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ESG Risk Management Insights from the Energy Industry

On episode twenty-six of Coffee Chat with CastleHill, Managing Partner Tim Carbery continues the discussion around Environmental, Social, and Governance compliance.

Joining him is GRC and ESG consultant Tom Birmingham, governance, risk, and compliance professional with twenty-five years experience in the energy industry. He seeks to support companies’ transitions towards more sustainable, ESG-oriented workplaces, with an especial focus on reporting, measurement, and programming.

THE THREE THEMES OF GRC VALUE PROPOSITION
To frame the conversation, Tom Birmingham introduces three themes relevant to GRC value proposition to an organization. The first is the most straightforward: protecting corporate value by maintaining a robust understanding of basic compliance requirements.

The second proposition concerns a company’s business change management processes. As ESG requirements remain in development, it is crucial that organizations improve their processes, systems, and procedures to best support efficient change management. The more efficient an organization’s change management process is, the more adaptable – and therefore, competitive – an organization will be.
“You have to get better about managing change around all of these requirements in the ESG field, particularly around reporting and measurement,” Urges Birmingham. “If you do it in an organized and sustainable way, in my own opinion, you get better at it, you get more efficient at it, and then you are much more able to adapt and remain competitive.”

The third value proposition is in helping company-wide business strategy adoption.
“There are a lot of initiatives that the C-Suite likes to push down into the organization. Governance, Risk, and Compliance professionals really understand how that is supposed to ripple through the organization from a policy perspective, from procedures, control environments, training, data management,” Explains Birmingham. He recommends team leaders make use of these professionals’ skills by folding them into corporate strategy. “All the elements of a robust risk and compliance program are the same things that one would like to see in a successful strategic initiative. Bringing compliance and risk professionals to the strategy table is a good move by the C-Suite to understand how to make their strategy stick in their organization.”

INTERNAL AND EXTERNAL PRESSURES
With an increased interest in ESG comes new regulations and expectations for the energy industry, both internally and externally. Internally, Birmingham notes the usefulness of a strong governance organization to improve a company’s risk data flow.

“I had a couple of opportunities to work in different corporate structures and it really opened up my eyes to the difference between a centralized governance and compliance approach versus a decentralized approach,” he says. “When we talk about trying to standardize and automate the flow of compliance-related information, it’s really helpful to have a strong central operation that can organize and standardize all the policies and procedures that you want to push down into the organization. The trick is to balance that with decentralized decision making.”

The energy industry has been under increased scrutiny from external sources, as well. “There’s a lot of growing expectation from regulators, shareholders, and consumers around responsible behavior of companies. Part of that is coming from a look at how well companies do operate: how efficient they are, whether they can get things done in a short period of time, whether they are cost-effective,” explains Birmingham. But beyond the traditional pressures of shareholder investment, Birmingham notes a new trend rising in the energy industry.

“What’s really interesting on the ESG front is the shareholder interest in companies’ non-financial performance. I think the shareholder and investment community are really getting pressure themselves from their investors, saying, ‘Hey, how risky is my investment in this economy, in this industry? I need more information to make an informed decision,’” says Birmingham. “Increasing interest increases pressure on companies to get better at their reporting.”
“It’s really interesting how the pressures are mounting rapidly in the energy industry and how those pressures will mirror themselves in other industries,” comments Carbery. “From an ESG-perspective, is this focus really driven by the environmental aspect, or are there social and governance aspects of it, too?”
“It’s definitely all three,” confirms Birmingham. “The challenge is trying to manage all three at the same time.”

Check out Episode 26: ESG Risk Management Insights from the Energy Industry to hear more about the changing landscape of ESG, or email us at: info@castlehillrisk.com

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Analyzing ESG Scenarios with Dr. Guan Seng Khoo

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:

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Examining Workplace Diversity’s ESG Impact

In this special, two-part episode of Coffee Chat with CastleHill, Managing Partner Tim Carbery is joined by Yakut Akman and Alpa Inamdar as they consider the Environmental, Social, and Governance (ESG) impact of diversity in the financial industry.

While the push for racial and ethnic diversity is far from new, focus over the past year has reinvigorated companies in every industry to examine their actions regarding diversity and inclusion, including their third-party vendors. Yakut and Alpa bring their decades of experience in the industry to the discussion to examine the necessity of accountability, transparency, and education.

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