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'The impact of cyber risks has changed, and companies have to raise the standards'

'The impact of cyber risks has changed, and companies have to raise the standards'

24-07-2019 | Insight

Information on the cybersecurity of companies and their products is hard to obtain at the moment. Robeco cybersecurity expert Vincent Toms talks about the changing impact of cyber threats and the cybersecurity risk framework and ranking system he is developing for Robeco holdings, as well as the plans the company has to include cybersecurity in its sustainability engagement activities.

Cybersecurity is a rapidly evolving field. How can we keep up with – or, better still, stay ahead of – all the threats?

“We approach cybersecurity as a risk factor that can be of influence when assessing the investment attractiveness of a company. There are currently more than 90,000 known vulnerabilities and over 50,000 exploits of these vulnerabilities. And these numbers grow every day. Keeping up with these ‘known’ vulnerabilities and updating the IT environment (legacy) takes considerable time and resources.” 

“Basic digital hygiene is essential. The root causes of most data breaches and attacks are still a lack of on-time patching, easy-to-guess passwords and unsecure installations. This is low-hanging fruit for attackers.” 

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Cybersecurity costs a lot, but a hack could cost more. How willing are companies to spend the money needed to create secure systems?

“The situation has changed significantly over the last few years. We have seen cybersecurity controls receiving more attention from management boards. The topic has even gained the attention of shareholders, who have been voting to make cybersecurity part of executive-level bonus systems. Serious hacks and regulatory and supply chain pressures have all contributed to these developments.”

“However, you will not find details on how much companies spend on cybersecurity in corporate disclosure information. And that’s is a pity, because it does not give the kind of assurance that we are looking for.”

Corporate disclosure information will not tell you how much a company is investing in IT and cybersecurity

“Also, we have not yet reached the stage when we can say when buying a product if it is more secure or less secure. While manufacturers and suppliers can claim that their products are very secure, there is no guarantee. And even if they are secure by design, you have to look at a product’s life cycle because something that is safe now may not be two days from now. I know some companies that put a lot of effort into securing their digital environment. If they can’t ensure that their clients’ data is safeguarded, they will lose the trust of customers. The Cybersecurity Council of the Netherlands advises companies to spend 10% of their IT budget on cybersecurity, yet the question of whether this is enough, too little or too much cannot be answered.”

What is the cybersecurity risk framework you are implementing?

“There are several cyber risk domains that need to be covered by an organization in order to minimize the chance and impact of an attack. Their efforts need to be balanced with the threats (for example, business risk), the level of controls (costs) and the impact of possible damage (cost of an attack).”

“In our research, we assess how a company complies with the key controls per risk domain. The key controls we look at are based on several international cybersecurity frameworks. At the end of this, we give the company a score, which is then compared to peers in order to make a relative ranking. This score can be a factor of influence when deciding whether to invest in a company.” 

Are trends funds more exposed to cyber risks than other funds?

“Cybersecurity affects many sectors. We decided to start with trends funds because the cyber risk associated with trends, and particularly fintech, is high compared to other industries and trust is very important. Our holdings in these funds give us exposure to companies that have a large digital footprint. Our approach is to work agile and start small, make it work, make it lean and mean, and then make it bigger. When we see that our ranking framework works, we can use it for other funds.”

What is behind the push to develop this cybersecurity ranking for Robeco holdings? And what goals and timelines were set for you when you joined Robeco?

“The threat of cyber risks in the digital world is increasing, yet often this is not taken into account in the investment process. Investors are very much used to assessing physical risks such as those associated with the supply chain or production. But as corporate value generation increasingly moves online, the risks are changing and therefore investors’ analyses should change too. Today’s investment community is still far behind when it comes to assessing cyber risks and their impact on investments. Robeco is now closing this gap.” 

“Initially I was asked to rate ten companies, as a pilot. The longer-term goal is to integrate the cyber ranking in Robeco’s investment process and sustainability engagement. And, there is a vision to include it in one of their SDGs. So, it fits the Robeco philosophy.”

Investors want to know the level of cyber security and associated risk of an investment. And Robeco can make that happen, just like with sustainability

How will cybersecurity be included in Robeco’s sustainability engagement activities?

“The vision is that over time, there will be a reciprocal relationship between the cybersecurity ranking and the sustainability engagement. When shortcomings in the ranking of portfolio holdings or attractive investment candidates are discovered, the engagement team will work with the company in question to improve their cybersecurity practices. This will benefit both the company and investors. The outcome of such engagement may influence the cyber ranking.”

“The goal is to have insight into the cybersecurity and risk profile of a company and to integrate this information in the investment and engagement processes. Hopefully, this will also improve corporate governance reporting on this topic. For example, information on CO2 emissions is now included in public reports and we believe that cybersecurity data should be treated equally in the future.”

Where are we now with this initiative and what is the next step?

“We are now at the stage of improving the risk rating method and reporting standards. So, we plan to finish reviewing the framework and key controls by the end of this year. Then we want to test and automate the framework, after which we will scale it up and add more companies to the ranking. Our aim is to rate 2,000 to 5,000 companies within three years.”

Important information

This information is for informational purposes only and should not be construed as an offer to sell or an invitation to buy any securities or products, nor as investment advice or recommendation.
The contents of this document have not been reviewed by the Monetary Authority of Singapore (“MAS”). Robeco Singapore Private Limited holds a capital markets services license for fund management issued by the MAS and is subject to certain clientele restrictions under such license.
An investment will involve a high degree of risk, and you should consider carefully whether an investment is suitable for you.

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