What Treasurers Can Learn From How Central Banks Approach Risk

As Warren Buffet once said, risk comes from not knowing what you’re doing. After all, opportunities multiply as they are seized — but so do the negative consequences of risk.

For corporate treasures and finance teams operating in today’s uncertain environment, many of whom are facing mounting pressures to manage financial risk, maintain liquidity and optimize cash flow, there are few better objective benchmarks than the International Organization for Standardization’s ISO 31000 and Committee of Sponsoring Organizations of the Treadway Commission (COSO) enterprise risk management (ERM) frameworks.

These two standards are the favorites of central banks around the world. But for enterprise finance leaders, understanding the ISO 31000 and COSO ERM risk management standards isn’t just an academic exercise.

While finance function challenges are often unique to the private sector, the frameworks that guide the world’s central banks in managing risk offer lessons for any treasurer looking to build resilience and agility. With financial volatility, geopolitical uncertainties and rapid technological evolution all key factors of the contemporary operating landscape, corporate treasurers can adopt these approaches to make informed decisions, anticipate disruptions and future-proof their organizations.

Read more: Unlocking the Critical Role of Treasurers in Corporate Decision-Making

The Strategic Advantage of a Risk Framework

While the corporate finance function may not be responsible for managing the fate of entire economies, its role as financial steward within an organization still carries significant responsibility.

By adopting the disciplined risk management practices of central banks — such as stress testing, diversification and proactive monitoring — finance leaders can work to build more resilient treasury operations.

The ISO 31000 standard offers a broad, principle-based approach to risk management. First introduced in 2009 and updated in 2018, ISO 31000 emphasizes a structured yet flexible method for addressing uncertainty.

ISO 31000 positions risk management as a core function, embedded into organizational processes rather than siloed as a compliance task. For treasurers, this means integrating risk considerations into everything, from cash flow forecasting to hedging strategies.

The framework highlights the importance of leadership commitment in fostering a risk-aware culture. Treasurers, often working closely with CFOs and other executives, can use this principle to advocate for investments in tools and processes that support proactive risk management.

According to PYMNTS Intelligence, a full 77% of treasurers believe that at least one department in their organization would benefit from closer collaboration with them. Within the consumer packaged goods industry specifically, that number jumps up to 88%.

ISO 31000 also acknowledges that risk is not static. By emphasizing a continuous review of risk strategies, treasurers can better adapt to shifting economic conditions, regulatory changes or competitive pressures. For example, a treasurer at a multinational corporation might use ISO 31000 to establish a consistent methodology for evaluating exchange rate risk across multiple jurisdictions. By embedding this approach into day-to-day operations, the organization can work to gain a clearer picture of its vulnerabilities and act decisively when market conditions shift.

Read more: 5 Ways 2024 Kicked Off a New Era for CFOs and Treasury Pros

Proactive Risk Mitigation

For its part, the COSO ERM framework’s latest update, titled “Enterprise Risk Management — Integrating with Strategy and Performance,” provides a roadmap for aligning risk management with organizational goals.

COSO ERM emphasizes that risk management should not only protect value but also enable organizations to seize opportunities. For treasurers, this means viewing risk as a potential driver of innovation rather than just a liability. The framework connects risk management to performance metrics, ensuring that organizations can quantify the impact of risk on strategic objectives. Treasurers can leverage this alignment to better communicate the ROI of hedging strategies or investments in cybersecurity.

A corporate treasurer adopting COSO ERM might develop a risk dashboard that ties key risk indicators to strategic KPIs. This not only helps the board understand the implications of financial risks but also positions the treasury function as a strategic partner in achieving business objectives.

Ultimately, while ISO 31000 and COSO ERM differ in their focus — with ISO 31000 providing a universal structure and COSO ERM delving deeper into strategy — both frameworks share principles that can elevate the treasury function, and both frameworks highlight the role of leadership in fostering a risk-aware culture. Treasurers can champion risk management by demonstrating its strategic value, such as how effective currency hedging can unlock growth in new markets.