PRMIA Intelligent Risk - October, 2021

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INTELLIGENT RISK knowledge for the PRMIA community

October 2021 ©2021 - All Rights Reserved Professional Risk Managers’ International Association



Steve Lindo


Editor introduction

Principal, SRL Advisory Services and Lecturer at Columbia University


Using risk intelligence to uncover opportunities for growth by Camms

Nagaraja Kumar Deevi


Managing Partner | Senior Advisor DEEVI | Advisory | Research Studies Finance | Risk | Regulations | Digital

Central counterparts margin models, procyclicality and clearing members - by Anne Job de Lescazes


COVID-19 and Fed emergency facilities by Ashish Deccannawar


Regulation of climate risks: from problem statement to solution steps - by Aleksei Kirilov & Valeriy Kirilov


Sustainability linked financing – a step in the right direction to address esg issues! - by Vikram Nath


Future of risk enterprise: toward growth and competitive advantage in financial institutions by Vijayaraghavan Venkatraman & Pradipta Niyogi


How zero-washing undermines the impact of net zero investment portfolios - by Tamara Close


PRMIA volunteer spotlight, Emil Nysschens by Adam Lindquist


PRM™ Spotlight - Ken Radigan


2021 PRMIA Risk Leader Summit


Calendar of events

SPECIAL THANKS Thanks to our sponsors, the exclusive content of Intelligent Risk is freely distributed worldwide. If you would like more information about sponsorship opportunities contact




Intelligent Risk - October 2021

editor introduction

Steve Lindo Editor, PRMIA

Nagaraja Kumar Deevi Editor, PRMIA

In this October issue, PRMIA’s Sustaining Members and Sponsors contributed a diverse set of articles, as the COVID-19 pandemic continues to disrupt communities across the world and global economy recovery efforts are slowing down. The economy may well remain fragile and continue to struggle to regain prepandemic levels until the vaccination rate hits much higher levels. The WHO’s global COVID-19 vaccination strategy aims to get 70% of the global population vaccinated by the year 2022. The global economic growth and recovery is taking place in developed and developing nations. Overall, developed nations have invested over 28% of their GDP in recovery, compared to only 1.8% for the least developed countries. Despite the headwinds created by the Delta variant, the US economy is recovering and overall GDP growth in Q2 has surpassed pre-pandemic levels. The strength of economic growth during the pandemic is attributed to the enormous legislative response in the last few quarters, including the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the Consolidated Appropriations Act, and the American Rescue Plan Act. Based on these all-out efforts, U.S. economic growth targets 5.6% GDP growth in 2021 and an expected decline to 4.4% GDP growth for 2022. We continue to acknowledge the valuable contributions from our authors, for taking time out of their complicated work-life situations during these challenging times to share their thoughts, which range from the future of risk and compliance in financial institutions, to using risk intelligence to uncover growth opportunities, lessons learned from the 2008 market crisis, climate risk regulation, sustainability-linked financing, investment carbon zero-washing, the resiliency of central counterparties and Fed emergency procedures. We thank this issue’s authors for their thoughtful contributions and extend this wish to the PRMIA community for the upcoming holidays: continue to be cautious and follow all health safety guidelines.

Intelligent Risk - October 2021


our sponsor

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Intelligent Risk - October 2021

using risk intelligence to uncover opportunities for growth

by Andrew Cutter So often negative perceptions about risk management have needed to change. It’s astonishing how many C-suite executives still see risk management as a mandatory checkbox-ticking exercise by a department whose function it is to aggregate risk data and generate reports on it. The risk management function historically focused on responding to issues, developing worst-case scenarios, and bringing visibility to the organization’s mistakes and problems. It’s easy to see how organizations developed a negative perception of risk management. However, in order to drive organizational success and enhance performance, business leaders need to redefine the risk management function and unlock its potential to uncover new opportunities. By using tools and methods that are already familiar to risk managers — the same functions that have protected organizations from risk for decades now, can also be critical to delivering more useful business intelligence for the C-suite. Hidden within the sea of risk management data is an expansive view of the business landscape – one that includes not only risk, but also new possibilities and opportunities. Risk managers are already equipped with the skillset to aggregate the information and spot trends and can therefore use the data to detect process efficiencies and identify opportunities for growth. They can help the C-suite to take calculated risks, design better-informed strategies and pursue opportunities so the organization can perform at its best.

reframing the role of risk management Before the risk management function stands ready to fulfill its role as strategic consultants to the C-Suite, it must have a best practice framework in place to ensure the necessary data is being captured. To create a mature risk management program, risk teams must form relationships with business leaders across the enterprise to ensure that risk is front of mind in every department. They must consult with teams across compliance, information technology, cybersecurity and legal to ensure there are no grey areas and that risks from all departments feed into a central repository.

Intelligent Risk - October 2021


Capturing data in a consistent way is also a prerequisite for risk management functions to add more value. Historically risk management processes and systems have grown organically to meet requirements and have often left businesses with disparate and siloed systems. Teams must use technology to amalgamate the data into a central platform to build a holistic view of risk. In a recent webinar we held with thought leader and GRC pundit Michael Rasmussen he commented, “The greatest challenge for compliance right now is managing change and keeping all that change in sync – from legal and regulatory change, to changes in the external risk environment, as well as changes to the internal business environment”. As Michael alludes to, it is clear to see the number of risks has grown, and risk types have become more diverse, heavily affected areas include regulatory environments, third-party risk and cyber threats. A Risk Manager’s goal is to centralize this data to enable comparison of results and identify potential impacts, trends and opportunities.

creating a positive view of your risk management team For risk management teams to unlock their potential and become trusted informers to the C-Suite, the overall perception of risk management needs to be reframed. This positive view must be recognized and acknowledged by senior business leaders in order to echo throughout the organization. Risk management teams already hold invaluable amounts of data across departments relating to business operations. Once the C-Suite sees values in this data they will want even more! Risk management thought leader and OCEG fellow Norman Marks also believes there could be a richer role and brighter future for the risk management function. In a recent webinar he spoke about a chief risk officer he knew who changed the name of his department from “risk management” to “decision support.” This simple reframing of the department’s image conveyed how much more his risk managers could do for their organization. Norman added, “Too often the risk team is seen as the department of ‘No’, the department that quite literally stops people from doing what they want to do and diverts them from what they see as running the business.” Often, boards and C-Suite leaders focus on the big picture, while risk and compliance contribute at only an operational level, inhibiting the value of risk management teams. This is why studies consistently show that “80% of executives think of risk management as a compliance activity,”1 and only 3% of executives and board members see risk management as vitally important to setting strategy.

1 /


Intelligent Risk - October 2021

Once business leaders begin to see the hidden value in risk management these figures are likely to pivot over the coming years. Executives and board members would benefit from greater awareness of how risk management tools, models, language and techniques could contribute to strategic planning and corporate goal-setting. With this awareness, their organizations could derive greater value from the expertise and information already resident in their risk management departments. Giving leaders the opportunity to exploit risk intelligence to drive success and accelerate growth.

expanding risk management’s role into strategy Risk management teams are often separated from strategic board meetings, but striking advantages emerge when they’re closely linked. Risk managers are often viewed as enforcers — whose findings enforce rules and inhibit action — but risk teams could be identifying strategic advantages and opportunities as well. Risk management data is essentially business intelligence – and it isn’t all doom and gloom. Within that data risk teams can help uncover new opportunities and identify risks worth taking. Making use of risk intelligence provides leaders with a realistic real-time view of the current status of the business, so they can make informed decisions that guide their strategy.

supporting strategy, tracking outcomes Without monitoring your strategic goals & metrics, it’s impossible to know if an organization is on track to achieve its strategy – or if it needs to shift its focus. Risk managers’ skills can be as readily applied to measuring progress toward goals as they are to identifying risk and uncovering opportunity. This is why risk management should be linked to strategy and become an integral part of the strategic decision-making process. Executive boards should work more closely with risk managers to build the intelligence that will drive the strategic direction of the organization and drive assured decisions backed up by facts. Armed with the right tools, risk teams can not only identify opportunities for process efficiencies and growth, but also make predictions about the future by assessing likelihood and impact.

Intelligent Risk - October 2021


driving new insights The importance of linking data and process so organizations can derive the greatest possible value from risk and compliance data has never been greater. Camms has helped its clients achieve business success by linking their data and processes so that corporate strategy, risk intelligence and compliance can reside on a single platform. This unified approach to GRC provides leaders with insights and opportunities to identify the connections that inspire new competitive strategies and goals. Sharing intelligence on integrated GRC platforms in this way ensures alignment of corporate strategies, policies and risks, and elevates organizational performance to gain competitive advantage. To learn more about how Camms Risk can help link your corporate strategy to your strategic goals visit and request a demo.

author Andrew Cutter Vice President North America at Camms Andrew is a leader in enterprise transformation and has deep domain expertise in Governance, Risk and Compliance. He previously worked for 15+ years at GE Capital Corporation and led transformation across large global Internal Audit, Internal Control, and Compliance teams.


Intelligent Risk - October 2021

central counterparts margin models, procyclicality and clearing members

by Anne Job de Lescazes CCP resiliency within COVID-19 crisis, a lesson learned from 2008 market crisis The UK HMT1 provides a clear and elegant definition of Central Counterparties (CCPs): “financial institutions which firms use to reduce risks that arise when trading with others on financial markets. They provide more certainty than specific types of financial contracts, including derivatives, will, if cleared through the CCP’s services, be honoured if one of the counterparties to a trade were to default.” In other words, CCPs are designed to bring down counterparty risk. They help to ensure that financial markets are both safer and more efficient. Following the financial crisis in 2007-08, where CCPs confirmed their essential role of market stability cornerstone, regulators, upon G20 request, extended the derivative contracts perimeter to be ‘cleared’ processed by a CCP (EMIR, Dodd-Frank Act). Parallelly, they published standardized principles to ensure that CCPs were well prepared and resourced to fulfil their increasing accountabilities (PFMI)2, complemented by numerous additional guidelines3. As a likely result of this worldwide effort to improve market resiliency against unavoidable crisis, CCPs, in particular European ones, remained resilient through the COVID-19 crisis, due to effective Business Continuity Plans and robust margin models. Additionally, further ESMA 3rd EU-wide CCP Stress tests did not reveal any systemic Risk concerns in either credit, liquidity, or concentration scenarios4.

margin procyclicality versus sensitivity: trade-off is still to be found A robust margin model is doubtless key for financial markets stability. However, increase of margin calls during Q1 2020, brought reflexion about margin models procyclicality to the center stage. The latter is officially defined as follows: “mutually reinforcing interactions between the financial and real sectors of the economy that tend to amplify business cycle fluctuations and cause or exacerbate financial instability”5.

Intelligent Risk - October 2021


Too conservative margin calls, instead of safeguarding the financial market stability, would cause harmful liquidity stress for market participants. In other words, the medicine would be worse than the disease. Key findings of EACH survey carried out after the crisis6 were that global margin levels increase, which was observed in Q1 2020, were not due to margin model changes during the COVID-19 market turmoil, but as market volatility integration in margin models, as well as position volume increase over this period. One precision at this stage: margin requirements consist usually of two elements: Variation Margin and Initial Margin. On one hand, Variation Margin Requirements are reflecting the effective change of market price of a product and allocating resulting gains and losses among market participants; VM is thus, in aggregate, not removing liquidity form the systems but redistributing it.7 On the other hand, Initial Margins (IM), designed to cover potential future losses in the event of a clearing member default, can entail a procyclical effect while jumping in a sudden way in reaction to market volatility increase, consequently demanding from them additional liquid assets at the most difficult moment to source them. The regulators8, fully aware of these risks, gave the CCPs a choice between three AntiProCyclicality (APC) tools they had to integrate in their margin models. • Adding a 25% margin buffer on top of their computed IM • Assigning a 25% weight to observations of stressed periods in their historical scenarios • Ensuring that IMs were not lower than would be computed using a lookback period of 10 years. In addition, innovative APC measures are being elaborated, seeking to improve the balance of IM levels between sensitivity/reactivity and procyclicality, based for example on the use of a dynamic scaling factor9. Depending on their clearing services, CCPs IM models are adopting those 3 options in a quite equilibrated way10,while raising interpretation questions11. Parallelly, they keep enriching their margin framework with increasingly sophisticated APC measures.12, 13

consequences of IM frameworks changes facing clearing members APC measures are embedded in a more global mutation of CCP margin models implementation, moving from analytic methodologies like SPAN to a portfolio-based historical V@R / Expected Shortfall computations.14 Those improvements in CCP margin frameworks, while providing undeniable benefits to market members and global market stability, entail technical challenges for clearing members.


Intelligent Risk - October 2021

Auto-calibration: it no longer requires regular calibration work on interclass/ intraclass spreads to represent correlations. As a result, CCP operational risks are reduced. Margin models get more transparent. Scalability: it is more scalable and open to cross margining since the correlations are implicitly captured by times series of different risk factors. Therefore, it fully takes into account the effects of portfolio diversification in the context of multi-asset strategies. In addition to portfolio-based V@R the Initial Margins are often complemented with additional requirements, to capture aspects of liquidity, concentration and credit risk correlation between portfolio/collateral and position holders. As stated by the Bank of England15, no mystery that ‘market participants need to manage their liquidity in anticipation of potentially large margin calls in a stress’. This means being able, as EACH stresses, to predict the margin moves, by replicating margin models, as prices and margin parameters are deemed to be public.16 Even if this assertion is perfectly true, it should be kept in mind that depending on their size, and their margining process automation level, the clearing members are facing an increasingly complex implementation of margin models, requiring a higher level of investment and expertise as the historical and standardized SPAN methodology used to.17 This move is only one of a row of challenges that clearing members are facing, for which they may need carry out significant improvements in their daily risk margining process.18

references 1. HM Treasury: Expanded Resolution Regime: Central Counterparties, February 2021 2. Resilience of central counterparties (CCPs): Further guidance on the PFMI – jul 2017 The PFMI outlines 24 principles for FMIs and five responsibilities for authorities and provides “[f]or each standard ... a list of key considerations that further explain the headline standard. An accompanying explanatory note discusses the objective and rationale of the standard and provides guidance on how the standard can be implemented.” 3. Resilience of central counterparties (CCPs): Further guidance on the PFMI – Jul 2017 4. ESMA 3 rd EU-wide CCP Stress Test 13 July 2020 - ESMA70-151-3186 5. Committee on the Global Financial System, The role of margin requirements and haircuts in procyclicality 2010 6. EACH Paper – CCP resilience during the COVID-19 Market Stress, June 2021 7. The Bank of England’s supervision of financial market infrastructures December 2020

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8. Bank of International Settlements, (Avril 2012) Principles for financial market infrastructures, article n°3.6.10- Limiting procyclicality. 9. Lauren W. Wong and Yang Zhang, Procyclicality control in risk-based margin models 10. ESRB.report_200109_mitigating_procyclicality_margins_haircuts_in derivative markets and securities financing transactions_january 2020 11. EACH Paper – CCP resilience during the COVID-19 Market Stress June 2021 12. LCH SA FLR 2.0 Margin framework highlights, June 2021 13. CME, The SPAN2 Framework CME’s new margin methodology, April 26, 2021 14. SLIB White Paper 15. The Bank of England’s supervision of financial market infrastructures December 2020 16. EACH-Paper-CCP-resilience-during-the-COVID-19-Market-Stress-June-2021.pdf 17. Costas Mournelas, (September 2019), Span 2 : A fine balance, 18. SLIB White Paper

author Anne Job de Lescazes Marketing manager, SLIB Anne’s expertise lies in the area of risk, especially in clearing and counterparty risk, with 20 years experience as a senior consultant, functional architect, product owner in financial institutions like Société Générale and CIC Securities. She’s currently working as product marketing manager at SLIB and driving an innovative revamping of the Credit Risk Product Line. Anne is graduated from the Institut d’Etudes Politiques de Lyon and has a post-graduate diploma (DESS) in Organization and Protection of IT Systems.


Intelligent Risk - October 2021

COVID-19 and Fed emergency facilities

by Ashish Deccannawar abstract COVID-19 led to systemic liquidity crisis around March 2020. The Federal Reserve Board (Fed) took extraordinary efforts and reacted with a lightning speed to alleviate this exogenous shock. Fed created number of liquidity facilities under the section 13(3) of the Federal Reserve Act citing unusual and exigent circumstances. Each and every facility played a critical role in not only stabilizing the American economy but also leading to rapid recovery. The aim of this article is to provide view on effectiveness of these emergency facilities that stabilized the financial markets and highlight the key differences between 2008 financial crisis era facilities and COVID-19 related emergency facilities.

quicker announcement but lag in the operational details During the COVID-19 crisis the Fed re-introduced most of the 2008 crisis era facilities without taking much time. However, the Fed lagged in providing operational details on how these facilities can be used. Announcements of these facilities did provide the positive signal to the market; however, the initial phase of these facilities lacked guidance on operational implementation on these facilities. Banks in the initial phase struggled and were in the limbo on how they can implement these facilities to benefit the American economy.

reputational challenges associated with the facilities Fed Discount window lending facility is considered as lending of last resort and thus has a stigma associated with tapping into Fed’s discount window facility. One would wonder if the similar stigma is also associated with the Fed’s emergency facilities. Based on the 2008 Financial Crisis experience, it was clear that pretty much most of the large banks have drawn down on the Fed’s emergency facilities that were made available in the Financial Crisis. In the 2020 COVID-19 crisis, banks were likely to tap down on most of the facilities either to manage their liquidity or to achieve affordable funding compared to other expensive funding sources. But how banks reacted to these facilities and whether they draw down on these facilities or not is yet to be seen in the published data.

Intelligent Risk - October 2021


Based on the current available data and announcement from the Chair of the Federal Reserve, Jerome Powell, it is clear that banks are even encouraged to draw down on the discount window facility. Based on the March 2020 data, it was confirmed that discount window usage more than doubled in a two-week time (i.e., $11 Bn to $28 Bn). There is also anecdotal evidence where large US banks made announcements noting that they will be drawing down from the Fed’s discount window facility to reduce the stigma associated with it. Clearly, stigma associated with using these facilities did not deter banks from using these facilities to appease COVID-19 liquidity concerns.

Summary of facilities: The table below provides the summary of emergency facilities provided by the Federal Reserve Board.



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The section below covers details on some of the facilities that had significant impact on the markets. 1. Primary Dealer Credit Facility (PDCF) PDCF was introduced by the Federal Reserve Board (Fed) on 17th March 2020. The PDCF facility intended to allow primary dealers to support smooth market functioning and facilitate the availability of credit to the businesses and households. As of May 2020, there were around 24 primary dealers in the US that acted as trading counterparties to the New York Fed to support Federal Open Market policies, which include market making for fixed income securities and equities, bidding in the treasury auctions, etc. Primary dealers largely rely on the secured and unsecured funding from the financial markets with funding term ranging from short term (Overnight to weekly funding) to medium term (up to 90 days in funding); however, due to COVID-19 fears, Primary dealers faced challenges to rollover unsecured term funding in the market as investors were willing to lend in short tenor and were staying away from lending over 90-day tenor. The PDCF facility largely helped to alleviate the Broker-Dealer’s term funding concerns as they were allowed to pledge investment grade debt securities, Commercial Papers (CPs), municipal debts, and certain equity securities. The PDCF facility was also introduced in the 2008 Financial crisis; however, one major change in 2020 is that this facility allowed up to a 90-day term vs. 2008 when the PDCF facility allowed only the overnight funding to the primary dealers. In 2008, most of the primary dealers rolled over their overnight funding as PDCF facility was available from March 2008 till April 2009. Introduction of the term funding really helped Broker Dealers to maintain their Liquidity Coverage Ratio (LCR) as they could rely on the term funding over 30 days to count this as an outflow beyond 30-day LCR time horizon.

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Based on the Paper published by the Fed2, it was observed that peak usage of the PDCF facility in 2008 was ~40 billion vs. ~35 billion seen in April 2020. The introduction of this PDCF facility in 2008 helped in alleviating the market. Current evidence from 2020 data (as shown in the Figure 1) indicates that PDCF facility is following the same path of usage as of 2008. As shown in the figure 1, the 2020 PDCF facility just peaked within a month of the introduction indicates that it has its fair share in providing the credit to businesses and households and stabilizing the market. Figure 1 - PDFC loans outstanding, 2008 vs. 2020

Source: Federal Reserve form H4.1 Note: This chart represents the weekly average of daily loans made at the PDFC.

2. Commercial Paper Funding Facility (CPFF) CPFF was introduced by the Federal Reserve Board on 17th March 20203. The CPFF facility intended to support smooth market functioning and to provide liquidity backstop to the commercial paper market. COVID-19 - 2020 Usage: Companies use commercial papers as a short-term funding vehicle to run the businesses. The COVID-19 crisis led to the dislocation of the commercial paper market, which made commercial paper issuance illiquid and expensive. Based on the anecdotal experiences, investors were willing to extend the credit mostly on the overnight basis, and firms were struggling to raise funding over longer horizon. The Federal Reserve stepped in to backstop this market and started purchasing the commercial papers through this facility. This facility alleviated the market’s liquidity concerns, but the funding through this facility still remained at the elevated levels. Generally, high credit quality firms are able to access this market, as investors for the commercial papers are mostly prime money market funds, who seek to invest in short- term high quality assets. Clearly, Fed’s action to introduce CPFF facility worked really well and reduced the panic in the unsecured funding from Commercial papers. Based on the comparison to the financial crisis of 2007-2009, facility introduced in COVID19 had limited usage, however COVID19 facility helped the market to achieve return to normal conditions4. 016

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3. Money Market Mutual Fund Liquidity Facility (MMLF) The Federal Reserve Board announced the introduction of MMLF on March 18, 2020, but the actual facility became effective on March 23, 2020. The MMLF facility intended to improve liquidity in the market and to stabilize the outflows from the panic redemption of the prime and municipal money market funds by providing the liquidity back-stop to avoid “breaking the buck” scenario. Similar redemptions in these funds were also experienced in the 2008 financial crisis and in the 2011 European Debt Crisis. In response to the similar behavior seen in 2008, Federal Reserve Board had introduced Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) on September 18, 20085. In the Money Market Mutual Funds, investors can avail three types of Mutual Funds. First, Prime Funds that invest in short term debt instruments issued by corporates (non-financial) and financial firms. These short-term debts include products such as Certificate of Deposits (CDs), Commercial Papers (CPs), and floater (i.e., floating rate notes). Second, tax-exempt funds government-only funds (i.e., Muni Funds). Tax exempt funds invests securities issued by the state and local governments. These securities are also called as Municipal Securities or Munis. Third, taxable government-only funds. These taxable government funds invest in the securities issued by the US Government that includes U.S. Treasury and agency securities. At the peak of COVID-19, around March 2020, financial markets experienced liquidity shock. Investors concerned with the viability of the financial, non-financial and muni sector, started a panic redemption leading to the fire sell. This massive outflow in prime and muni funds looked for flight to quality and market saw inflows in the taxable government-only funds. See the graph below6 in Figure 2; at the peak of COVID-19, there was outflow from the redemption from Prime and Muni funds but with the introduction of MMLF facility (vertical black bar), prime and Muni MMFs stabilized with investor buying in these funds. Figure 2 - Domestic Prime and Muni MMF decline and rebound

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4. Paycheck Protection Program Liquidity Facility (PPPLF) PPPLF was announced by the Fed on 9th April 2020, but the actual launch of this facility happened on April 16th, 2020. Unlike other facilities, PPPLF was unique to the COVID-19 crisis and there was no comparable facility introduced in 2008 financial crisis. With the news of rapid spread of COVID-19, the US government took the swift action of shutting down the economy. As the ever-booming economy came to a sudden halt, it brought in several economic challenges. Several small- and medium-sized businesses in a service industry were particularly hard hit. With no revenue due to complete shut-down, it was challenging for them to keep employees on the payroll, pay rents and utility bills. Additionally, the credit market literally froze to these small and medium sized businesses, as banks were hesitant to extend credit due to COVID-19 uncertainties. In response to this situation, the Fed in collaboration with the Small Business Administration (SBA) announced the PPPLF to cover the payroll, mortgage/rent, and utilities cost. The whole point of this facility was to encourage liquidity constraint banks to support PPP loans to make credit available to small and medium sized businesses, which will spur the business activity in the US market PPPLF effectiveness There are several anecdotal incidences on how PPP loans got abused but at large these loans achieved the intended objectives of generating credit and liquidity to the small and medium businesses to avoid insolvency. Initially, the PPPLF was only intended to the Banks which later got extended to the non-banks and financial technology (“Fintech”) firms. The liquidity facility provided by the PPPLF was crucial to the success of the PPP loans. This facility essentially took out the counterparty default risk, liquidity risk and market risk from the financial institution’s lending profile and essentially provided them with a fee income for underwriting the PPP loans. As seen from the Figure 37, the PPP loans reached several industries, but one could argue that these loans were not distributed equally raising the question regarding equality. Figure 3 - PPP Loans based disbursed as per the NAICS code

Sources: Paycheck Protection Program (PPP) Report, Small Business Administration; Census Bureau, Statistics of US Businesses


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summary Clearly, emergency actions and facilities announced by the Federal Reserve Board to fight the 2008 Financial Crisis and COVID-19 liquidity crisis worked very well. There won’t be any surprise if the Federal Reserve Board announces the similar facilities in the future crisis as these actions have a proven track record to stabilize the liquidity crisis.

references 1. only AAA-rated securities are accepted: commercial mortgage-backed securities (CMBS), collateralized loan obligations (CLOs), and collateralized debt obligations (CDOs). Other eligible securities as specified above are accepted if rated investment grade (such that BBB- securities and above). Specifically, investment grade commercial paper is accepted: commercial paper rated both A1/P1 and A2/P2.

2. Published article in Liberty Street Economics – Federal Reserve Bank of new York refers to the peak use of PDCF facility in 2008 and in 2020 (Mid-March to end of May).

3. 4. Nina Boyarchenko, Richard Crump, and Anna Kovner, “The Commercial Paper Funding Facility,” Federal Reserve Bank of New York Liberty Street Economics, May 15, 2020,

5. Michael J. Fleming, “ Federal Reserve Liquidity Provision during the Financial Crisis of 2007-2009,”Federal Reserve Staff Reports, July 2012’

6. Marco Cipriani, Gabriele La Spada, Reed Orchinik, and Aaron Plesset, “The Money Market Mutual Fund Liquidity Facility,” Federal Reserve Bank of New York Liberty StreetEconomics, May 8, 2020,

7. Data sourced from Paycheck Protection Program (PPP) Report, Small Business Administration; Census Bureau, Statistics of US Businesses (SUSB)

author Ashish Deccannawar Ashish Deccannawar is a Senior Manager at one of the top 10 largest Banks in the U.S. and leads Liquidity Strategy and Governance function for their Consolidated U.S. Operations. Ashish is an expert in Liquidity risk, and Bank’s balance sheet management functions. Prior to his current role, he worked as a Senior advisor at one of the Big four consulting firms advising Global Systemically important Banks (G-SIBs). Ashish has extensive experience in advising US and foreign Banks in the Liquidity Risk space. Topics of his interest include Liquidity Stress Testing, Cash Flow Projections, Fr2052a reporting, Funds Transfer Pricing (FTP), and Net Stable Funding Ratio (NSFR). Intelligent Risk - October 2021


regulation of climate risks: from problem statement to solution steps

by Aleksei Kirilov & Valeriy Kirilov government response to climate change News headlines have been getting eerily monotonous lately with reports of floods, droughts and wildfires. This is happening everywhere: Canada, Germany, Russia, USA, etc. When making decisions, governments and corporations now have to take into account the risks of climate change. Until a few years ago, this problem was a topic for discussion only at scientific conferences. So, climate change is a reality today. What will characterize the process of climate change in the coming years and decades? Most likely, humanity will face the emergence of unexpected correlations, a pronounced non-linearity of many processes and the formation of positive feedback loops. The latter factor will lead to instability and the appearance of bifurcation points, after which the system will go into a fundamentally different state. An example is the possible change in existing ocean currents, which will drastically change the climate on all continents. How will governments and corporations respond to climate change? We will probably see inconsistent and ineffective actions. This will translate into changes in monetary policy, taxes, industry standards, accounting rules, etc. This, in turn, will cause fluctuations in the value of various assets, both industrial and financial, a revision of the strategy for placing manufacturing sites, volatility in commodity prices, and disruptions in the work of global supply chains1. An example is the plans of the European Union to unilaterally introduce additional customs duties on goods with a large carbon footprint. To the greatest extent, the inconsistency of actions will come to light during the transition period, while generally recognized international standards, criteria and methodologies are formed, as discussed below.

climate metrics Let’s first try to define the risk of climate change. Climate change risk or climate risk is the risk of losses arising from adverse natural phenomena caused by climate change and affecting the environment (for example, rising sea levels), engineering infrastructure (for example, a dam), business processes (for example, supply chain operations) and people. 1 / How vulnerable supply chains are to the slightest external influences could be observed in the past and this year, see Aleksei Kirilov, Valeriy Kirilov. Impact of the pandemic on global supply chains. Intelligent Risk (PRMIA), April 2021,


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When assessing climate risks, an integrated approach will be needed, including an assessment of the likelihood of destruction or damage to infrastructure and agricultural facilities, such as a railway, a vineyard, as well as to social units, such as a city. In addition, it will be necessary to quantify the resulting financial losses. This significantly complicates the methodology for assessing climate risks compared to financial ones. To ensure unified approaches to climate risk management, it is necessary to develop a unified international classification of climate risks and metrics of these risks. The meteorological models existing today mainly focus on the integral characteristics of climatic parameters: the average temperature of the atmosphere, the average temperature of the ocean, the rise in ocean water level, etc. Can regulators today require market participants to quantify the risks of climate change using these parameters? Yes, it is possible, but only at a basic level, using scenario analysis and stress testing tools. Such estimates will be approximate and only for short time horizons. However, a quantitative assessment of the risks of climate change is possible on a fundamentally different basis, providing for the formation of long-term forecasts for individual regions and countries on the basis of modeling.

the climate data challenge The development of models to quantify the risks of climate change will require the collection of a large amount of data for countries and regions, including not only meteorological parameters, but also geophysical, geological, demographic, agricultural, infrastructural, etc. Such data are required for all countries and regions, due to the planetary nature of climate change. Another big task is the collection of data on the state of the world’s oceans and atmosphere. For example, recently, due to the increase in the concentration of carbon dioxide in the atmosphere, the acidity of ocean water has begun to increase. This can lead to unpredictable consequences for the flora and fauna of the ocean. Note that, in parallel, it is necessary to develop generally accepted standards for collected data. This is due to the need to combine data from different jurisdictions and scale the simulation results. In addition, it is necessary to create a publicly available data warehouse that will be used by all stakeholders: regulators, governments, corporations, rating agencies, modelers, etc. Currently, detailed information on meteorological, geophysical, infrastructural and other parameters required for modeling and assessing potential losses from climate risks in different countries is not available to any organization. Today, no organization or company has either such data or a sufficient number of trained specialists who could analyze such data. For the purpose of a uniform approach to assessing climate risks and preventing erroneous decisions, it is necessary to create an international body whose assessments and decisions would be recognized by all countries and companies. Let’s call it conditionally the Climate Change Risk Management Agency (CCRMA). The legal details of the creation of such an Agency are beyond the scope of this article and deserve a separate study. Such an Agency would take over and coordinate all of the above tasks: developing a climate risk classification, developing standards for collecting initial data, collecting and verifying data provided by other parties, creating a data warehouse, developing and validating models for assessing climate risks. Additionally, the Agency could conduct an assessment of the impact on the climate of individual companies and states. Intelligent Risk - October 2021


This is a very necessary, but very difficult task, both from a technical and legal point of view. This problem is already causing very heated discussions, for example the intention of the European Union to impose an additional environmental tax on goods imported into its territory. The tax should be higher for products with a high carbon footprint.

risk managers can play a key role The establishment of the CCRMA is currently one of the key tasks in developing a framework for managing these risks, because it is impossible to manage what today cannot be measured and predicted on a global scale. Furthermore, the key role in the Agency’s work, in our opinion, should be played by risk managers, with the involvement of subject matter specialists in meteorology, ocean physics, engineering infrastructure, demography, etc. It is risk managers who are able to consolidate a huge amount of diverse data and then transform this data into quantitative and probabilistic estimates based on modeling. The results obtained will then require the adoption of coordinated measures at the international level, including coordinating monetary policy by the central banks of many countries. Based on these prerequisites, it is advisable to create and start the Agency’s activities on the basis of the Bank for International Settlements (BIS) https:// BIS has established itself as an independent objective international organization that has developed many regulatory documents on risk management. International professional associations of risk managers could take the most active part in the creation and work of the CCRMA. For the first time, modern civilization is faced with the need to create methods of adaptation and counteraction to planetary changes. People have not yet had the experience of such activities. The concerted and coordinated actions of governments and corporations on all continents will not only reduce the impact of climate risks but will also allow the knowledge gained to be applied in ensuring the further progressive development of humankind as a single community.

authors Aleksei Kirilov Partner, Conflate LLC Conflate is a Russian management consulting company specialized in strategy, risk management, asset management and venture investment. As the partner of Conflate, Aleksei is responsible for asset management and venture investment. He specializes in the US stock and debt markets. Aleksei has more than 15 years of experience in financial services including development of financial strategy and financial KPI, liquidity management; controlling system, allocation of expense on business unit, financial modeling and debt finance. He has cross industries experience: banks, oil & gas manufacturing, real estate.


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Aleksei has an MBA from Duke University (Fuqua School of Business), a financial degree from Russian Plekhanov Economic Academy and an engineering degree from Moscow Engineering Physics Institute.

Valeriy Kirilov General Manager at Conflate LLC Valeriy is the General Manager at Conflate LLC. He has 15+ years’ experience in risk management and management consulting (BDO, Technoserv, then at Conflate). Besides he previously worked in the nuclear power industry (safety of Nuclear Power Plants). Valeriy has an MBA from London Metropolitan University as well as a financial degree from Moscow International Higher Business School MIRBIS and an engineering degree from Moscow Engineering Physics Institute. He holds the PRM and FRM certifications and the certificate of Federal Commission for Securities Market of series 1.0. Valeriy was a member of the Supervisory board of the Russian Risk Management Society in 2009 – 2010.

Intelligent Risk - October 2021


sustainability linked financing – a step in the right direction to address esg issues!

by Vikram Nath introduction Environmental, Social and Governance (“ESG”) Risk has assumed an unprecedented importance over the last couple of years. Specifically, the ‘environmental’ aspect of the ESG risk has become a key criteria when it comes to investment/financing decisions for banks, insurance companies, asset management companies and other investors/capital providers. This environmental focus has accelerated in the aftermath of the 2015 Paris Climate Accord. As a result, companies with a poor ESG track record or a higher perceived ESG risk are facing difficulties in getting access to capital while companies considered good for the environment (e.g. solar/wind projects) are able to secure capital at a relatively lower costs, as the demand for such investments has increased substantially. Given that many industries (e.g. utilities, oil and gas production, cement etc.) cannot become ‘green’ overnight and are still required for the society to flourish, a new type of financial product may fit the bill as it envisages to address and mitigate the environmental concerns of potential investors.

sustainability linked financing Sustainability Linked Loan (“SLL”) and Sustainability Linked Bond (“SLB”) are growing into popularity, and a number of companies across industries have already availed this type of financing. Per a report1 compiled by Vinson and Elkins (one of the prominent law firms in the United States), there have been over 40 issuances of SLBs and SLLs globally during 2019-2021 (YTD). Unlike Green Bonds or Green Financing, which are mostly used in the context of pure renewables financing (e.g. solar/wind projects), SLLs/SLBs are industry agnostic and therefore could be used by any issuer provided they commit to the requirements of categorizing their financing as an SLL or as an SLB. The ‘use of proceeds’ from such SLL/SLB issuances is unrestricted and therefore these could be used for general corporate purposes, refinancing an existing debt or even for acquisition financing. The chart below demonstrates the growing popularity of Sustainability Linked Bonds/Loans along with other sustainable debt issuances since 2013.


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Figure 1 - Global Sustainable Debt Annual Issuance, 2013-2020

Source: Bloomberg2

Sustainability Linked Loan Principles (“SLLP”) and Sustainability Linked Bond Principles (“SLBP”) With the growing popularity of SLLs/SLBs, the tripartite organizations Loan Syndications and Trading Association (“LSTA”) in the United States, Loan Market Association (“LMA”) in Europe and Asia Pacific Loan Market Association (“APLMA”) jointly published the “Sustainability Linked Loan Principles3” in May 2020 that formed the primary guidance for issuing SLLs. On similar lines, the International Capital Markets Association (“ICMA”) also published Sustainability Linked Bond Principles4 in June 2020. The goal of SLLP/ SLBP is to promote the development and preserve the integrity of the sustainability linked loan product by providing guidelines which capture the fundamental characteristics of these loans. Sustainability linked loans are any types of loan instruments and/or contingent facilities (such as bonding lines, guarantee lines or letters of credit) which incentivize the borrower’s achievement of ambitious, predetermined sustainability performance objectives. The borrower’s sustainability performance is measured using predefined sustainability performance targets (SPTs), as measured by predefined key performance indicators (KPIs), which may comprise or include external ratings and/or equivalent metrics, and which measure improvements in the borrower’s sustainability profile. The SLLP/SLBP set out a framework, enabling all market participants to clearly understand the characteristics of a sustainability linked loan, based around the following five core components: 1. Selection of KPIs: The KPIs should be (I) relevant, core and material to the borrower’s overall business, and of high strategic significance to the borrower’s current and/or future operations, (ii) measurable or quantifiable on a consistent methodological basis and (iii) able to be benchmarked.

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2. Calibration of SPTs: The SPTs should be ambitious, i.e. (i) represent a material improvement in the respective KPIs and be beyond a “Business as Usual” trajectory (ii) where possible be compared to a benchmark or an external reference (iii) be consistent with the borrower’s overall sustainability / ESG strategy (iv) be determined on a predefined timeline, set before or concurrently with the origination of the loan. 3. Loan Characteristics: A key characteristic of a sustainability linked loan is that an economic outcome is linked to whether the selected predefined SPT(s) are met. For example, the margin under the relevant loan agreement may be reduced where the borrower satisfies a predetermined SPT as measured by the pre-determined KPIs or vice versa. 4. Reporting: Borrowers should, where possible and at least once per annum, provide the lenders participating in the loan with up-to-date information sufficient to allow them to monitor the performance of the SPTs and to determine that the SPTs remain ambitious and relevant to the borrower’s business. 5. Verification: Borrowers must obtain independent and external verification of the borrower’s performance level against each SPT for each KPI (for example, limited or reasonable assurance or audit by a qualified external reviewer with relevant expertise, such as an auditor, environmental consultant and/or independent ratings agency), at least once a year. How can SLL or SLB have a meaningful impact on curtailing Green House Gas (“GHG”) Emissions? SLLs or SLBs are predicated on organizations committing to address any of the Environmental, Social and Governmental (“ESG”) issue(s). While organizations are free to choose which specific issues matter to them the most, an organization with a desire to address the environmental aspect can commit to reduce direct GHG emissions (also called as Scope 1 emissions as defined by United States Environment Protection Agency5 (“EPA”)). Per EPA’s Greenhouse Gas Reporting Program6, direct reported emissions for 2019 totaled 2.85 billion metric tons of carbon dioxide equivalent (CO2e). If these organizations commit to reduce their scope 1 emissions by 10%, it will result in CO2e emission reduction of 285 million metric tons. Per the EPA, a typical passenger vehicle emits 4.6 metric tons of CO2e per year. As such, a mere 10% reduction in just Scope 1 emissions by the reporting companies will equate to curtailing the GHG emissions from over 60 million passenger vehicles. What benefit can an organization realize by issuing SLLs/SLBs? Issuing an SLB or an SLL in the right earnest can result in several benefits for an organization. First such issuances will demonstrate a willingness on the issuing organization’s part to acknowledge ESG issues in general and climate/global warming issue in particular. In many cases, the capital providers are also willing to incentivize such organizations in-cash (i.e. better loan pricing) and/or in-kind (better loan terms) if they commit to certain ESG goals. For example, an energy company can reduce its loan interest expense by 50 basis points (0.5%) if it commits to certain ambitious ESG targets including a reduction of its Scope 1 and Scope 2 GHG emissions. 026

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In conclusion, SLB/SLLs can play an important role in addressing ESG issues in general and climate issues in particular. When aggregated over thousands of organizations, such Scope 1 and Scope 2 reductions would cause a meaningful decrease in the GHG emissions and everyone will stand to benefit by them.

references 1. 2. 3. 4. sustainability-linked-bond-principles-slbp/ 5. 6.

author Vikram Nath Vikram Nath works as a Managing Director in the energy direct lending group of Munich Re. Based out of Houston, Vikram’s core responsibilities include structuring and executing structured finance transactions in the energy space, lead and advise on the energy transition strategy for his business unit and serve as an integral part of the firm’s business development efforts. Vikram has over 10 years of experience in energy finance including his prior positions with Natixis and Credit Agricole Corporate & Investment Bank. Vikram has an MBA from Rice University, Houston and an undergrad degree in engineering from Indian Institute of Technology, Delhi. The views presented in this article are his personal views and may not reflect the views of his employer.

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future of risk enterprise: toward growth and competitive advantage in financial institutions

by Vijayaraghavan Venkatraman & Pradipta Niyogi introduction The world has changed—recent events and changing global dynamics will leave a lasting impact on all walks of life. The banking, financial sector and insurance industry is not immune to this, even more so as it forms the bedrock of financial stability while enabling global trade and commerce. Change brings risks, and governing bodies often respond retrospectively albeit in a forward-looking fashion leading to enhanced regulations and compliance obligations. Traditionally, the risk and compliance function has always been driven by protection and mitigation. However, increasing and fast-changing customer preferences, market and business model disruptions, operational stresses, geopolitical challenges and compliance needs are underscoring the need for firms to look at risk and compliance management as a catalyst for sustaining and accelerating the growth of business and its ecosystems. In this article, we examine the emerging priorities of financial institutions’ chief risk and/or compliance officers’ (CRO/CCO) functions, their response to changing imperatives, and how business strategies, processes, controls and digital technologies are being recalibrated to stay ahead of the curve.

insights In August 2021, we surveyed the risk and compliance functions of more than 60 diverse financial institutions and garnered some interesting insights.1 The CRO’s role has become increasingly broad, linking various parts of the business as well as providing a quantitative superstructure to organization strategy, operational management, and financial and actuarial analytics. Additionally, the CRO needs to focus on the impact of operational risks of new digital strategies and infrastructure as well as risks arising from data security and privacy, financial crime including cybercrime, fraud, misconduct, and culture and external partners. 1 / Future of Risk Enterprise: Towards Growth and Competitive Advantage, TCS-Chartis Survey Report For more information, please contact:


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The emphasis on core financial risk will continue—credit, market and liquidity risk management remain top priorities. Businesses are becoming integrated and scaling to serve varied customer preferences. Given increasing competition and innovation pressures, operational and emerging risks are gaining prominence— identifying and quantifying risks, developing futuristic capabilities to manage them, and providing enterprise assurance needed for business model disruptions are becoming crucial. Our study2 indicates that structural changes across risk types have influenced CRO focus toward: • Commercialization of risk capabilities via working relationships with clients and third parties — varies from 18% to 55% • New, trained personnel for enterprise controls, KRI-based monitoring and early warnings – varies from 22% to 33% • Centralization and utilization by encompassing all areas of the enterprise – varies from 5% to 57% CRO functions in FIs are now increasingly focused on building a next-gen Smart Risk Enterprise to help define and execute business strategies via value-centric programs which will sustain and strengthen the financial and operational resilience and longevity of the enterprise. However, our survey reveals that accomplishing this comes with its own set of challenges (see Figure 1).

Figure 1: Key Challenges to Building a Relationship between Risk and Business

Source: Future of Risk Enterprise: Towards Growth and Competitive Advantage, TCS-Chartis Survey Report

2 / Future of Risk Enterprise: Towards Growth and Competitive Advantage, TCS-Chartis Survey Report For more information, please contact:

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the way forward Our survey reveals (see Figure 2) that there is traction from risk functions of financial institutions, to drive growth and competitive advantage through business outcomes. An efficiently structured and integrated Smart Risk Enterprise can generate substantial value for firms. It enables multiple levers with the ability to: • Drive customer-centric outcomes • Maintain and improve firms’ credit rating • Manage investment and liquidity risk, achieve portfolio optimization • Ensure better predictive capabilities and quantification of inherent risk impacts • Enhance efficiency in compliance risk management, controls, and control assurance • Enable clearer and topnotch reports to the C-suite for interventions • Facilitate appropriate benchmarking of managerial decision-making quality Figure 2: Role of the risk function in driving competitive advantage

Source: Future of Risk Enterprise: Towards Growth and Competitive Advantage, TCS-Chartis Survey Report


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The role of the CRO and CCO has evolved through the last decade and has begun to see specialization. While the use of data and analytics has been at the forefront for post-facto analysis for specific risks and risk-based business strategies, the focus was on portfolio exposure management, capital allocation, and hedging. As firms continue to operate in a digitally hyper-connected economy with ecosystem business models, CROs need to broaden their focus to include operational and emerging risks such as climate, ESG, cyber, conduct, model and reputational risks. Complexities multiply due to dichotomies related to specific strategies in a department or function potentially resulting in conflicting risk linkages in another. This necessitates a holistic approach to the risk and compliance function that is purpose- and business outcome-driven, customer-centric, while ensuring compliance with regulatory obligations. Such an approach can enhance operational resilience, support changing market and business model disruptions, and generate exponential stakeholder value. Our survey revealed certain key risk and compliance capabilities that financial institutions are prioritizing (see Figure 3) to gain competitive advantage. To successfully meet the conflicting demands of balancing risk mitigation and fueling business growth, we believe that financial institutions must adopt a broad set of tools, methodologies, and robust operating models and frameworks. Figure 3: Risk and compliance function - target state capabilities

Source: Future of Risk Enterprise: Towards Growth and Competitive Advantage, TCS-Chartis Survey Report

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enabling a smart risk enterprise In our view, building a smart risk enterprise will entail transitioning to a nimble operating model (see Figure 4) with the ability to garner real-time and near real-time visibility of exposures and facilitate quick and insights-driven decision-making. In addition, effective integration of digital technologies, processes, and methodologies across the enterprise as well as with external stakeholders across the value chain will be key.3 To maximize the value generated by the risk function, firms must pay as much attention to the way it is implemented as to the linkages to transactional systems and business processes as well as the core risk systems. Figure 4: Smart risk enterprise of the future - capabilities and building blocks

Source: TCS, Smart Risk Enterprise in Banks: Toward Competitive Advantage and Growth

the bottom line The CRO will continue to be a key stakeholder in delivering business outcomes and meeting regulatory obligations in financial institutions. Along with other C-suite executives, the CRO and the risk function will play a critical role in helping financial institutions negotiate an increasingly volatile playing field.

3 /


TCS, Smart Risk Enterprise in Banks: Toward Competitive Advantage and Growth,

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authors Vijayaraghavan Venkatraman (Vijay) Global Head, Risk Management Vijayaraghavan Venkatraman (Vijay) is Global Head, Risk Management and Regulatory Compliance, Banking, Financial Services, and Insurance (BFSI) unit at TCS. He has over 23 years of experience in banking, risk management and regulatory compliance. Vijay has worked on several global risk and compliance engagements for various banking and financial services clients cutting across risk transformation, data science led innovation in risk and compliance and regtech based regulatory compliance implementations. Vijay holds a master’s degree in Business Administration from Sri Sathya Sai Institute of Higher Learning, Prasanthi Nilayam, India, and a bachelor’s degree in Electrical and Electronics Engineering from the College of Engineering, Guindy, India. He is a GARP certified Financial Risk Manager (FRM), a Project Management Professional (PMP), and holds a CFA charter from ICFAI. Vijay speaks at various risk and compliance industry events and has coauthored white papers on several contemporary risk and compliance themes.

Pradipta Niyogi (Prad) Consulting Partner with the CRO Strategic Initiatives group Pradipta Niyogi (Prad) is a Consulting Partner with the CRO Strategic Initiatives group in the Banking, Financial Services, and Insurance (BFSI) unit at TCS. He specializes in consumer banking with focus on customer experience and conduct risk mitigation. Prad has 23 years of experience in implementing strategic transformation initiatives as well as ‘run-the-bank’ projects for global clients and is a key contributor to engagements with customers, partners, and analysts. He is passionate about diversity and inclusion, coaching, and mentoring, and is an active contributor to various internal initiatives and forums. Prad holds a master’s degree in Quantitative Economics from the Indian Statistical Institute, Calcutta, India.

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how zero-washing undermines the impact of net zero investment portfolios

by Tamara Close different paths to net zero A key transition risk from climate change is a material global rise in the price of carbon. A carbon price shock at just $75 / ton of CO2e will impact over $20 trillion of Enterprise Value through a greater than 5% decline in their return on capital.1 Implementing carbon budgets or creating net zero portfolios can help reduce this risk. However, managers need to ensure that they are not “zero-washing”.

Technically, a Net Zero business model means that the carbon emissions produced by any activity must be reduced to zero or offset by carbon absorbing activities. However, simply getting to net zero emissions for a company is not enough to ultimately achieve the emissions mitigation required to limit the global temperature rise to 1.5 degrees Celsius. In order to get there, the pathway and business model design have to reduce actual emissions. For instance, purchasing offsets to cancel out the emissions that a company has produced will get you to net zero, but that doesn’t necessarily reduce absolute emissions in the real economy. Companies must first reduce emissions. Offsets can then be used for hard-to-decarbonize sectors or activities. 1 / See the recent SEC Response letter which summarizes the research performed by Mark Van Clieaf from FutureZero and Tamara Close from Close Group Consulting (CGC):


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The Pembina Institute2 has published guiding principles to get to a net zero economy. Figure 2 illustrates how net zero pathways impact global emissions differently.

While offsets are a useful and necessary tool, they are not all created equal. The Oxford Offsetting Principles3 identify five types ranging from avoided emissions at the lowest end, to offsets that enable carbon removal with long-lived storage at the higher end.4 Understanding the type of offset being used in a net zero strategy is key to determining if the approach is actually reducing emissions. It is also important to understand the underlying carbon metrics from companies. Since there are significant financial incentives tied to making a net zero commitment and no industry standard as to what that actually means, “carbon-washing”5 can be prevalent amongst companies.

zero-washing in net zero investment portfolios Calculating a weighted average carbon intensity (WACI) or carbon footprint of a portfolio and managing this within set limits may mitigate carbon risk. However, this may not reduce absolute emissions, which should be the underlying goal of a “true net zero” investment strategy. Strategies that may not reduce absolute emissions • Short selling: While this may reduce exposures to high carbon business models of investee companies, it does not actually remove CO2 emissions.

2 / 3 / 4 / Ibid. 5 / See Soh Young, In and Schumacher, Kim, Carbon-washing: A New Type of Carbon Data-related ESG Greenwashing (August 8, 2021). Available at SSRN:

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• Divestment: This will reduce exposure to carbon risk in the portfolio but will not necessarily encourage decarbonization. Additionally, since most companies only report on their scope 1 and 2 emissions, you may still end up with a high carbon portfolio if you include scope 3.6 • Carbon offsets: These can be used to get to a net zero portfolio. However, the offsets need to be certified and should fall into the carbon removal category.7 Strategies that may not reduce absolute emissions • Security selection: Understanding the carbon exposure, business model design and net zero strategy of a firm will ensure the portfolio aligns to those companies that are implementing a true net zero strategy.8 • Strategic engagement: Engaging and supporting investee companies that need to drastically transform their business models9 can help to reduce global emissions.

classification methodology for climate change assessments of securities Climate change assessments are inherently complex. Before creating a net zero portfolio, managers can classify securities based on how they have been assessed for climate change risk. This can help identify the level of potential climate change risk in a portfolio.10

6 / Scope 1 covers direct emissions from owned or controlled sources. Scope 2 covers indirect emissions from the generation of purchased electricity, steam, heating and cooling consumed by the reporting company. Scope 3 includes all other indirect emissions that occur in a company’s value chain. 7 / See the Oxford Offsetting Principles (2020) 8 / To do this, and for a list of carbon-adjusted metrics, see the earlier cited research from Mark Van Clieaf and Tamara Close. 9 / Ibid. Less than 5% of the world’s adult population have the level of conceptual capacity and systems thinking to conceptualize and implement business model and industry eco-system transformations. 10 / Reference: Close, Tamara, Applying the FAS 157 classification methodology to ESG risks in an investment portfolio – a focus on climate change (November 30, 2020). Available at SSRN:


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conclusion While net zero portfolios can be an effective way to mitigate carbon risk, it is imperative that investment managers understand the underlying path and strategy to get to net zero in order to truly reduce absolute emissions and avoid zero-washing.

author Tamara Close Founder and Managing Partner Tamara is the Founder of Close Group Consulting, which is a boutique ESG advisory firm that designs and implements tailored end-to-end ESG integration practices for asset managers, asset owners and corporates. Tamara has over 20 years of combined experience in capital markets and ESG strategy and has held senior investment and risk management positions for the Bank of Montreal, Credit Lyonnais, and PSP Investments. She was recently the head of ESG integration for KKS Advisors. Tamara is a Chartered Financial Analyst (CFA) and chairs the ESG Working Group for CFA Societies Canada. Tamara is also a Board member of CFA Montreal and is a Strategic Advisor for various industry organizations.




best in the profession



PRMIA volunteer spotlight Emil Nysschens, Regional Director, PRMIA South Africa

by Adam Lindquist PRMIA Volunteers are risk professionals who have a desire to help others and benefit from helping build the PRMIA network. Some, like Emil Nysschens, take a leading role in helping a local Chapter flourish and grow. I caught up with Emil, Regional Director of the PRMIA South Africa Chapter.


Tell us how you got started in risk, how long have you been in risk, and what is your current

role? Emil I had a long career in the accounting field prior to risk and there were several steps along the way. My ‘risk journey’ started in 2003 when I realized I had a great interest in investment management and banking in general during my tenure at the asset management division of a large South African bank. From there I moved into the financial markets training field in 2008, and I am now at Riskworx, a unique South African consultancy that focuses on Financial and Quantitative Modelling as a Lecturer.


How did you first learn of PRMIA?

Emil My introduction to PRMIA happened back in 2008, right after I officially left the accounting fraternity and started working for a financial markets training company. One of the very first projects I worked on was with the late Dr Graeme West and involved the original second exam of the PRM (the mathematical foundations of risk measurement). Within the PRM I found the perfect intersection of my interests in business, mathematics, and science.


When did you first volunteer and why?

Emil My first foray into volunteering started a very long time ago! I first served on the South African PRMIA Steering Committee back in 2009 to 2011.


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You have relaunched a chapter. What lessons have you learned about volunteering and your experience in doing so? Emil I think the relaunch has been a collective effort. There is an African proverb that my colleagues at Riskworx are fond of referring to “If you want to go fast, go alone. If you want to go far, go together.” I think our team effort in relaunching the chapter has been a manifestation of this proverb. It was also the first lesson we had to learn, and I think modelled on the Steering Committee I was a part of all those years ago, i.e. structuring the committee in such a way that it plays to people’s strengths and interests. It also helps for the members to care and identify with the PRMIA mission. Having the chapter restored also would not have been possible without the assistance and support from PRMIA staff. In particular, Sara Lepp Soliz has been of tremendous help all along the way and we cannot thank her enough for her efforts. At no time did we feel like we were going at this alone or that we were in the dark.


Did you/ do you have a favorite role you have done?

Emil Previously my role was in the events portfolio, and it was a great amount of fun at the time. It involved a lot of face-to-face events and networking. Of course, this was during a time long before COVID. We all had to adjust to the change to remote events and remote working in 2020. I am grateful for and enjoying my current role as Regional Director, and it feels like an evolution from my previous role. After all these years I’m still enjoying my involvement and actually feel that we are living through some of the most exciting and challenging times ever in the risk field.


Have you leveraged your experience to the benefit of your career or in other tangible benefits?

Emil I tend to take a big picture view on this, and the benefits I have experienced from my involvement in PRMIA are significant. At first the benefits as a Sustaining Member have been numerous, and among these I benefit tremendously from webinars, publications, and networking opportunities. Secondly, having the PRM™ Designation (and later teaching the PRM) has done wonders for deepening my own understanding and knowledge in the field. It has also been a major factor in my career advancement along the way. Lastly, to be involved as a volunteer has intensified some of the aforementioned benefits experienced and, in turn, I’m grateful for the opportunity to give back to the community that shaped me.

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What are the hardest things with volunteering?

Emil I think our committee stumbled upon a secret to success that we had not consciously planned but worked well in our favour. We all know that volunteering requires sacrificing your time for a noble cause and interestingly, our initial meetings were all held on Fridays in person and after work! I think by doing that we immediately got a handle on making the time available in our schedules and also finding out who will be in this for the long haul. Thankfully, things have been easier since those days and the capability to now meet online has also made staying connected that much easier and more convenient.


What advice would you give someone who has not considered volunteering?

Emil I most certainly have some advice. If you answer yes to any of the following, I suggest that you should consider volunteer work: • Do you have a passion for risk? • Would you like to be part of a group of people with similar interests as you? • Do you enjoy meeting like-minded people? • Do you have the desire to leave the world in a better place than how you found it? Possibly, even contribute to a legacy in the strive towards more effective risk management for future generations? Adam

Emil, thank you for your contributions to PRMIA and for the great insights on your role and why others should volunteer. If you are interested in volunteering for your local Chapter, contact the local Regional Director for any Chapter under Network on the PRMIA website. If you are interested in a volunteer role for a committee, please contact

interviewee Emil Nysschens


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PRM™ Spotlight - Ken Radigan Ken Radigan was working at AIG during the 2008 financial crisis as Director of Catastrophe Modeling. AIG was the beneficiary of a bailout package from the US government, but they needed to prove that they were taking appropriate steps to enhance their risk management oversight. Ken was asked to be the Chief Risk Officer of the Casualty Business. As Ken recalls, “I took this position very seriously. We had made some very big mistakes in the past, and we couldn’t afford to make any more. I needed to learn everything I could about risk management to ensure that we were following best practices. I looked at the risk management certification programs that were currently available, and I thought the PRM™ program was the best program to meet my needs. I thought it was more technical than other programs, and I also liked the fact that it included a study of real-life case examples.” Upon completion of the PRM program, Ken also became very involved with the PRMIA community. He joined the New York steering committee and was ultimately elected as Regional Director. He was chair of the ethics committee and chair of the finance committee for PRMIA. He also served as a member of the Board of Directors and is currently serving as PRMIA’s CEO. “The PRM program and the broader PRMIA community have been instrumental in my career development. The PRM program is a challenging one. It requires you to be an expert in several areas of risk management. However, upon completing the PRM program you will have the confidence of knowing that you have distinguished yourself as being a leader in the field. The PRMIA community will also provide you with the resources you need to enhance your risk management career. You will have access to new and evolving practices, as well as the ability to network with other risk practitioners.”

Ken Radigan

Intelligent Risk - October 2021


2021 PRMIA Risk Leader Summit Risk leaders from around the world gathered virtually on October 12-13 for the 6th annual PRMIA Risk Leader Summit. Speakers focused on understanding current and expanding risk areas and how to respond to today’s challenges. Thank you to our sponsors for their support of this year’s Summit.

platinum sponsors CubeLogic is the leading supplier of business intelligence enabled enterprise risk management solutions arising from market risk, credit risk and regulatory compliance. CubeLogic’s founders are renowned experienced industry specialists who have an impressive track record of developing and implementing global risk IT solutions. In the current volatile market conditions, CubeLogic addresses the increasing demand for robust, cost effective Business Intelligence solutions for risk management. For more information, visit CubeLogic will be contributing an article in the January 2022 issue of Intelligent Risk.

Tata Consultancy Services (TCS) is an IT services, consulting and business solutions organization that has been partnering with many of the world’s largest businesses in their transformation journeys for over 50 years. TCS offers a consulting-led, cognitive powered, integrated portfolio of business, technology and engineering services and solutions. This is delivered through its unique Location Independent Agile™ delivery model, recognized as a benchmark of excellence in software development. A part of the Tata group, India’s largest multinational business group, TCS has over 500,000 of the world’s best-trained consultants in 46 countries. The company generated consolidated revenues of US $22.2 billion in the fiscal year ended March 31, 2021 and is listed on the BSE (formerly Bombay Stock Exchange) and the NSE (National Stock Exchange) in India. TCS’ proactive stance on climate change and award-winning work with communities across the world have earned it a place in leading sustainability indices such as the MSCI Global Sustainability Index and the FTSE4Good Emerging Index. For more information, visit Please refer to the article contributed by TCS in this edition of Intelligent Risk.


Intelligent Risk - October 2021

gold plus sponsor Calypso Technology and AxiomSL have combined forces under a new name: Adenza. Adenza provides customers with end-to-end, trading, treasury, risk management and regulatory compliance platforms which can be delivered onpremise or on-cloud. Adenza enables financial institutions to consolidate and streamline their operations with front-to-back solutions integrated with data management and reporting, benefitting from a single source of truth across the business. With headquarters in London and New York, Adenza has more than 60,000 users across the world’s largest financial institutions spanning global and regional banks, broker dealers, insurers, asset managers, pension funds, hedge funds, central banks, stock exchanges and clearing houses, securities services providers and corporates. Visit: to learn more.

gold sponsor The Nasdaq Risk Platform works with PRMIA to deliver thought leadership on cross-asset risk management across global markets and trading environments. They are a proud partner of forthcoming webinars and the Risk Leader Summit, informing the PRMIA network about risk best practices in capital markets. The Nasdaq Risk Platform aggregates live positions and trading exposure across exchanges giving a single view of risk helping improve capital efficiency and risk management. The platform offers real-time risk, exposure, and margin replication helping improve client relationship management and respective capital allocation. Real-time analytics include VaR, stress-testing, What-if analysis, Limit and Alert monitoring, Exchange margin replication and more. A cloud-based SaaS solution, the platform is hosted and maintained by Nasdaq so firms can focus on what matters most – driving revenue. For more information, visit

If you’re interested in PRMIA sponsorship to engage risk professionals, please contact

Intelligent Risk - October 2021


calendar of events Please join us for an upcoming virtual course, thought leadership webinar, or virtual event. New offerings are added on a regular basis; watch the PRMIA website at for updates.

PRM™ SCHEDULING WINDOW September 11 – December 17 CANADIAN RISK FORUM November 1 – 2 – Virtual event SPREADSHEET CONTROL FOR RISK MANAGEMENT November 2 - November 29 – Virtual course

AI/ML, A COMMON SENSE APPROACH TO MODEL VALIDATION November 3 – Thought Leadership Webinar UNLOCKING THE FUTURE OF DATA RISK MANAGEMENT November 4 - Thank you to Duco for their collaboration on this webinar

KEY SKILLS TO PROPEL YOUR CAREER AS A RISK MANAGER November 10 – Thought Leadership Webinar

PRM™ TESTING WINDOW November 16 – December 17

WHAT’S NEXT IN THIRD PARTY RISK MANAGEMENT? TRENDS, REGULATIONS AND PREDICTIONS November 16 - Thank you to MetricStream for their collaboration on this webinar


Intelligent Risk - October 2021

DATA AND ANALYTIC SOURCES TO EVALUATE CLIMATE RISK December 8 – Thought Leadership Webinar VALUE AT RISK METHODS USING R January 18 - February 28 – Virtual Course INTRODUCTION TO CLIMATE CHANGE & CLIMATE RISK MANAGEMENT February 22 - March 21 – Virtual Course

Intelligent Risk - October 2021


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