Do You Have the Knowledge to Manage the Risk?

After a fantastic session and insightful discussion on the “Keep Your Risk on the Radar: Bring your company up-to-date with the latest risk management insights and tools” webinar, we have caught up with RadarRadar to answer your questions. Read what they have to say below:

How do you maintain a strong culture of risk with remote workers?

Maintaining a strong risk culture is a critical component of effective risk management, especially in the commodity industry where volatility and uncertainty are inherent. The shift to remote work due to the pandemic has created new challenges in maintaining this culture.

In addition to the recommended hybrid model for regular check-ins, there are other strategies that can be employed to maintain a strong risk culture with remote workers. One important strategy is to clearly communicate the organization's risk management objectives, policies and procedures, and encourage open dialogue and collaboration among team members. This can be achieved through regular virtual meetings, webinars, and training sessions focused on risk management.

Another key element in maintaining a strong risk culture with remote workers is to ensure that the technology infrastructure and systems are in place to support effective communication and collaboration. This includes leveraging technology tools such as video conferencing, instant messaging, and project management software to facilitate real-time communication and information sharing among team members. It is also important to establish clear guidelines and protocols for the use of these tools to ensure that they are used effectively and securely.

Ultimately, the success of maintaining a strong risk culture with remote workers depends on the commitment and engagement of all stakeholders, including senior management, risk management professionals, and individual team members. By fostering a culture of risk awareness and collaboration, organizations can continue to effectively manage risk and navigate the challenges of remote work.

In the panel's opinion, what's the best way to quantify and mitigate environmental risks? Seems like the newest risks aren't really part of traditional systems?

Mitigating environmental risks has become an increasingly important concern for companies in the commodity industry. The challenge, however, lies in quantifying the risks and developing effective strategies to address them.

One way to quantify environmental risks is to conduct a comprehensive risk assessment that considers the full range of potential impacts, including both direct and indirect impacts. This may involve assessing the environmental impact of the organization's operations, as well as the impact of its supply chain and other external factors.

Once the risks have been quantified, there are several strategies that can be employed to mitigate them. These may include implementing environmental management systems, setting environmental targets and objectives, conducting regular environmental audits, and investing in new technologies and processes that reduce environmental impact.

Another key aspect of mitigating environmental risks is to engage with stakeholders, including customers, investors, and communities, to ensure that their concerns are heard and addressed. This can help to build trust and credibility, and ultimately support the long-term success of the organization.

It is also important to recognize that environmental risks are often interconnected with other types of risks, such as reputational, regulatory, and financial risks. Therefore, a holistic approach to risk management is needed, one that considers the full range of potential risks and their interdependencies.

In summary, the best way to quantify and mitigate environmental risks is to conduct a comprehensive risk assessment, develop effective mitigation strategies, engage with stakeholders, and take a holistic approach to risk management that considers the full range of potential risks and their interconnections.

There are shortages around data experts, how is that impacting the risk management function given its ever growing need for data management?

The shortage of data experts is a critical issue that impacts the risk management function in the commodity industry. As companies increasingly rely on data-driven decision-making, it is essential to have a skilled workforce that can handle complex data technologies beyond traditional excel work. While there is hope with the emergence of a new generation of data-savvy workers, the talent shortage is a challenge that will persist.

Organizations must take a proactive approach to address this issue. The responsibility of upskilling the workforce to handle data technologies rests not only on the individuals but also on the companies. Companies must develop initiatives that facilitate the transition to the new data-driven environment and ensure that the skill gap is addressed. These initiatives can range from internal training programs to partnering with academic institutions to develop industry-specific data science programs.

Furthermore, it is essential to create an organizational culture that values data-driven decision-making and supports continuous learning and development. This can be achieved by encouraging collaboration, providing opportunities for experimentation and innovation, and creating an environment that fosters curiosity and learning. Ultimately, addressing the shortage of data experts requires a collective effort from individuals, organizations, and academic institutions to ensure that the industry stays competitive and relevant in the ever-changing landscape of risk management.

Where do you start when you wish to define and more importantly quantify risk appetite of an organisation and how do you ascertain which risks you should encourage yet control and which you wish to mitigate to the fullest extent?

Defining and quantifying an organization's risk appetite can be a complex and challenging process. It requires a careful balance between the organization's objectives and the potential risks it faces. To begin this process, a combination of top-down and bottoms-up approaches is recommended.

The top-down approach involves conducting a qualitative discussion with key stakeholders such as shareholders, board members, and income generators. This discussion should aim to understand their intuitive risk appetite, what risk culture they are looking for, and how much risk they are willing to tolerate to achieve their goals. This approach will help to align the organization's overall objectives with its risk appetite.

On the other hand, the bottoms-up approach is more quantitative, focused on analyzing the balance sheet on a risk-weighted basis and modelling the assets sensitive to price variability in perspective with the capital base of the company. This approach involves identifying the various risks that the organization faces and assessing their potential impact on the organization's financial performance. Banking models can be used as guidance to translate capital capacity to the value at risk of these assets.

Both approaches will need to be merged in a risk policy framework that consistently measures the actual risks against the appetite. This will help the organization to prioritize risks and determine which ones should be encouraged but controlled and which ones should be mitigated to the fullest extent. It is important to ensure that the risk appetite statement is integrated into the organization's overall strategy and decision-making processes and is continuously reviewed and updated to reflect changes in the risk environment.

How is the increasing involvement of hedge funds in commodity trading impact risk management?

The increasing involvement of hedge funds in commodity trading has brought new dimensions to the market, and it requires commodity market participants to be even more vigilant about risk management. Hedge funds provide liquidity and contribute to the efficient functioning of the market, but their participation can also create new risks for other market participants. Hedge funds are known for their speculative positions, which can create market volatility and price fluctuations. This can lead to disconnects between fundamental drivers of the market and technical trends, which can make it difficult for commodity traders to assess the true value of the underlying assets.

As such, risk management models must take into account not only the impact of the primary market, but also look at the interconnectivity between other financial asset classes, as well as hedge funds and other market participants. To manage this risk effectively, risk managers need to have a deep understanding of the unique characteristics of the hedge fund market, including the types of strategies employed by hedge funds, the risks they pose, and the techniques that can be used to mitigate these risks. Risk managers also need to be able to adapt their risk management strategies and models quickly to respond to changes in the market environment. Ultimately, the key to effective risk management in the face of hedge fund involvement is to have a comprehensive risk management framework that is tailored to the specific characteristics of the commodity market and the individual needs of each participant.

Given the numerous recent events, is it still relevant to use historical data?

Historical data is certainly relevant, it is important to recognize that historical data is a proven guide to estimate the shape of future possibilities. However, as we have seen in recent events, unexpected and unprecedented events can occur, which can significantly impact commodity markets and associated risks. Therefore, while historical data can provide valuable insights and context, it is important to complement it with other sources of information and analysis, such as real-time data, scenario planning, and stress testing. In addition, risk managers should continuously reassess their assumptions and models to ensure that they remain relevant and effective in the face of changing market conditions and emerging risks.

Considering the previous question what alternatives are there to VaR for risk reporting when looking at illiquid markets which have fat tails and events which are not captured in the historical dataset?

Data quality and availability is a central challenge for any risk manager. Picking and parametrizing models can mitigate some of the data issues but just to a certain extend. When liquidity events are not present in the data or data has other material limitations we recommend combining data-dependent metrics such as VaR with other approaches such as stress test.

Stress tests are an effective alternative to VaR for risk reporting when dealing with illiquid markets and fat-tailed events. Stress tests involve simulating extreme scenarios, such as large price movements or liquidity shocks, to assess the impact on the portfolio. This approach can help identify potential vulnerabilities and inform risk management decisions in a more dynamic way than relying solely on historical data. Additionally, stress tests can be tailored to specific scenarios or market conditions, providing a more customized view of risk. It's important to note that stress tests also require quality data inputs and robust models to be effective. Therefore, a combination of different risk metrics and approaches, including stress tests and VaR, is likely the best approach to risk reporting in illiquid markets with fat tails and limited historical data.