Day two of Risk Awareness Week focused on practical step-by-step workshops showing how to apply quantitative risk analysis to climate and environmental decisions.
However, even though the sessions all related to ESG in some way, the techniques shared by the experts can be applied to any type of threat facing a business. For example, modelling principles, quantification of uncertainties, moving away from averages and avoiding human biases are all critical for improving business decision making. Therefore, the strategies shared by our experts are exactly the same as those you would use for strategic risk, investment risk and many other common threats. The calculations you use for climate risk, can also be applied to cyber risk, supply chain risk, or risk of fire and flood.
Here we examine the three most popular sessions of the day, and highlight the specific techniques shared by each speaker as well as where to watch the sessions to find out more.
Scenario planning for risk decision making
One of the top sessions was a workshop on scenario planning for climate and other global threats, by Hans Læssøe, the Founder of AKTUS.
This session is a demo workshop where four distinctly different, yet plausible scenarios are used to generate a series of issues which are then prioritised systematically.
The process was initially created at the LEGO Group where it became a mandatory part of strategic planning for each business area. It is also described as a case study used for MBA training at Harvard and several other universities. The process shared during the session is a revised and improved version of the original.
Hans argues that using scenarios helps us to think of important risks that we might otherwise have missed. It also helps to avoid issues where linear thinking is inadequate for effective planning.
Hans then walks listeners through the valuable PAPA model and gives a step-by-step guide on how to implement this. The model is used to help prioritise risks into four categories: Park, Adapt, Prepare and Act. There are two axes in the two-by-two model, likelihood (do we expect this to happen within our focus timeframe) and speed (relative to our adaptability).
Using this model can allow you to define a specific set of mitigating actions or steps that need to be taken for each risk. Some that are low likelihood and low speed, will require not action at all, while those that are high speed and high likelihood will need defined owners, actions, timing and follow ups.
The technique can then be used for a variety of risks, not just those that are climate related.
You can watch the 45-minute session and download a template for the model here.
Understanding uncertainty and discovering levers
Another top workshop examined how to make sense of uncertainty, led by Mariia Kozlova, a post-doctoral researcher at LUT University.
Mariia argues that classic sensitivity analyses help to prioritise risks, but their power is limited. They check factors one by one, whereas, in the real world, many things change simultaneously and often interdependently.
In her step-by-step workshop, she explores how companies can understand these complexities and how to derive value for decision-making from them.
This included a valuable technique showing how to decompose a loss exceedance curve, Monte Carlo distribution and risk profile into the underlying factors, which is a better alternative to a Tornado diagram that you might normally use.
Typically, Tornado diagrams can be quite limited because they take just one variable at a time, and show the independent effects on the final decision. But Maria’s technique demonstrates a mathematically sound way of showing how different risks and different assumptions affect your overall risk profile.
As well as helping to better quantify risks and make decisions around them, this is also quite a valuable exercise in communicating risk profiles to decision-makers.
You can watch the 30-minute workshop and download a sample simulation here.
Deciding which risks to focus on
The third most popular workshop of the day examined how to establish which risks a business should focus on.
He says there are three stages to setting up a risk analysis.
- Define the types of impact you care about
- Define the risk tolerance appropriate to each activity
- Define the different ways you want to aggregate risks
This means that essentially when you have controls, you can figure out which will bring the greatest amount of value, and which will bring no value at all.
A bow tie diagram is then a way of understanding the story that leads you from why a risk might occur to the consequences that might come out of a risk. There’s a driver, control, risk event, mitigation and consequence.
If you can look at three points, the point the event occurred, how this happened and who would experience pain and by how much, it allows you to develop strategies to prevent an event from occurring. It also lets you look at limiting the damage if an event does happen, but generally you will focus on prevention rather than mitigation.
He argues that this logical structure is helpful and moves away from traditional risk registers which just jumble these things together.
But where bow tie analysis becomes really helpful is looking at multiple causal factors and multiple possible consequences. Looking at risks this way means that sharings of controls and mitigations don’t get lost.
The session showed examples on how to apply this method to environmental risks, but once again, the technique can be applied to any threat facing a business.
Watch David’s full session here.
Other key sessions for the day were:
- Forest fires and floods are not the same – Sam Savage & Joe Scott, ProbabilityManagement.org & Pyrologix – watch here
- Green Accountability and Incentives: Reflecting the Social and Economic Cost of CO2 in New Capital Projects – Robert Brown III, Senior Strategy Analyst, Novelis – watch here
- Identifying and understanding optionality with value of information – Brian Putt & Alex Sidorenko, Putt DQ Consulting & EuroChem – watch here
- Using stochastic decision trees to quantify environmental risks – Alex Sidorenko, Chief Risk Officer, EuroChem – watch here