By Olu EriOlu, Associate Director, Infrastructure Advisory Group, KPMG
The Resilience Statement
Introduction
This article explores the implications of the long-awaited Resilience Statement on the UK infrastructure sector. The Resilience Statement is part of a set of the UK government’s proposals to improve corporate governance following recent failures. The UK government’s original proposals set out to “improve how organisations identify, manage and report on their resilience risks that are most material to their business” [1]. The UK government’s intention was that the Resilience Statement will apply to Public Interest Entities (PIEs) with 750 or more employees and £750 million or more in annual turnover. Within it are three areas for those with senior management responsibilities to focus on: 1) assessing resilience, 2) performing a reverse stress test and 3) reporting and seeking independence assurance. Further reading is available here.
Latest view
The Resilience Statement has long been delayed, and it has been through many revisions following industry consultations, the most recent being a withdrawal of the draft secondary legislation on the 16th of Oct 2023 [2]. However, the Resilience Statement, which is only a part of the proposal to improve corporate governance, does not require legislation. The Financial Reporting Council stated in its policy statement that it plans to address the Resilience Statement through amendments to the UK Corporate Governance Code [2], to be confirmed when the revised Code is published in early 2024 [3]. That said, the pressure for reform remains, and infrastructure organisations are not immune to the threats and impacts being addressed by the Resilience Statement, especially given the role infrastructure plays in our lives. The rest of this article will focus on the implications of the Resilience Statement on the infrastructure sector.
If the government goes ahead with its plans, the Resilience Statement will address “the UK Government proposals for large companies to improve the information disclosed to stakeholders about the future prospects of the business, including the principal risks to the business in the short and medium term, together with their likelihood, impact and the mitigating actions being taken by management to address them. Reverse stress testing performed, and any long-term trends will also be required to be disclosed.”
Source: https://www.bdo.co.uk/en-gb/insights/advisory/heads-of-internal-audit-newsletter/uk-corporate-governance-reform-is-delayed-again-what-does-this-mean-for-heads-of-internal-audit
What are the potential implications of the Resilience Statement? Why is it important?
We will consider three implications of the Resilience Statement on infrastructure organisations, building on insights from our annual publication Emerging Trends in Infrastructure – which be will be released on our website soon.
- Cost and Supply Chain disruption: Whilst UK inflation rates have reduced, there has been increasing uncertainty due to price and inflationary pressures, and the severity of supply chain disruptions on infrastructure, leading to a negative effect on customer perceptions and the value of assets.
Previously, price risk was considered poor cost management. But, today, the link between risk and discipline has become unhinged. No amount of cost or price discipline can protect margins during times of inflationary shocks of this magnitude, supply constraints and volatile commodity price fluctuations. This is coupled with a lack of understanding of how to properly incorporate price inflation and cost volatility into contracts [4].Implication #1
Infrastructure organisations and their supply chains need to develop an improved level of risk transparency to ensure they have a much better visibility and understanding of costs and risks, and the methodology to appropriately review and mitigate these. To deliver this transparency, businesses need to develop an improved understanding of their corporate risks and the effectiveness of the associated controls down through to their supply chain. This will enable accurate reporting on dependencies and potential implications through the Resilience Statement and, more importantly, it will provide the trigger for businesses to act.
- Digital adoption: The infrastructure sector lags behind others on digital adoption and therefore misses out on opportunities due to a reliance on old ways of working, tacit knowledge, and the challenge of embedding new work management tools. Digital systems and AI can be deployed to enhance decision making, improve understanding of risks, provide access where human beings are limited and process volumes of data at speeds beyond our capacity, generating more accurate forecasts or running multiple scenarios that support improved investment decisions.
The big question is whether infrastructure owners, procuring authorities, investors and operators are willing to pay and whether they can offer the right incentives into their supply chain to encourage digital design and cooperation. A further challenge is whether they will have the right skills and experience to translate their digital capabilities into actual insight and value creation [3].
Implication #2
As infrastructure assets continue to age, infrastructure professionals need digital capability support to better assess risks, cost, and performance impact. To ensure any materially significant risks and financial liabilities are understood, bottom-up assessments by asset management and infrastructure professional must be embedded as part of methodologies for producing the Resilience Statement. This will also support companies in carrying out their reverse test – a key requirement for the Resilience Statement. For more on the key requirements, see our short blog here.
- Climate proof, net-zero transition: Our infrastructure sector is ubiquitous, supporting our way of life and economic advancement. We have an expectation that at its core, it should contribute to improving the quality of life of both – people and the planet. As we transition into a net-zero world, we need to ensure that we do not transition into a less resilient net-zero world. We need to do this by ensuring resilience and net-zero investments go hand in hand. This starts with the decisions made by infrastructure operators, investors, and regulators.
The pathway to transition will be varied, and challenging. Rather than trying to replace current assets with lower-carbon alternatives, organisations should ensure they are asking themselves “what we are actually trying to achieve” and then come up with low (or no) carbon ways to achieve this. Carbon is only one of many important variables, electric cars providing a good case in point. There may be a point where the damage caused by manufacturing the electric car outweighs the damage being done by the combustion engine it is replacing [3].
Implication #3
There is a growing need to move away from static resilience risk assessments to more dynamic resilience assessments. These dynamic risk assessments will need to be embedded within asset investment decision making so that operators and investors can, in a timely fashion, understand any risk exposure that may lead to (for example) stranded assets due to changing flood risk, or the inherent risks of a net-zero investment plan that is not aligned to the present and future realities of climate adaptation.
In summary, adopting the broad principles of transparency from the Resilience Statement will enable infrastructure organisations to:
- Gain a deeper understanding of the impact of their supply chain on their corporate risks and the effectiveness of the controls.
- Improve digital capability to ensure bottom-up risks are understood and to carry out Reverse tests, deeper scenario analysis and make better decisions in material risks that would not be identified in a top-down exercise.
- Move towards a more dynamic resilience risk assessment approach to ensure that they don’t end up with stranded assets.
About Olu:
Olu is an asset management professional within KPMG’s Infrastructure Advisory Group. He has successfully supported his clients across multiple sectors to transform their approach to risk, resilience and climate adaptation and how that integrates with investment planning and operations.
