It’s well known that last year inflicted upon us the greatest unanticipated risk of our generation. We can only expect that the coming year will result in after-shocks that will be felt worldwide, creating disruptions across business sectors.
Social risks are often at the root of disruptions that later play out – a single social grey swan event – can cause irreparable damage to companies or an entire economic sector. 70% of this social risk lies outside of companies internal operations – it’s in their asset portfolios and supply chains. A single social disruption in a pressure point of the supply chain (Suez canal), or social backlash at sourcing from a region with forced labour reports (recently seen with Nike in China’s Xinjiang province) can mean that millions of dollars can be at stake by reacting too late.
Despite the increase of forward-thinking companies using massive amounts of data to respond earlier to these emerging disruption risks, there are still information gaps. The reality is that by the time news has made it to mainstream news sources like DowJones Factiva the disruptive event has already happened. Then there are risk indexes that forecast disruption based on structural data—such as economic indicators, country legal frameworks, or climate information—but these indexes are updated annually or, at best, quarterly, again resulting in a problematic information gap.
Social data—opinions sourced from regular people, be they citizens, organization leaders or local experts —is increasingly being implemented to fill these gaps and to understand disruption while it still matters. Real-time information complements these other sources to increase coverage and decrease blindspots.
The Inter-American Development Bank (IDB), the largest public financing vehicle in Latin America and the Caribbean, with $11.3 billion in their lending portfolio in 2019, is one of the institutions where social risks matter significantly to their portfolio and operations. Here we’ll take a closer look at how the IDB partnered with Citibeats to implement social risk mitigation across 26 countries.
Getting ahead of the disruption curve in Latin America
What we saw as part of the aftermath of COVID-19 is that countries with existing social instability were propelled into a state of major disruption, particularly across Latin America. Although sadly we don’t have a crystal ball to predict the future, in these cases the social risk warning signs have often been there well in advance.
On March 14 in Paraguay, the media began reporting that citizens were taking to the streets in protest of the health system’s failure to cope with COVID-19. How did it come to this?
Citibeats’ risk indicators had flagged alerts of social risk 60 days before the March 2021 political crisis. During those 60 days, Citibeats sent 2 other alerts that were building up a climate of distrust in the government’s handling of COVID-19 and a second wave of destability, as well as educational complaints pointed out that resources were not being invested in the long term. This added up to an increasing demand for state accountability. By the time widespread protests were ignited on March 5th, social risk signals had been pointing to this scenario with enough time to prepare for such events.
Not every risk needs a response - so when to react?
Alerts across data sources can help draw attention to a potential risk, but once that’s accomplished, an understanding of context is needed to determine whether or not action is required. In December 2020, Argentinian highways (formerly a PPP) were about to be nationalised. Risk managers began searching for clues as to how this could impact their operational logistics, should the country be faced with social disruption, plus any side effects this could have on associated logistics and the agro businesses as a whole. Was a reaction needed?
Citibeats signals pointed to ‘no’. The polarization rate on this topic amongst the population was very low. Digging further into this indicator, based on qualitative data of social comments, it appeared that Argentinians had low attachment to this infrastructure issue (they did not perceive highways as a “national asset”, since it was perceived as such poor quality). Data showed that the conversation had been steadily declining from an already low point. By triangulating information with civic perceptions, it was possible to de-escalate the needed response, and not make unnecessary changes.
And when a risk does happen, which of our assets are affected?
Social risks are particularly complex because a single risk may affect many companies and sectors. Across asset management and business-lending risk in the financial services sector, clients are using Citibeats to map their portfolio against given social risks.
In Spain, Citibeats worked with a top 5 Spanish bank that possessed financial information about 10,000 key business clients, but it didn’t have contextual information to understand the social risks these portfolios were subject to. One of these risk factors was tourism reliance, meaning the extent to which these businesses relied on the tourism sector.
By applying Citibeats analytics to the online conversation around their portfolio, it was possible to extract indicators for each business. When COVID-19 hit, and it became clear that tourism-dependent businesses would suffer, it was possible for the bank to understand where in its portfolio it was over-exposed to this risk, and act faster to take risk management measures.
Bespoke systems for social risks: map, detect, qualify
By getting systematic about social risks, companies are starting to fill the information gaps that help them respond while the issue still matters.
Detecting social risk from social signals is notoriously difficult, and that’s why Citibeats is advancing the best in social data science to make it easy. With pre-tested components for social risk detection models that have a proven track record in financial services, govtech and supply chain, we configure our platform to serve as a bespoke system for your ESG risk, supply chain and country risk portfolio.
For a demonstration of our existing modules and their use cases, please contact our team. We’ll be happy to discuss your business needs and walk you through how Citibeats can help you meet your goals and objectives.