Risk 2.0: reimagining risk management for investment organisations

This is part 1 in a series of 7 thought pieces exploring risk management for investment systems, or what we are calling ‘risk 2.0’. This piece serves as an introduction while the rest of the series is based on our up-coming paper Fresh snow, written by Tim Hodgson, Jeff Chee and Andrea Caloisi.

In today’s volatile, uncertain, complex, and ambiguous (VUCA) world, traditional risk management frameworks are increasingly being outpaced by the realities of modern investing. As a result, the shift to a more robust and forward-looking risk practice is becoming a strategic imperative. Risk 2.0 demands a rethinking of tools, culture, and governance.

The traditional risk 1.0 has long been the backbone of institutional risk management. Grounded in historical data and quantitative models, it offers clarity and consistency through metrics like tracking error, tail risk, and volatility. However, these models often fall short when markets are disrupted by events that defy past patterns. Our current investment environment is uncertain and complex, riddled with geopolitical upheaval, climate transition and technological disruption. As a result, historical data is losing its relevance as a reliable guide for future performance.

As discussed at Thinking Ahead’s forum on risk 2.0 earlier this year, the growing disconnect between traditional, quantitatively driven risk management approaches and the emergence of systemic, non-linear risks underscores a fundamental weakness in current practices of overreliance on backward-looking data. Increasingly, investment professionals acknowledge that the risk 1.0 framework is no longer sufficient to navigate the complexities of today’s global landscape.

Risk 2.0 represents a significant shift in how organisations perceive and manage risk. It moves beyond the confines of quantitative analysis to embrace a multidimensional view that incorporates qualitative insights, scenario thinking, and cultural awareness.

At its core, risk 2.0 is about mindset. It encourages investment teams to accept ambiguity, work with incomplete information, and use narrative models to explore future possibilities. This approach blends data with dynamic storytelling, allowing organisations to assign probabilistic weight to qualitative scenarios and better anticipate emerging threats.

Some of the key features of risk 2.0 include:

qualitative scenario testing: tools that explore future states based on current signals and systemic interdependencies
key risk indicators (KRIs): metrics that reflect broader domains such as liquidity, operational resilience, and transition risk
cultural integration: a strong internal risk culture that embeds responsibility across functions and elevates strategic conversations.

Despite its promise, however, the journey to risk 2.0 is challenging. One of the first challenges is institutional inertia. Large organisations, particularly public entities, often struggle to adapt due to legacy systems and rigid governance structures. As noted by participants in the forum, the slow pace of change can hinder the adoption of dynamic models.

Another challenge lies in quantifying the unquantifiable. Climate risk, for example, resists traditional measurement, leading to its underrepresentation in risk models. Bridging the gap between qualitative and quantitative data, such as assigning numerical values to narrative models, remains a complex but necessary task.

Risk 2.0 is not just a technical upgrade; it requires a cultural transformation. Organisations must cultivate a shared understanding of risk that goes beyond compliance. Training and education are essential to embed this thinking across teams, fostering a culture of strategic risk stewardship.

Governance also plays an important role. Enhanced interaction between risk teams, senior management, and boards is crucial for articulating risk appetite and integrating risk into strategic planning. Scenario testing and second-order thinking, considering how different risks interact, are central to this evolution.

Survey results from the forum revealed a strong consensus with 100% of participants agreeing that the risk 1.0 mindset is no longer fit for purpose. While most organisations are still operating within traditional frameworks, there is a clear ambition to transition towards risk 2.0 within the next five years. Encouragingly, the majority believe that risk 2.0 is not only theoretically appealing but practically implementable.

Practical steps to support this transition are:

scenario analysis development, enhancing the rigour and relevance of qualitative scenarios
framework building, blending the structure of risk 1.0 with the dynamic adaptability of risk 2.0
climate risk integration, developing methods to quantify and embed climate risk into planning.

To conclude, risk 2.0 is more than a methodology. It is a strategic lens through which investment organisations can better understand and navigate complexity. By embracing adaptive frameworks, integrating diverse data types, and fostering a culture of continuous learning, institutions can build resilience and make more informed decisions.

All of this is explored in the rest of the series. The next part, Risk depends on your mental model of reality, emphasises the importance of mindset and explores the theoretical differences between risk 1.0 and 2.0.

Anastassia Johnson is a researcher at the Thinking Ahead Institute at WTW, an innovation network of asset owners and asset managers committed to mobilising capital for a sustainable future.