November 12, 2019 / 9:43 PM / 23 days ago

Climate, geopolitical and cyber risks challenge firms to navigate uncharted terrain

NEW YORK(Thomson Reuters Regulatory Intelligence) - It’s not just about financial risk anymore. Geopolitical, cyber and more urgently, climate risk, have emerged as areas that banks and other firms need to get their heads around. This new reality is prompting innovative research and a quest for data and tools to monitor and measure such risks, a challenge that some U.S. regulators are now beginning to raise concerns over.

Smoke and steam billows from Belchatow Power Station, Europe's largest coal-fired power plant operated by PGE Group, at night near Belchatow, Poland December 5, 2018.

At a conference last week, a senior official from the Federal Reserve Bank of New York said a “new lexicon” has emerged for companies and banks regarding climate risk: “physical” and “transition” risk.

“Physical risk is the potential for losses as climate-related changes disrupt business operations, destroy capital and interrupt economic activity. Transition risk is the potential for losses resulting from a shift toward a lower-carbon economy as policy, consumer sentiment and technological innovations impact the value of certain assets and liabilities,” Kevin Stiroh, executive vice president at the New York Fed, told the GARP Global Risk Forum{here}.

“Risk managers must be aware of these risks and develop the tools needed to identify, monitor and manage them appropriately,” Stiroh said. “Physical and transition risks may manifest through traditional risk stripes such as credit, market, operational, legal and reputational risk, but today’s tools are not necessarily well-suited for the unique challenges associated with climate change.”

Stiroh then pointed to three challenges facing risk managers: (1) current risk management tools, models and scenarios are not designed to capture the long-term nature of climate-related risks; (2) climate change is complex and the impacts are uncertain, non-linear and hard-to-predict, which render credit models, for example, less useful and reliable, and (3) there are “significant data gaps.”

“Climate change is a global phenomenon, but risks should be assessed locally, which requires new data such as asset-specific, geo-spatial data. Borrower-specific analysis requires data, for example, on asset utilization and climate effects for particular industries at particular locations. Such granular data is currently limited and requires significant resources to acquire and process,” Stiroh added.


Climate, cyber and geopolitical risks are what chief executives now worry about most, experts have said. And because the issues are complex and difficult to quantify, many business leaders are left essentially groping in the dark. To help guide them, new efforts are emerging to understand how businesses can incorporate such risks into their decision-making processes, hoping to make sense of what 10 years ago was not even on their risk management radar.

“I think one of the reasons that we chose to focus on these three groups of risk is that they are at the top of the list of every CEO when you ask what keeps them up at night,” says Richard Berner, co-head of the Volatility and Risk Institute at NYU’s Stern School of Business{here}. Berner described to Regulatory Intelligence a new effort to put cyber, geopolitical and climate risk in the spotlight. The institute earlier this month announced it had formed an interdisciplinary approach to analyze each area and how they interacted.

“What’s important is that we look at the interplay among those risks,” said Berner, who previously headed the U.S. Treasury’s Office of Financial Research, a group formed in the aftermath of the financial crisis to look at systemic risk issues. “Looking at these risks together is more fruitful than in separate buckets. But in doing so we quickly came to recognize that we need an interdisciplinary approach.”


In addressing these non-financial risks, the institute is effectively borrowing resources from across the university. For example, the cyber risk initiative is led by Randal Milch, a professor at NYU Law, who was previously executive vice president and strategic policy adviser to Verizon’s chairman and CEO. The cyber unit works closely with NYU’s Center for Cybersecurity, which trains cybersecurity professionals. It also collaborates with the university’s engineering school and other departments at NYU.

For climate risk, the work is led by Johannes Stroebel, a finance professor at the Stern business school, who works with ESG experts such as Tensie Whelan, head of the Center for Sustainable Business at Stern. Another input to their research comes from V-Lab, a unit of the institute, which tracks the performance of a broad range of ETFs dedicated to water, solar, carbon and other environmental factors. Meanwhile, geopolitical risk is headed by Thomas Philippon of Stern, drawing on research that spans from understanding the influence of social media in politics to the implications of Brexit and sovereign credit risk.

Berner acknowledges that the institute’s programs and potential benefits are part of a long-term process. “We are taking the first steps so that these issues can be discussed and analyzed,” adding the institute sees itself as a forum for business leaders and policymakers to come together to discuss the risks businesses face. He also pointed to perhaps the biggest challenge: quantifying the new risks.

“In all three of these areas it’s hard to analyze and measure,” said Berner. “We are trying to create metrics from bottom up, information that we can aggregate. . . I’m not sure we can ever get to where we are on measuring financial risk, but I think we can make progress.”


While the views from Stiroh of the New York Fed may mark an important turning point in attention paid by U.S. regulators to climate risk, the San Francisco Fed has been a leader on the issue, and held its first climate conference on November 8. The event focused on how to quantify “the climate risk faced by households, firms, and the financial system; measuring the economic costs and consequences of climate change.”

American and foreign academics, as well as regulators from Sweden and the UK, took part in the discussion and presentation of research findings.

Frank Elderson, member of the governing board of the Netherlands Central Bank, and chairman of the Network for Greening the Financial System, a body of global central banks, was to give a keynote speech.

*To read more by the Thomson Reuters Regulatory Intelligence team click here:

(Henry Engler is a North American Regulatory Intelligence Editor for Thomson Reuters Regulatory Intelligence.)

This article was produced by Thomson Reuters Regulatory Intelligence - - and initially posted on Nov. 8. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @thomsonreuters

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