The number of investment institutions prioritizing risk management has more than doubled since before the 2008 financial crisis, but the way in which risk is communicated internally is holding back further progress, according to new research by the Economist Intelligence Unit.

The survey, Closing the communication gap: How institutional investors are building risk-aware cultures, was conducted in the first quarter of 2013 and commissioned by State Street Corporation.

Respondents included about 300 executives of investment institutions, 48 per cent of which were asset managers, 35 per cent asset owners and 18 per cent intermediaries. Of these, 39 per cent were headquartered in the Asia-Pacific region, while 33 per cent were from Europe and 19 per cent were from North America.

The survey found that 78 per cent of respondents said their organization had a “very risk-aware” culture today. This compares to only 30 per cent who made risk their highest priority back in 2007.

“Investors and regulators will be reassured by the survey’s conclusion that asset owners and managers have improved their risk awareness ‘beyond recognition’ since 2008,” said David Suetens, executive vice president and international chief risk officer at State Street.

“But a mindset shift still needs to occur at many organizations to improve levels of trust and dialogue between the business and risk functions and ensure they are developing a real culture of risk awareness across the whole enterprise,” Suetens said.

Communication gap

Over half (56 per cent) of the survey respondents cited reputational risk and risk rising from market volatility as the top threats to investment institutions.

But the study also identified a disconnect between business and risk functions, and differences of opinion about the role of the risk function at many institutions, State Street said.  

For example, the majority of non-risk staff (52 per cent) think the risk function exists primarily to fulfil regulatory obligations, while 30 per cent of risk professionals think this way.

The report says these findings imply that risk managers are “not fully communicating their mission to the wider organization” but that the risk function itself is “keenly aware of this.”

“It [the findings] indicates a certain amount of frustration from both perspectives, possibly hindering the development of risk awareness across the enterprises,” Suetens warned.

Role of risk committees

The survey recognized the “important” role of a senior risk committee or governance body in bringing together senior risk, compliance and audit representatives.

“Senior risk committees play an important role in improving the risk culture,” said Wai Kwong Seck, executive vice president and head of global markets and global services across Asia-Pacific at State Street.

“In fact there is clear evidence across a number of risk measures that strong committees have a tangible impact on closing the communication gap,” he said.

Indeed, the research points to a “significant cultural change” among investment institutions. But the report argues that, by shrinking the communication gap, firms will be in an even better position to fulfil their responsibilities to shareholders, clients and regulators.