Fundamentals of Risk Management

eRM in energy and finance
Risk management in the energy and finance sectors has become a well-developed 
specialist branch of the discipline. In the finance sector, the objective of an ERM
initiative is to enhance shareholder value by:
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improving capital and efficiency by providing an objective basis for allocating 
resources and exploiting natural hedges and portfolio effects;
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supporting financial decision making by considering areas of high potential 
adverse impact and by exploiting areas of risk-based advantage;
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building investor confidence by stabilizing results and protecting them from 
disturbances and thus demonstrating proactive risk stewardship.
ERM in the energy sector is often dependent on the treasury function and the
specialist expertise of hedging against the price of a barrel of oil. This area of financial 
risk management has become well established, with very large departments being set 
up in many energy companies. However, the practice of ERM in energy companies 
still remains very closely related to the management of treasury risks.
One of the drivers for risk management in the finance sector is the regulatory 
environment. Banks have been subjected to Basel II for some time, and are preparing 
for implementation of the Basel III requirements by 2019. The insurance sector in 
Europe is about to be subjected to similar requirements, set out in the Solvency II 
Directive. This gives rise to the obligation on financial institutions to measure their 
exposure to operational risk.
The output of operational risk management (ORM) activities in financial institu-
tions is the ability to calculate the capital that should be held in reserve to cover
the consequences of the identified risks materializing. The impact of these ORM
activities is that risks will be better identified and managed, so that the capital
required to meet the consequences of the risks materializing is lowered. ORM within 
financial institutions can be seen as a particular application of the ERM approach.

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