The Era of Exponential Risk

Foreword

Navigating The New Era of Risk

New Risk LandscapeMeeting the Challenge of

The Future of

Moody’sContents

PART 1

Foreword

Navigating the
New Era of Risk

PART 2The New
Risk LandscapePART 3

Meeting the
Challenge ofPART 4

The Futureof2Foreword

Navigating The New Era of Risk

New Risk LandscapeMeeting the Challenge of

The Future of

In conversations with leaders in business,government, and financial markets, I hear acommon theme.

FOREWORDThe Era ofExponential
Rob Fauber, President & CEO

The world has grown incredibly complex.
Risk has grown more complex. Supply chain
failures; cyberattacks; geopolitical tensions;sanctions and security issues; and extreme
weather events — all playing out against a
backdrop of economic uncertainty andsocial unrest.
It’s clear: we’re now living in a new era.
The Era of RiskN – Exponential Risk.
We’re linked by technology and trade, byculture and commerce. This means that risks
no longer exist in isolation. As organizations
and nations are linked, so too are the risks
they face.
For leaders, understanding the new era isimperative: resiliency and sustainable value
creation depend on recognizing and adapting
to Exponential Risk. And it’s an opportunity —not just to understand Exponential Risk, but
to get ahead of it.
The past few years alone have brought into
focus how our interconnected world creates

Moody’snew, compounding risk.
A military conflict creates a cascading
series of risks, from energy insecurity andcommodity disruptions to rising inflation
and a refugee crisis. A ransomware
attack directed at an oil pipeline leads
to widespread goods shortages. A
devastating weather event shuts down vital
supply chains.

The old ways of managing risks — asone-offs, in silos — no longer cut it. We
need a new mindset that drives growthby understanding RiskN – Exponential
Risk through a growing body ofknowledge and increasingly powerful
analytical tools.
Like the shift from analog to digital, fromagricultural to industrial, the new Era ofExponential Risk is here to stay. With
the right perspective, leaders can morethan meet the RiskN – Exponential Risk
moment: they can anticipate, adapt, andultimately thrive in this new era.

3Foreword

Navigating The New Era of Risk

PART 1

New Risk Landscape

Navigating the
New Era of

Meeting the Challenge of

The Future of

Moody’s

We’re living
in a new era
One where the nature of risk has
fundamentally changed.
For decades — centuries, even —organizations faced different formsof risk. They sought to understandthose risks. To anticipate them.
Prevent or mitigate them. Build
resilience. And unlock theopportunity on risk’s flip side.

4Foreword

Navigating The New Era of Risk

New Risk Landscape

New risks emerged over time. Each
new risk that appeared on thescene was studied and gradually
understood. Resources wereapplied against the risk, models
built. The number of risks may
have multiplied, but the underlying

This is the new era:the Era of—Exponential Risk
formula largely stayed the same.
What happens, though, when
individual risks begin to feed offeach other? When one risk meets

Meeting the Challenge ofand multiplies another risk — toproduce an entirely new set ofchallenges, often unforeseen?
Now structural trends likeglobalization, digitization,
fragmenting regulatoryenvironments, climate change, andchanging consumer expectations
are colliding with low probability,
high-severity flashpoints.
And it’s creating challenges locally,nationally, and internationally —across digital, physical, and sector
operating environments.
Organizations, sovereigns, andmarket participants must now
contend with cyberattacks,
operational failures, supply chain
bottlenecks, growing geopoliticaltensions, and environmental andsocial pressures.

The Future of

Moody’sOnecyberattack.
Multiplerisks.

May 2021: Colonial Pipeline, which operates
a major pipeline for refined oil products in the
U.S. Northeast, shuts down in response to aransomware attack.
The shutdown severely limits the flow of fuelto industry and residents in the Northeast.
Shortages develop. A cyber issue — affecting
one company — has now exposed supply
chain risk across multiple companies, entire
industries, towns, cities, and states.
As the shortage plays out, cities begin drawing
up plans to reduce public transportation.
This creates another potential risk: workforce
disruption for companies whose employees
can no longer get to work. Airlines curtailflights, further restricting the free flow ofpeople and goods.
Petrochemical and heavy manufacturingindustries — dependent upon refined oil
products and fuels — begin planning to
reduce production. That, in turn, createsanother wave of supply chain disruptions.
Now, companies operating in other parts of
the U.S. — or outside its borders — are facing
a business continuity risk that began with acyber breach at one regional energy company.

5Foreword

Navigating The New Era of Risk

New Risk Landscape

RANSOMWARE X SUPPLY CHAIN

Meeting the Challenge of

The Future of

CLIMATE X BUSINESS CONTINUITY

Moody’sCYBER RISK X AUTOMATED AGRICULTURE

Examples ofExponential Risks
INFLATIONARY PRESSURE X CREDIT RISK

Organizations and nations now find themselves
increasingly vulnerable to a risk “domino effect.”A single risk, affecting a single company or
country, that triggers other risks over time — bothwithin the entity itself and beyond.

SUPPLY CHAIN X SOVEREIGN DEBT

ENERGY INFLATION X COMMERCIAL REAL ESTATEETHICAL RISK X SUPPLY CHAIN

GOVERNANCE X COUNTERPARTY RISK

6

Foreword

Navigating The New Era of Risk

New Risk LandscapeMeeting the Challenge ofAs organizations,
economies, and nations
have become moreintertwined, risk itself
has evolved

The Future of

Moody’s

For leaders, this new form of risk creates a fresh set of
considerations: the need to look at risk in a different way.

1 How might individual risks feed off each other?
2 What remote risks lie deep within a network of suppliersor partners?

3 How do we decode risk, even as we forge more connections

and grow even more intertwined with others in our ecosystems?

4 How do we build resilience, not against one shock alone,
Rare is the risk that exists in isolation. Anyrisk — large or small, new or longstanding —likely connects to other forms of risk. And theaggregate risk can be much greater than thesum of its parts — with cascading effects for
creditworthiness, access to capital, insured anduninsured losses, valuation, and profitability.
The result for companies and countries that arecaught out: surprise, disruption, and loss. But for
those who anticipate and act quickly, the Era ofExponential Risk promises a new eraof opportunity.

In a single week in 2022, Moody’s sent
more than 9,000 alerts on supply chain
vulnerabilities, ranging from fraud to humantrafficking risk, that could affect companies’
bottom lines and licenses to operate.

but against multiple shocks at once?

5 Where can we uncover and unlock opportunity to get aheadof the competition?

7

Foreword

Navigating The New Era of Risk

New Risk LandscapeMeeting the Challenge of

The Future of

Moody’s

How risk grows exponentially across the value chain
1. INTERCONNECTED SUPPLY CHAIN

2. TIER 1 SUPPLIERS

3. TIER 2 SUPPLIERS

Based on a supplier’s closeness to yourbusiness or your final product, there arelikely multiple tiers of suppliers withinyour supply chain.

These are your closest partners that
directly conduct business with you,including contracted manufacturing
facilities or production partners.

The next layer of suppliers or
subcontractors serve as a source
for where your Tier 1 suppliers get
their materials.

TIER 3How risk grows
exponentiallyacross the value
chain

TIER 2TIER 2TIER 1TIER 1

Your company

4. TIER 3 AND BEYOND

5. VALUE CHAIN RISK

6. RISKN – EXPONENTIAL RISK

Additional tiers — further removed
from your organization — are stillconnected to your business andcan expose you to risk.

Knowing your supply base is fundamental
to minimizing risks, which can occur
further down the supply chain where
they might not be immediately apparent.

Each organization in the value chain has aunique risk factors – from cybersecurity tohuman rights, physical climate risk to sanctions, and credit to geopolitical pressure.

Your company

Risk events in one
value chain can
exponentially spread8Foreword

Navigating The New Era of Risk

New Risk Landscape

It is convenient to evaluate risk in silos
and daunting to consider all the complex
interactions; in a reasonably stable world,that may have been sufficient. Today,
that’s not enough. In this new era, thoughdetailed analysis of individual risks remains
necessary, evaluating the interactions
between risk domains has become
imperative.
Leaders now need to base their decision
making on a 360-degree view of what’s
coming next, getting ahead of emerging
risks to build resilience, fully understanding
their supply chain and customer base, andprotecting and creating growth opportunities.
They need to be able to see both the trees
and the forest.
Thankfully, leaders now have access to alevel of risk assessment and understandingthat was unavailable to anyone as recently as
five years ago. Massive data sets, powerfulcomputing, and a growing understandingof exponential risk, together, provide — forthe first time — a detailed view of RiskN –Exponential Risk.
Looking ahead, it’s clear: this new era isn’t
going to fade away. In fact, the number ofrisks — and the ways they interact witheach other — will only multiply. For those in
c-suites, boardrooms, or seats of government,
understanding exponential risk has becomea necessity.

Meeting the Challenge ofSmartdecisionsin the Eraof

The Future of

How leaders can navigate Exponential Risk
Separate out the signal from the noise by accessing
larger data sets — beyond your own organization — tofocus on high-impact and interconnected risk areas.
Break down risk planning silos by bringing different
teams together to explore overlapping risks andemerging issues.
Identify any single points of failure — such as a facility,
software, or component — and bulk up resiliency andredundancy.
Create a poly-crisis team equipped and empowered toact decisively in the face of multiple shocks.

Top Exponential Risks:
Geopolitical Instability
Inflationary Pressures
Cyberattacks
Extreme Weather Events
Supply Chain Disruptions

Moody’s

9Foreword

Navigating The New Era of Risk

New Risk LandscapeMeeting the Challenge of

The Future ofin action

Baby formula
S U P P LY C H A I N X E X T R E M E W E AT H E R

The 2022 disruption of Abbott Nutrition’s baby
formula plant in Sturgis, Michigan demonstrates
the impact of exponential risks. At the start of 2022,
the industry was under production pressure due tomaterials shortages and pandemic-related supply
chain issues. By May 2022, 43% of formula products
were out of stock nationwide.1 In June, an extreme
weather event hit the Sturgis facility, forcing it offline.
The failure of a single plant quickly became a national
challenge for families and the Biden administration,as out of stock rates hit 90% or more in 10 U.S. states.
Abbott faced compounding risks with financial
impacts for customers, suppliers, commercial realestate companies, insurers, and banks.
Source: 1Bloomberg - One in Five US States Is 90% Out of Baby Formula - June 2022

Out of stock rates for formula products
hit 90% or more in 10 U.S. states.

More and more management teams wantto understand their exposure to extreme
weather risk — across their operations andright down to the individual facility level. Bybringing together historical and predictive
data streams with natural catastrophe risk
modeling, organizations can build resilienceand make better business planning decisions
that protect and enhance value.

– Robert Muir-Wood
Chief Risk Officer, Moody’s RMS

Moody’s

10Foreword

Navigating The New Era of Risk

PART 2

New Risk Landscape

The New Risk
LandscapeMeeting the Challenge of

The Future of

Moody’s

What makes thisnew era even morechallenging?
Interconnected risks are often
too difficult to spot in the earlystages. Multiple recent “black swan”
generational events — the Covid-19
pandemic, Russia’s invasion of Ukraine— started off as risk “noise,” withlittle hint of their future impact, ability
to trigger other risks, or potential for
cascading effects.

11Foreword

Navigating The New Era of Risk

New Risk Landscape

What defines
the Era of

Meeting the Challenge of

The Future of

Moody’s

The new vocabulary of Exponential Risk?

Given their complex, multi-dimensional nature, no two risk areas are exactly
alike. And exponential risks often fall into one of the below categories.
Sequential Risk

It is driven by several factors:
The interconnected web of relationships thatmost — if not all — organizations and nations now
possess. Rarely does any entity operate in isolation.
The underlying shared platform connectivity thatlinks us all. There is system-wide interdependence:
we need each other to perform the functions of
our respective organizations. And technology
interdependence: we are linked — by software,system integration, or basic electronic
communication — to each other.
The multi-dimensional nature of newer risks — likecyber, supply chain, or extreme weather events —that thrive in an interdependent environment.

The result: Organizations and nations now
find themselves increasingly vulnerable to arisk “domino effect.” A single risk, affecting asingle company or country, that triggers otherrisks over time — both within the entity itself
and beyond.

Definition: A single event triggers
multiple secondary risks:
Risk1

Risk2

Risk3

EXAMPLEThe Suez Canal obstruction: A container
ship runs aground and unleashes a series ofrisk events, cutting across multiple areas:

Supply chain disruption

Banking and financial losses

Consumer goods prices

Swelling Risk
Definition: Two or more risks
unexpectedly converge and cause
a networked, cascading effect:
Risk x Risk
EXAMPLE

Risk #1 – Cyber: A one-off ransomware
attack shuts down a large, cybervulnerable grain co-op — causing theoperation to go offline.
Risk #2 – Stretched supply chains:
Pressured to maintain high margins,meat producers run lean, just-in-time
supply chains — with little redundancy
or extra capacity.
Impact – The halting of grain (animalfeed) — a cyber risk with one company— collides with downstream, vulnerable
supply chains to create an industrywide issue with implications for an
entire system.

12

Foreword

Navigating The New Era of Risk

PART 3

New Risk LandscapeMeeting the
ChallengeofMeeting the Challenge of

The Future of

Moody’sThe
interconnectednessofas well as
the volatility it
creates — isunprecedented
But market participants have never been
in a better place to identify, understand,and mitigate these threats.

13Foreword

Navigating The New Era of Risk

New Risk LandscapeMeeting the challenge, however,requires both advanced data andtechnology and, often, organizational
behavior change.

Moody’s is bringing together multiple
data sets to assess emerging risks
and building risk analysis tools acrossmultiple factors.

Historically, organizations studied
and managed risks in silos, definedby the risk area in question or theexpertise it required. The supply
chain team managed risks within the
supply chain. The office of the CIO
managed cyber risk.
As new risks emerged, companies
assessed data and analysis tounderstand those risks. They added
in-house expertise to manage thoserisks. But the risks still remained
siloed, dealt with largely on their own.

Meeting the Challenge ofNow, as leaders witness orexperience the impact of
exponential risk, they are breaking
down their own internal silosthat can limit the ability to see,understand, and addressthese threats.

The Future of

Moody’s

Getting thedata right

Effective integrated risk analysis defines acommon language and framework for a wide
variety of risk factors and their potential
financial impact.

Cross-risk threat analysis andmitigation are now best practice.
The focus is less on the individual
risk and more on potential
combinations.

It then translates events into probabilitiesof default and loss, and analyzes how risksinteract and compound over time — andhow that affects financial performance fromvaluation to cash flow and returnon investment.

The complexity and vastness of
RiskN – Exponential Risk meansthat an unprecedented level ofintelligence and insight is required.

It works at both asset and portfolio level,
allowing organizations and nations tounderstand their exposure and swap out
riskier assets.

That’s now possible thanks tomassive third-party data sets built
around complex relationships andsupply chains, powerful analytical
tools able to unlock deep insights,
and a growing body of knowledge
drawn from one real-time example
after another.

14

Foreword

Navigating The New Era of Risk

New Risk LandscapeMeeting the Challenge of

The Future of

Moody’s

15

Where to start?
As demand tounderstandExponential Risk

To navigate RiskN, leaders should first probe the following areas
VALUE CREATION
Which established and emerging risk factors are most financially relevant?
How will those material risks evolve and change over time?

VALUE CHAIN

And build resilience grows, Moody’s
is bringing together multiple data sets
to assess emerging risks and building
risk analysis tools across multiple
factors that are both backward — andforward-looking — modeling what could
result after an event has occurred andpredicting what could result if an event
were to occur.

How can we know who we are working with in developing and delivering our
products and services — both directly and indirectly? Can we map our entire
supply and value chains out to the furthest tiers?

DASHBOARDSDECISION
MAKING

What are the risk profiles of the organizations we’re serving and/or partneringwith? Can we map our entire customer base?

DATA
What data reporting systems do we have to help our leaders make integrated
risk assessments and evaluate long-term plans?

VALUE
CREATION

Do we have trusted and verifiable data sources on our risk exposure?
Do we have an effective system to combine multiple risk data inputs,
and to interpret the potential up and downsides?

DASHBOARDS

VALUE
CHAIN

What is our early warning system for new outside threats that could createcontagion effects, including public health risk, armed conflict, and social unrest?
What mechanisms do we have to flag and escalate potential flashpoints?

DECISION MAKING
How are we learning from past experiences and making real-time decisions
based on reliable data?
What processes do we have in place to model and predict potential risks
and opportunities with a strong degree of accuracy?

DATA

Foreword

Navigating The New Era of Risk

New Risk LandscapeMeeting the Challenge of

The Future of

Moody’sin action

Cybersecurity
G E O P O L I T I C S X C Y B E RC R I M E X O P E R AT I O N A L D I S R U P T I O NCyberattacks are increasing in frequency:
up by 15% in 2021 compared to theprevious year,6 with implications for nation
states, economic sectors, and individualcompanies.

risk exposure, an increase of $1 trillion
since 2019.7 Moody’s Investors Service
scored critical infrastructure sectors suchas electric, gas and water utilities, and notfor-profit hospitals as very high risk.

NATION STATE ATTACKSCOMPANY ATTACKSIn 2022, Albania blamed the Iranianadministration for multiple cyberattacks
on its national systems, which led togeopolitical risk as the Albanian government
considered invoking NATO’s Article 5, wherean attack against one member is an attack
against all.

As the agricultural industry becomes
more technologically advanced, there isa higher risk of cyber criminals targeting
agribusiness. In 2020 and 2021, there
were several major cyber incidents in the
sector, which resulted in the FBI releasing
a notice warning agricultural businesses tobe alert and that farming cooperatives are
particularly susceptible to cyberattacks,
as a successful attack would have had
profound knock on effects for consumer
prices and community wellbeing.

SECTOR ATTACKS$22 trillion — or 28% of the $80 trillion — incollective debt rated by Moody’s across 71
global sectors has high or very high cyber

Source: 6MIS Cyber heat map: Risks are rising, but many sectors are boosting defensive capabilities - September 2022
7
MIS Cyber Risk – Global - September 2022

$1 trillion increase between 2019 and 2022 in
the collective debt rated by Moody’s which has‘high’ or ‘very high’ exposure to cyber risk.

16

Foreword

Navigating The New Era of Risk

New Risk LandscapeMeeting the Challenge of

The Future ofin action

Commercial real estate
ENERGY PRICES X COVID
D I S R U P T I O N X E S G STA N DA R D S

Demand for office space in Europe is an example of long-term
trends colliding with unpredictable shocks to shift a market andcreate financial pressures. On top of the ongoing disruption
from the pandemic and broader shifts in working patterns, thecommercial real estate sector is now further threatened by agenerally weakening economic environment in Europe. Lesssquare footage is expected to be available overall, as landlords
either extensively renovate older buildings to comply with newenvironmental standards or redevelop offices to serve otheruses altogether, like retail or residential.
The cost of renting office space will go up to compensate
owners for new energy efficiency retrofits and companies
looking to reduce their emissions can either upgrade to moreenergy-efficient space, reduce their total space, or both. Thismeans that net debt to EBITDA8 ratios have weakened for many
real estate investment trusts, increasing from an average of 11x
in 2019 to 13x in 2021.
Source: 8MIS CMBS and REITs – Europe: Hybrid work will weaken demand for office space, with modest credit
impact - July 2022

Investors and operators who can better
anticipate developments in commercial
real estate by piecing together previously
separate data sets on occupancy rates, deal
flow, and energy efficiency standards will
be well-placed to capitalize — while those
who are caught off guard risk losing out
on financial value.

– Luis Amador
General Manager, Commercial Real Estate,
Moody’s Analytics

Moody’s

17

Foreword

Navigating The New Era of Risk

PART 4

The Futureof

New Risk LandscapeMeeting the Challenge of

The Future of

Moody’s

The trends thatushered in the Eraof Exponential Risk
are here to stay
Organizations aren’t likely to unwind
their vast — and growing — networkof relationships or complex, multilayered supply chains. Economies
and countries will remain heavily
intertwined. New risks will emerge,with the ability to influence other,longstanding risks.

18

Foreword

Navigating The New Era of Risk

New Risk LandscapeMeeting the Challenge ofPotential Exponential
Risk “early warning”
signs
Recent increase in the number of individual
risks identified and mitigatedOngoing market or industry expansion
Surge in online activity
M&A activity

RiskN – Exponential Risk isn’t a temporary stateor moment in time: it represents a permanent
shift in the nature of risk. Like the transition
from agricultural to industrial and analog todigital, this is a fundamental revolution in how
global systems work and interact.

The Future of

Moody’s

This is the challenge facing companies and countries:
The traditional approach to risk management — effective
up to this point — is likely not sufficient to build resilience
going forward.
For leaders and decision-makers, this creates new priorities:

In the c-suite
Tear down risk silos; seek expert data/analysis to learn
more about priority risks when making decisions; driveinterconnected risk planning.
At the board level
Incorporate assessments of the organization’s risk domains
and mitigation efforts, when evaluating decisions from amulti-stakeholder perspective.
In the public sector
Tailor policy and regulatory decisions to the new landscape,and design services and systems for resilience in the Era ofExponential Risk.

19

Foreword

Navigating The New Era of Risk

New Risk LandscapeMeeting the Challenge of

Lookingahead

The Future of

The next frontier in the Era of RiskN – Exponential
Risk is the integration of massive and diverse
data sets, made simple and visible by predictive
analytics that help to anticipate the effects ofemerging threats, identify vulnerabilities, spot
and seize opportunities, and support lasting
competitive advantage.
Building more agile and resilient organizations,
economies, and communities — capable ofanticipating and withstanding interconnected risk
— is now essential to resilience. And while thisnew era presents a fresh set of challenges, leaders
are already rising to the occasion. The expertise is
there; the data and tools are there. We can meetthe challenge of interconnected risk and thrive.

Moody’s

20

moodys.com/RiskN© 2024 Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their affiliates and licensors. All rights reserved.