Cedric Stephens | Put risk managers on company payrolls

What does the Government of Jamaica’s Fiscal Policy Paper for 2024/25 and a big private sector financial group’s consolidated audited financial statements for the period ending March 31, 2024, have in common? Answer: they spend many pages discussing risk management.

In the case of the GOJ policy paper, 16.3 per cent of it records how risks are assessed and managed in the economy. The private sector group allotted 22 per cent of its pages saying how risks are administered.

Governance, risk management and compliance – referred to as GRC – is a relatively new management system. It integrates these functions into the processes of every department in an organisation. GRC reduces risks and costs. It is a strategy that requires organisation-wide cooperation to achieve results that meet guidelines and processes for each of the three key functions.

Ministry of Finance and Public Service technocrats wrote GOJ’s policy paper. They identified 12 risk factors and grouped them into three categories. They are macroeconomic – that is, risks affecting the economy as a whole; contingent liabilities; and others. Macroeconomic risks include inflation, exchange rates, and interest rates. Contingent liabilities include climate-related risks and adverse court awards. The upside and downside risks from the operations of the central bank fall into the other category.

The private sector financial group said its risks arose from the use of financial instruments. As a result, its operations expose it to a variety of financial risks: credit risk, liquidity risk, market risk and other operational risks.

Market risk includes currency risk, interest rate risk and price risk. Operational risks were not defined. They include weaknesses in an organisation’s staff, systems, and internal controls to prevent disruptions and financial losses. The fraud that reportedly occurred in the SSL fiasco is one example of an operational risk.

Surprisingly, the private sector financial group did not mention climate-related risks in its discussion about the threats that the enterprise faces. On the other hand, Pages 9 to 14 of Appendix VI of the Fiscal Policy Paper deals exclusively with climate-related risks to the local economy.

Here is one excerpt: Climate change and measures to respond to it have potentially significant physical, macroeconomic, and fiscal consequences. The physical consequences include changed precipitation patterns, sea level rise (amplified by storm surges) and more intense and frequent extreme weather events. The potential economic consequences include productivity changes in agriculture and other climate sensitive sectors and financial market disruption.

The Bank of Jamaica spoke recently about the threats of hurricane-related storm surge and earthquakes in its planned downtown and uptown expansion plans.

Experts say that financial groups are increasingly exposed to climate-related risks. These risks can be divided into two broad categories: physical risks and transition risks.

1. Physical risks:

• Acute physical risks refer to the direct damage caused by extreme weather events like floods, hurricanes, or wildfires. Financial institutions that have assets or investments in regions prone to these events may face losses or the need for costly repairs and insurance payouts.

• Chronic physical risks relate to long-term climate changes such as rising sea levels or gradual temperature increases that affect the viability of certain industries, infrastructure, or real estate markets. These risks can diminish asset values over time and increase liabilities for financial groups.

2. Transition risks:

• These arise as the global economy shifts to a low-carbon future. Changes in policies (like carbon taxes, stricter regulations, or emissions reduction targets), technology advancements (such as renewable energy adoption), and shifts in market preferences (such as greater demand for green products) can impact companies’ financial performance. Financial institutions may face exposure to industries that become obsolete or more expensive to operate due to these changes, such as fossil fuels or high-emission industries.

• In addition, financial groups may face reputational risks if they fail to adequately manage or disclose their climate-related risks. Increasing pressure from regulators, investors, and the public means that those who don’t align with sustainability goals may experience a loss of trust or capital.

Liability Risks: Financial institutions may also face legal liabilities if they are perceived to be complicit in contributing to climate change or failing to manage climate-related risks. For example, there could be lawsuits from stakeholders claiming financial losses due to the institution’s investments in high-risk sectors, or failure to disclose climate-related risks adequately.

These threats are not remote. This newspaper reported a few days ago that Hurricane Beryl, whose eyewall passed to the south of the island, sent the economy into decline. The Planning Institute of Jamaica estimated that the economy contracted by 2.8 per cent during the July-September quarter and is projected to do so again by 1.5 per cent in the October-December period.

Do members of the private sector recognise and understand the nature of the climate-related and other threats that they face? Do they have the capacity to effectively manage the risks? Do members of Jamaica’s insurance industry possess the required skills to help private sector companies effectively manage the threats?

Risk management 101 says a risk manager is responsible for identifying, assessing, and mitigating risks that can potentially harm an enterprise or organisation. The role is crucial in ensuring its long-term stability and success.

The key functions of a risk manager are: risk identification; risk assessment and evaluation; risk control and mitigation; monitoring and reporting; risk communication; crisis management and response; compliance and regulatory management; training and awareness; strategic decision support; and business continuity and recovery.

Risk managers play a vital role in safeguarding an organisation against uncertainty, whether it’s financial, operational, technological, or reputational risk. They do this through structured risk management practices, ensuring that risks are properly identified, assessed, mitigated, and communicated throughout the organisation.

Private sector enterprises must include risk managers on their payrolls. The risk landscape is rapidly changing as the Ministry of Finance & Public Service has shown.

Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel, write to: aegis@flowja.com or business@gleanerjm.com