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Outside the Outside BoxI am writing this Web log to contribute to the larger discourse within the risk management community in order to shed light on some of the more remote, yet inherently integrated aspects of strategy and innovation - for me, the building blocks of a sound risk management system. This blog will approach "risk" and "management" from an interdisciplinary view April 30, 2010 Links & resourcesThe following are links to organizations/resources drawn from books synthesizing the topics of capital, risk, design, society and environment. Good luck! Rocky Mountain Institute: www.rmi.org The Natural Step: www.naturalstep.org The Wuppertal Institute: www.wupperinst.org World Resources Institute: www.wri.org SustainAbility: www.sustainability.com CERES: www.ceres.org Redefining Progress: www.rprogress.org Product-Life Institute: www.product-life.org World Business Council for Sustainable Development: www.wbcsd.org The Center for Clean Products and Clean Technologies: eerc.ra.utk.edu/ccpct/index.html United Nations Environment Programme: www.unep.org Forum for the Future: www.forumforthefuture.org International Institute for Sustainable Development: www.iisd.org Businesses for Social Responsibility: www.bsr.org Stockholm Environmental Institute: sei-international.org International Society of Ecological Economics: www.ecoeco.org Environmental Protection Encouragement Agency: epea-hamburg.org William McDonough + Partners: www.mcdonoughpartners.com Sustainability Institute: www.sustainer.org (The first 17 links are references drawn from pages 314 to 315 of Natural Capitalism; the 18th and 19th links are drawn from Cradle to Cradle; and the 20th link is drawn from Thinking in Systems.) Posted by Odette Gregory at 08:28 PM | Comments (0) March 31, 2010 Language and paradigmsPeople engaged in conversation or other shared meaning-making across disciplines express the same or similar ideas without realizing it. This seems to be a situation that revolves around (1) language and (2) paradigms and the following quoted section from Thomas S. Kuhn's The Structure of Scientific Revolutions (Chicago and London: The University of Chicago Press. 3rd edition. 1996. 202.) speaks to this phenomenon more aptly than I would be able: "Briefly put, what the participants in a communication breakdown can do is recognize each other as members of different language communities and then become translators. Taking the differences between their own intra- and inter-group discourse as itself a subject for study, they can attempt first to discover the terms and locutions that, used unproblematically within each community, are nevertheless foci of trouble for inter-group discussions. (Locutions that present no such difficulties may be homophonically translated.) Having isolated such areas of difficulty in scientific communication, they can next resort to their shared everyday vocabularies in an effort to further elucidate their troubles. Each may, that is, try to discover what the other would see and say when presented with a stimulus to which his own verbal response would be different. If they can sufficiently refrain from explaining anomolous behavior as the consequence of mere error or madness, they may in time become very good predictors of each other's behavior. Each will have learned to translate the other's theory and its consequences into his own language and simultaneously to describe in his language the world to which that theory applies. That is what the historian of science regularly does (or should) when dealing with out-of-date scientific theories." "Global society", "shared interests" and other such conceptions of long distance collaboration (metaphorical and literal) assume that words translated into spoken or written language will sufficiently enable communication. Yet, also important for the identification of issues and the successful work toward resolution and further progression is mutual clarity regarding worldviews. Policy makers and other professionals who utilize a risk management function in their decision making processes, especially in the realm of economics, would be more effective if they took "the differences between their own intra- and inter-group discourse as itself a subject for study." Understanding a panoply of languages specific to disciplines and how they relate to paradigms, and vice versa, will also, as indicated by Kuhn, provide the (scientific) practitioner with tools to predict a wider range of behavior and, as language and psychology are mutually reinforcing, to also effect better influence and change. Posted by Odette Gregory at 07:43 PM | Comments (0) February 27, 2010 How do you generate trust?
EMPRICIAL EVIDENCE
Within participatory democracy, risk communication and risk management cannot rely therefore upon technical study, specification and communication alone, but also upon the political apparatus of influence (trust-making) in order to design and implement strategies for risk management and amenable public perception of risk activities.
It is thought that by creating processes for trust (like enhanced public influence on decision-making) that are clearly defined and repetitive, risk management will become more facile as public opinion aligns more readily with technical specification of risk rather than with perceptions of risk that are not necessarily technically-sound.
Within those experiences, anticipations and contexts there are tendencies and orientations for thought and action. These thoughts and actions are learned habits that play out upon the ground of genetic material, but they are not genetics expressed through habits. If I am distrustful I am afraid that a negative instance will more likely occur and a positive instance will less likely occur. If I am trustful I am not afraid of a negative instance and I feel it is less likely to occur and that a positive instance is more likely to occur. It is not the case that I "just am" distrustful, it is the case that I am distrustful because I fear a negative influence and I have chosen to emphasize and anticipate negative influences in my existence. Fear is associated with control. Control is related to distrust. People are often trained to attempt to exert control over events outside of themselves, or to value a perceived ability to control events outside of themselves. We are both (1) not trained to trust ourselves and (2) trained to distrust ourselves. Rather, let us receive training on controlling ourselves and orienting that training toward an ability to have control in a diverse set of stimuli and environments. This will mitigate the need to rely upon frequency of an event to colour our perceptions of an entity or circumstance (as we will see "frequency" as merely a representation of what we paid attention to and determined as occurring rather than "hard coding" it as "reality"). It will also allow more of life's events to unfold with specific lack of specificity as individuals feel more comfortable with allowing cadences of simultaneous nuance to influence their thoughts and emotions, thereby becoming more adept at responsiveness within an ever-changing environment and more able to cognitively process the complexities of risk. Rather than designing risk management strategies as distrust mitigation, society-wide risk management strategies (and finance risk management strategies, too) should be designed to encourage individuals to trust their own competence and confidence. An individual confident in their competence will be less likely to fear risk and more likely to accept varying levels of risk (even extreme risk) as a normal course of everyday investment and interaction. That very confidence will naturally enhance the competence to manage increasing levels of risk. It is a virtuous circle and a possible enhancing "contagion" in society. An individual confident in their competence will be able to maneuver the critical emotional and intellectual juncture whereby we separate risk, on the one hand, from the outcomes of risk, on the other. This is an important step related to a critical difference. Too often the two are conjoined. Because I fear I will lose my capital by investing in an asset does not mean that I will lose my capital by investing in that asset. If I fear I will lose my capital by investing in an asset, will not my fear influence my ability to rationally execute around that asset? We create what we anticipate. If I do not invest in an asset because of my fear, will I not limit my portfolio (even a "portfolo" of life experiences) to only those things that I do not fear? Even if my fear is based on my experience and reason, is not my experience and cognition limited by those things I know and is not what I know circumscribed by that which I am familiar with? Learning and evolving is necessarily a process of engaging with the unfamiliar. Investment is one process of learning and evolving -- it has to be or there would be no higher future returns -- economic or human capital returns. A "bubble" is a fixation upon the familiar. It is a swamp of monotony. It is a dearth of complexity. It is a form of homogeny. It is a fundamental expression of risk aversion. Individuals comfortable with risk (Deepak Chopra would call this comfort an embrace of the unknown) will have a more open perception toward unfamiliar ideas or ideas contrary to their own, will more likely engage institutions and other members of society with trust and will less likely see through the lens of apathy, ignorance, antagonism, intimidation or fear. Risk and the outcomes of risk are two separate phenomenon that should not under any circumstance be conceptualized through a "naturalization" of fear-based strategy. Trust in finance, trust in society, and an engaged and informed professional and social risk management constituency is generated through a culture that embraces risk through the cultivation of confidence and competence.
Posted by Odette Gregory at 10:44 AM | Comments (3) January 29, 2010 ReciprocityReciprocity (Dictionary.com) This brief entry takes as its theme the idea that risk management is about the processes, tools, procedures and relationships that enable reciprocity. This idea comes out of the risk management literature that discusses risk as an engine of dynamic systems, as a conduit of transference within dynamic systems and as collateral and material for those systems as well as in conjugate form from within those systems. Examples There are many other permutations. It is conceptually interesting to consider risk management as an effort to encourage, monitor, control, enhance and predict giving and getting. The design of the efforts that will culminate in a transaction can imagine a transaction as mutual exchange. As far as reciprocity as a tool for inter-country correspondence, managing risk for entry into or exit out of a market may be more (realistic? robust? predictive?) when thought of as mediations of advantage between citizens. Posted by Odette Gregory at 08:11 PM | Comments (5) December 30, 2009 Links & resourcesFollowing are links to resources that are useful for risk professionals. ... Ideas, conversations, organizations & trends ... the new economics foundation: http://neweconomics.org Copenhagen webcast on how information & communication technologies (ICTs) enable global & local green initiatives: http://bit.ly/6BvHjM Autodesk webcast to Copenhagen on corporate environmental governance & building energy analysis (+ a touch of policy): http://bit.ly/563noR "Space technologies, climate change and World Heritage" webcast by Chief of Remote Sensing Unit, UNESCO: http://bit.ly/7oDZdT Sakyong Mipham on success: http://bit.ly/4XE36U Institute for New Economic Thinking: http://iNETeconomics.org U.S. Environmental Protection Agency's ENERGY STAR website: www.energystar.gov Ten climate scientists consider the future: http://bit.ly/6VvmXM Global sensor network: central nervous system for the planet: http://bit.ly/3AnEco Vienna Convention on the Law of Treaties (VCLT): http://bit.ly/3XtQCB "Since we made the problems we can solve the problems." -- Jared Diamond, TED, Why societies collapse: http://bit.ly/1YoKPi Arpa-e sets off to explore new energy technologies: http://bit.ly/2dYhVO George Soros on risk: http://bit.ly/3XnaQ8 "The fact is we need both productivity and sustainability." Bill Gates to the World Food Prize symposium: http://bit.ly/oEugq ECHO emphasizes relief pre-planning, yet also requires improved coordination with the UN: http://bit.ly/uw0Cjhttp://bit.ly/uw0Cj National Science Foundation creates team to experiment in new approaches to next generation computing: http://bit.ly/106ewI Some interesting moments around design of the workplace: http://bit.ly/mEfe US federal Executive branch as 2009's most interesting start-up: http://bit.ly/15TD5H Japan's five-year project to put robots into society-wide practical use: http://bit.ly/gxH2f Social networks may damp innovation: http://bit.ly/ypgej Technology, privacy, security & policy: http://bit.ly/LMXJb Research as per reality of symbiosis versus stasis: http://bit.ly/3h4yyK Environmental stewardship = business prosperity: http://bit.ly/TUrgC Advocate for banking w/out speculation: http://bit.ly/hfIz6 Science, math & philosophy: http://tinyurl.com/delyah Posted by Odette Gregory at 10:01 AM | Comments (3) November 11, 2009 Trusteeship for natural resources"What would be the consequence of a separate trustee for the people traditionally living in these areas? I'm thinking of e.g. the consequence of many CDM (Clean Development Mechanism) projects, chasing traditional land users away. How could this be prevented?" This question was asked by a site visitor & it appears to me an important one for risk management, so I will attempt to answer it here as its own blog. First, a general thought: The consequence of a separate trustee would depend upon the trustee in question and the rules, regulations, processes, relationships, etc. that would accompany the formal custodianship and stewardship of a natural resource like a forest. Then, some others: 1. What are the terms of the agreements for any effective CDM or other flexible economic incentive program or larger protocol for the environment, regarding a (minimum) legal and social jurisdiction for all the world's inhabitants that can receive (also) flexible appropriation on a nation by nation basis for the evaluation and enactment of rights, liabilities and rules as per management and law of natural resources? 2. The idea of managing costs and the framework behind the logic of cost. 3. Philosophy to help determine nature's valuations for the market. It is more than a decision that can be made exclusively within the contours of finance or policy. 4. Forward planning to train at the individual level of operations for people to understand and have the ability to put into action the actual tasks of responsibility in resource stewardship. 5. Sometimes stewardship is about keeping humans out, but not always. Considering custodianship as something for man and land as a step toward ensuring that humans using land are not considered "pests". 6. Really clear communication and transparency from the outset about expectations and desired outcomes would also help to safeguard land for those who "originally" lived there. (Having a conflict resolution crisis management team is also a good idea.) 7. Looking to others more actively for best practice lessons is also important –- the case of Costa Rica is one example, Warren Buffet's recent infrastructure investment can be imagined in its own way as another example of long term valuation and the merging of natural and material infrastructure for the purpose of profit and custodianship. 8. Devising more equitable agreements in the first place: if I understand correctly, industrialized countries are able to offset their emissions by financing foreign investment clean energy projects and also by receiving "in additionality" emission reduction credits under the CDM Kyoto Protocol. That kind of relationship does not really inspire CO2 reduction in aggregate. 9. The oversight body should have actual jurisdiction in the event of transgressions. How else can a project succeed if there is no ability to enforce compliance -- can the markets do that? Risk management could further evolve under these circumstances to become an interpretive discipline for qualitative information, transferring the value of arguments or logic in environmentalism into risk models and data for risk strategy information. Thank you for your question, and I hope this adds something meaningful. References: Posted by Odette Gregory at 12:53 PM | Comments (0) October 29, 2009 Theory: How to value a natural resourceThis entry is an effort to answer a question about how one would value a natural resource such as a forest from a risk perspective. Indeed there are already models for the valuation of natural resources & this entry is not intended to reference any of them specifically, if only because this author is relatively unfamiliar with the models themselves. Rather, this is an attempt, from a risk perspective, to outline some criteria that might be considered in order to value a natural resource, like a forest, for the purpose of conserving its lifespan and vitality. From this author's perspective, a natural resource has its own right to exist that has primacy & valuations within the context of markets are secondary & necessary in order to protect the first right. To some extent then, this entry is also an indirect consideration of legal procedures and related determinations of value. In this author's opinion, cost, per se, is not an ideal indicator for determining routes to steward the environment. This is for two primary reasons - the first is that on almost every practical front, i.e., the practical implementation of the actual tools for generating energy through sustainable sources, sustainable sources, including the costs of installation and use, are less expensive than those costs associated with maintaining non-renewable sources of energy generation. (This entry is assuming that valuing natural resources is directly related to drawing energy from natural resources and therefore that valuation of a natural resource is part and parcel of methods to steward the environment.) "Cost" is generally a blanket term that refers to the (sunk) cost of previously established business that is generated through the procurement, manufacture and sale of non-renewable resources. "Cost," as it can be used in finance does not speak to cost in real terms. In real terms, there is less cost, from a purely marketable perspective. The second reason is that cost as a function is a product of mathematics only so far as mathematics is employed vis-à-vis the discipline of finance, both in theory and in practice. Mathematics has roots in natural phenomenon, so it is in part a descriptive field of endeavor whereas finance is a social phenomenon, used to construct a reality, and only describes it in so far as what has been constructed can be further analyzed as a product of itself. Financial cost is not a pure indictor for establishing a relationship between civilization and nature, it is rather a metric for our willingness to embark on a proactive custodianship of that relationship. Therein, this entry will not consider financial cost as a relevant element of a rigorous theoretical approach to the valuation of natural resources, while honoring it as a relevant practical element as per action within the field of markets. The next point is to further extend the argument of a natural resource's right to have value. Simply, in the same way that human society is networked, interfaced and relational, so is society networked with all the other elements of nature. In nature, there is a web of relationship, that, similar to a "complex adaptive system," is an "open question" of life interwoven and sensitive to the actions upon the ground of the paradigm. No element or group of elements is actually separate or unaffected or non-influential from or within the paradigm, even though there are varying time continuums that in experience, from a given perspective, may seem to imply acts or instances of non-relation. Further, all elements upon the ground of nature's paradigm, including the human existence paradigm, have vectors of intimate relationship between and amongst themselves that require each element to retain integrity in order for the system to remain upheld. This last idea is somewhat similar to the theory that the safety of one implies the safety of all - monitoring each element for health helps to guarantee the convention of a healthy system for all. It is logical to keep natural resources fresh and in abundance because that aids in the guarantee that the human social system will also remain in good health. The question that arises then is how can one create a realistic valuation of natural resources that can be implemented in the financial markets while simultaneously separating the markets from the valuation? The answer to that relies upon the previous point regarding health and security. Health and security are supposed to be "natural rights" covenanted within the realm of law; therefore it should be a reliable base from which to create a tool for measurement for the valuation of a natural resource that contributes to health and security, especially since so many facets of health and security implementation at local and global points of entry occur within some kind of legal framework while simultaneously occurring within a market framework. Natural resources could be valued according to how they tangibly and intangibly contribute toward health and security. Risk assessment could consider the weight of the tangibles and intangibles. Intangibles could be valuations around aesthetics and happiness - there is already one nation who prioritizes a happiness indicator (GNH: Gross National Happiness) over a GDP indicator, so it is not that far fetched an idea, even on an international playing field. Tangible valuations could be around literal tons of filtered CO2 over a given period of time; literal acreage provided for sustainable agriculture, literal liters of potable water, or, requiring more complex modeling, literal contributions toward regional security, especially when the resource straddles or touches more than one sovereign entity, as most do, etc. Let us say that Bank A wants to invest in Fund B that includes a 20% holding in a mining interest within Country C. In order to, for example, measure credit risk for contributing to such a fund, Bank A's risk analysts might consider the extent to which the mine causes the artificial migration of certain kinds of birds and how the departure of those birds affects a certain type of mollusk and how the overabundance of the mollusk affects the ability of a certain kind of water algae to thrive and how the lack of that water algae causes a discernible decrease in fishing stock and how that lack of fishing stock negatively impacts the "happiness" of Country C's citizens. The layers of inquiry are certainly no more complex than the layers of relationship in common derivatives on the market, and are actually better constituted for complex derivation as there is an abundance of available quantitative data that can be sourced on each layer of analysis. In this example's credit risk analysis, many disciplines within risk come together, like political risk, operational risk, legal & regulatory risk, etc. and are analyzed concurrently. Also, valuing natural resources should not be simply setting risk against the traditional interests like mining, but the mining entity should also conduct a similar risk assessment for its own uses. For example, they may discover that a species of bird artificially migrates when the engines on dump trucks hit a certain decibel. They could then, for instance, invest in a technology that mitigates the sound, and thereby does not disturb the bird species, and thereby improves their company’s risk profile. This is just an off hand example using an instance of one investment by one firm yet it is interesting to note that valuation of natural resources can also be used at the governance tier to set the risk appetite for the firm as a whole. What may be a subject unto itself is also the risk of not taking natural resources into account from a risk perspective; but suffice it to say that natural resources, like forests, oceans, wind, the earth's internal heat and even the sun are predicated on the idea of an earth-bound environment that is adaptable to using such energy sources. However, continued resource degradation can plausibly lead to pools of volatility that do not allow prudent or cohesive execution of renewable energy systems and technology. It is difficult to overstate the intimate relationship between the tools and mechanics for valuation of a natural resource, including the implementation within a market, on the one hand, and the viability, on the other, of adapting the current energy conundrum to a sourcing procedure using natural resources that are renewable. To sum, natural resources can be valued in the market through mechanisms that consider the complexity of health and security issues related to them and that then create paradigms of investment value based on the integrity of the natural resource, its capacity to contribute positively to present and future health and security-related investments, procedures and conditions, the extent to which the natural resource is or is not put at risk through other market activities (and vice versa), and the degree to which the natural resource is necessary for future energy-related human activities. From a business perspective, the advantage to valuing natural resources is fundamentally about how it migrates company activity, across sectors, products, disciplines, regions and cultures toward more intensive R&D, and thus, toward innovation processes. Innovation has historically been the driver of resurgent marketplaces. Even though most firms will not be in the business, per se, of buying, selling and producing energy, movement toward myriad company, civic and government entities valuing natural resources will inevitably create a more vibrant market space for energy sourcing technology. In fact, as an increasingly varied consortium of private and public sector interests value natural resources for investment purposes, that process in and of itself will innovate the nature of how wealth is generated and also, could potentially lead to an environment where the creation and at least sustenance of energy for professional and personal purposes becomes the purview of everyone, at the micro and macro, with mobile and / or land access to a shared economic and energy grid. Finally, longer term investment horizons (may too) become quotidian because factors of time used in evaluation will become more transparently transcendent due to the regenerative attributes of natural resources. Posted by Odette Gregory at 08:42 PM | Comments (0) September 28, 2009 Risk management for natural resourcesTouching risk management on many fronts, as commodities and assets, natural resources like forests, water ways & fertile, mineral-laden soils are also often mismanaged inputs with improper mechanisms in place to guide transparency. There are many reasons why this is the case and the causes are nuanced across regions and sectors, however, the overarching cause, in this author's opinion, is a lack of easily identifiable stewardship of many natural resources, and therefore, legally & politically, an often untoward labyrinth of caveats regarding accountability in management. This makes not just for poor business practices, but also for poor governmental practices, as the management of natural resources, because there is not an easily identifiable and juridical best practice framework, becomes an ad hoc patchwork of legislation that is determined and altered on a case-by-case basis, by nation, according to the winds of any given administration or regime. Considering the several hundred nations of the world, the trans-sovereign contours of almost all the best pools of natural resources & the short (or very long), widely variable & non-regular intervals between administration change across, between and within nations, this method of stakeholding or husbandry is clearly not convenient for the most effective oversight of the resources all of humanity & associated life depends upon for the proper functioning of the ecosystems, societies, nations and markets of the contemporary world. Some areas of natural resources are privately owned and some are public lands. However, they can both be managed similarly, if important bodies of natural resource, like the Congo Basin Forest, are put under the custodianship of an empowered international agency, which acts, like a trustee, on behalf of that resource's sovereignty, dignity and security. In effect then, natural places would have their own sovereignty, like a corporation, &/or like the status of the UN headquarters in Manhattan, NY - upon arrival, one is officially in international territory, that is by definition the territory of all, while simultaneously not the exclusive domain of anyone. Yet and still, business is transacted there and policies are set - it is neutral territory, but not a languid one. To carry the example, to do business with a natural resource, an entity would be able to describe in detail what they bring to the table that would impel the forest, for example, to want to transact business with them. This changes the framework of liability and use regarding natural resources from one of extraction to one of partnership, mutual exchange and benefit. Underlying this approach is the idea that the global community of nations and independent actors is better served by the conservation of natural resources and by the peaceful and transparent transactions between agents across borders, no matter how many degrees of distance one investor may be from another in any given transaction or series of transactions. Underlying this approach is also the acknowledgment of evolution and the idea that humanity's social and economic networks and methods of livelihood and resource exchange change over the course of time for the purpose of optimization, self-preservation and sustenance; with today's environment as a potentially lucrative pivot point for such retooling of technology. (Homo erectus migration, the development of agriculture and industrialization are previous examples of such evolving.) Different incentives could be introduced into the markets that would steer risk appetites toward new kinds of custodianship & capital ventures. There is ample room for a series of complex methodologies to strive toward and many new types of partnerships that could take place, with some already happening amongst sophisticated investment partners. Research, valuations and other forms of analysis could be oriented toward, for example, the optimal risk strategy when investing in the planting & growth (with a potential percentage for harvest) of ten million new tress over a given time period in a given region, rather than, as might exist now, a risk averse strategy regarding the same crop and the chances of civil unrest erupting in the same period in the same region. The general idea would be to invest in the infrastructure of the natural resource, which is the holistic ecology it exists within, including the human societies sustained by it; said another way, to guide the challenge, excitement and science of investment toward the stimulation and verdancy of the natural and social environment, using that cooperation as a method to stimulate the economics of capital and policy toward more sustainable and environmentally reliable wealth, stability and / or growth would be the ultimate economic policy goal and an important consideration during risk management practice. With such an interregional agreement regarding natural resources, risk assessors might begin to ask different questions and assign different assessments of risk. For example, such international stewardship would necessarily imply more concerted liaison between private, government and civil society actors. Without delving now into potential scenarios for waves of increased and decreased accord across populations and constituencies over time in securing real commitment, one important shift in political risk assessment might be a calibration of risk attributes as per proximity of political systems to appropriately stewarded resources. In so far as there are details, there is the tedium of combing through with extraordinary due diligence and managing expectations regarding such an endeavor, yet there is also the potential satisfaction of creating a global best practice scenario where each stakeholder's minimum satisfactions are met and the group continuum is used to leverage returns for all parties that exceed anything any one entity could have managed by themselves. The argument for the cost is actually paramount for political risk - placing the human and technological resources in play in order to make such an arrangement possible would be counter weighted by the benefit (ultimate cost savings and near-term / long-term capital returns) of building sustainable societies and markets that improve livelihoods, thereby incentivizing people, especially in "broken places," (1) to become engaged within their current communities and to become active patriotic internationalized citizens of the world and of their homelands. (1) term used by Samantha Power Posted by Odette Gregory at 07:30 AM | Comments (1) August 29, 2009 AufklarungEnterprise Risk Management and Governance are the two sides of the same coin that deliver effective risk practices for the firm. If Governance is about the relationships between the Board of Directors and Management regarding the functions, responsibilities and pathways of communication and oversight and if Enterprise Risk Management (ERM) is about Risk Types and Risk Management Processes, then corporate strategy and risk response strategy must obviously evolve out of the synthesis of the two systems (ERM and Governance). In consideration of increasingly complex relationships across structural boundaries, it is no longer prudent (as a strategic factor) to adhere to an ideology of the isolated element within any given ecology. Existence occurs within a reality of shared instances and influence (there are a plethora of social and scientific studies across disciplines that point to this idea as a reliable basis for generality), and the rules therein apply to each of our individual element-identities as it does also to each of the networks we form or join with their own respective individual group element-identities (networks of nation, town, profession, recreation, etc.). Within corporate management, the division, function or department that most closely adheres to the idea of interdependent systems is Corporate Social Responsibility (CSR). It is there that management takes into account their firm's relationship to exterior entities and discovers ways to introduce and optimize evolution between the firm and the firm's ecology. While other divisions like Finance or R&D may have more sophisticated infrastructure for assessing the firm's relationship to the outside, their missions are often contestable rather than directed toward delivering inputs to enhance an outside yet shared web of relationship or responsibility. Envisioning the corporation as a member element within a community of infinite elements of business, social, cultural and political nature focuses the business strategy on upward contributions and therein is an excellent incentive for a business-wide ethic that is results oriented. When the firm is seen as singular and responsible to only a limited stakeholder pool, incentives for excellence can be diminished by parochial interests yet when the firm is seen as one facet within a dynamic system, the bar is raised because the stakeholder pool has been broadened and deepened. In this scenario the firm's outputs are inputs of stimulus to the larger ecology (the shared elemental system) while the larger ecology infuses the firm with its ever-evolving synergies (synergies formed via inputs of positive stimuli). Performance at the firm will improve because benchmarks for quality will always be challenged in an effort to maximize the synthesis of a shared elemental system. (This will happen even if other elements do not make initial inputs of equally high quality by virtue of the law of association.) Just as the most useful employees and most favorably compensated are the employees who contribute most dynamically to their group's fundamental wellbeing, so are the most enduring firms in this case those that do the same. How does this synthesis develop? Although the subject of this entry is theory, it is about application in practice in so far as international governing bodies are able to create and enforce the legal frameworks that mandate corporate practice within the metrics and standards of corporate social responsibility and human rights that have been generated through institutions such as the United Nations. It is these practices of accountability that do best suit the development of a wealth-generating 21st-century economy and these metrics and standards can be diffused through each corporation's internal controls regardless of the corporation's basic structure or nationality. Committing to the health of the full global ecological system will contribute to the immediate health of the firm. However, we operate in an advanced framework of science and technology, while our larger social discourse remains at the mercy of arcane language and ideology. One of the primary roadblocks to consensus building around performance improvement is our inability to agree as a global community as to what does and does not constitute acceptable controls for government generated and law-based accountability. While this dialogue typically revolves around so-called profitability, it is this author's opinion that resolution should first be achieved from the firm's perspective by the merger of Governance, Enterprise Risk Management and Corporate Social Responsibility in order to craft criteria relevant for performance in the 21st-century that is then used as a benchmark for generating and measuring profitability. Adherence to a standard of verifiably scientific rules of creation and reclamation for a sustainable (internal and external) environment of synergy that is then enhanced through cross-regional companion standards of quality control for ethical responsibility, transferred and made operational through coordinated efforts of communication and cross-sector compatibility, is actually a stimulus for profitability. The technology exists to make this so. Increased support for such willingness also decreases probabilities for perennial occurrences of emergency response and recovery that is typically caused through a dissonance between the firm and the other elements of its shared society. Toward a resolution Cross-pollinating ERM and Governance more carefully while providing CSR with the policies, methodologies and infrastructure that match in scientific and technological rigor the capacities of Finance or R&D are the steps necessary for firms, financial and otherwise, to contribute and also compete healthily in today's and tomorrow's society and economy. Relationships, risk types and risk processes have to more thoroughly expand beyond their currently applied and incentivized conditionality. Ensuring that accounting assessment is a better reflection of economic performance is one primary locus of attention in developing firms beyond rubric and ideology and toward a fastidious evolution of verifiable stakeholder accountability, for example. Improvement in just this discipline alone would lend extraordinarily valuable, preferably independent and real-time, information to internal, and external yet co-performing, entities. Retooling the questions Boards ask themselves and their managers regarding their company's business strategy and the implied risks therein to incorporate a larger network of stakeholders is another example of how to further develop a truly performance oriented company, enriching its ability to provide generous opportunities to challenge employees to create and innovate within a global knowledge economy. Again, improving coherence and communication between and within the firm, as one entity, with the larger ecology of simultaneously acting and co-producing entities, can only improve firm performance and profitability via the logic of synergy and shared responsibility. Wishing everyone a happy Summer Bank Holiday. (The Essentials of Risk Management, Chapter 4 (Crouhy, Galai, Mark) & Complex Adaptive Systems, Chapter 7 (Miller and Page) were helpful in organizing this author's ideas for this entry.) Posted by Odette Gregory at 04:47 PM | Comments (1) June 30, 2009 Management capacity"Management's job is not to prevent risk but to build the capacity to recover when failures occur." "The most important networks are those of the imagination, which cross from the conventional to the unconventional, refusing to accept that what exists is the only thing that is possible." That failure is a necessary ingredient in the recipe for success is something we all have acknowledged, if only because venture capitalists and other entrepreneurs we admire have published their version of this verity in book form and other media. We also acknowledge, maybe more hesitantly, that genius is as much an attitude toward events and circumstances as it is a creative response to them - we are by now comfortable with knowing it is actually the attitude that in great measure will determine what the response will be; and we know the more robust the attitude the better the chance our response will garner success. Yet it still appears to be that although we "know" our (statistical) chances for success are much higher when we believe we will succeed (before we actually do) and although we know that failure is a (statistical) potential to be embraced as a necessity on the way toward great success, we do not, in general, have enough "knowledge" to actually go out and have that intense experience of success for ourselves. For a long time this author has wondered why this is so. Why do so many otherwise very intelligent people not chance the risk failure for success? At first it was a matter of believing that people were taking risk, but somehow the evidence wasn't able to be seen. This then evolved into believing people were willing to take risk, but they just had not yet had the chance to do so; but now the new theory this author is working with is that people are willing to say they believe it is true that great success can be had with risk, but they themselves do not want to personally experience the risk, unless it can be made to bear with convenience. First, knowledge is quite experiential. Please allow a boating analogy: If one is not experiencing a rocking ship & the threat of great waves, then one does not really know how to navigate a thunderstorm on the water. Appreciating the idea of knowing the thunderstorm on the water is very much not the same thing. Second, to extend the analogy, if one is on a journey from one land to another and has to cross a great sea, to not want to experience the sea is to miss the point of the journey - one is not setting out to experience the sea, per se, but to arrive to the new land. The sea is merely the gateway to getting there - and one should therefore set out prepared to meet it at its terms, including its storms and great fish. To conclude the analogy, a raging storm and a giant shark are by definition inconvenient. Neither can be met in close range comfortably. Yet, knowledge that storm or fish can manifest unpredictably (but with statistical probability) is a guide for preparation. Sailing on the sea is a close range experience. There is not a "risk premium" to defer this and there is not a loophole out of the experience that will somehow nonetheless grant the journey's rewards. If one is sailing from one land to another, then one has to take the risk onboard. Therein, a conundrum arises. There are both those who have trepidation of setting out to sea and those who are excited about the potentials inherent in the new land. (Christopher Columbus and Vasco da Gama would, incidentally, exist in the second grouping.) What is essential to see is that the groups are only separated by their difference in perspective and priority. The latter group is focusing on the reward - the new land; the former group is focusing on the details of the risk in getting there - the sea. What we must do is source convergence between the excitement of the land and the risk reality of the sea. Most of us agree, albeit for myriad reasons, that the financial systems we have worked with recently are not well suited for a 21st-century globally integrated reality - they are legacy systems stemming from 17th, 18th, 19th and early 20th-century autarky. We also know that it is not that we do not advocate for new and better systems, but that we worry about the shocks such systems would leave within the confines of our present reality. We are more comfortable with reforms and other measures of incremental revision not because they are the best remedies but because we believe they are the remedies we can generate coherently within a wide spectrum of complexity. It is interesting that we do not have the same concern about sudden systemic shocks when they are by-products of known methods of operability - yet we do fear them when they are front-loaded in alternative paradigms of sustainability. It is time to emphasize the nature of the land we would like to reach and to then construct a sea lane to get there. Wide consensus can be drawn amongst disparate partners when we talk about the future rather than finding discrepancy in the different ways we each choose to work within today. Within financial services, there are few who would say they would like to see a world with mass starvation, disease and war fare, but there are still not many who can decide on a method to generate wealth that is not arbitraged through systemic chaos and instability. A 21st-century risk management system will use complexity as a tool to navigate and optimize the sea of systemic evolution rather than as a gear to stall or improve resistance to rules and regulations of the sea. While in the past it was prudent to avoid risk, or to package it in such a way as to defer its downside to exogenous entities, in the future success will be guaranteed through taking on risk in the "first person" liberally. The difference in the future is that businesses, partnerships, other ventures and societies will emphasize their capacity to choose activities and associated risks that offer the best chance of recovering from failure and for diffusing benefits to the macroenvironment with limited opportunity for a widespread macro downside proclivity. Products, services and strategies that continually enrich the multisphere cosmology of individual and group reality will become the premium for risk - inverting the paradigm of risk reward from greater reward for greater degree of downside or negative risk to greater reward for greater degree of upside or positive outcome. It is a shift in perspective and priorities from fears to achievements. Because multipurpose success in business and society is more complex to execute than linear, single-purpose, single-entity strategy, risk will be rewarded for embodying skill in mastering work with dimensional (beyond the walls of financial dimensionality) predictability and sustainability. In the risk management community, a shift from legal and financial tools that seek to outdo the regulatory fundamentals will be replaced by tools that seek to discover how regulation can be used as an asset for the development of higher order ideas, products, business ethics and comradery, supporting the environments within which work is done. Envisioning finance as one component of business strategy as private enterprise is one component of society and as society is one increment within the evolution of humanity, risk management for the future will rate favorably "options" originating from due diligence and reportage as understood within a full spectrum of accountability. Failing while on course for success is different from failure incurred through poor practices. Rather than mitigate risk as safety from unknowns, poor planning or nefarious activity, it is better to initiate risk for the benefit of a new kind of financial heterogeneity that seeks diffusion throughout society. Risk management for business advantage is something that must be incorporated personally by each practitioner. Etiquette and practice can only be improved when leadership and guidelines are developed with a clear sense that, "this is me." This will require professionals to take a more holistic view of themselves as not only agents of work but also as simultaneous agents of "themselves." Rather than inducing a non-professional sentimentality, or something inappropriate to professional activity, self-reflection on the job at the individual and institutional level within the sphere of management and day-to-day staff activity enhances the business' ability to sanely and coherently meet and surpass expectations and bottom-line responsibility. Through the language of risk, risk practitioners and theorists can also show other members of the finance and business community how to more rigorously dissolve the disconnection between departments, sectors and other spaces and spheres of activity. Even if we ourselves cannot completely unfetter from the social and personal constraints that cause us to approach risk and investment from a self-centered or rigid perspective, it is at least wise and prudent to prepare future generations of professionals to operate within a landscape where such limitations no longer exist. As such, risk management can and should be about teaching and training (young) people to view the globally integrated economy as an opportunity and not as a threat (and also not as an opportunity buoyed by a threat to someone else). That is a great way to prepare for long-term profitability. While extant practices of slowness, rigidness and opacity will continue to obfuscate such an endeavor over some time, they cannot be used as excuses for radical inactivity. Preparing those in business, government and society to achieve competitive advantage through practices designed within a context of mutual responsibility is the greatest benefit today's practitioners, senior and otherwise, can bequeath. Great achievement, including financial success, will require great capacity to overcome failure as it should arise. Developing business communities and families, with special attention to young recruits, in the practice of a future-forward enterprise-wide risk management system with values of a globally integrated mutual accountability can only increase the chances of reaching "the other side." (The author is appreciative of reader's willingness to translate her various uses of the word "risk.") Posted by Odette Gregory at 12:53 PM | Comments (0) May 30, 2009 What is new?It has been a point of interest to note the many ways that the present is used as a recycling station for the past. Processes, products and people are retained not because they meet criteria of fitness but because they are familiar. Concurrently, meetings, strategies and reports pay homage to and advocate for progress and change - methodologies for meeting new criteria are then proposed in order to create or maintain efficiencies and profits. There is a general desire to foresee and take appropriate advantage of new opportunities and yet new activity is located within assumptions of previous paradigms, the most cohesive and popular of which is "boom, bust and recover". According to this framework, right now we are working to recover as we anticipate continued jolts from the bust while we model scenarios for riding the peaks of the next big boom. This way of looking at and redeeming one's self in the markets is not necessarily an innovative or sustainable way to create prosperity and wealth; and as a methodology it is, to use a hospital analogy, something rather for the intensive care unit than for the maternity ward. While there may be nothing new under the sun, there is still the possibility for creating something good - not good as posited against bad, but good as in processes, procedures and outcomes that are integral and whole, that do not pollute (physical as well as psychological waste) and that generate the best outcomes for the most people most of the time. Innovation is not necessarily something no one has ever seen before, but something that takes a given situation and assembles the given components to generate the most optimal outcome. Innovation is having the right answer at any given moment, consistently. However, innovation requires a departing from previous mental and physical models that have an inability to work. Risk management has been at its heart about stewarding change, yet I would add it should also be about optimizing the systems within which business occurs. In this way profitability can become wealth that is naturally regenerative, widely distributed and stable. (e.g., does instability really need to be the froth of future success?) What is new today in risk management? Posted by Odette Gregory at 07:25 PM | Comments (0) April 29, 2009 Historical referentsThe April 18/19 2009 weekend FT (US) published an article entitled 'Banking's earliest chapter', written by Mr. Vincent Boland. It chronicles some of the work by historian, author, archivist and academic Mr. Giuseppe Felloni in his research about the Genoese origins of Italian banking. Mr. Felloni's work is important as its manifestation amends the history of contemporary banking, although already historicized through an Italian legacy. What could be most important about the information presented in this article is that it reminds us that to know anything in the present fully, it is not unimportant to have an accurate knowledge about (its) evolution (from the past). This is not to say that a real-time, present, entity lacks full identity outside of its immediate self - an exchange rate is that rate and a company guideline is that guideline - yet it is to say that historical accuracy provides a useful tool of context. To know something by the criteria of its evolutionary details is a more robust knowledge than to know something through the context of its modernity. Increasingly history will be relevant for risk managers as they deploy their trade. For example, systemic anomalies are evidential as historical referents - they are behaviors that emerge from a wider or deeper context than the one currently available to see. Likewise, banking practices work well, or not well, and in specific ways, as per their reason for being. If that original reason is not historically situated with accuracy, then present-day practice, implementation failure, and implementation success, is only partially determined and advocated for, or mitigated against, in terms of risk. A complete risk management process will include a survey of history. Posted by Odette Gregory at 05:35 PM | Comments (2) March 31, 2009 Accept: insights into risk from functionalismIn 1931 "acceptera" was published in Stockholm. It is widely conceived as the Swedish manifesto of functionalism in building-art. As per my PRMIA web log entry of October 19, 2008, "acceptera" is also one of the essays within the triad published by The Museum of Modern Art last year under the title, Modern Swedish Design Three Founding Texts. That design, art and architecture are intimately tied to risk is based in their mutual concern with functionalism. Naturally, there are divergences and other trends, but that the form of a construct should match its function is a mainstay principle in the creation of elements, modules, nodes or systems of any scale that are intended to mesh appreciably within their intended environ. "Acceptera" routes out the excuses for not freely expressing best form within a contemporary setting and, in the context of Swedish building-art, with the architecture of any time considered as an integral component of that time's international culture, government, technology and economy, calls for society at large to accept, without provision, the immediate details of present-day reality, so doing, to come to terms honestly with now's conditions and, to thereby, place everyone-s best effort toward determining and creating a sustaining environment that is flexible in its construction and in its meeting of the present moment's most immediate needs. -- Within this essay advocating for acceptance (of reality), there are many intermingling and interlocking themes, of which several are presented here: Relinquishment of the status quo: breaking with historical forms that cannot meet contemporary standards: separating development from improvement - evolution as a relative state, qualified by the contextual societal terms it finds itself situated within; the idea that one cannot recreate the past nor should want to do so, while also allowing elements of the past to remain comfortably in situ with their present-day analogues. The development of positive attitudes of inquiry: change as a normal function that inherently destroys the old to make room for the new; letting go of solutions that fit personal interests in favor of solutions that fit the real problems of the day, as they are, in and of themselves; knowledge that today's forms of prosperity will differ from yesterday's; a willingness to delve deeply into the nuances of language that often describes realities that have already changed form (and thus relegate the user of that language in the present to the past). Present-mindedness: "affirm(ing) the features of the present that differ from other eras and to fearlessly allow new ideas of form to emerge;" paying close attention to the actual facets of mechanized, technological society and finding the procedural implications for social organization and regulation in order to construct the best systems for their most efficient facilitation (rather than proscribing from a historical vantage point). The idea that how individuals in society live ought to be the basis point for determining the architecture that should house them (the architecture that should house the systems through which they live as well, as an extension of the idea of form fitting function for system optimization). The unification of aesthetics with logic: beauty per se as useless unless merged with a clear and definite advancement of form, calculated rigorously to meet the criteria and demands of any given function. Design objectivity: working from the interior to the exterior; recognizing the smallest node as the seed for the flowering of the full body system; planning based on today's criteria with replacement of old points of departure (especially as per spatial relationships and the fit within [theories of] socially adaptable architecture). Design integrity: emphasis on installing intentional mechanisms for transparency as a function of systemic health and adaptability (windows for illumination); allowing quality templates for architecture to flourish for the sake of economic prosperity (better templates with thereby greater international relevance generate opportunity for increased mass production) - striving toward flexible standardization with craftsman-like attributes; emphasis on the living nature of systems. Allowing speculation, organization, commerce and design to co-create inexpensive high quality design to replace in/expensive low quality design in the market: utilizing a global network to achieve this; refrainment from artificial sustenance for industrial maintenance. The invaluable nature of relationship between man and machine: embracing machine society to elevate standards for human potential; envisioning the division of labor and specialization as an opportunity to discover new professional satisfaction through the pooling of human resources for the sake of holistic outputs that are, in sum, greater than the constituent parts. Recognition of technology as art and thus imbued with functional style that uses materials and structure as the means toward achievement of solution-appropriate form: "Art is order;" "the desire to give logical clarity to the workings of [its] form-constitute in reality a rejection of the dualism between technology and art." -- As risk management is increasingly concerned with leadership and the ideological model of risk, along with its communication, it is hoped that the ideas presented here can, from the realm of architecture, design and art, add some additional context for the shaping of constructive interdisciplinary, cross-institutional, dialogue. "[A]ccept the reality that exists-only in that way have we any prospect of mastering it, taking it in hand, and altering it to create culture that offers an adaptable tool for life." (all quotes) Source: Ahren, Uno et alia. "acceptera." Modern Swedish Design Three Founding Texts. The Museum of Modern Art. 2008. p. 140-347. Posted by Odette Gregory at 08:16 PM | Comments (2) February 19, 2009 Balanced risk"Since the spring, and most acutely this autumn, a global contagion of fear and panic has choked off the arteries of finance, compounding a broader deterioration in the global economy." (1) "The social amplification of risk framework (SARF) enjoys the status as the most comprehensive overall framework extant for the study of risk. It ostensibly meets certain fundamental criteria expected of fruitful conceptualizations: coherence, internal consistency, sound organization and parsimony. Disciplined inquiry into the facets of risk has been systematically and fruitfully guided by the SARF. That the SARF is capable of generating testable hypotheses has been amply demonstrated with a range of empirical studies that either elaborate the scope of the framework's applicability or seek to test its congruence with propositions explicated or implied in the framework. Thus, the principal means for affirming the theoretical usefulness of the SARF has been based upon empirical matters. "Because the SARF is not only a framework for theoretical elaboration, but also a policy tool, the argument was extended to risk policy. The incorporation of a metatheoretical framework into the core of the SARF also provided a basis for establishing symmetry between the SARF and democratic risk policy. Furthermore, it established this basis on the practical grounds of common framing, demonstrating a shared, pre-analytic frame between experts and policy makers, on the one hand, and laypersons on the other. Common framing is one essential element in creating effective democratic procedures for the management of risks. The policy utility resulting from this approach, combined with the theoretical utility above, offers a compelling basis for incorporating the framework of reconstructed realism and its contents, HERO, into the Social Amplification of Risk Framework." (2) Risk, as probability or as "hierarchical epistemology combined with realist ontology" or as policy or as theory, has to be first understood as that which is before it can be understood as that which has value. This is because it is in the placement of value that our perceptions or judgment interpret risk according to our own means. That we require judgment to execute decisions is, for all intents and purposes, correct. But that risk should be conceptualized via our judgment is incorrect. Risk is a situation that might happen or might already be happening in some fashion we have not yet detected. To say then that an event "happens," is really to say that we have just acknowledged or discovered it (perhaps as only yet a possibility). Since risk is a happening that coincides with our perception of it, and also with its effects upon us (these effects are, also, arguably, subject to, and therefore made "real" by judgments & perceptions), it is not only something negative to be capitalized upon or mitigated away. Rather, it is just some thing that, in its own ontology, merely is. Therefore, risk management, from the vantage point of our perceptions & professional concerns, should really be the process of looking out for events that can have a positive, negative or neutral effect, and then figuring out ways to place the firm in the best position to sustain itself within the context of that synergy. Our ideas & our perceptions can be a truly "unknown known." How do you develop a "risk and control function" that discovers knowledge as ideas, values them, determines their net effects and also accounts for perceptual shifts? How do you figure out what it is you know that you don't know you are aware of - i.e., how do you find the nature of your perception when you might not even know that what you perceive is an extension of something that you know? How do you negotiate, rank in quality & delineate between the ontology and the phenomenon? Risk may not ever be taken completely out of the financial system, if only because, as risk is part perception, it will be within any system, but the hierarchy of preferences for certain kinds of risk will change. It does seem also that the public (laypeople) and the experts need to find a common context for meaning-making, aside from also defining risk thereof, as per SARF & HERO (as an example), in order to then come to trust. Perhaps stating, Risk is Everything, is not to indulge in a non-empirical circus of logic. We exist, ontologically, within a framework of probabilities, and phenomenologically, within a context of intentions, actions & meanings, shared & individual. The phenom and the noumenon interact to form our reality (also shared & individual). This interaction is what risk is - it is a circumstance and result, which, depending on your preference, is negative, positive or neutral. Acknowledging that dynamic is the first step toward not only finding "democratic procedures for the management of risks," it is also the first step in becoming aware of the known unknowns, of finding our own perceptions - if we know that what we know may actually not be knowledge itself (noumenon/ontology) but our idea about what knowledge is (phenom), we are prepared to take a newly articulated, practical & testable approach toward determining, and placing ourselves within a context of, management and risk. Seven lessons were derived from the financial changes of late in the article first quoted above and it is notable that each of the lessons finds some home or relation, explicitly or otherwise, in/to the balance sheet. Moving forward, it would appear that if the balance sheet, with ontology, and phenomenology, could be simultaneously brought forward as a locus of inquiry for the firms, the regulators and the public, hashing out productively the nature, the cause, the effects & the on-going solutions for and management of risk could be a happening that much closer at hand. (1) Blankfein, Lloyd. 'Do not destroy the essential catalyst of risk'. Financial Times. 2.9.09, p.7 Posted by Odette Gregory at 08:59 AM | Comments (0) February 08, 2009 Valuing alternative energyResponse to December 10, 2008 Web log inquiry. Dear Mr. van Huijstee, Following is my response to your inquiry about oil/alternative energy: "What we obviously like to see is how we can translate the market movements of petro in sensible valuations of (proposed) alternative energy assets. Classic DCF may well be failing us. Could you suggest a direction?" First, thank you for your use of the word, "sensible." Second, may I recommend to you the Fall 2008 issue of Rotman, entitled The Future of Capital. Here. -- Classic DCF is failing, in my opinion, because there is no holistic and accounting- and regulation-universal code for valuing the firm. DCF equations use arbitrarily derived inputs and corporate &/or firm tactics are then based on these models as if they are predictions of the market. In fact, they are predictions of the outcomes that would come to pass if and only if every added input were verifiably true, over multiple periods of time, in a closed set of variables and variation. I suppose DCF is okay as a finance and accounting tool, but I would de-prioritize as a way to get to value. -- The primary premise, as I understand it, of the current valuation regime in the energy markets is that competition is objective between oil and alternative energy in a zero-sum market. We do not have a zero sum economy and the relationship between oil and alternative exists as a function of a regulated market. Historically, regulation has favored the oil industry over other forms of energy. This is common knowledge, I believe. Alternative energy is not a special case because it is still widely known as a marginal asset -- all disruptive assets start out at the margin (think, Internet). A signal has been sent at the US federal level, however, so market participants should feel confident about alternatives. Even many of the oil majors, like ExxonMobil, have been scaling alternative for some time now. -- I think that alternative energy is an exponential object, an asset class that is actually a function in and of itself. Applied to other assets, including human capital, alternative energy increases an asset set in value. Risk models should take this into consideration, using valuations that include things like positive weightings for net contribution toward future carrying capacity for the non-man-made ecology; and also considering variables to determine value that include social impacts for capital value. I think more robust frameworks for the determination of probability, like Mr. Jerome Glenn's Future Wheel, can help to better value, avoid, transfer, mitigate or retain risk, as well. -- "We would like to propose a somewhat radical idea: that companies redesign their internal financial performance measurements for the digital age. It is time for organizations to take measure of the real engines of wealth creation in the 21st century: the knowledge, relationships, reputations and other 'intangibles' created by talented people. … Intangibles are true 'capital' in the sense that they produce real cash returns." (1) "To create wealth today, companies must first change their financial performance metrics so that they are focusing on returns on talent rather than returns on capital alone; and second, they need to change how they measure performance internally in order to motivate managers at all levels to make better decisions - particularly with regard to spending on intangibles." (2) I would add, and I think this is directly related to energy asset finance and risk, that consensus is needed on a definition of the digital age and of time in general. Also, intangibles function as liabilities too and should be measured as engines related to growth. We should also define (in multiple contexts) what we mean by talent (again, in multiple contexts). Arguably each and every member of a firm should be provided with the tools for motivation to make better decisions. I wouldn't stop at management. I would educate from the ground up. A firm wants to create a professional environment where everyone is skilled and activated to improve and promote capital value -- risk experts do advocate for firm-wide risk literacy and I do link risk literacy to decision making on the job; therefore I also suggest including in-house risk literacy as a variable in any energy investment model. Another issue is that not only do firms need to do some redesign of finance benchmarks, but a universal standard needs to be drawn and agreed to for accountability and meaning across borders. There is already a movement geared toward universally agreed upon standards (and agreements for standards of measurement) for finance and risk, and this is complemented by the movement to grade and measure environmental impacts into and out of the markets. However, consensus is hampered by interests vested in respective legacy systems. -- Suggested direction: Since investment has so much to do with perception of risk, I advocate for different language for green energy as an asset class -- 'alternative' in my thinking implies an outsider status that does not properly reflect the mainstream profitability of green technology and entrepreneurship. Also, not everything can be parallel processed and I think valuing green energy, especially as it is so closely interwoven with regulation, government incentives and the entire global economy, is no exception. By this I mean that the framework for the valuation itself, ideally based on a common understanding, cannot be evolved thoroughly with the attention required for due diligence if the markets continue to evaluate energy assets (and those tied to energy) according to the currently operating system -- I think this is because the valuations are outmoded as per my comments above and also because, arguably, we do not have a lot of time to come to new terms and make actionable decisions. So, since valuation can be so complex and because I think it would be almost impossible to fairly choose, amongst all market players, the assets, positions and other holdings that should be subject to special attention for the sake of an energy market "upgrade," I would recommend instead a freeze on all energy asset valuations as of today. I suggest this for two reasons -- 1. It's objective, certain caveats aside, "now" can be easily date stamped in a transparent fashion everywhere; 2. freezing these valuations will allow for a constant value variable, as per the most up-to-date market information available on energy; constant variables of this kind will be needed moving forward in an attempt to design a coherent "21st-century" energy valuation protocol (I'm thinking of something similar to currency exchange where green energy becomes the new "base currency" for the energy market) . I would then recommend the following: Choose a time period for the freeze (like 10 years); Reconstruct the global energy supply chain by using favorable regulation to incentivize (meanwhile prices trade at today's values-should the mechanics for that really work); Prioritize education and technology to ensure an optimally productive workforce; Properly include all current energy players in the establishment of new markets based on their areas of expertise; release the 10-year stasis on the energy commodity index and drop the prices into the new market (ten years hence). Determine the value of alternative and oil assets through market valuation using metrics such as those touched upon above. -- Thank you, again, for your comments. -- (1) & (2) "Financial Performance Measurement for the 21st Century". Bryon & Joyce; Rotman Fall 2008. Posted by Odette Gregory at 03:42 PM | Comments (0) |
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