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Welcome to Coffee Chat with CastleHill, the show where CastleHill’s Managing Partner Tim Carbery interviews experts from around the globe about emerging risk topics and trends. In this week’s episode, Tim is joined by Guan Seng Khoo, Ph.D. to discuss the importance of performance scenario analysis and environmental data factors.

Dr. G.S. Khoo began his career as a university professor researching semi-conductors with supercomputers, a skill set that ultimately extended into environmental analysis. With a long history of research modeling and a passion for the outdoors (including a recent nature guide focused on the flora and fauna of Singapore), he is an authority on analyzing non-standard measures. 

Non-standard analytics present a unique problem to most organizations. “One of the interesting aspects of the environment, social, and governance part of analytics is that there is no single standard across the world, no single standard in most countries,” Tim points out.

Without a global standard, organizations investing in improving their ESG capabilities are uncertain about how to allocate their funds and resources.

“Most firms tend to adopt the simplest approach, which is convenient in the sense that they usually procure their information from an information service provider,” says Dr. Khoo. “The danger is that they may be missing the trees from the forest or, vice-a-versa, the forest from the individual trees. Most of the information service providers tend to focus on the financial impact, the environmental impact, and the social impact, but what they miss in terms of the data – the approach that they have today by adopting ratings from somebody else – is how to measure environmental risks.”

In-house risk model teams offer organizations the opportunity to be more thorough. “When I was doing it, I realized that the more independent you are, the more granular you can go,” notes Dr. Khoo. “With purchasing data and models from information service providers, the danger is that you depend on them… the expanse of alternative data is so wide, especially in environmental risk management, that sometimes for different sectors you may have to curate a different selection of choices of data rather than just using all the available data wholesale. The granularity may be missing. The focus may be missing.”

Granularity and focus offer greater control and accuracy, which support improved ESG risk rankings. Combined, those factors become compelling tools for organizations interested in managing their environmental impact.

The sheer range of possibilities for managing ESG components and measures can be overwhelming. From natural disasters to social issues, it can be daunting for organizations to factor ESG risk into their existing business models.

“What if you were able to manage the wastefulness of your business model?” Dr. Khoo asks. “The idea is to make use of the ratings you have today to try and make the business model or economy more circular. If you assess a company by profit against the waste it produces, it gives you an opportunity to redesign your business model.”

By linking ESG performance to improved business models, companies have an incentive to invest in a higher quality of analysis. As to how organizations can improve, Dr. Khoo offers a recommendation: a performance scenario analysis.

Take climate change as an example of scenario analysis’s efficacy. “Since there is so much uncertainty about climate change’s impact because in between the manifestation of the outcome there could be episodic events like a natural catastrophe, the most optimum method by which you assess the most possible outcomes of this particular investment you make, whether it’s ESG positive or not, is through performance scenario analysis,” Dr. Khoo states.

“It’s like you are investing in an option. You consider all the in-the-money cases and the out-of-money cases. With ESG, you must consider both aspects, in-the-money, and out-of-money, and then, if it’s out-of-money, you assess judgmentally with your fellow peers if that is the worst case that can happen. If it is very likely to happen, what should we be doing right now? Should we be transforming the business? Should we be avoiding the business? Should we be enhancing the business in another direction? Scenario analysis gives you a chance to ponder the various options.”

Performance scenario analysis provides a framework with which companies can view the many aspects of ESG horizontally. It encourages organizations to take a comprehensive view of the numerous potential risks attached to environmental change and empowers those organizations to create business models capable of withstanding multiple scenarios.

Dr. Khoo sums up the many benefits of approaching ESG risk from a performance scenario analysis perspective:

“It is always better to be prepared than to be reactive.”

Check out the full conversation below or email us at info@castlehillrisk.com to hear more about performance scenario analysis and what organizations can do better today to plan smartly for tomorrow: