Energy Risk Culture
Contents
Definition
Energy Risk Culture denotes the combined set of organizational or societal values, norms, attitudes, competencies and behavior related to Energy Risk awareness (the perception of energy risk) that determine their commitment to and style of Energy Risk Management.
Energy risk culture influences the decisions of decision makers and has an impact on the risks they assume. In corporate Risk Management is strongly related to Operational Risk and Cost Risk and the level and quality of the corresponding risk culture can be considered to be a Key Risk Indicator for such risks.
Context
The notion of "Energy Risk Culture" comes to prominence in the context of the Energy Transition and facing the potential of an Energy Crisis. It is central for the sound and sustainable management of any entity that relies on significant Energy Consumption to deliver its mission.
The energy risk culture of an organization is likely to:
- Determine the degree to which organizational policies are internalized by staff and exhibited into day-to-day behavior
- Determine staff response to crises or situations that fall outside well prescribed operating guidelines
- Influence the organization's reputation with stakeholders such as regulators, clients, investors and the broader market
Challenges
It is useful to sketch a range of "unsound" energy risk cultures
- An active rejection culture. E.g., rejection of internal or external risk control guidelines and expectations around Energy Risk management as irrelevant or inconvenient. The senior management of the organization may be either distracted or tacitly endorses this attitude.
- An under-performance culture. This is linked to ignorance or incomplete understanding of internal or external guidelines and/or expectations due to lack of focus, and deficiencies in governance, risk management personnel, systems etc. There is an unspoken assumption that obscurity or small size or other factors are mitigating for the lack of pro-active risk management
- In some cultures there may be a tendency towards formal (appearance oriented) compliance culture. The focus shifts to "letter of the law" compliance and there is indifference towards the "spirit of the law". This can range from a "minimum requirements" compliance attitude, to "hyper-compliance", where every requirement is meticulously met but not really internalized.
- An overconfident culture. This is more of a secondary pathology. High performing firms with good knowledge of internal and external guidelines and expectations may make the conscious decision to operate at the margin of safety
Underlying Factors
Different cultural manifestations can be classified along the dimensions of the ability and willingness of an individual / unit to understand and operate following explicit and implicit norms and guidelines around energy risk management
Short-Termism
Short-termism may be a contributing factor to a variety of the above mentioned pathologies (e.g., rejection of risk culture, overconfidence). With a short term horizon individuals (or whole units) may make a (possibly rational) re-evaluation of their risk buffers for given risk tolerance and decide to magnify gains.
Lack of Reward
Skilled personnel with intrinsically sound risk culture may opt to stay in the sidelines because acting on their views may lead to penalties or be simply ignored. A minimum requirements culture is then seen as a safe haven
Poor Definition
Staff are not clear as to what is the expectation around energy risk management because this is not clearly defined and/or communicated by senior executives
Lack of Skill / Knowledge
This can be a significant factor for both senior and junior personnel.
