.
To help manage the risk for lenders, new approaches must be adopted that are fit for purpose in a changing landscape. Enhanced credit risk due diligence procedures should be adopted to dig deeper into non-financial risk indicators surrounding companies and entities.
A business’ resilience to post-pandemic fallout will vary depending on the organisation, its processes and, crucially, the people within the business. Institutions looking to mitigate risks in an uncertain landscape should be embracing all of the financial and non-financial data points at their disposal to help improve decision making.
How is credit risk currently being assessed?
The rapid, ever-changing nature of the pandemic has led to many financial institutions adapting quicker than they ever have before. By looking through a different lens and utilising readily available data such as non-financial data points, you can better predict the performance of entities.
Traditional borrower credit risk is usually evaluated by considering the financial position of the borrower, market position, industry specific characteristics and, finally, the quality of the management.
What was once a structured, well-established credit risk assessment has now been turned on its head.
Although many institutions have adapted their credit risk due diligence processes, those who aren’t embracing a data-led approach, including non-financial data points, are left evaluating credit risk with limited visibility and an uncertain path ahead of them.
The Credit Risk Implications of the Coronavirus Pandemic
We cannot rely on outdated financial reporting
With the dawn of the pandemic, many conventional sources of typical credit risk data became obsolete overnight. Where previously a high degree of importance would have been placed on financial reporting, even with the typical 6-12 month lag, the relevance of those figures decreased rapidly as markets crashed and industries were rocked.
While many industries were halted by the pandemic, some prospered. What’s true in all cases though is that none have experienced a typical trading period through that time. As a result, the robust, quantitative financial data that normally forms the cornerstone of credit risk due diligence becomes significantly less reliable.
So how then do we evaluate the parties in question? While some form of reporting delay may feel inevitable, it is time to engage with alternative solutions to help bolster risk-modelling. By considering non-financial data points such as customer reviews, worker voices and more, we are able to build a more complete picture of the current performance of the company.
We are beginning to see an emergence of a reliance on qualitative non-financial factors, to counter the shortage of concrete financial data:
“Banks have long relied on qualitative factors, which they seek to use as objectively as possible, to counter the shortage of more concrete financial data. These banks now also explore publicly available data as a means of cross-checking and validating qualitative information.” – McKinsey, 2021
Using non-financial data for better risk modelling
At present, public online data is a largely untapped resource when it comes to credit risk due diligence. Open source intelligence can deliver a significantly greater level of understanding of who you’re doing business with and the potential risks associated with them.
Our own enhanced due diligence checks enable our clients to evaluate financial and non-financial risk data. The non-financial data points considered as part of our credit risk due diligence service would include:
Management due diligence
Public customer reviews
Worker voice assessments
With so much uncertainty currently surrounding quantitative financial data, the benefits of additional data sources are clear – including behavioural factors. Placing greater emphasis on the C & A in the CAMPARI model – Character and Ability – can help improve decision making by considering wider risk factors than purely financial factors.
While character and skillset alone are not enough to ensure the credit worthiness of a business, when combined with other assessment factors, they can prove to be valuable resources for evaluating the resilience of a business in challenging circumstances.
Pandemic Uncertainty Leads To Forecasting Difficulties
Traditional credit risk analysis includes evaluating backward looking actuals and forward looking forecasts. In present conditions, that task is more difficult than ever.
While many have predicted continued economic contractions in global GDP, the true fallout of the downturn may be felt for years to come. Although recovery is expected, the expectation is for it to be slow.
The rate of recovery will differ by region, by industry and by organisation. While some have seen profits boom over the last 18 months, many others have faced sustained challenges. The importance of those elements must be considered as part of the risk analysis, where a sector-based approach will not be sufficient and more tailored considerations should be made.
For those dealing internationally, the picture complicates further. With many global economies in different stages of recovery or suppression, relying solely on outdated financial data or recovery forecasts would be unwise.
Time To Adopt Data-led Approach Is Now
With most firms seeking every available opportunity to gain a competitive advantage when it comes to investing or lending, the adoption of a more data-led credit risk approach was inevitable.
While the pandemic may have accelerated the process for some institutions, the advantages of adopting these additional tools are clear. Going beyond traditional processes and considering all available risks enables quicker, more informed decisions – while having greater understanding of those you’re working with also comes with a host of clear benefits.
Our proprietary technology is able to process vast quantities of data that are left unindexed by traditional credit risk sources. By diving deeper into analysing public data, our clients are able to make better informed, lower risk and ultimately more profitable decisions.
We are also able to offer our clients the benefits of our Ongoing Monitoring service. Perfect for fast-moving markets, this service uses our AI-driven technology to consistently evaluate and identify emerging risks and threat opportunities. Clients are able to monitor ongoing risks, without false positives.
The impact of social media on sport – how to avoid a crisis
Social media and sport are inextricably linked. The globalised, commercial nature of professional sport means it now relies on social media to bring its products to new audiences and to communicate sponsored messages to fans. The relationship between the two is not always without disruption though.
While online platforms have grown rapidly over the last 10-15 years, the impact of social media on sport has opened up possibilities for both opportunity and risk.
On one side of the sometimes-troubled relationship, there are the negative effects of social media on sports. In particular, the endemic issue of fan abuse towards professional athletes. Our Director Ian Howard wrote previously of the growing problem – arguing for the use of open source intelligence (OSINT) to help detect, verify and punish those caught being abusive on the platforms.
On another side are more positive effects of social media on sport – such as commercial opportunity. Social media and digital presence play an increasingly significant role in determining player, or even organisational value. More than ever, that value is determined by both sporting ability and global marketability. So what happens to that value when said player, athlete or club is embroiled in a damaging social media scandal?
History Repeating Itself
Scandals, or reputational crises, as a result of social media have become relatively commonplace in sport.
Premier League strikers Andre Gray and Jarrod Bowen are among two recent cases. Both players apologised for their actions and while their respective clubs condemned the behaviour – they are often rendered guilty by association. As these types of incidents have no clear end-point, they are often prolonged and the guilty parties can be forced to carry it with them for years – as has Gray.
Despite the regular occurrence of these incidents, sport continues to fall victim to social media fuelled crises.
Before May 2021, many who recognised Ollie Robinson’s name knew him simply as a talented cricketer. Now, Robinson is embroiled in a reputation scandal. A selection of abusive tweets made nearly a decade ago surfaced shortly before Robinson was due to make his England debut.
Now both Ollie Robinson and the England and Wales Cricket Board find themselves fighting a crisis management fire, a crisis that could so easily have been avoided.
Social Media – Weaponised Threat
One potentially alarming idea now is the prospect of a weaponised attack using historic social media posts, such as Ollie Robinson’s, to derail a sports team. While it may be hard to quantify the impact the scandal had on the England cricket team, when it unfolded, little public conversation was focused on the actual cricket being played.
Shortly after the Robinson story reached its peak in terms of news coverage, another emerged of an as yet un-named player sharing damaging social media posts in their past. Although the reason for the timing of the leaks is unknown, it’s difficult to not establish a link between the two.
While many in sport have a win-at-all-costs attitude, the idea of weaponising these crises is a distressing one. When the stakes are as high as they are in professional sport, not properly addressing all of the risks in front of you can have a seriously damaging impact on staff wellbeing, financial performance and public reputations.
How to mitigate risks – use the right tools
Effective employee screening, using social media background checks, would have helped mitigate the risks of social media in all of the cases mentioned above.
Social media screening uses open source intelligence to assess a person’s digital footprint against employment related risks only. It can be used to screen potential and existing employees, helping avoid damaging hiring decisions or future reputational damage.
In the case of Ollie Robinson, the checks would have identified the tweets in question, as well as any other high-risk behaviours, using our natural language processing. Those insights would have been handed over to the ECB, who could then make an informed decision for how to move forward. In this scenario, the ECB would also have been prepared to deal with any future events based on the incident. This is proactive crisis management.
These tools are used consistently in corporate recruitment to help employers, recruitment teams and HR personnel understand the risks more fully before making hiring decisions. They can also be used to help monitor and maintain culture within teams, identifying potentially dangerous behaviours within an organisation or team.
For sports teams, whose position is so public-facing, regular screening of employee (including players) social media profiles can help minimise risks.
Proactive Protection Against Threats
When it’s so easy to prevent this kind of crisis, it’s hard to see why organisations wouldn’t learn from the mistakes of the past. Governing bodies, sporting clubs or any organisation with outward facing, high profile representatives should be embracing this technology and using it to proactively to protect their reputations from future risks.
Due to their public persona, athletes are not always considered as regular employees but in this case they should be treated as such. Players and individuals may be the biggest assets for any team but they could also be the biggest weakness.
Social media screening from Neotas is the perfect solution to this issue. It has a rapid turnaround time and is cost effective, especially when weighed against the damaging implications of an ongoing reputational scandal.
The checks are GDPR compliant, use only public data and are regulated by third party associations like AFODD. Our technology processes data in over 200 languages so is perfectly placed to screen international employees like players, managers or staff.
While the use of social media screening grows in corporate recruitment, sport, for now, is lagging behind in not vetting their employees as fully as they could. Such is the impact of social media on sport that reputations and financial value continue to be damaged in crises that could have been sidestepped.
Whether competing for the World Cup, The Ashes or the Champion’s League, social media screening checks should be one of the first, most powerful tools in your risk management armoury.
If you want to discuss social media screening or risk management, our team are here to help. Feel free to get in touch or schedule a call here.
Guest Blog by Vero Screening: How Social Media Screening Benefits Our Clients
How Has Social Media Screening Benefited Our Client Base?
In a world that requires ever-increasing online due diligence, we are seeing clients’ screening requirements constantly evolve. As of 2019, and after much supplier comparison, we partnered with Neotas to provide our social media background checks.
The Need for Social Media Screening
On average, a quick Google search only shows you 4-6% of all data available on the internet. As the digital age progresses, HR Managers are seeking more information about who they are hiring, to paint a fuller picture of a potential employee, and whether they will suit their company culture.
Now more than ever, there’s an increasing focus on how a bad hire could potentially harm a business’ reputation. Tools such associal media screening can help lower the risks involved with a bad hire.
We recently conducted a Social Media Screening Webinar in collaboration with Neotas where 46% of attending professionals revealed they had an experience of an employee with a negative online profile.The results show the importance of pre-employment enhanced screening, with attitude and behaviour not always considered highly enough in the hiring process.
The interest from our clients has been clear and has been growing steadily in the first quarter of 2021. Clients undertaking these checks fell within Financial Services, Legal, Tech and Consultancy sectors, where regulation is stringent. Each month we’ve seen new clients sign up.
Upon conducting these searches for our clients, themes of negative findings fell within:
Sexually explicit content
Hate and discriminatory behaviour
As well as highlighting risk categories from prospective and current employees, Neotas social media screening reports also revealed positive indicators, such as an individual’s charitable work and volunteering roles.
For our clients, these findings can make or break the decision to bring a new hire into the team, or raise new information about a current team member.
Three per cent of red flags raised by Neotas’ social media screening resulted in businesses withdrawing offers from candidates due to concerns about their online behaviour. Although a small percentage, it highlights the reassurance that these searches can provide and enabled these firms to avoiddisruption to their workforce in the form of a dangerous or difficult employee.
Taking a future-proof approach to supply chain risk management
Change and uncertainty are breeding grounds for risk and the timing of Brexit alongside the global pandemic has seen the opportunity for risk to increase significantly.
The risk management lifecycle is familiar to many of us:
But what about when the risks, and the dangers and implications associated with them, evolve? What about when well established procedures and risk management protocols are turned on their head by unprecedented global events?
Locking down a globalised world has brought with it intense challenges for risk management. Global supply chains have come under immense pressure as they deal with changing localised restrictions, the societal impact of the health crisis and the need for many businesses to adapt to survive.
So how do we solve the problem of increased risk? With uncertainty looking here to stay, the solution may be to supplement your supply chain risk management practices with a more agile approach.
Why have we seen risk increase?
Through both the pandemic and the changing regulations of Brexit, businesses have been forced to adapt in almost every way. Supply chains have been rocked by unforeseen vulnerabilities, often left exposed by the new pressures we have found ourselves under.
The globalised nature of many multi-tier supply chains has seen these challenges exacerbated from the top down. A single product could now have hundreds or even thousands of suppliers contributing to its delivery, with risk increasing at every stage.
Travel restrictions have contributed to increased risk. Supply chain risk management becomes an even more difficult task when face-to-face assessments are limited and we become reliant on remote reporting and approval systems.
The typical lag in reporting and the uncertainty of the past 18 months means that it can also be difficult to trust financial data on the surface. Without further inspection, how can you trust that a supplier’s most recent statements are sound, when the pre-pandemic period may no longer be applicable and the during-pandemic period was so unprecedented?
Lastly, social media also has a part to play in reputational risk. Managing reputational damage can play a significant role in the overall health of a business and while financial data can lag, social media’s impact can be swiftly felt and unforgiving. Reputations can be tarnished by association so while it may not be your fault directly – it can still be your problem.
“You can insure against the failure of a customer, but how would you deal with the failure of a key supplier?” – Deloitte
Supply Chain ESG Risk
With an increased focus on ESG, comes greater scrutiny for the supply chain. The general public has never been more interested in knowing where their products came from, who made them and what impact their production had on the environment. The wrong decision could be catastrophic for industry.
In a modern multi-tier supply chain, the firm at the top of the chain remains at least partly responsible for the sustainability and societal impact of the suppliers at the bottom – at least in the eyes of the public. The larger the chain, the more difficult it can become to identify risks – particularly when subcontractors are introduced and when the only method of reporting is remote self-reporting.
The self-reporting model has always relied on honesty and integrity from companies but with increased pressure brought by the pandemic, businesses have been forced to adapt. Are firms likely to divulge information that could harm their reputations? Brendan Bradley thinks possibly not:
“Are firms likely to divulge information that could harm their reputations? I think there’s a grey area there with respect to what they will report and how much that’s actually being fully audited. If these assessments are being reduced to box-ticking and that’s never audited, you’re reliant on complete honesty from organisations whose number one interest will always be self-preservation.”
While self-reporting models were previously audited and punctuated by announced and unannounced site visits, travel restrictions have rendered those a thing of the past. As such, an independent, data driven, flexible auditing solution is required to help lower risks.
An ideal reporting model would no longer rely on self-reporting alone to assess the risks and credibility of a supplier and would also report data closer to real-time.
Time to stay compliant
The disruptions to supply chains have brought with them increased risk of non-compliance. The need to improvise and adapt brought by the pandemic has led to increased likelihood of non-compliance amongst suppliers, as chains came under pressure to continue operating under heavy restrictions.
Personnel Today recently reported on a huge surge in umbrella companies being used to abuse the UK tax system, with suppliers taking advantage of reduced taxation loopholes. The potential impact for associated companies includes regulatory action, as well as the reputational damage of non-compliance within your supply chain.
An independent audit of suppliers, building a clear risk profile using public data can help highlight any issues in transparency and ensure the chain remains compliant.
Identifying the weak link
“Your supply chain is only as strong as its weakest link” – Deloitte
While tried and trusted supply chain risk management procedures continue to be effective, now more than ever it’s crucial to be agile in our response to risk. It’s critical that businesses can establish a clear risk profile for each of their suppliers, highlighting vulnerabilities and assessing a wide range of financial and non-financial factors.
Are your supply chain screening procedures up to date? Are they robust enough to identify modern risks including cyber risk, risks associated with the pandemic or modern slavery?
Identify the risk factors most appropriate to your business. Design a risk model that will allow you to identify which suppliers are the most important and which are the most vulnerable. It’s about making sure you have the tools, expertise and techniques to gain a high level of understanding of your key suppliers.
Using Open Source Intelligence To Lower Supply Chain Risk
The role that open source intelligence (OSINT) can play in reducing supply chain risk is clear. Using OSINT we can monitor risks much closer to real-time, highlighting potentially damaging events or actions that occur outside of the regular reporting period.
Through OSINT, we are able to map supplier networks and analyse non-financial risks including those linked to adverse media, customer feedback, ESG and more. Adopting an enhanced, AI-driven model to supplement existing checks allows for deeper insights to inform your supply chain risk management strategy.
Technology like Neotas’ proprietary advanced machine learning technology is capable of processing vast quantities of relevant risk data, lowering the reliance on the self-reporting model. Our enhanced risk & compliance solutions aren’t limited by global jurisdictions and harness natural language processing to analyse data in over 200 languages.
The time to adapt traditional supply chain risk management practices is now. Using OSINT powered EDD, businesses can harness publicly available data to help lower supply risks. Get in touch with our team today to discuss your supply chain risk management practices and how we can lower your risks.
Download our recent supply chain risk management case study here: