Strategic, Reputational and Emerging Risk
Strategic risk
Strategic risk arises from the strategy itself, its execution, or changes in the competitive, regulatory, technological or macroeconomic environment. It includes M&A integration risk, business-model disruption, and misallocating capital to a declining franchise. Historical loss data captures it poorly, so it is assessed through scenario analysis, competitive benchmarking and stress testing of the plan.
Reputational risk
Reputational risk is the risk that an event or perception damages stakeholder trust and the franchise. It is usually a second-order risk - the consequence of another risk crystallising - rather than something with an independent likelihood. It is managed through its drivers: conduct, operational failures, customer treatment and stakeholder expectations. Quantification is approximate (revenue at risk, funding cost, franchise value).
Emerging risk
Emerging risks are newly developing or changing risks with high uncertainty and potentially material impact: climate, AI, cyber, geopolitical fragmentation, demographic and regulatory shifts. Management uses horizon scanning, expert panels, scenario analysis, early-warning indicators and a defined escalation path to the board, so emerging risks enter the appetite framework before they are precisely measurable.
Traps
- Assigning reputational risk its own PD and LGD in the register as if it were a credit exposure.
- Treating strategic risk as operational risk because the loss surfaced during operations.
- Ignoring emerging risks because they lack historical data.
- Assuming a scenario must be probable to be worth testing.
Rule of thumb: don't forecast reputational risk - map it. Identify the underlying events, assess severity through stakeholder scenarios, and set tolerance on the drivers you can control.