The Enterprise Risk Management role in Italgas.
Italgas developed an ERM model designed specifically on its own business characteristics and organizational structure. Even more than that, the Company is constantly committed to evolve its ERM model, with the aim of ensuring the full success of the strategy.
Let us deepen how this model works and which opportunities it presents by talking to Marco Porro, who is at the helm of the Enterprise Risk Management in Italgas.
Why is it important for a company like Italgas to have a good ERM?
If an ERM system is adequately structured and implemented, it can offer an essential contribution. With this support, the Company can pursue its strategic objectives independently from the changes that might occur over time. Basically, the ERM success determines the health status of the entire structure of an organization. It is clear that if risks are not identified, they cannot be managed nor mitigated: this would leave the Company constantly exposed to different threats and would limit the opportunities to adapt to changing circumstances.
Is it easy to predict the risks that a company will have to face?
In a business context that is always more complex and in rapid transformation, also the corporate risk profile has to evolve, to include new risks that might be hard to foresee. For this reason, a disciplined and integrated approach to ERM is needed, also considering the business specificities and the context in which the company operates. The model that we have adopted at Italgas provides for an approach with a precise sequence – risks are identified, classified, evaluated; a priority rank is then assigned. These risks are constantly monitored over time and are made object of reporting. The risk map covers the whole range of corporate risks: firstly, those connected to business, but even the financial, regulatory or reputational ones.
What is the ultimate reason for having an effective ERM?
The way to read ERM has deeply changed over time. Years ago, the concept of risk was commonly associated with possible negative impacts or worries about an unknown future. Therefore, Risk Management essentially consisted in insurance coverages protecting the Company from the occurrence of certain events. Later on, the focus shifted on the goal to identify and strategically manage “material risks” across the entire corporate organization, within a certain risk degree – technically defined as “risk appetite”- recognized as acceptable. For this reason, the ERM’s sphere of action has broadened: in addition to the analysis of operating processes, aimed to defend the enterprise value, following a more integrated approach, it came to include also planning activities and, generally, decision-making processes.
So, a merely negative interpretation of risk is overcome…
Exactly. Today the risk paradigm has a twofold nature; it takes into account both negative and positive factors, where the positives represent opportunities that the company can choose to seize. In essence, an ERM system should make it possible to manage downside risks as well as upside opportunities: not just leading the company to avoid risks with negative impacts, but also helping it to decide where and how to allocate resources given a certain predefined risk/return ratio. At Italgas, we think that ERM’s goal should be to facilitate consistent, informed and conscious decisions in order to pursue corporate objectives according to a sustainable approach.
What are the tasks of the ERM team at Italgas?
Our main task is to maintain the model and ensure its adequate evolution over time. There are two sub-processes within our competence: the ERM risk map and the Business Plan risk analysis. In both activities, we provide a methodologic and operating support to the Process Owners, i.e. the people who are in charge of the processes. Concerning the risks that are under the responsibility of every Process Owner, we provide the information classification and historization; we also offer improvement ideas and solutions for the evolution of the risk management system. Furthermore, in our role of ERM function, we ensure the risk prioritization and reporting, and we integrate the different guidelines on corporate risks control, this way making available a comprehensive overview to the Top Management and the Supervisory and Control Bodies.
What is the ERM role in the Group risk map?
We support Process Owners to identify, evaluate, manage and monitor risks connected to operations, value preservation and business continuity. This analysis, which involves around 50 Italgas colleagues, provides a picture of how the Group’s risk-profile is evolving. It also allows us to map information related to the single risk and identify the areas in which the Process Owners can effectively act to handle the risks they are responsible for. This analysis is iterative – it is repeated at least once a year through six defined steps.
How do you use the results of this analysis?
The output of the analysis is the “Group ERM risk map”, summarized in the Italgas Group Risk Report. It is a document produced every three months, presented to the Top Management and the Supervisory and Control Bodies.
Monitoring is therefore quite frequent…
Yes, we monitor the Group’s main risks on a quarterly basis, involving the responsible Process Owners. Whenever it is possible, we use the measurement of specific Key Risk Indicators, collecting data that allow us to analyze the main risk factors: basically, they are real signs that anticipate future evolution. During the meeting with the Process Owners, we also monitor the completion status of the treatment actions that we are implementing.
You were saying before that ERM is also in charge of the analysis of Business Plan Risks…
Sure.Together with the Strategic Planning process, the ERM function, in coordination with the Finance, Planning and Control functions and the contribution of all other competent departments, conducts an additional quantitative analysis on risks, opportunities and uncertainties connected to the financial targets of the Strategic Plan.
What is your specific role as ERM function?
We ensure the identification and evaluation of risks, opportunities and uncertainties in the Strategic Plan and we estimate the comprehensive exposure of Plan’s targets.
As regards financial variables, we use quantitative methods to determine the volatility and its correlations, while, for more operational and managerial elements, we involve the Management, asking them to evaluate the potential variability of the main operating assumptions behind the Plan. This way, we have the availability of forecasts on possible variations as regards both timing and contribution from specific initiatives included in the Strategic Plan.
How do you use so many information?
We “aggregate” data to obtain a measure of the total variability of financial targets in the Strategic Plan. Through our proprietary MonteCarlo simulation model, the ERM team uses the information collected on risks, opportunities and volatility to generate over 2,500 alternative scenarios for variables evolution and assumptions behind the Plan; then, we evaluate their overall impacts on the value drivers of the Strategic Plan. Furthermore, we coordinate the identification, deployment and evaluation of the “disruptive” scenarios, meaning those scenarios that, in case they occur, would substantially change, for better or for worse, the reference context of the Strategic Plan.
What are the ultimate results of this work?
In conclusion, the analysis done by the ERM team provides Italgas with an estimation of the volatility of the financial targets of the Strategic Plan and allows for an evaluation of the Company’s resilience level in case of context changes.
You were mentioning the ERM model needs a constant evolution. What drives this evolution?
The drivers could be changes in the perspectives of the external environment, but even changes inside the Italgas Group. Among the factors driving the evolution of Italgas risk profile, and that of its ERM, we can think for example of regulatory changes, like GDPR, or perimeter changes, new services offered by the Group,… With the acquisition of Seaside, for instance, our Group entered the energy efficiency services business; that clearly implies a change in the risk profile as well. In that specific context, as ERM function we collaborated with our Seaside colleagues to identify and evaluate the industry risks, prioritizing them in an “Enterprise” view; we also ensured adequate reporting at all levels.
Are there any other factors that can play a role in the ERM evolution?
Sure. Some evolutions or extensions of the model can be driven by the opportunity to improve the management system of some specific risks. For example, at the moment we are working with the Procurement & Material Management division to evolve the risk management model connected to the procurement process. Those solutions will allow us to strengthen our analysis skills and to enhance the information to support the Procurement & Material Management function in its decision-making process, also with the aim of reducing from the start the occurrence of execution risks.
In conclusion, all asset managers think in terms of expected returns given a risk profile that is consistent with their investment style: they do not want to buy shares of companies that can later reveal unforeseen risks. The price they believe fair for a share is in most cases determined on the basis of expected cash flows, actualized at a rate incorporating also a Company–specific risk. Investment decisions are essentially dependent on risk evaluation and on the way in which the Company manages risk.