KPMG report highlights energy risk shortcomings

January 29, 2014 | 11:13
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KPMG International has released a review of energy and natural resources data collected by the Economist Intelligence Unit.

The data collected for KPMG’s Global Energy and Natural Resources (ENR) practice reflects that while risk management continues to be a high priority for ENR executives and boards – the management of these risks is not advancing as fast as the threats that they face and companies are at risk of falling short in important areas.

“ENR companies are at a critical point in their risk management efforts,” said Ta Hong Thai, partner and ENR leader for KPMG in Vietnam. “The data in the report clearly shows that ENR organisations urgently need to return to the basics and reconsider what they expect to achieve through their risk programmes if they hope to keep up with the rapidly-changing risk environment in which they now operate.”

The data also shows that ENR organisations are already starting to lag behind. Less than two thirds of respondents said that they ‘often’ or ‘constantly’ incorporated risk management into their strategic planning decisions, only 14 per cent of respondents said they had a formal risk appetite statement, almost half admitted to not doing an annual bottom-up risk assessment, and more than a third said that their risk management function relies on a self-assessment from the business units, rather than a centralised risk analysis.

The review also reveals that more than two thirds of ENR respondents saw geopolitical instability as the greatest threat to the industry, while more than half cited regulatory pressure as a major threat. Regulatory uncertainty is particularly keen for those ENR organisations venturing into new countries or unstable regions.

When it came to risk management, ENR respondents noted less confidence in their boards than other industry sectors surveyed in the research. Just over a third of respondents suggested that their boards had a strong enough understanding of the issues to effectively communicate risks. In addition, only 42 per cent thought that their boards fully appreciated the importance of the risks they were facing.

Also according to the data, almost a quarter of ENR organisations had no means of measuring the return on their investment into risk management at all. In addition, a third focused on reviewing past events to assess the effectiveness of their risk controls. 

“Many ENR companies often have very good systems for measuring the return on investment in major capex programmes but they do not adequately measure the return on the investment they make in managing and mitigating the risks associated with those programmes,” noted Nguyen Anh Xuan Trang, Risk Consulting director at KPMG.

“ENR organisations, including those active in Vietnam, need to have clear goals around their risk management programmes and link those to what internal and external stakeholders expect,” indicated Trang. “The heart of the problem is that even huge companies address risk and measure risk very simplistically. It’s not connected to the real-world finances and operational targets of the group.”

The survey, conducted by the Economist Intelligence Unit, included almost 1,100 respondents from around the globe and across business sectors, and responses from more than 155 ENR executives in various functions including risk, compliance, finance, and general management.

KPMG is a global network of professional firms providing audit, tax and advisory services. It operates in over 155 countries and has more than 155,000 professionals working in member firms around the world. 

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