PRMIA Intelligent Risk - April, 2022

INTELLIGENT RISK knowledge for the PRMIA community

April 2022 ©2022 - All Rights Reserved Professional Risk Managers’ International Association

PROFESSIONAL RISK MANAGERS’ INTERNATIONAL ASSOCIATION CONTENT EDITORS

INSIDE THIS ISSUE

Carl Densem

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Message from our CEO

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Editor introduction

Nagaraja Kumar Deevi

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Managing Partner | Senior Advisor DEEVI | Advisory | Research Studies Finance | Risk | Regulations | Digital

Asynchronous work: an adaptation for its time

by Teresa Chan & Marguerite DeMartino

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Challenges of developing data pool on ESG by dr. K. Srinivasa Rao

Steve Lindo

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ESG and risk management: standards and rules

by Maya Katenova

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Why financial institutions need to ramp up their climate risk response - by Damian Hoskins

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Managing the risks and fallout from Russia’s invasion of Ukraine - by dr. Jay Grusin & Steve Lindo

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On the choice of an alternative to coal-fired power plants - by Aleksei Kirilov & Valeriy Kirilov

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Climate change risk classification methodology

by Tamara Close

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PRMIA volunteer spotlight - Shantanu Srivastava

by Adam Lindquist

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What a time to be a risk manager: Navigating climate change risk - by Elisabeth A. Wilson

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The voice of risk: how to avoid ESG missteps

by Carl Densem

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Chapter spotlight: PRMIA Hungary

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Calendar of events

Risk Manager, Community Savings Credit Union

Principal, SRL Advisory Services and Lecturer at Columbia University

Raghu Mehra Senior Vice President, Citibank Risk Advisor

SPECIAL THANKS Thanks to our sponsors, the exclusive content of Intelligent Risk is freely distributed worldwide. If you would like more information about sponsorship opportunities contact sponsorship@prmia.org.

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@prmia

Intelligent Risk - April 2022

message from our CEO It is with great pleasure that I send this message to our members all around the Justin C McCarthy world. For those of you who do not know me, my name is Justin C McCarthy, CEO, PRMIA and I am the new CEO of PRMIA. From the Irish Chapter to the Global Council of Regional Directors to being the chair of the Global Board, I have worked as a PRMIA volunteer for many years and now I am excited to have taken the CEO role.

During my volunteer years, I have gained experience in risk and leadership roles in PwC, Merrill Lynch, Bank of America, Ulster Bank, and many others.

Now in PRMIA I have taken on a leadership role in a 20-year-old organization. My focus in the last few months has been to review how we do business and to work with the wider PRMIA team on how best to serve our global risk community and as a non-profit, ensure a surplus, build our reserves, and start to invest in the future.

Part of this has been to enable the launch of our new Professional Operational Risk Manager Designation, put in place online forums for topics such as ESG & Cyber, and start to re-engage with chapters and members through a return to online and even hybrid events.

To allow this to be more easily engaged with, we will have a different theme for each of the coming months – Operational Risk and Individual Membership has been an April Topic, we will focus on Cyber for June, and as per the focus of this edition of Intelligent Risk, we are focusing on ESG and climate risk. As you can see from the articles in this edition, there is a great interest in ESG and climate, and PRMIA is working to meet that interest. In May there will be related webinars and a Global Online ESG Forum on May 17th and 18th.

Related to membership and especially Sustaining membership – if you are not already doing so, please support PRMIA through a Sustaining membership. I can list all the benefits but really, I want to ask you to support us financially. It allows us to create a surplus, build our reserves, and invest in the future of the PRMIA community and ensure a legacy for our designation holders and many others. If you do not wish to support us in this way, then please consider PRMIA as your Learning and Development partner for your own career or for the careers of others across your employer.

Thank you and looking forward to an exciting PRMIA future!

Justin C McCarthy CEO, PRMIA

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our sponsor

The proactive leadership and administration of an insurance business in today’s dynamic environment requires a holistic understanding of the interdisciplinary relationships between key business units and the foresight to implement timely advancements. The ability to be forward-thinking, apply emotional intelligence, and convey thought leadership will help insurance professionals distinguish themselves and their companies.

The Columbia University Master’s in Insurance Management program provides students the opportunity to refine these skills, incubate new ideas, and expand their professional network while they receive instruction and mentorship from a team of respected industry professionals who are committed to sharing their knowledge and experience.

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editor introduction

Carl Densem

Nagaraja Kumar Deevi

Steve Lindo

Raghu Mehra

Editor, PRMIA

Editor, PRMIA

Editor, PRMIA

Editor, PRMIA

The April 2022 issue of Intelligent Risk arrives at a time of significant global turmoil and uncertainty. According to the theme chosen for this issue, most of its articles address the topics of climate risk and ESG. However, in light of the looming risks and consequences of armed conflict in Europe, we decided to broaden this issue’s scope. Consequently, the articles cover topics ranging from the classification, response to, and navigation of climate risk, the future of coal-fired power plants, ESG risks, ESG data pools and missteps to avoid, the strategic impact of asynchronous working, and the risks and fallout from Russia’s invasion of Ukraine. Each quarter, our editorial team relishes the privilege of reviewing and editing the thoughtful contributions by PRMIA’s Sustaining Members submitted to Intelligent Risk for publication. If you’re not already a Sustaining Member, there’s no better time to become one!

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asynchronous work: an adaptation for its time

by Teresa Chan & Marguerite DeMartino Millions of workers have adapted to remote work, and companies have successfully pivoted to this new work dynamic necessitated by the pandemic. Now, an emerging question is whether remote work can be viable when it is also asynchronous. Corporate culture, business need, and operational efficacy are some key considerations. However, if we reflect on what many already practice, we can alleviate uncertainties inhibiting fully asynchronous work and employ a strategic approach to embracing it.

Asynchronous work does not require an employee to be physically present in the office during set hours of the day. Workers can complete their work, subject to the usual deadlines and standards, but with the flexibility to complete the work at times that are convenient for them and without the expectation that they are immediately available for interaction during set work hours. While this concept may seem more foreign than remote work, asynchronous work is woven into our traditional work structure. Workers have readily applied it to managing their desk, schedules and workflow. Recall the last time you set aside time outside of work hours, or even during business hours, to “get things done” – arriving at the office an hour or two early for uninterrupted work time before a day of scheduled meetings, or staying late to tackle a to-do list that only got longer throughout the day.

It started when remote login was possible and Blackberrys or laptops were routinely distributed, first to managers and then to non-managerial employees at all levels and in almost every function. Indeed, employers initiated the trend towards making asynchronous work not only acceptable, but often expected. The ability of an employee to perform at or above expectations despite increasingly greater demands is reliant on remote, off-hours work and has become a performance metric. The foundation for asynchronous work was laid well before 2020.

For those employers who are concerned that information sharing, innovation, and the quality of asynchronous work would be lacking, the success of online, asynchronous programs in higher education indicates otherwise. Full time professionals enroll as part time students in master’s programs where they balance demanding work and personal lives with the rigors of earning an advanced degree. The combination of asynchronous instruction, coupled with synchronous problem based learning projects and assignments, provides optimal flexibility for the busy professional. Through a dedicated learning management system or LMS (designed to make materials accessible 24 hours a day, seven days a week), students watch/listen to recorded lectures, panel discussions, and read content on their own time. They do this from anywhere – in the office or car, at their child’s soccer practice or on vacation several time zones away.

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Clear deliverables and deadlines are set forth each week as students engage asynchronously in virtual dialogue with professors and peers that simulates dynamic classroom discussions, and electronically submit complementary assignments. Students have time to formulate thoughtful responses to deliberate virtual dialogue prompts, integrating what they’ve absorbed from the course materials. While most people assume spontaneous, in-person or live dialogue is better, especially for innovation, allocated windows of time for mulling over ideas result in more specific and constructive answers. Professors employ a myriad of tools and applications to facilitate engagement, including brainstorming, in asynchronous programs, which have also been effectively used for business. Self and group assessment tools help professors modify activities and manage remote learning.

Asynchronous learning and synchronous activity are not mutually exclusive. Synchronous activities provide students with a balanced sense of inclusion – group assignments require real-time collaboration at the convenience of group members, not unlike many projects at the office. Students communicate with each other through messaging, email and real-time calls, as needed, to complete their tasks and assignments.

We can draw parallels between this form of learning and the work environment to create and manage a completely asynchronous work structure.

Synchronous and asynchronous work activities can be defined by designing a customized workflow management system adapted from the common LMS used by many institutions and companies for training. This is an innovative approach to shifting the work dynamic that can be applied to both the core and support functions within the re/insurance industry.

For example, let’s look at back-office operations. Many of the processes performed in the back-office cover an array of functions ranging from claims to accounting to reporting. Each of these functions have defined workflows that can be transformed into an asynchronous system keeping user needs in mind. Focusing on developing a system that is simple to use, requires minimal training and is user friendly will improve the overall end user experience. It also empowers employees to better manage their day-to-day responsibilities independently, thereby enhancing employees’ motivation and job satisfaction.

This will revolutionize work because it will compartmentalize and streamline every aspect of end-to-end processing. In turn, managerial and operational adjustments/realignments will have to take place in order for companies to transition to an optimal hybrid if not fully asynchronous workplace.

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authors Teresa Chan Teresa is the Director of the Master’s in Insurance Management program at Columbia University. She launched the program in 2020 after 27 years of insurance industry experience in legal, product and business development. The program is an epicenter for innovation, mentorship and thought leadership, and accelerates the advancement of diverse insurance professionals into leadership roles.

Prior to joining Columbia, Teresa was an advisor on the formation of MGU start-ups funded by Willis Group that leverage emerging tech capabilities to underwrite specialized markets. During 22 years at AIG, Teresa served as regulatory counsel as well as Senior Vice President of AIG Energy Warranty and Director of Corporate Product Development. She led the creation of new property, casualty, personal, life, accident, and health coverages, and designed policies to insure and finance new energy technologies.

Teresa has a J.D. from Fordham University and B.S. in Operations Research from the School of Engineering and Applied Science at Columbia University. She has been recognized by Business Insurance as one of “25 Women to Watch” and ReActions Magazine as one of the “Top Insurance Women”.

Marguerite DeMartino Marguerite DeMartino is the Vice President of SCOR Reinsurance Company, where she assists the Senior Vice President in overseeing the Technical Accounting and Administration Unit. She currently is a Lecturer in the Columbia University, School of Professional Services, Master’s in Insurance Management for the Insurance Operations: The Backbone of the Company online course. Previously, she was the Senior Project Manager at American International Group, Inc. and later transitioned to the role of Global Operations Director.

Throughout her career, DeMartino honed her ability to direct global operations for enterprise-wide initiatives, business improvements, organizational transformation, and process reengineering. She has also managed complex operational issues worldwide, evaluated business needs that drive technology solutions, and launched multiple process improvement projects.

Marguerite holds certifications for Associate Risk Manager, Six Sigma Master Black Belt, and New York City Office of Emergency Management Emergency Manager. She also spent 28 years with the United States Coast Guard Reserve retiring as a Public Affairs Senior Chief Petty Officer.

Education: • M.F.A., CUNY Brooklyn College • B.S., SUNY New Paltz 008

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challenges of developing data pool on ESG

by dr. K. Srinivasa Rao Commercial entities are broadly focused on business centricity. The regulators also orchestrate surveillance and supervision to monitor the quality of operations, governance, risk and compliance (GRC). They are seldom focused on overseeing compliances related to parameters measuring Environmental Social Governance (ESG) efforts. In the process, though the organizations are ESG centric, they may not find it necessary to develop data base making it difficult to measure the efforts.

Historically, ESG activities are considered as philanthropic for the well-being of the society. They are not reckoned as an integral part of mainstream activities of the organization and are usually not mapped to the data system making it equally difficult to monitor, measure and intensify ESG efforts.

This puts ESG compliance on backfoot.

Looking to the intensity of environmental degradation, global warming, pollution, deforestation, exploration of fossil fuels, etc. and their consequential threat to the life and livelihood of people, the focus is shifted back to ESG compliance. The frequency of natural calamities and its fury is already creating crisis for people in different geographies.

The trend is even threatening the habitability of the planet for coming generations. Unless corporate entities act now with multipronged inclusive approach working upon concrete contribution towards ESG, it will be difficult to contain the fury of climate risk. Collective and concerted action across the globe is needed, among others, for afforestation, shunning dependency on fossil fuel (coal, gas and oil), reduction of fossil fuel subsidies and its explorations.

1. COP26 deliberations: It can be recalled that 26th United Nations Conference of Parties (COP26) at Glasgow have highlighted the overwhelming climate risks posing serious threat to the planet. There was consensus to adhere to COP 21 - Paris agreement (2015) accords to contain rise in the average global temperature limited to 1.5 degrees above pre-industrial levels. Participating countries were encouraged to strengthen their emission reduction resolution and to align their national climate action pledges with the Paris Agreement. The two-week long COP26 deliberations convincingly impressed upon members to act and realize its goals in both letter and spirit.

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Keeping these priorities in view, various governments have begun to focus on ESG to ensure that damage from climate risks are contained. Regulators across the globe have also begun to insist that listed companies and commercial entities as corporate citizens have to not only accelerate efforts under ESG but should also capture essential data points to be able to show progress and make sustained efforts to improve performance.

2. ESG impact: Globally, the ESG criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.

Basel Committee on Banking Supervision (BCBS) in its paper on ‘Climate-related risk drivers and their transmission channels’ (April 2021) clearly highlighted the risks to the financial system if ESG is not enforced in letter and spirit.

Banks and the banking system are exposed to climate change through macro- and microeconomic transmission channels that arise from two distinct types of climate risk drivers. First, they may suffer from the economic costs and financial losses resulting from the increasing severity and frequency of physical climate risk drivers.

Second, economies seek to reduce carbon dioxide emissions, which make up the vast majority of greenhouse gas (GHG) emissions. These efforts generate transition risk drivers. These arise through changes in government policies, technological developments, or investor and consumer sentiment. They may also generate significant costs and losses for banks and the banking system.

3. challenges in managing ESG: Taking cue from the intensity of impact of climate risk, its domino impact on the sustainability of businesses and global targets set under COP26 deliberations, the business entities should not only accelerate the efforts under ESG but must institutionalize data-based review and monitoring. Unless the data is developed to measure performance, there cannot be targeted move and efforts to achieve them. Times ahead, there will be environment friendly investors who allocate funds only in companies that are ESG centric. The disclosures and transparency of the entities have to be based upon ESG performance data. Initially there will be challenges in capturing that kind of data as the technology architecture may have to be rebuilt to accommodate the relevant data points.

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Many securities market and financial sector regulators are insisting disclosure of information on ESG compliance so that socially conscious companies could be separated from others. In the future, nonattention on ESG activities could also be self-defeating as such companies may not be able to attract investments/equity. With the governments becoming conscious and regulators making it mandatory, the corporate entities will have to overcome the challenges and raise the bar of performance to contribute to ESG and pool the relevant data for greater good.

author Srinivasa Rao Srinivasa Rao teaches risk management at the Institute of Insurance and Risk Management (IIRM), Hyderabad. India. He has been with Bank of Baroda with wide experience in managing risks at the corporate level. He was associated with business process reengineering and was engaged in asset liability management. He worked to design bank level policies to manage diverse risks in business operations.

He is passionate in teaching, writing and publishing. He brings his vast industry experience to the classroom in B – Schools. He is keen in disseminating digital and financial literacy to ensure that stakeholders are able to explore the power of digital banking.

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ESG and risk management: standards and rules

by Maya Katenova Nowadays, environmental, social, and governance (ESG) investing is a fast-evolving trend in the sphere of financial industries. As mentioned in the 2021 Thompson Reuters report “Understanding ESG and ESG related risks,” ESG investors track factors related to climate change and carbon emissions, human rights and worker conditions, corporate board diversity, and a number of other social and environmentrelated issues. It is universally accepted today that ESG analysis plays a significant role in investing.

Not only investors, but consumers and employees are interested in ESG as well. Consumers and other stakeholders are also paying more attention to these measures of a company’s performance. It should be mentioned that consumers today demand greater transparency into everything starting from labor standards to executive compensation and deforestation policies. As a result, companies need to keep a close eye on the ESG-related concerns of all stakeholders.

seeing further and steps to comparability Long-term corporate success in a rapidly changing world depends on avoiding reputational risks and protecting the integrity of the company brand. Businesses should focus on long-term perspectives rather than the short-term. Financial and regulatory risks are two types of risks, which are closely connected with this issue.

As firms scramble to meet community demands for information on sustainability and social responsibility practices within their operations and across their supply chains, the percentage of firms publishing sustainability reports and ESG performance data has rapidly increased. ESG performance is evolving, and reporting has remained a voluntary activity. However, regulatory bodies have begun to move toward establishing reporting standards.

the importance of being green The environmental portion of ESG takes into account a company’s use of natural resources and the impact of its operations and global supply chain practices on the planet. These factors can include emissions, use of toxic chemicals, and waste management, moreover, its role in water pollution and effect on biodiversity and deforestation. The growing demand for renewable energy and green infrastructure continue to be the most sensitive concern today. It should be noted that green technology is quite a popular topic worldwide today. Investors pay attention to environmental issues as well as green technology.

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For example, Michael Milken, the famous American financier, philanthropist and presidentially-pardoned felon, has a positive attitude toward green technology and is actively promoting his projects related to a “healthy planet.” He is co-founder of the Milken Family Foundation, chairman of the Milken Institute, and founder of medical philanthropies funding research into melanomas, cancer and other life-threatening diseases. He is known for his role in the development of the market for high-yield bonds (or “junk bonds”) in the 1980s.

All large companies are concerned with environmental issues today. As businesses focus on corporate practices and the environment, both data and the development of new reporting metrics play a crucial role in understanding sustainability-related risks. Half of the companies listed on the S&P 500 disclose climate risks. However, there is no uniform standard in this area.

Recently, the Securities and Exchange Commission, Federal Reserve, and other regulators moved toward updating required reporting related to climate change-related risks and costs. Mandatory disclosure will provide more consistent, comparable data on how firms are affected. Compliance with new regulations will require U.S. regulators to issue clear data standards. Activist investors and financial institutions are also forcing a re-assessment of the risks in failing to improve corporate sustainability practices.

the future of governance The accepted definition of corporate governance is the set of rules and processes dictating the board of directors’ management of operations and the practices supporting transparent decision making, legal financial practices, and protection of employee and shareholder rights. From within the framework of ESG concerns, new measures of corporate governance have emerged.

Interestingly, executive compensation has received considerable attention and metrics have emerged that take aim at the board’s management of regulatory, legal, and reputational risks. Legal action has become a tactic in pressuring corporations to reform business practices and manage ESG-related risks, thus the concern from boards.

conclusion Businesses today face intensified scrutiny over their sustainability and social responsibility practices. New approaches and tools, innovations and modified techniques are shaping the business environment. Such issues were not even discussed in the past. Moreover, this trend has not reached its pinnacle and may see future growth. Reporting requirements on corporate diversity and environmental practices appear to be forthcoming and monitoring of vendors and workplace compliance has gained new emphasis in the business environment. A long-term, sustainable approach to measuring against ESG performance factors and mitigating related risks has become more important than ever.

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author Maya Katenova, DBA, PRM, Dip FM Dr. Maya Katenova, Assistant Professor of Finance, KIMEP University. Maya teaches bachelor students as well as master’s students including Executive MBA students. She received a Teaching Excellence Award in 2017. Courses in her teaching portfolio include Financial Institutions Management, Ethics in Finance, Financial Institutions and Markets, Principles of Finance, Corporate Finance and Personal Finance.

She supervised master’s thesis dissertations of several students and has numerous publications in different journals including high quality journals. Her research interests are mostly related to corporate social responsibility and global ethics.

Maya holds the Professional Risk Manager designation and is planning to teach Risk Management in the future. Her future career is strongly connected with Risk Management conferences, symposiums and workshops.

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why financial institutions need to ramp up their climate risk response

by Damian Hoskins Climate change risk is growing - and financial institutions are beginning to recognize the need to take swifter action. Some 83% of firms highlight climate risk as a major topic, with more than half (60%) putting in place plans to prepare for the impacts of climate change, according to independent research commissioned by Acin.

Global financial regulators have also been intensifying their scrutiny of climate-related risk management.

Last year, the European Central Bank (ECB) asked the region’s banks to conduct self-assessments based on its supervisory expectations, and to draw up action plans to meet them. The U.S. Securities and Exchange Commission (SEC) in October 2021 signaled its intention to finalize climate change regulations this year. Meantime, the Bank of England’s Prudential Regulation Authority (PRA) also called on institutions to embed climate change-related financial risks into existing governance and risk management frameworks.

All of this heightened regulatory attention dovetailed with COP26 last November, which underscored that global financial services companies will be under just as much scrutiny as high carbon-emitting industries such as fossil fuels, mining and aviation. The wider public focus on climate change also means financial institutions will face scrutiny not just from regulators but also investors, customers and their own employees - who are all demanding that firms do more to tackle climate risk.

more work to do Yet despite this growing awareness, financial institutions still have much more work to do, with this year set to catapult climate risk even further up the risk management agenda. For example, in January the PRA issued a Dear CEO Letter outlining its 2022 priorities, one of which was financial risks arising from climate change. While some firms have made good progress, the letter said, action has not been consistent across all firms. It observed that most firms are more focused on the business opportunities presented by climate change, such as publishing glossy reports trumpeting their ESG credentials.

Instead, financial institutions need to recognize that climate change is a business risk that is rapidly closing in and requires urgent action now.

The PRA says it expects firms to take a forward-looking, strategic, and ambitious approach to managing climate-related financial risks.

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From this year, the PRA will fold supervision of climate-related financial risks into its supervisory approach. In other words, this is the year when climate risks will have to be properly identified, confronted, and managed in a way we haven’t yet really seen in financial institutions. There is a journey that firms need to embark on to be ready for climate risk regulation, and a lot of firms have not boarded that particular train yet.

take action now You do not have to look very far into the past to see why leaving it to the last minute is a bad idea. Take the European Union’s General Data Protection Regulation (GDPR). Many firms hesitated on implementation, despite having a long runway to get prepared, resulting in firms rushing to meet deadlines and, in some instances, falling short. With climate risk, the cost of inaction could be catastrophic.

So, what should firms be doing to get prepared? Here are five steps your organization should take to get started on the climate risk management journey: 1. Move beyond high-level, box-ticking exercises such as net-zero pledges and annual reports and start working on detailed implementation and framework-building, a core part of which will be getting into the weeds and identifying the relevant climate risks and controls that need to be managed.

2. Understand where your firm is relative to your peers. Because climate risk and control management are so new, not many firms will have a clear idea of what ‘good’ looks like when it comes to the details and implementation. Seeing how you shape up compared to your peer group is a useful barometer to check if your coverage is good enough - or if more work needs to be done.

3. Know how climate risk fits into your existing risk framework. Climate risk will likely span all the major risk types—from credit (because of credit exposure to fossil fuel firms) to market and liquidity risk, as well as the more obvious operational risks.

4. Get your climate-related risks and controls data in order. We have identified more than 80 climaterelated risks and controls that need to be considered for a climate risk framework to be effective, from regulation, legislation, and litigation to reporting and disclosure risk.

5. Climate change is a systemic risk that requires firms and the wider industry to work together. Just as firms do today with cyber risk, sharing data on climate risk can ensure all firms are adequately prepared. There is no point being the last person standing if all other firms around you are failing, given there is a potential domino effect to mismanaging climate change.

The time for talking about climate risk is over - firms need to take immediate action and square up to the risks that are not only going to impact their operations, but also society as a whole.

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references 1. “Dear CEO.” Bank of England, January 12th, 2022, https://www.bankofengland.co.uk/-/media/boe/ files/prudential-regulation/letter/2022/january/artis-2022-priorities.pdf

author Damian Hoskins Damian joined Acin as Innovation Specialist in October 2020, tasked with building the world’s first climate risk inventory for financial institutions. Today, the firm has extended its network-driven, peer-to-peer operational risk platform to include climate risk. Prior to joining Acin, Damian had 15 years’ experience in operational risk and risk transformation roles at Société Générale, HSBC, RBS and Lehman Brothers. Previously, Damian served in the British Army for 19 years.

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managing the risks and fallout from Russia’s invasion of Ukraine

by dr. Jay Grusin & Steve Lindo inter-connectedness magnifies uncertainty Both the COVID-19 pandemic and climate change have demonstrated that major disruptions today produce far-reaching, unintended consequences, due to the increased interconnectedness of global commerce, communications, technology, and politics. It’s no surprise, therefore, that Russia’s invasion of Ukraine has introduced unprecedented uncertainty into the well-laid plans of organizations across every industry and geography.

The list of activities where organizations are exposed to direct or indirect loss as a result of Russia’s invasion of Ukraine is a long one. Table 1 below provides a non-exhaustive list of examples.

Table 1

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crisis decisions require a different process Most organizations are ill-prepared to make high-stakes decisions in situations involving extreme uncertainty, such as the armed conflict in Central Europe, because of the relative infrequency and different dynamics of such decisions, as shown below in Table 2.

Table 2

Decisions involving activities like the ones listed in Table 1 require a structured, methodical approach, which promotes slow and disciplined thinking, respect for uncertainty and complexity, and active participation by all key stakeholders. For over 30 years, the US intelligence services have been using such methods, known as Structured Analytic Techniques, which were adapted for business use in our 2021 book.1 The method we describe, called Intelligent Analysis, brings rigor to uncertainty, tests high-stakes decisions, and counters authority, group-think, cognitive biases, and emotions. It comprises a five-step process: 1. Identify the audience, their priorities, and the Key Intelligence Question:

Who in the organization will make the decision, and what are their priorities?

The Key Intelligence Question (KIQ), meaning: what problem are they trying to solve?

2. Record the Working Assumptions: list all plausible assumptions—conditions that must persist—in order for the desired outcome to occur.

3. Select the Key Assumptions: the five or six assumptions most critical to the desired outcome.

4. Use the Key Assumptions Check to rate the level of certainty and quality of the data that supports each assumption, then use the ratings to select the Linchpin Assumption(s)--the one or two Key Assumptions crucial to achieving the desired outcome.

5. Communicate your assessment and recommendations to the decision-makers.

1 / Grusin, J. & Lindo, S. (2021). Intelligent Analysis – How to Defeat Uncertainty in High-Stakes Decisions (available from Amazon KDP). Intelligent Risk Management Publications.

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testing high-stakes decisions: Russia-Ukraine invasion example Below we give a brief example of how a financial institution can use the five steps of Intelligent Analysis to manage its risks and the potential fallout from Russia’s invasion of Ukraine.

Background Bank Vanderbilt, a diversified bank with global reach, is required to comply with multi-jurisdictional laws that require the prevention and reporting of accounts and transactions involving entities who may be conducting organized crime, money-laundering, terrorism, or be owned or controlled by companies or individuals domiciled in sanctioned countries. Suddenly, the wave of sanctions imposed in 2022 by the US government, Canada, EU, UK, and other countries in response to Russia’s invasion of Ukraine, imposes a deluge of new requirements that mean hundreds of accounts and transactions may need to be reclassified as potentially unlawful.

Step 1: Identify the Key Intelligence Question (KIQ) The bank has to decide whether to wait for specific regulatory instructions on how to restrict its activities with newly-sanctioned accounts and transactions, or to pre-emptively apply restrictions limiting its business with Russian entities. The heads of commercial banking, wealth management, trade finance, compliance and legal counsel advise waiting for specific regulatory instructions. The Chief Risk Officer (CRO), however, decides to convene an interdisciplinary Task Force to analyze the situation and make an independent recommendation.

The Task Force’s first step is to craft the KIQ. The Task Force develops three possible KIQs that would meet the CRO’s requirement: a. How many Russian accounts, loans and transactions does the bank handle and how much money is involved? b. How much revenue could the bank lose by restricting its business with Russian entities? c. To what extent could the bank be impacted by fines, reputational damage and/or loss of other business if it waits for specific instructions before implementing the new sanctions?

Alternatives a) and b) address only narrow perspectives of the bank’s business and would lead to an incomplete or biased response to the question. The Key Intelligence Question therefore is c) because it addresses the entire breadth of the bank’s business.

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Step 2: Develop a list of Working Assumptions Table 3 below provides a non-exhaustive list of plausible Working Assumptions in no particular order.

Table 3

Step 3: Select Key Assumptions The Task Force selects the five Working Assumptions which it considers to be most critical to achievement of the bank’s desired outcome. Table 4 shows the ones which they select.

Table 4

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Step 4: Use the Key Assumptions Check and Determine the Linchpin Assumption(s) The Task Force now assesses the validity of these five Key Assumptions, using the Key Assumptions Check (KAC), which rates the amount and reliability of supporting data, the interdependence of the assumptions, and their degree of criticality. An example of these ratings is shown below in Table 5. The KAC focuses on testing the validity of the estimated probability (highly likely) of the desired outcome stated at the top of the KAC table.

Table 5

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What the columns mean: -- Ratings in columns 2 and 3 gauge the level of certainty and reliability in the available evidence.

-- Ratings in column 4 measure the assumptions’ interdependence.

-- Ratings in column 5 measure the impact of each assumption’s strength/weakness on the estimated probability of the desired outcome. It is a separate discussion, not an average of columns two, three, and four.

The ratings shown in Table 5 demonstrate the following: 1. (Column 2) Vanderbilt’s reporting systems are not sufficiently accurate or complete in order to identify all of its business activities with entities owned or controlled by Russian corporations or individuals, who often conceal their identity behind shell companies or proxies.

2. (Column 2) In spite of international condemnation of Russia’s invasion of Ukraine, there is little hard evidence predicting how shareholders, regulators or customers will react if they learn the scale of Vanderbilt’s business with entities owned and controlled by Russian corporations or individuals.

3. (Column 4) Public disclosure of Vanderbilt’s business with entities owned or controlled by Russian corporations or individuals is the only assumption which is highly likely to cause the desired outcome to fail, and therefore is the Linchpin Assumption.

4. (Column 5) If any of the five Key Assumptions proves incorrect, Vanderbilt’s desired outcome will fail.

Step 5: Assessment and Recommendations Based on the above Key Assumption ratings, the Task Force assesses the probability that Vanderbilt will be impacted by fines, reputational damage or loss of other business if it waits for specific instructions before implementing the new Russia sanctions as being likely, which contradicts the earlier recommendation of the heads of commercial banking, wealth management, trade finance, compliance and legal counsel. The Task Force therefore submits the following assessment and recommendations to the Chief Risk Officer: Before making any decision, the bank should: -- Investigate: Conduct a thorough internal investigation in order to accurately identify all its business activities with entities owned or controlled by Russian corporations or individuals.

-- Evaluate: The profitability of all its business activities with entities owned or controlled by Russian corporations or individuals.

-- Assess Materiality: If the resulting scale of the bank’s business activities with entities owned or controlled

by Russian corporations or individuals is significant, the bank could suffer significant negative consequences if this were to be publicly disclosed, such as by a politically-motivated employee or a phishing attack.

-- Terminate: If the profitability of the bank’s business activities with entities owned or controlled by Russian corporations or individuals is only marginal, the bank should immediately take steps to terminate or reduce these activities, in order to mitigate the potential negative impact of disclosure.

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-- Prevent: The bank should strictly prohibit new activity with entities owned or controlled by Russian corporations or individuals, and ensure that watertight controls are in place to prevent any from occurring.

-- Re-evaluate: While Russia’s invasion of Ukraine is ongoing, the bank should update this Key Assumptions Check at least monthly, or sooner, in the event of any significant developments.

conclusion While the above example shows the application of Intelligent Analysis only in the area of sanctions, its use is equally valid for testing decisions in all the other activities listed in Table 1. Regardless of what industry sector they’re in, risk managers can use this, or any other suitable method, to rigorously test their organization’s decisions when the stakes and level of uncertainty are as high as currently caused by Russia’s invasion of Ukraine.

authors Dr. Jay Grusin Dr. Jay Grusin is a highly-regarded expert on intelligence analysis. After a career of 29plus years with the Central Intelligence Agency, in 2008 Dr. Grusin joined Leidos (then part of SAIC) and then, in 2012, established the Analytic Edge, to bring intelligence training to public and private sector organizations outside the US Intelligence Community. Since 2019 he is also Co-Principal of Intelligent Risk Management LLC. He and Steve Lindo are co-authors of “Intelligent Analysis – How to Defeat Uncertainty in High-Stakes Decisions,” published by Amazon KDP. During his tenure at the CIA, Dr. Grusin was a member of the Senior Intelligence Service, was instrumental in creating and delivering a training course which redefined how analytic tradecraft would be taught and became the foundation of the Directorate of Analysis tradecraft training curriculum. He also led the development and delivery of the first sequenced management/ leadership curriculum. He is a Central Intelligence Agency University certified instructor, with over 20,000 hours of classroom experience instructing analysts and their managers, and received the Distinguished Career Intelligence Medal in recognition of his contributions to the Agency. Dr. Grusin has a BA from Bradley University and an MA and PhD from the University of Arizona.

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Steve Lindo Steve Lindo is a financial risk manager with over 30 years’ experience managing risks in banking, asset management and insurance. He currently is Lecturer and Course Designer in Columbia University’s MS in Enterprise Risk Management program, as well as Principal of SRL Advisory Services, an independent consulting firm specializing in risk governance, strategy, modeling, data and regulation.

He is also Co-Principal of Intelligent Risk Management LLC, an executive education and advisory partnership which uses analytical methods pioneered by the US intelligence services to enhance decision-making by organizations across all industries.

He and Dr. Jay Grusin are co-authors of “Intelligent Analysis – How to Defeat Uncertainty in High-Stakes Decisions,” published by Amazon KDP. His earlier career includes executive positions with Fifth Third Bancorp, GMAC Financial Services (now Ally Financial), Cargill Financial Services, First National Bank of Chicago (now part of JPMorgan Chase) and Lloyds Bank, in the US, UK, Spain and Brazil.

In 2010, he completed a two-year engagement as PRMIA’s Executive Director. He is a regular presenter at conferences, webinar host and author of risk management articles and case studies. He has a BA and MA from Oxford University and speaks fluent French, German, Spanish and Portuguese.

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on the choice of an alternative to coal-fired power plants

by Aleksei Kirilov & Valeriy Kirilov As we noted in one of our previous articles1, at present, for the first time, our civilization has encountered a problem on a planetary scale - the problem of catastrophic climate change on Earth. According to most experts, this is due to the release of greenhouse gases into the atmosphere. The main reason for the increase in the greenhouse effect is the release of carbon dioxide. According to the International Energy Agency (IEA) https://www.iea.org, in 2019 carbon dioxide emissions into the atmosphere due to the combustion of coal, oil and gas were respectively: 14,798, 11,344 and 7,250 Mt.

coal is the biggest source of CO2 About 70% of carbon dioxide emissions from coal combustion come from coal-fired power plants.

The rest comes from metallurgy and the chemical industry. The share of coal-fired power plants is still the highest in global electricity generation, see Figure 1. Furthermore, as shown in Figure 2, in recent years there has been a steady trend of increasing electricity production at coal-fired power plants.

And perhaps this trend will continue, despite the statements of politicians about the transition to green energy. A UN report published in October 20212 notes that fossil fuel production will increase by 2030.

The report looks at production plans in 15 major fossil fuel producing countries, including the US, Saudi Arabia, Russia, Canada, China, India and Norway. According to the report, these 15 countries plan to produce 240 percent more coal, 57 percent more oil and 71 percent more natural gas by 2030 than would be needed to limit global warming to 1.5 degrees Celsius. Even though countries such as China and the US plan to cut coal production, this will be offset by plans to increase production in Australia, India and Russia.

Figure 1

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Figure 2

As can be seen from Figure 3, the vast majority of carbon dioxide emissions from electricity production are due to coal combustion. Thus, the replacement of coal generation with other energy sources can significantly reduce carbon dioxide emissions into the Earth’s atmosphere.

Figure 3

replacing coal will not be easy What energy sources can replace coal generation and hydrocarbon energy sources in general? The prospects for hydropower and wind power are not high, due to the fact that conditions for the construction of hydroelectric power stations do not exist everywhere, and wind energy has not shown sufficient reliability.

In fact, there have been cases where entire regions received practically no energy from wind turbines for several months due to lack of wind.

Replacement power can also be obtained from solar and nuclear energy. Let us first consider, as an alternative to coal generation, the production of electricity using solar energy. Our goal is to assess the fundamental possibility of such a replacement within a reasonable timeframe, for example, by 2030.

Table 1

3 4

Table 1 shows the characteristics of solar panels from two well-known manufacturers, Sunpower and LG. For the purpose of our estimates, we will use a specific power of 210 W/m2 and an efficiency of 20%. In this example, the effective specific power will be 42.0 W/m2.

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In 2019, global coal-fired power generation was 9,914,448 GWh. More recent data is not available on the IEA website. Assuming that the trend shown in Fig. 2 will continue, coal-fired power generation will increase. Therefore, by 2030, electricity generation could reach 11,341,016 GWh. It is easy to estimate that, in order to generate this amount of electricity, the required area of solar panels would be of the order of 31,000 km2. By way of comparison, the area of Switzerland is just over 41,000 km2. Thus, the required area is comparable to the area of a medium-sized European country. While the production and installation of so many solar panels is not a technical problem, the withdrawal from economic activity of such a large area in the immediate vicinity of densely populated regions in the southern latitudes would not be optimal from an economic point of view. On the other hand, installing panels far from such regions would also be disadvantageous, since the transmission losses of electricity over such long distances would be significant.

We also note another potential disadvantage of solar power plants. The fact is that, unlike the ordinary earth’s surface, solar panels have a reflection coefficient of sunlight close to zero. Therefore, the use of solar panels over vast areas in the southern regions, exactly where solar radiation is most intense, could potentially cause a decrease in the albedo (reflectivity) of the earth’s surface, thus causing a stronger absorption of solar radiation. Assessment of the impact of this effect on climate is beyond the scope of this article, and needs to be done separately using climate models. In our opinion, the complete replacement of coal generation with solar power may not be the best solution.

our analysis shows that nuclear is the best alternative Let us now turn to nuclear power. According to experts, a nuclear power plant (NPP) does not produce carbon dioxide emissions and therefore can be considered as an environmentally friendly source of energy.

A nuclear power plant does not have to be built on the coast of a sea or lake, and the efficiency of a nuclear power plant does not depend on the number of sunny days per year or the strength of the wind. Of course, nuclear energy has certain problems, but modern technologies make it possible to successfully solve them. According to the International Atomic Energy Agency (IAEA, https://www.iaea.org), in 2021, 442 nuclear power units were in operation in the world5. Another 52 power units were under construction. Let’s estimate how many power units need to be built to replace coal-fired power plants. For evaluation, we use the power unit of the Soviet project VVER-1200. This is a pressurized water reactor design with improved efficiency and safety features. These power units in various modifications have a capacity from 1000 MW to 1200 MW. Nuclear power plants with such reactors are successfully operating in Bulgaria, India, China, Russia, Ukraine, and are being built in several other countries. Moreover, the first nuclear power plants were built in the early 1980s and over many years of operation have proven their reliability and safety. It is easy to estimate that in order to replace all coal-fired power plants by 2030, it is necessary to build about 950 power units with reactors with a capacity of 1200 MW. That is, only twice as many power units as are currently in operation. This is quite a feasible task for modern industry.

In our opinion, from the point of view of the potential impact on the environment, nuclear energy is more preferable than solar. Moreover, in the future, the task will be to replace not only coal, but also natural gas in the generation of electricity. The most effective, of course, will be a comprehensive solution to replace coal028

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fired power generation using a combination of nuclear, solar, wind and hydropower. This is a typical task for optimal control, which, in our opinion, should be solved within the framework of international cooperation for the most efficient use of the resources of our planet.

a multilateral approach is needed It is becoming critical to create mechanisms to motivate companies to switch to clean energy sources and reduce carbon dioxide emissions. Of course, the most effective will be financial motivation. But the approach in which one country or a group of countries tries to unilaterally impose an environmental tax on the products of foreign companies is, in fact, a manifestation of unfair competition. It is this approach that the European Union is implementing today. In our opinion, all companies on the planet, regardless of their jurisdiction, should be subject to an environmental tax. But these funds should be collected by a multilateral body whose assessments and decisions would be recognized by all countries and companies.

The accumulation of financial resources will then allow them to be directed to solving key tasks, including the construction of capacities that will replace coal-fired generation.

For the first time, modern civilization is faced with the need to create methods of adaptation and counteraction to planetary changes. People have not yet had the experience of such activities. The concerted and coordinated actions of governments and corporations on all continents will not only reduce the impact of climate risks, but will also allow the knowledge gained to be applied in ensuring the further progressive development of humankind as a single community.

references 1. Aleksei Kirilov, Valeriy Kirilov. Regulation of Climate Risks: From Problem Statement to Solution Steps.

Intelligent Risk (PRMIA), October 2021, https://issuu.com/prmia/docs/intelligent_risk-oct_2021 2. Brad Plumer. Fossil Fuel Drilling Plans Undermine Climate Pledges, U.N. Report Warns. New York Times, Oct. 21, 2021. https://www.nytimes.com/2021/10/20/climate/fossil-fuel-drilling-pledges.html?searchResultPosition=1 3. https://maxeon.com/us/solar-panel-products/maxeon-solar-panels 4. https://www.lg.com/us/business/neon-h/lg-lg405n3k-v6# 5. https://www.iaea.org/publications/14989/nuclear-power-reactors-in-the-world

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authors Aleksei Kirilov Partner, Conflate LLC Conflate is a Russian management consulting company specialized in strategy, risk management, asset management and venture investment. As the partner of Conflate, Aleksei is responsible for asset management and venture investment. He specializes in the US stock and debt markets. Aleksei has more than 15 years of experience in financial services including development of financial strategy and financial KPI, liquidity management; controlling system, allocation of expense on business unit, financial modeling and debt finance. He has cross industries experience: banks, oil & gas manufacturing, real estate.

Aleksei has an MBA from Duke University (Fuqua School of Business), a financial degree from Russian Plekhanov Economic Academy and an engineering degree from Moscow Engineering Physics Institute.

Valeriy Kirilov General Manager at Conflate LLC Valeriy is the General Manager at Conflate LLC. He has 15+ years’ experience in risk management and management consulting (BDO, Technoserv, then at Conflate). Besides he previously worked in the nuclear power industry (safety of Nuclear Power Plants).

Valeriy has an MBA from London Metropolitan University as well as a financial degree from Moscow International Higher Business School MIRBIS and an engineering degree from Moscow Engineering Physics Institute. He holds the PRM and FRM certifications and the certificate of Federal Commission for Securities Market of series 1.0. Valeriy was a member of the Supervisory board of the Russian Risk Management Society in 2009 – 2010.

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climate change risk classification methodology

by Tamara Close climate change as an unpriced systemic risk During the 2008/09 Financial Crisis, some market participants blamed Fair Value Accounting and Fair Market Valuations (FMV) for a worsening of the financial crisis, since assets and loans that were still performing were required to be marked-to-market to what were then extremely low values, sometimes even to a zero value. This caused, in some cases, extreme decreases in NAVs and even caused some financial firms to become insolvent. Opponents of the fair value approach argued that the market was pricing in a risk that had already happened and was not likely to reoccur. Today we find ourselves in the opposite situation with a risk – climate change - that is known and will occur and yet it is not being priced into the market.

Climate change is increasingly being viewed as a systemic risk, and the valuation of climate change risks (both physical and transition risks) represents a complex and multi-dimensional process for which there is currently no agreed-upon industry standard. Due to the inherent complexities of climate change risk, many investors are not factoring these risks into their investment valuations, or they are doing so at a broader sector or industry level, leaving investment / company level climate change risk as a largely unknown, unpriced, and yet very material risk in their portfolios. If there was a sudden repricing of climate change risk, we could see the same impact that we witnessed during the financial crisis.

climate change risk assessment classification methodology During the 2008/09 financial crisis, the valuation of complex OTC derivatives became increasingly unclear due to their dependence on certain underlying assumptions that no longer held as markets became dislocated. The FAS 157 classification methodology was developed to give investors and regulators a clearer view into the amount of complex OTC derivatives (classified as Level 3) in an investment portfolio. This required asset managers and asset owners to re-classify their financial assets into 3 risk levels. Investment firms were not required to change their valuation methodologies, but rather were required to classify their assets based on the valuation methodologies and inherent / perceived liquidity.

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The theoretical foundations and practical implementation of XVAs have been a matter of debate and controversy over the past years, due to misalignment between market, accounting, and regulatory practices.

Banks have been accused of boosting their profits by recording gains on the fall in value of their debt through DVA, while hedging of DVA is problematic and monetization of own default is almost impossible.

Similarly, inclusion of FVA in derivatives pricing has raised concerns between market participants about the potential for double counting with DVA, or the violation of the law of one price.

•

Level 1 securities included liquid securities that were tradable at observable market prices (e.g. listed securities).

•

Level 2 securities included mark to model instruments but that used inputs that were observable in the market (e.g. interest rate swaps).

•

Level 3 securities included instruments that required a model to value the instrument but that also included material assumptions within the valuation methodology (e.g. the recovery rate for credit default swaps).

The same concept could be applied to the assessment of climate change risks in an investment portfolio.

For instance, one could classify securities based on whether a climate change assessment was performed or not, and if so, the robustness of the assessment. This implies a reverse burden of proof on investment managers: If they have not performed a climate change risk assessment, then the security is categorized as Level 3. The manager would need to prove that they have performed a climate change risk assessment to be able to categorize it in Level 2 or 1.

For example: •

Securities that have not been assessed for climate change risks would be automatically classified as Level 3

•

Securities that have been assessed for climate change risks but at a sector or industry level would be classified as Level 2

•

Finally, securities that have been assessed for climate change risks at the investment / company level could be classified as Level 1

Proposed classification methodology for climate change risk assessments for a portfolio of securities

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Benefits of a classification methodology such as this include: •

Increased transparency into the current and future expected risks of an investment portfolio

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Ease of comparability between portfolios and asset classes

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Straightforward and universal application as the methodology is strategy and asset class agnostic

•

Expanded use of the classification model for broader ESG risk assessments within a portfolio of securities

While this is not a substitute for risk management practices, given the complex and multi-dimensional nature of climate change risks, a classification methodology can create a foundation for fostering essential conversations around climate change risks and impacts on valuations, and can be a critical first step to bring further transparency to stakeholders into the potential risks of a portfolio.

authors Tamara Close, CFA Founder and Managing Partner, Close Group Consulting Tamara is the Founder of Close Group Consulting, which is a boutique ESG strategy advisory firm that uses capital markets and ESG expertise to implement ESG integration best practices at asset managers, asset owners and corporates. She was previously the Head of ESG Integration for KKS Advisors, a global ESG Advisory firm and has over 20 years of combined experience in capital markets and ESG strategy. Tamara has held various investment management, risk and leadership positions in the global capital markets and spent 10 years in senior management roles within the risk and public markets investment groups of PSP Investments.

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PRMIA volunteer spotlight - Shantanu Srivastava

by Adam Lindquist Volunteers with PRMIA bring a volume of experience to our Association for the benefit of members.

Shantanu Srivastava brings more than his share as a Founding Regional Director for PRMIA’s first chapter in India at Mumbai, as well as Head of Operational and Resilience Risk for HSBC in India (and in regional roles across Asia Pacific) and as a guest speaker at Columbia University. I had a chance to connect with Shantanu and learn more about his work.

Adam

Can you share your current professional practitioner role?

Shantanu I am currently Head of Operational and Resilience Risk at HSBC in India. I have 28 years of broad-based experience in risk management, retail banking, wealth management, and asset management in India, Indonesia, and the Asia Pacific Region.

In my current role, I work with our C-Suite to embed the risk management framework with a particular focus on non-financial risks. I also provide subject matter expertise, own policies, and oversee procedures for resilience risks (technology, cyber security, data, processing, 3rd party, business continuity, change management, workplace safety and physical security). In addition, I steer the customer service committee of the Board and some other risk governance bodies.

Adam

How long have you been in risk, and what interested you in the industry?

Shantanu I joined the risk function in 2015, after having spent 22 years in various other functions and roles including sales, customer service, operations, strategy, planning, finance, product development and marketing at HSBC, Standard Chartered and ANZ Grindlays. My last two roles were as Chief Sales and Distribution Officer for our Asset Management Company and the Chief Operating Officer for our Retail Banking and Wealth Management Business. While these sound very far removed from risk management roles, there was a strong element of “First Line of Defense” responsibilities embedded within them.

I joined the risk function firstly because I could see that this was going to be a major focus area both for my firm, the wider financial sector, and economies and societies at large, globally. In fact, I could also see the increased attention being paid to the subject even by those outside the risk function. In addition, I realized that risk management was a “contact sport” in which success required familiarity and practical knowledge of a wide range of businesses, functions, and processes. In other words, it needed people who could “talk the talk” and “walk the walk”, and I thought I could fit the bill.

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Adam

What made you first decide to become a volunteer with PRMIA?

Shantanu

I first came across PRMIA soon after joining the risk function. I was looking for upgrading my personal skill set and obtaining some globally recognized professional accreditation/ certification in this area, for which my firm sponsored my participation in PRMIA’s ORM course. Thereafter, I was approached

by PRMIA to help set up our first chapter in India at Mumbai. I happily accepted the offer, since I thought that this could enable me to support the growth of our profession and community.

I could also see that while the field of risk management would become strategically important for our country and economy and demand for skilled professionals would increase, at the same time, there was very limited installed capacity on the supply side. Since risk management as a discipline is not covered in sufficient detail in any recognized academic or professional course or program, firms were having to impart the requisite skills through internal programs and mainly through “on the job” training, rather than through a structured, curated and fit-for-purpose curriculum. This is where I thought PRMIA could step in.

Adam

What has the experience of volunteering meant for you?

Shantanu

Working with PRMIA has been extremely exciting, challenging, and gratifying - all at the same time. Fortunately, we have had the support of PRMIA’s global leadership (including Ken Radigan and now Justin McCarthy), our board members (especially Mr S Rao and Dr S Basu), our India CEO and former Board Member (Dr N Pradhan) and nearly 100 volunteers across India.

Our first task was to set up a Steering Committee of dedicated volunteers for our chapter, who could lead our foray into India. The second task was to create salience for our brand, given that we were hitherto totally unknown in India, quite unlike the case with some of our competitors, who have been deeply entrenched and well recognized locally. Our third task was to build a network of prospective partner organizations who could sponsor/ host our events, nominate candidates for our programs and to provide expert speakers for our events. Our fourth task was to build relationships with regulatory, government and industry bodies and obtain their recognition for our programs.

Thanks to these efforts we have had nine events in the past three years, despite the pandemic. Our advocacy with regulators and industry has led to PRMIA courses being made requirements for senior level risk roles in the industry. We have also helped set up chapters in several other cities in India over the last 18 months, in Bangalore, Chennai, Delhi, and Hyderabad (all of whom have started organizing their own events) with several others in progress.

Adam

What would you tell others on why they should consider volunteering?

Shantanu

By becoming a volunteer, risk professionals can firstly contribute to the growth of their profession and community and to give back to it. In addition, they will get an opportunity to serve the wider industry and our society.

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Adam

What skills have you acquired or strengthened by being a volunteer?

Shantanu

My association with PRMIA has helped me establish a wide array of relationships and networks with industry experts, academics, regulators, professionals (both established ones and new) as well as students. This has enabled me to exchange best practice and thought leadership on key risk management topics, including practical suggestions on important business-related challenges. These insights have been very useful for my personal development, as an individual as well as a professional.

Adam

What advice would you share with your PRMIA colleagues?

Shantanu

We can all benefit from increasing our engagement with PRMIA. This will enable us to identify who we can derive mutual benefits from this association. This could entail becoming more familiar with PRMIA’s events, publications, courses that we could all either attend or participate in or contribute to.

This will improve not only our professional skills, but also our relationships and networks (as detailed in the previous answer)

Adam

What has been your biggest challenge in the profession?

Shantanu

The biggest challenge that I have faced in risk management is to strive for the perfect balance between “protecting” and “enabling” the business we serve, while creating insights, facilitating decision making and driving execution.

Adam

What has been the biggest surprise of working in the profession?

Shantanu

The fact that the above is a constant journey and an eternal quest, at least for me.

interviewee Shantanu Srivastava

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what a time to be a risk manager: navigating climate change risk

by Elisabeth A. Wilson With the Intergovernmental Panel on Climate Change (IPCC) issuing increasingly dire warnings about humanity’s ability to thwart the most serious implications of climate change, and with more extreme weather patterns and events exacting catastrophic tolls on life and property, it is clearer than ever that we stand at a stark tipping point.1 Climate change and its sister subject Environmental, Social and Governance (ESG) are considered by many to be emerging risks. These might not be new topics, but they have seen a rapid rise in prominence since 2020 thanks to the COVID-19 Pandemic, which has demonstrated in real time the potential economic and existential consequences of a low likelihood/high severity event. The current pandemic seemed unimaginable to a society resting on its scientific and technological hubris. However, the increased 100-year hurricanes and floods, wildfires and mudslides and unprecedented heatwaves and rains we have witnessed in the last two years are more unnerving harbingers. The resultant shocks to our economies, fundamental infrastructures, and supply chains are only the beginning.

What a time to be a risk manager. The possible negative outcomes of climate change—environmental, geopolitical, economic, social—seem endless, difficult to predict and even harder to quantify. Couple this with a lack of historical context to forecast future climate change-driven events and ramifications and you have the modern equivalent of the Gordian Knot, one that is even more challenging due to burgeoning regulations and limited global cohesion on how to tackle the necessary transition to a netzero economy. Increasingly, it looks like this transition will be a disorderly one, with various countries, regions and sectors taking maverick approaches regarding climate change-related regulations, laws, targets and methodologies.2 Luckily, risk managers do not have to go it alone. Current regulatory and risk approaches are still haphazard, but there are areas of solidarity. Thanks to the International Standards Stability Board (ISSB), there is the promise of future global consistency regarding climate change-related financial disclosures.3 The Financial Stability Board’s Task Force of Climate-Related Disclosures (TCFD) has been so widely adopted across the financial industry that it is being touted, not only by ISSB, but by other regulators such as the Security Exchange Commission (SEC) as the basis for future formalized regulatory guidance.4 The Network for Greening the Financial System (NGFS) also offers periodically-refined scenarios to support an initial scenario analysis, central to engaging business leadership in wrapping their minds around potential financial and economic climate exposures—and solutions. Subsequently, key facets of TCFD, NGFS and other standards like the Global Reporting Initiative (GRI) can become the foundation of a risk manager’s climate change arsenal.

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Broaching the concept of climate change-related risk can feel like waging a battle. Risk managers are not always greeted with open arms on the best of days, and now they need to be prepared to go into conversations with leadership supported by limited climate change data, a dearth of historical context, vague concepts regarding potentially myriad outcomes and far-reaching, difficult-to-fathom timeframes.

This is where a strong, persuasive argument around the long-term view of climate change is essential. Risk managers do not need to rely on science-backed arguments or moral proselytizing to engage leadership in identifying potential exposures. The argument is far more fundamental, compelling and age-old: follow the money.

From what we have seen of realized climate change events so far, future financial implications likely will be profound. A risk manager’s argument should focus on possible loss, certainly, but also on the potential for gain. There is a more proactive view of climate change, one where investments in green technologies may result in trailblazing societal advances and financial windfalls. With the world’s dependence on oil and gas requiring reliance on increasingly hostile and volatile countries, easing away from these carbonintensive supplies to greener solutions may not only curb greenhouse gas emissions but might pose greater geopolitical balance and economic boons.

Risk managers stand on the line, guarding their organizations against an enemy whose realization will be unpredictable and will come from all sides. However, risk managers at financial institutions hold an uncanny upper hand in the struggle to reduce greenhouse gas emissions and to promote a low carbon economy.

It is risk managers who will harness TCFD and NGFS to refine risk management infrastructures, who will provide feedback to help shape future regulations, who will lead identification of essential climate change abatement strategies through more sound financing and investment.

Financial institutions are the backbone of the global economy, and risk managers will help drive green finance and hedge climate risk exposures one conversation with leadership, and one scenario at a time.

What a time to be a risk manager.

notes 1. Harvey, Fiona. “IPCC issues ‘bleakest warning yet’ on impacts of climate breakdown.” The Guardian, February 28. 2022, https://www.theguardian.com/environment/2022/feb/28/ipcc-issues-bleakestwarning-yet-impacts-climate-breakdown?CMP=oth_b-aplnews_d-1.

2. Mulder, Gerhard and McCarthy, Oscar D. “A Random Walk into Climate Disaster.” PRMIA Institute, October 2021.

3. “IFRS Foundation announces International Sustainability Standards Board.” Value Reporting Foundation, November 3, 2021, https://www.valuereportingfoundation.org/news/ifrs-foundationannouncement/?utm_source=eloqua&utm_medium=email&utm_campaign=newsbytes&utm_ content=NEWSBYTES-20211104 Accessed February 28, 2022. Press Release.

4. Lee, Allison Herren. “Regulation S-K and ESG Disclosures: An Unsustainable Silence.” U.S. Securities and Exchange Commission, 26 Aug 2020. Public Statement.

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Disclaimer: All views expressed in this article are my own and do not represent the opinions of any entity that I may be associated with.

author Elisabeth A. Wilson Elisabeth A. Wilson has worked for over 14 years in the financial industry. She was recruited to Atlantic Union Bank’s Enterprise Risk Management Department in 2016 to support development of the company’s then-burgeoning risk management framework.

Recently charged with crafting the Bank’s Environmental, Social and Governance (ESG) Risk Framework, Elisabeth continues to build, implement, and manage key risk programs, driving regulatory alignment and promoting bank-wide engagement while simultaneously supporting business line risk oversight. She has also contributed to the ABA Banking Journal, The RMA Journal, and Risk Management Magazine. Elisabeth is based in Richmond, Virginia.

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the voice of risk: how to avoid ESG missteps

by Carl Densem As risk managers, we are in the room to think ahead and often at crosscurrents to the consensus.

If the business is determined to follow a new strategy, we are there to ask what dangers it might pose and how they could be mitigated, avoided, or protected against. Our job is to short-circuit the consequences of ill-advised actions.

Economic, Social and Governance (ESG) is no different. ESG is a prominent concern for global investors (79% consider it an important factor in investment decision-making1), who are escalating demands for action and transparency from corporations. Companies are responding feverishly with long-term carbon-cutting goals, sustainability efforts, and eyeing community pushes that will prove their seriousness. All of this is outside, as of today, a unifying and clear framework for materiality, how meaningful data are shared and progress measured.

Risk managers on all sides should be aware of this dynamic. While ESG has the potential to reap rewards, this depends on how carefully plans are rolled out. Risk has its place in clarifying terms, asking the uncomfortable questions, and provoking thought on what could go wrong.

background ESG is nothing new, having been through more transformations than Madonna. An early form of ESG began in the 1960s, before the Queen of Pop even hit adolescence, as “socially responsible” investing2 and today is enjoying its latest revolution.

ESG, as a conceptual basket, comprises ethical ideas about how corporations should behave regarding their non-financial responsibilities. The basket has dropped some outdated ideas and picked up glitzier ones over the years. Critically, in this appearance, ESG is more focused on longevity. As an OECD paper on ESG investing puts it, there is “growing momentum for corporations and financial institutions to move away from short-term perspectives of risks and returns.” 3 By their nature, ESG factors are complex and range in time horizon from the immediate to generational, out to existential (climate, for example). This presents a great analytical challenge to those attempting to integrate factors into valuation and business models. More so, they can be fairly abstract, escaping simple and agreed-upon descriptions.

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Question 1: As a risk manager, it is important to start with basics: “How do we define ESG?” With something as pervasive as ESG’s recent comeback, it should be no surprise interpretations vary. This will be made clear in a moment by surveys, but just think about your local pharmacy or grocery store. We find consumer products trending toward conscientious causes: ‘buy local’, cruelty- and toxin-free, vegan and organic, meat substitutes, and even ice cream with a political message4.

The dots connect from this new array of products directly to ESG and how companies are rebranding themselves to investors. But with such variety comes a pitfall if ESG is left undefined. On one hand, trying to be everything to everyone leaves companies open to the market’s whim and on the other, it might appear nonchalant or dismissive to ignore ESG. It may even be the case that companies are pursuing ‘ESG goals’ without knowing it and need to adapt their approach to the zeitgeist.

A “not-insignificant minority” of global financial professionals polled by the CFA Institute and PRI5 thought ESG was a negative screen, a way of excluding investable assets like heavy-emitting coal producers (based on [E] environmental impact) or cigarette manufacturers (on [S] social grounds). Most respondents considered it only a tool and the paper went so far as to say ESG investing would fade away in favor of ESG analysis. This makes sense when you consider the wide variety of investment approaches, from arbitrage to short-selling, where screening out candidates goes against the investment mandate.

The we is critical in Question 1, how we define ESG should be different from our competitors but it should not stop there.

Question 2: The next question is: “How does ESG fit with our larger strategy and competition?”

Using ESG to constrain the investable universe and, implicitly, pigeon-hole strategy could severely impact financial performance. While this may not be the intent, adherence to new limits could push performance objectives out of reach – something which should be open to management discussion and debate. This is not starkly different to investors being forced down the credit curve, into riskier issuers, to maintain yield and meet financial objectives. Yes, doing so risks credit loss events and reputational risk, but if the trade-off is clear then risk limits can be calibrated along the way.

A company which pivots to ESG as an overriding concern might accept losses or slippage on other goals to satisfy a Board worried about reputational risk. This should be kept in mind though: failed companies contribute nothing to ESG goals and having goals but not acting in accordance with them is a far bigger risk. The balancing act is tricky with far-reaching effects.

Most investors are acutely aware of the potential conflict between ESG and their fiduciary duty. According to PwC’s investor survey, 81% were “either unwilling to accept any reduction on returns or would accept only a drop of 1 percentage point or less.” 1 in 20 investors were willing to give up 3 percentage points or more in rebalancing.

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Question 3: ESG is defined and fits our strategy, the question now is: “Are ESG goals resilient and do we have a plan for misses?”

With companies following in the UN’s footsteps by espousing 2030 goals (and even 2050 ones), it is reasonable to expect some fluctuation along the way. As risk managers, we are aware of how poor longterm plans pan out – even plotting our own retirement is notoriously difficult – and should advocate for tolerances and contingency plans. Some ESG goals cannot be set in stone, acknowledging this sets more reasonable expectations on everyone and take the emphasis off misses as mistakes. Tabletops, scenario analysis and other well-worn risk policies, infrastructure and tools will be invaluable in shaping achievable goals.

conclusion The greatest opportunity with ESG, if taken seriously, is the chance to look decades into the future, beyond immediate competitive pressures and the market’s short-sightedness. If taken up, it should lead to capital investment and self-regulation that supports both investors and other stakeholders, both the environment and communities. The intent is good but that is only part of the puzzle, ESG could use the voice of risk to guide its future.

references 1. Chalmers, James et al. “The economic realities of ESG.” PwC, March 3, 2022, https://www.pwc.com/ gx/en/services/audit-assurance/corporate-reporting/esg-investor-survey.html 2. “The Evolution of ESG Investing.” MSCI, March 3, 2022, https://www.msci.com/esg-101-what-is-esg/ evolution-of-esg-investing#:~:text=The%20practice%20of%20ESG%20investing,the%20South%20 African%20apartheid%20regime 3. “ESG Investing: Practices, Progress and Challenges.” OECD, March 5, 2022, https://www.oecd.org/ finance/ESG-Investing-Practices-Progress-Challenges.pdf 4. “Issues We Care About.” Ben & Jerry’s, March 5, 2022, https://www.benjerry.com/values/issues-wecare-about 5. “ESG Integration in Canada.” CFA Institute, March 3, 2022, https://www.cfainstitute.org/-/media/documents/article/position-paper/cfa-esg-integration-canadaweb-3pp.pdf

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author Carl Densem Carl Densem has a decade of risk management experience under his belt since graduating from Oklahoma State University’s master’s in quantitative finance program in 2012. He spent four years in asset management before immigrating to Vancouver (Canada) and joining Central 1 Credit Union. There he helped establish several missing pieces from the risk function, including model risk management, and led integrated risk reporting. He is now Risk Manager with Community Savings Credit Union and lives in Halifax, Nova Scotia.

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chapter spotlight: PRMIA Hungary

PRMIA’s Hungary Chapter dates back to 2003 and has operated under the current setup since 2009.

The chapter stepped up its activity and visibility under the leadership of the former director, Tamás Tóth, organizing 6-8 events annually. The main goal of the chapter is to bring together and develop the Hungarian risk management community to enable a platform for sharing knowledge and ideas on current risk management challenges.

In its early years, the chapter focused on practical risk management issues, organizing events for the risk management professionals to discuss the effects and implementation of new regulations.

Chapter members are professionals of the Hungarian banking and corporate sector, the supervisory authority, and members of the academic community. Our upcoming events cover digital finance, ESG risk management and extreme risks in operational risk management.

While the chapter mainly focuses on applied risk management topics, lately our activities also incorporate academic research. We are organizing our annual research conference for the 7th time in a row this upcoming autumn, giving floor to the presentation of both theoretical and practical research results. Also, we regularly participate in organizing the regional round within PRMIA’s Risk Management Challenge competition. To strengthen our cooperation with academia, we work on awarding the PRM accreditation for the Finance Master and Finance and Accounting programs of Corvinus University of Budapest, the leading university in economics in Hungary.

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We focus on the local risk management profession but also aim to channel the Eastern European countries’ risk management experts to PRMIA’s community. The chapter’s work continued also during the pandemic years, with regular online workshops. However, we look forward to returning to on-site events that allow better networking and relationship building.

The steering committee consists of a wide range of professionals dedicated to voluntary work for our community.

Regional Directors •

Barbara Dömötör, Associate Professor, Department of Finance, Corvinus University of Budapest

Steering Committee •

Ákos Lois, Head of Risk Department, MKB Bank

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Alexandra Szatmári, Risk Manager, MagNet Magyar Közösségi Bank Zrt.

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Balázs Vajai, Deaputy CFO, Delta Technologies PLC

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Béla Öcsi, CEO, International Training Center for Bankers

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Csilla Bokor, Advisor to the CEO at Budapest Institute of Banking

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Gábor Boros, CEO, Mérlegállás Kft.

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Gergely Gabler, Deputy CEO at Interactive Brokers Central Europe

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Kinga Oravecz, Head of Equity- and Debt Capital Markets, Erste Bank Hungary Zrt.

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Péter Endre Kovács, Director, Finalyse

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Tamás Kálmán, Senior Manager, MFB Zrt., Hungarian Development Bank, Advisor to the CEO, Garantiqa Zrt.

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Tamás Tóth, Senior Adviser, Freelance

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Viktor Bóna, CEO, Lippert Ltd.

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Zoltán Pollák, Partner Consultant, International Training Center for Bankers

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Zsuzsanna Tamásné Vőneki, Head of Operational Risk Department, OTP Bank

Our sponsors: Budapest Institute of Banking; International Training Center for Bankers, KPMG, OTP, MFB, National Bank of Hungary, SAS, contribution is essential in maintaining the operation of the chapter.

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calendar of events Please join us for an upcoming virtual course, thought leadership webinar, or virtual event. New offerings are added on a regular basis; watch the PRMIA website at www.prmia.org for updates.

PRM™ SCHEDULING WINDOW March 12 – June 17 EMBEDDING ESG ACROSS THE REAL ECONOMY May 4 – Thought Leadership Webinar presented in conjunction with UK Sustainable Investment and Finance Association

EXPLAINABLE AI AS A TOOL FOR RISK MANAGERS May 11

ESG VIRTUAL FORUM 2022: THE NEW ERA AND FRONTIER OF RISK MANAGEMENT May 17 – 18

UNDERSTANDING TRANSITION RISK: A CLIMATE-READY APPROACH May 19 – Virtual live course

THE ROLE OF RISK MANAGEMENT LEADERS May 20 - Virtual event presented by PRMIA Egypt/KSA and AAMBF

MODEL RISK MANAGEMENT FOR MACHINE LEARNING MODELS May 23 – Virtual live course

PRM™ TESTING WINDOW May 23 – June 17

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CALCULATING SA-CCR June 7 - June 20 - Virtual course

CYBER RISK IN A TURBULENT WORLD June 14 – Virtual Event

RISK & ML MODELS: STRESS, SCENARIO TESTING & EVALUATION June 27 – Virtual live course

ALGORITHMIC AUDITING March 9 – Thought Leadership Webinar

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