Amir Soufizadeh is the Head of Commodities & Utilities Practice at BJSS. BJSS is an award-winning, delivery-focused IT consultancy, and you can learn more about its services at ETOT 2017.
In theory, Enterprise Risk Management (ERM) is an integrated and continuous process for ensuring that important business decisions remain within the overall risk appetite and acceptable risk tolerances associated with the strategic objectives of an organisation, in order to minimise unexpected performance variance and maximise intrinsic firm value. But despite having a fully comprehensive definition of ERM, it could be interpreted in different ways by different firms and its definition can be misled, which means different objectives are sought by companies that implement it.
The first, and most common one, is to protect value and avoid lost losses and defaults. The second is to derive profitability and growth by leveraging the latest risk management techniques. Third is to provide stability and continuity by ensuring the enterprise’s independence; while the fourth objective - which is one of the most important - is to avoid penalties by ensuring regulatory compliance.
In general, for any successful ERM, there are five key factors to take into account:
1. Risk appetite of the firm
2. Risk culture and strategy
3. Risk governance and organisational structure
4. Risk related decision making processes
5. Insight and transparency levels within the firm
Moreover, it is fundamental to consider the way ERM organisation is setup, which is mainly correlated to both underlying industry and internal organisation structure. This can be achieved either as a centralised or decentralised function and each of them have their own remits. For instance, a decentralised ERM function allows greater flexibility in risk management practices while allowing the business to tailor models and processes that works best for their needs. On the other hand, when looking at a centralised ERM function, one of the key advantages is that it ensures a consistent approach, where the similar risks across the organisations are often assessed using the same tools and processes, which means functions like market and credit risks are very similar across the enterprise.
“To determine the right approach and how best to setup and align the ERM function, the most important task is to identify the inherent risks of the firm’s business model, as well as the risk governance and ownerships across the organisation.”
To determine the right approach and how best to setup and align the ERM function, the most important task is to identify the inherent risks of the firm’s business model, as well as the risk governance and ownerships across the organisation.
In the energy sector, for instance, the main ERM goal in the vast majority of firms is the value protection element. This can be explained by taking a closer look at the industry’s business model. Two key risks in the sector are regulatory and operational risk; along with the industry’s long term nature of the business model – for example, in oil and gas explorations, it takes years before the project starts generating profile, and only if all goes as planned will the project be profitable.
Overall, there are many opportunities for energy firms to improve their ERM practices and functions. To begin with, enterprises should assemble a dedicated group of risk practitioners and implement common risk management standards at the group level. This initiative will provide visibility of all risks emerging throughout the group to the risk function, allowing energy firms to move towards achieving a more integrated view of all the risks while enabling them to make more informed and educated trade-offs.
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