I'd like to talk to the architect of the Australian superannuation system and ask him/her/them whether their risk assessments included the current scenario. The move from a government regulated pension system was seen as a dramatic step forward in the acknowledgment and management of the country's fiscal long term responsibilities. But the exposure to market volatility and severe collapse puts many people in the firing line through no real fault of their own. Lots of people have benefited from the rise in the market over the last few years but imagine if you had pumped a heap of dough in the last 18 months in preparation for your retirement. Ouch.
It also highlights the problems of managing intergenerational conflicts.
Now I yield to no-one in my views that the baby boomers have had an easy ride (I'm generalising). Plentiful jobs, great wages, cheap housing, free education. These conditions have never existed for the bulk of Generation X and Y. Normally I would grind my teeth thinking about it. But I might have to start feeling sorry for the boomers. Facing retirement their nest eggs have been hit very hard, their homes values are starting to drop and the end figure could be severe. All of the assumptions they had for the future are gone and may not ever return.
This is going to be a real policy conundrum for the government. None of us should expect Boomers to go quietly into the night. They will work longer – forget about assuming the mantle if you are Gen X or Y - , they will lay off younger workers, they will demand favourable taxation. In short they will demand solutions for their problems at the expense of the rest of us and of future generations. And they will do this because, like all of us, they are selfish, but unlike the rest of us, because they can. Maybe I shouldn't feel sorry for them after all.
Wednesday, November 26, 2008
Saturday, November 22, 2008
Climate Change Liabilities
I actually wrote this several months ago but did not publish for one reason or another. Can I claim I tipped this?
Much was made at the time of plaintiff law firms warning large companies to get their ducks in a line with respect to climate change mitigation. Perhaps the same law firms might also send similar letters to firms on the other side peddling hysteria and misrepresenting the reliability and predictions of climate models. A lot of people have spent a lot of money based on those representations. If they turn out to be wrong or exaggerated then they would have the right to be angry and consider seeking compensation.
P.S. Those same companies and individuals should also check the quality of their own professional indemnity insurance covers.
P.S. Those same companies and individuals should also check the quality of their own professional indemnity insurance covers.
Climate Change - The Honeymoon is Over
Climate Change - The Honeymoon is Over
In February 2007 a report was released entitled The Business of Climate Change: Challenges and Opportunities. The report discussed the climate in 2100, documented economic and financial projections, and likely mitigation and adaptation costs several decades into the future. It included a range of possible values for a tonne of carbon tonne in 2050. The report authors are highly credentialed and referenced what look to be the best contemporary scientific knowledge including the recognised global expert body the Intergovernmental Panel on Climate Change.
So what?
Well, the report was written by Lehman Brothers. Eighteen months later Lehman Brothers is no more. They were happy to make predictions and provide advice about the climate and the financial markets 90 years in the future but were unable to predict their own demise a little over one year later.
Of course this doesn't mean the report is wrong. But it doesn't mean it is right either. And certainly their ability to take advantage of whatever opportunities might have been available is now.....somewhat diminished.
But I digress. The executive summary of the report states, in relation to climate change:
Firms that recognise the challenge early, and respond imaginatively and constructively, will create opportunities for themselves and thereby prosper. Others, slower to realise what is going on or electing to ignore it, will likely do markedly less well.
On this point I think they are absolutely right, particularly if, by imaginatively and constructively, they include the decision to do nothing. I'll come back to that in a moment.
On climate change collectively we seem to be experiencing a variation on the five stages of grief - denial, anger, bargaining, depression, acceptance. Your interpretation of the stages depend on your point of view. Climate change sceptics for example might see the denial stage as the acceptance stage and vice versa. I'm not trying to create a new management consultancy model, I'm merely suggesting that the climate change debate has moved into a new stage. Lets call it the cold hard reality stage. For some this might be called the bargaining stage. Again, depends on your perspective.
The reaction to recent financial events suggests that the commitment to climate change action is a mile wide and an inch deep. When faced with the choice between future, uncertain risk represented by climate change, and certain risk that is happening right now then it would appar that there really is no choice. Our responsibility to the future diminishes when we must focus on shoring up the present. Commentators can gnash their teeth all they want about the shallowness of such a view but they are wasting their time. It is who we are. And it is not going to change.
The honeymoon for the climate change industry is well and truly over. That's bad news for some of them but good news for the rest of us. The opportunity to bring the debate and the discussion back to a a more sensible level should be welcomed by all parties.
In the booming economic times we have recently experienced a more wistful approach to issues like climate change inevitably emerge. Our basic and luxury needs are met, we can afford to focus on our spiritual and moral concerns. In less certain times such as these, long term risks are ignored in an effort to deal with the here and now. The correct approach lies somewhere in the middle. It is the analogous to how people deal with risk. High impact, low probability events are underestimated at the point before they occur and overestimated immediately afterward.
The current financial crisis has pushed climate change off the front page but it will be back and hopefully a bit chastened. What is needed is a rational, evidence based assessment process that cuts through the rhetoric.
Tom Roper former Victorian Minister for Planning and Environment and State Treasurer and now an active advocate for environmental and climate change issues, recently told the Age.
Victoria had to plan for a two-metre sea level rise and "if it's less than that, we can all be thankful". "I don't think, certainly in Australia, we have thought through what up to two metres of sea level rise will actually means in terms of our major cities".
Try this, it's fun. Replace two with ten in that passage. Have we thought through what up to ten metres of sea level rise will actually mean in terms of our major cities. How about twenty? Have we thought that through? Probably not.
Let me explain why I'm being so flippant. According to publicly available information from the IPCC and CSIRO, global sea levels are set to rise by up to 60cm if you just take into account the model projections, and, up to 80cm if additional contributions are included due to ice sheet dynamic processes. This is for the last decade of the 21st century - 2090 to 2100 . These figures are the top of the range projections for the last decade of the 21st century relative to 1990. In other words, worst reasonably foreseeable case in 80 to 90 years. If its 80 cm why call for a planning figure of 2m? I don't get it.
This is not a skeptical rant about climate change being a hoax. The vast body of expert evidence suggests that it is real and therefore the only rational response is to accept it and take action. But taking action does not mean going off half cocked. It means having an evidence based approach to understanding the potential risks, measuring their impacts - primary, secondary, tertiary etc - and formulating sensible strategies to mitigate or adapt.
Every decision brings with it unintended consequences. If you introduce a 2 m planning level for an 80 cm problem then there will be a few people that will be upset about it. Such as existing property owners whose land value will head rapidly south perhaps to zero, when the market realises that the utility of that land is now significantly reduced. Insurers will restrict or refuse cover to their assets. Governments and businesses will choose to not replace, maintain or extend essential infrastructure such as drainage, water or electricity.
And if its is 90 years away can't we wait a bit longer and see how the sea level actually rises compared to the theoretical models before committing to policies that will have profound impacts on property values and public infrastructure?
Climate change presents risks. It also creates opportunities for the informed. We tend to overreact to risk or perceptions of risk. Just witness the behavior in the financial markets. People have lost and gained fortunes depending on their view of risk and their willingness to act on it Businesses and governments that understand climate change risk and opportunities can exploit them and gain a competitive advantage over those that don't. They can also avoid making uninformed or rash decisions through the influence of the soaring rhetoric of those with a particular agenda.
True understanding requires a balanced view of existing and future risks and a consideration of the likely actions of others.
Sit down and do a formal risk assessment and you will soon come to a few key realizations.
Firstly that issues such as population growth, economic turmoil, infrastructure investment deficits and demography will have a far more profound impact on the near and medium term future than a changing climate. In fact the biggest short term risk posed by climate change to the economy and society is the emissions trading scheme, an artificial man made construct rather than a change in climate.
Secondly in all the commentary about climate change and the potential impacts there seems to be a view not just that the future is far too risky but that so is the present. The notable characteristic of climate change is that it amplifies existing risks. There will be increases in frequency and intensity of flooding, bushfire, windstorm but in most cases the increases are incremental rather than catastrophic. These risks are already with us but the big ones only hit only once every twenty, thirty or a hundred years. We know this and we are fine with it. Why would we think that an incremental increase would render them a total disaster?
An example. A dry hot climate will lead to a reduction in soil moisture content and cause problems with building foundations and underground infrastructure. Pardon me but isn't the soil already as dry as a dogs biscuit. Lets not get carried away with what the future might hold when it is already here and on reflection, not all that bad.
Thirdly. It's not all bad news. There are some positive effects and some risks will be negatively correlated. Concerns about urban storm water drainage capacity for example will be offset by household rooftop water harvesting.
When doing your assessment consider the the unintended consequences. Map it against a number of scenarios. Consider the consequences of the models being incorrect. Consider how the risk compares to other risks? Consider time factors. Where can you afford to wait and where do you need to take action right away. Have a framework in which to manage it and be prepared to adapt and iterate. In this way you can make sensible, informed decisions and will be able to adapt to changing circumstances.
And some final advice for the climate change industry. It's time to treat climate change like we do any other issue - costs versus benefits. Not because of the financial crisis but because it makes sense. A lot of the proposed adaptation and mitigation strategies do make economic good sense and should be done regardless of the eventual impact of climate change.century relative to 1980-89
So cut out the rhetoric and the scare tactics. Sell us the benefits and outline the true costs. But don't speak in platitudes and don't exaggerate because you'll lose us and we won't come back. And we'll all be poorer for that.
In February 2007 a report was released entitled The Business of Climate Change: Challenges and Opportunities. The report discussed the climate in 2100, documented economic and financial projections, and likely mitigation and adaptation costs several decades into the future. It included a range of possible values for a tonne of carbon tonne in 2050. The report authors are highly credentialed and referenced what look to be the best contemporary scientific knowledge including the recognised global expert body the Intergovernmental Panel on Climate Change.
So what?
Well, the report was written by Lehman Brothers. Eighteen months later Lehman Brothers is no more. They were happy to make predictions and provide advice about the climate and the financial markets 90 years in the future but were unable to predict their own demise a little over one year later.
Of course this doesn't mean the report is wrong. But it doesn't mean it is right either. And certainly their ability to take advantage of whatever opportunities might have been available is now.....somewhat diminished.
But I digress. The executive summary of the report states, in relation to climate change:
Firms that recognise the challenge early, and respond imaginatively and constructively, will create opportunities for themselves and thereby prosper. Others, slower to realise what is going on or electing to ignore it, will likely do markedly less well.
On this point I think they are absolutely right, particularly if, by imaginatively and constructively, they include the decision to do nothing. I'll come back to that in a moment.
On climate change collectively we seem to be experiencing a variation on the five stages of grief - denial, anger, bargaining, depression, acceptance. Your interpretation of the stages depend on your point of view. Climate change sceptics for example might see the denial stage as the acceptance stage and vice versa. I'm not trying to create a new management consultancy model, I'm merely suggesting that the climate change debate has moved into a new stage. Lets call it the cold hard reality stage. For some this might be called the bargaining stage. Again, depends on your perspective.
The reaction to recent financial events suggests that the commitment to climate change action is a mile wide and an inch deep. When faced with the choice between future, uncertain risk represented by climate change, and certain risk that is happening right now then it would appar that there really is no choice. Our responsibility to the future diminishes when we must focus on shoring up the present. Commentators can gnash their teeth all they want about the shallowness of such a view but they are wasting their time. It is who we are. And it is not going to change.
The honeymoon for the climate change industry is well and truly over. That's bad news for some of them but good news for the rest of us. The opportunity to bring the debate and the discussion back to a a more sensible level should be welcomed by all parties.
In the booming economic times we have recently experienced a more wistful approach to issues like climate change inevitably emerge. Our basic and luxury needs are met, we can afford to focus on our spiritual and moral concerns. In less certain times such as these, long term risks are ignored in an effort to deal with the here and now. The correct approach lies somewhere in the middle. It is the analogous to how people deal with risk. High impact, low probability events are underestimated at the point before they occur and overestimated immediately afterward.
The current financial crisis has pushed climate change off the front page but it will be back and hopefully a bit chastened. What is needed is a rational, evidence based assessment process that cuts through the rhetoric.
Tom Roper former Victorian Minister for Planning and Environment and State Treasurer and now an active advocate for environmental and climate change issues, recently told the Age.
Victoria had to plan for a two-metre sea level rise and "if it's less than that, we can all be thankful". "I don't think, certainly in Australia, we have thought through what up to two metres of sea level rise will actually means in terms of our major cities".
Try this, it's fun. Replace two with ten in that passage. Have we thought through what up to ten metres of sea level rise will actually mean in terms of our major cities. How about twenty? Have we thought that through? Probably not.
Let me explain why I'm being so flippant. According to publicly available information from the IPCC and CSIRO, global sea levels are set to rise by up to 60cm if you just take into account the model projections, and, up to 80cm if additional contributions are included due to ice sheet dynamic processes. This is for the last decade of the 21st century - 2090 to 2100 . These figures are the top of the range projections for the last decade of the 21st century relative to 1990. In other words, worst reasonably foreseeable case in 80 to 90 years. If its 80 cm why call for a planning figure of 2m? I don't get it.
This is not a skeptical rant about climate change being a hoax. The vast body of expert evidence suggests that it is real and therefore the only rational response is to accept it and take action. But taking action does not mean going off half cocked. It means having an evidence based approach to understanding the potential risks, measuring their impacts - primary, secondary, tertiary etc - and formulating sensible strategies to mitigate or adapt.
Every decision brings with it unintended consequences. If you introduce a 2 m planning level for an 80 cm problem then there will be a few people that will be upset about it. Such as existing property owners whose land value will head rapidly south perhaps to zero, when the market realises that the utility of that land is now significantly reduced. Insurers will restrict or refuse cover to their assets. Governments and businesses will choose to not replace, maintain or extend essential infrastructure such as drainage, water or electricity.
And if its is 90 years away can't we wait a bit longer and see how the sea level actually rises compared to the theoretical models before committing to policies that will have profound impacts on property values and public infrastructure?
Climate change presents risks. It also creates opportunities for the informed. We tend to overreact to risk or perceptions of risk. Just witness the behavior in the financial markets. People have lost and gained fortunes depending on their view of risk and their willingness to act on it Businesses and governments that understand climate change risk and opportunities can exploit them and gain a competitive advantage over those that don't. They can also avoid making uninformed or rash decisions through the influence of the soaring rhetoric of those with a particular agenda.
True understanding requires a balanced view of existing and future risks and a consideration of the likely actions of others.
Sit down and do a formal risk assessment and you will soon come to a few key realizations.
Firstly that issues such as population growth, economic turmoil, infrastructure investment deficits and demography will have a far more profound impact on the near and medium term future than a changing climate. In fact the biggest short term risk posed by climate change to the economy and society is the emissions trading scheme, an artificial man made construct rather than a change in climate.
Secondly in all the commentary about climate change and the potential impacts there seems to be a view not just that the future is far too risky but that so is the present. The notable characteristic of climate change is that it amplifies existing risks. There will be increases in frequency and intensity of flooding, bushfire, windstorm but in most cases the increases are incremental rather than catastrophic. These risks are already with us but the big ones only hit only once every twenty, thirty or a hundred years. We know this and we are fine with it. Why would we think that an incremental increase would render them a total disaster?
An example. A dry hot climate will lead to a reduction in soil moisture content and cause problems with building foundations and underground infrastructure. Pardon me but isn't the soil already as dry as a dogs biscuit. Lets not get carried away with what the future might hold when it is already here and on reflection, not all that bad.
Thirdly. It's not all bad news. There are some positive effects and some risks will be negatively correlated. Concerns about urban storm water drainage capacity for example will be offset by household rooftop water harvesting.
When doing your assessment consider the the unintended consequences. Map it against a number of scenarios. Consider the consequences of the models being incorrect. Consider how the risk compares to other risks? Consider time factors. Where can you afford to wait and where do you need to take action right away. Have a framework in which to manage it and be prepared to adapt and iterate. In this way you can make sensible, informed decisions and will be able to adapt to changing circumstances.
And some final advice for the climate change industry. It's time to treat climate change like we do any other issue - costs versus benefits. Not because of the financial crisis but because it makes sense. A lot of the proposed adaptation and mitigation strategies do make economic good sense and should be done regardless of the eventual impact of climate change.century relative to 1980-89
So cut out the rhetoric and the scare tactics. Sell us the benefits and outline the true costs. But don't speak in platitudes and don't exaggerate because you'll lose us and we won't come back. And we'll all be poorer for that.
Monday, November 10, 2008
Risk management the new whipping boy
While our biggest public companies line up to accept the government handouts (i.e. our tax money) that arose from the Black Swan that just occurred in the financial markets we are glibly told of the reasons why.
"Our risk management was not up to scratch".
As if it was all down to a imperfect process or the shortcomings of a single role. The reasons are many and complex and clouded by political ideology. But this was no Black Swan. It was preventable and it was predictable. A simple debt boom.
Too much borrowing fueled by cheap money and moral hazard from too many prior bailouts. Any financial company not willing to play the game gets left behind in the run-up. So the choice is play the game or get out. Prudent companies and individuals saw what was coming a long time ago and developed plans to deal with it. They cashed out, reduced their debt and waited.
Understanding risk (and being willing to act) can give you a huge competitive advantage in normal situations but it is a matter of survival in times like these.
Thursday, October 2, 2008
The future of risk management
Risk management is an immature discipline. In my view the current practices are far too focused on reporting, compliance and relatively minor operational matters. Major risks - those that happen infrequently but have a huge impact are not as well managed as they should be. Strategic risks, major operational risks and project risks. That's where the value lies.
Thursday, June 19, 2008
Property Risk Management
I presented at the Institute of Chartered Accountants Property Day in Melbourne on 16 June. The feedback I got from the session was suitably cryptic - e.g "relevant", "not relevant to my area". Property risk management is a very broad field and the risks vary considerably depending on your position in the property world - tenant, owner, manager, investor. Have a look through the slides and email me if you have any questions: andrew@cirk.com.au
Tuesday, March 25, 2008
The value of risk management
I don't pretend to understand the unbelievable complexity of the global financial market. From what I've been reading, nobody does.
Wednesday, February 20, 2008
Alliance Contracting - Risks in the TOC
I recently presented at the Alliancing Association of Australasia forum at the Stanford Hotel in Melbourne. Alliancing contracts create some interesting risk allocation permutations and require some critical thinking around risk management and, in particular, the cost benefit of certain insurances.
Thursday, January 31, 2008
If you take risks you need to have risk management
The recent meltdown of the US sub prime loan market and the Société Générale rogue trader losses, although perhaps only loosely connected, highlights some issues around the value of risk management.
Most organisations pay lip service to their risk management functions. They see it as a compliance/assurance activity largely focussed on protecting boardmembers. Nothing wrong with that. Why should someone have to risk all their assets for helping to run a company? However it becomes a problem when it is only about that because people tend to then focus on reporting and process and lose focus on getting to the heart of the key risks. And in doing so they actually make the directors more exposed.
Evidence based risk management cannot defeat power. When risk matters are routinely overridden because of "commercial reasons" the enterprise gets a whole lot riskier. A wonderful example of this is the role of the Risk Assessment and Control department of Enron, entertainingly detailed in The Smartest Guys in the Room.
An enterprise risk management system can be effective when it doesn't drill down too far. Concentrate on where the big risks are and let the others take care of themselves. And I mean really concentrate.
Most organisations pay lip service to their risk management functions. They see it as a compliance/assurance activity largely focussed on protecting boardmembers. Nothing wrong with that. Why should someone have to risk all their assets for helping to run a company? However it becomes a problem when it is only about that because people tend to then focus on reporting and process and lose focus on getting to the heart of the key risks. And in doing so they actually make the directors more exposed.
Evidence based risk management cannot defeat power. When risk matters are routinely overridden because of "commercial reasons" the enterprise gets a whole lot riskier. A wonderful example of this is the role of the Risk Assessment and Control department of Enron, entertainingly detailed in The Smartest Guys in the Room.
An enterprise risk management system can be effective when it doesn't drill down too far. Concentrate on where the big risks are and let the others take care of themselves. And I mean really concentrate.
Tuesday, January 1, 2008
The Future Will Take Care of Itself
There was a futurologist (is that their name) on the TV this morning opining on what is in store for society for 2008 and beyond. He was ambitious. He predicted all the way out to 2050 with remarkable certainty. My turn to make a prediction. He will almost certainly be wrong and he will never be called to account. That is the beauty and the weakness of the prediction industry and one of the reasons companies shouldn't plan too far ahead. Events are far too complex to predict with any kind of certainty. The winners are those that get lucky. Of all the globe shifting events that have occurred in the past 50 years - September 11, the collapse of the USSR, the rise of China and India etc - who predicted them? These events - described by Nassim Nicholas Taleb as Black Swans, - drive history but are near on impossible to predict.
It is one of the reasons why we should all calm down a bit when it comes to climate change. If there is a more complex system than the world's climate then I'd like to know what it is. And yet we have people predicting with absolute certainty what the weather will be like in 50 years. When I hear an opinion on climate change I do what Deep Throat suggests - "follow the money". Sensible people and organisations stress the uncertainty inherent in modelling climate change. An iterative risk management approach is requried which means making adjustments as the science gets better and the actions of individuals, organisations and countries demonstrates what can be done while changign the future before it occurs. Overreacting to the climate change risk could waste precious resources making it doubly harder to adapt to changes that are now seen as inevitable.
It is one of the reasons why we should all calm down a bit when it comes to climate change. If there is a more complex system than the world's climate then I'd like to know what it is. And yet we have people predicting with absolute certainty what the weather will be like in 50 years. When I hear an opinion on climate change I do what Deep Throat suggests - "follow the money". Sensible people and organisations stress the uncertainty inherent in modelling climate change. An iterative risk management approach is requried which means making adjustments as the science gets better and the actions of individuals, organisations and countries demonstrates what can be done while changign the future before it occurs. Overreacting to the climate change risk could waste precious resources making it doubly harder to adapt to changes that are now seen as inevitable.
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