As my tenure as, Chief Risk & Sustainability Officer at Argo Group has come to an end, the Risk Coalition’s Hanif Barma asked me to think about what has changed in the last 7 years in the world of risk and sustainability.
What is different from 2015?
Climate and Sustainability
o Was this even ‘a thing’ back then?
o On my third day at Argo, I was called upon by the General Counsel to complete the Californian regulatory climate change return. It was due in a month’s time, and it was ‘just a filing’. No one at that point, yet had any sense of what our strategic stance on climate was or should be.
o That was the start of a long journey. I established a cross-functional Sustainability Working Group and an ESG Strategy in 2016. Although I was definitely ahead of my time, it built the foundations of the ESG program at Argo today, which I am very proud of.
o In 2015, ‘Climate’ was typically on an emerging risk register and considered to still be ‘in the future’. Well, it has now well and truly emerged and it is a significant threat for most organisations. Those who will succeed will be those that also see the opportunity to thrive as a result of the transitions we all face.
o Notice I speak of ‘Sustainability’ (which I see as the inside-out view of how an organisation links these issues to their strategy and purpose), and not ‘ESG’ which is how an investor (and other stakeholders) take an outside-in view of how the organisation appears to be dealing with these challenges.
o I would just counsel that organisations need to work out what Sustainability means for them – define your own ambition – and not wait to be told by investors or regulators. Using a materiality grid is really helpful in this regard. It helps rank issues and communicate. It is after all a solid risk management tool.
o But remember, you don’t have to over-promise or commit to ‘what you feel you have to’. Do less but do it well. Be authentic and be proactive.
Economic stresses
o Much like in 2008-2009 we are currently re-writing the rule book as far ‘financial events’. In 7 years’, time, all risk reports will include a ‘2022 stress scenario’ for investment downside risk.
o The market uncertainty and inflationary situation that we find ourselves in a post-COVID and post-Ukraine invasion world are an opportunity for CROs to show what they can do to help their organisations to think through the implications.
o It is not about having ‘the right answer’, but it is about thinking through a wide range of scenarios and stress tests and helping your organisation work it out in real-time, and ensure that it can survive under all scenarios, by helping to plot the route map through these times of change.
o What is worrying is how misleading and unhelpful some models have been. Actual shocks seen have in some cases been 3 times the level of loss scenarios come out of investment provider models.
o This reinforces the importance of thinking the unthinkable through scenarios, reverse stress tests and gathering feedback from colleagues and peers through workshops. Don’t just rely on models. George Box’s aphorism applies: “all models are wrong, but some are useful”. Be thoughtful.
The rise of Chief Sustainability Officer
o Today may be the moment for the Chief Sustainability Officer. I like the Korn Ferry paper on the subject.
o They are spot on in terms of considering this the role for the ‘The Impatient Optimist’. You have to have a vision and be ambitious with your targets, but on the other hand you can only move at the pace at which you can take people with you on the journey.
o Other features they raise are being resilient and playing the long game as well as being able to navigate internal and external networks.
o One thing is for sure, there is not enough talent to go around, and that means there is opportunity for those who want to grasp it.
What is the same as in 2015?
Risk Culture
o I was recently asked to update my chapter on Risk Culture in the “Risk Management Handbook” edited by David Hillsom, for a second edition, due out in 2023. I originally wrote my contribution in 2015, and this in turn was based on work done with the Institute of Risk Management back in 2011.
o I was struck by how little things have changed at one level. On the face of it this is because organisations and human nature have not, despite increased focus on the topic from boards and regulators.
o However, we have moved on from the debate of ‘is there such a thing as risk culture’, to doing something about it, which I see as a positive.
Reputational Risk
o Reputation is most organisations’ most precious asset, but many seem to forget that a brand is built over years and destroyed in a minute of inattention.
o The Daily Mail test is a simple but easy way of asking the question ‘What could possibly go wrong?’ and ‘Have we really thought this through?’. Some might argue this would have prevented a lot of pain for the UK government in recent times.
o My basic premise is always: if it can leak, it will and at the most inconvenient time. So be prepared.
o If you have nothing to be ashamed of, then be transparent, and control the narrative. Be timely, don’t wait for others to dictate the agenda.
o If you don’t have any appetite for the risk itself, then just don’t do it.
Risk Appetite
o Boards and management are paid to make choices, draw lines in the sand and be accountable for their decisions.
o Particularly in financial services, there is a tendency to defer to the regulator or ‘the model’, but choices about how proactive to be about Sustainability or how much exposure to climate change a particular insurer is willing to contemplate are not the regulator’s call. The regulator is there to ensure that choice is made; and can be clearly articulated and followed through.
o The buck stops with the board, assisted by the chief risk officer and others. It is often a matter of gut instinct or judgement. This is not somehow a bad thing. At the end of the day directors will have to live with the consequences, not the regulator or the model.
The CRO sits in a fairly warm seat
o The CRO is sometimes called upon to make a difficult call. Nothing can prepare you for that moment other than keeping focused on ‘Doing the right thing’, for your organisation, for your colleagues and for yourself. See my article on whether it is time to transition towards a ‘Chief Responsibility Officer'.
o Although there is a lot of technical content, the CRO role is not at its heart a technical role; it is a leadership role, and you need to keep reminding yourself of that.
o It’s not about how well you understand scenarios or models, that is a given. It is about how you engage with colleagues and how you react under pressure in those few ‘moments of truth’. Do you take the easy path or, do you do what is necessary for the organisation? In other words, in the end it is about integrity, courage, influence and building capability. The Institute of Risk Management paper on hiring a great CRO lays it out well, as does this blog from NC State University.
At the end of the day, you are only as good as your team, your relationships and the last difficult call you made. It’s not a job you can sit back in, but at the end of the day it can be very rewarding. Be yourself, live your values, and if you have the freedom to do so; then you are in the right organisation. Try to enjoy the journey, it is a great role.
Alex Hindson is co-founder of the Risk Officer Sustainability Forum, which is hosted by the Risk Coalition). He was previously Chief Risk & Sustainability Officer at Argo Group and now is Partner and Head of Sustainability at Crowe U.K and contactable at alex.hindson@crowe.co.uk