Two risks have emerged as the most pressing concerns for organizations worldwide: digital disruption and climate change. According to a recent report by the Institute of Internal Auditors’ (IIA) Internal Audit Foundation, these risks are projected to grow at an unprecedented rate over the next three years. Digital disruption is expected to increase by 20 percent, while climate change-related risks will surge by 16 percent.
Despite the significant impact these risks could have on organizations, many internal audit functions are not prioritizing them. Instead, their primary focus remains on cybersecurity, governance, corporate reporting, and business continuity. This gap in risk prioritization could leave organizations vulnerable to unforeseen disruptions and long-term sustainability challenges.
Understanding Digital Disruption
Digital disruption refers to the transformation of industries, business models, and operational processes driven by rapid technological advancements. The Risk in Focus report reveals that 39 percent of survey respondents currently rank digital disruption as a top-five risk, with expectations that this will rise to 59 percent in three years. The shift is even more pronounced in North America, where the concern is projected to increase from 48 percent to 70 percent.
One of the most influential drivers of digital disruption is artificial intelligence (AI). AI is revolutionizing industries by improving efficiency, decision-making, and automation. However, it also introduces a host of new risks:
- Cybersecurity Threats: AI-driven cyberattacks are becoming more sophisticated, leveraging machine learning to exploit vulnerabilities faster than traditional security measures can counteract.
- Data Privacy Concerns: Organizations must navigate complex data protection laws while ensuring responsible AI deployment to avoid regulatory backlash.
- Human Capital Challenges: AI-driven automation is reshaping the workforce, necessitating upskilling and reskilling initiatives to prevent talent gaps and unemployment.
- Regulatory Compliance: With AI being integrated into various industries, governments worldwide are implementing stricter regulations to oversee its ethical use, adding compliance complexity.
Case Study: The Rise of AI in Financial Services
Consider the financial sector, where AI-powered fraud detection systems have significantly reduced transaction fraud. However, AI also poses new risks, such as algorithmic biases in lending decisions or deepfake frauds that compromise customer security. The growing reliance on AI in this sector underscores the need for robust internal audit functions to assess algorithm transparency, fairness, and cybersecurity.
Climate Change: A Rising Concern
While climate change has been acknowledged as a global risk for years, its prominence among internal audit concerns has been relatively low. Currently, only 23 percent of global respondents rank climate change among the top five risks, but that number is expected to climb to 40 percent in three years.
A key driver of this shift is the rise of climate regulations. Governments worldwide are implementing stricter sustainability reporting and compliance measures, pushing organizations to enhance their environmental risk management strategies. The study highlights significant regional disparities in climate risk perception:
- Europe: 33 percent of audit leaders rank climate change as a top-five risk.
- Canada: 30 percent express similar concerns.
- United States: Only 9 percent of audit leaders prioritize climate change today, though this number is expected to double to 27 percent within three years.
Why Climate Change Matters for Business
The impact of climate change extends beyond compliance—it directly affects supply chains, operational costs, and brand reputation:
- Supply Chain Disruptions: Extreme weather events such as hurricanes, wildfires, and floods can severely disrupt logistics, manufacturing, and raw material availability. The global semiconductor shortage caused by droughts in Taiwan is a prime example of how environmental factors can cripple industries.
- Increased Operational Costs: Energy price volatility, carbon taxes, and resource scarcity are driving up costs for businesses worldwide. Companies that fail to adopt sustainable practices risk financial instability.
- Greenwashing Risks: Organizations promoting sustainability initiatives must ensure transparency in their reporting. Misleading claims, also known as greenwashing, can lead to reputational damage and regulatory penalties.
Example: The Automotive Industry’s Green Transition
The automotive sector has seen a significant shift toward electric vehicles (EVs) due to climate concerns and regulatory pressures. However, challenges such as battery supply chain ethics, rare earth mineral shortages, and sustainable energy sourcing remain key obstacles. Tesla, General Motors, and Volkswagen have all faced scrutiny over the carbon footprint of their supply chains, highlighting the need for robust internal audits in climate-related decision-making.
Regional Risk Differences and Strategic Approaches
The Risk in Focus study also highlights regional variations in risk priorities. Different industries and geographies face unique challenges that require tailored mitigation strategies. Roundtable discussions across Africa, Asia-Pacific, Europe, Latin America, the Middle East, and North America provided insights into how organizations can proactively address these risks.
Embracing AI and Emerging Technologies
One of the key takeaways from the report is the need for organizations to embrace technological advancements while managing associated risks. Strategies include:
- Upskilling Workforces: Investing in AI and cybersecurity training ensures that employees are prepared to navigate digital disruptions effectively.
- Enhanced Governance: Boards and executives must integrate AI risk assessment into their corporate governance frameworks.
- Cross-Sector Collaboration: Public-private partnerships can drive industry-wide best practices for responsible AI adoption.
Climate Change and ESG Compliance
To stay ahead of climate-related risks, organizations should:
- Strengthen Sustainability Reporting: Companies must enhance transparency in environmental, social, and governance (ESG) disclosures to meet regulatory expectations.
- Adopt Resilient Business Models: Diversifying supply chains, improving energy efficiency, and investing in carbon offset initiatives can mitigate climate risks.
- Engage Stakeholders: Investors, consumers, and employees increasingly demand sustainable practices. Organizations that align their strategies with stakeholder expectations will secure long-term resilience.
The Role of Internal Audit in Risk Mitigation
Given the rapid acceleration of these risks, internal audit functions must evolve beyond traditional compliance roles. The IIA advocates for internal audit leaders to take a more strategic advisory role, ensuring businesses remain resilient in the face of change.
“The Risk in Focus findings underscore the importance of agile collaboration and partnership among internal audit functions, boards, and management to stay ahead of emerging threats and improve understanding of potential risk exposures.” — Anthony Pugliese, CEO of the IIA
Conclusion: Preparing for an Uncertain Future
Organizations that fail to adapt to the evolving risk landscape risk financial losses, reputational harm, and regulatory penalties. Digital disruption and climate change are no longer distant threats—they are immediate concerns that demand action today.
To navigate these challenges effectively, businesses must:
- Integrate emerging risk considerations into internal audit strategies
- Invest in AI and cybersecurity risk management
- Enhance sustainability initiatives to mitigate climate-related risks
- Foster cross-industry collaborations for shared risk mitigation best practices
By proactively addressing these growing risks, organizations can ensure both short-term success and long-term sustainability, positioning themselves as leaders in an uncertain world.
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