MANAGING EMERGING SYSTEMIC RISK
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Alan Laubsch
Director, VP of Risk Products
View of smoke plumes emitted from the Syncrude upgrader plant north of Fort McMurray, northern
Alberta, Canada. Photograph: Jiri Rezac/Jiri Rezac. Source: guardian.com
Systemic Implications of the Global Energy Meltdown
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Market linkages Clustering
Bilateral exposure data Asset price data Balance sheet data
Financial Cartography reveals connected
risks and hidden patterns
Central nodes
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How can we best manage emerging
systemic risk?
As in healthcare, our best chance lies is early detection
Source: MULTIPLE SCLEROSIS: ORIGIN OF ABNORMAL CELLS
FOUND, UC DAVIS (2011)
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Classic contrarian phase transition
1. Low vol (complacency)
2. Peak prices
3. … and then an outlier
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Divestment Tipping Point
Litterman believes an immediate risk
that investors should address is the
potential for "stranded assets," or
energy sources companies will not be
able to harvest as the cost of oil, natural
gas, coal and other fossil fuels increase
from carbon-related taxes.
"It's a risk management issue. Fossil
fuel companies aren't evil or bad—
they're acting rationally given the wrong
incentives. The incentive to emit is not
being penalized today," Litterman said
during a panel discussion on money
management in the face of global
warming.
"The risk that investors have in their
portfolios is not climate risk, per se, it's
the risk that assets will be repriced
because appropriate incentives are
created globally to conserve on
emissions."
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22 Sep 2014: Rockefellers Divest“John D Rockefeller, the founder of Standard Oil, moved America
out of whale oil and into petroleum….We are quite convinced that
if he were alive today…he would be moving out of fossil fuels and
investing in clean, renewable energy.”
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Given inevitability of carbon pricing, was
OPEC’s decision surprising?
Given that we have
exceeded safe levels of
atmospheric CO2, carbon
pricing or limits are
inevitable.
Paradoxically, until these
costs are imposed,
producers will keep
pumping
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Subprime Energy Bubble Bust
Carbon intensive industries/countries most vulnerable
- Equity, Credit, FX.
- Commodity bubble bust? Materials
2n order effects: Financials exposed to Energy &
Materials? Utilities? Liquidity risk.
Monitor systemic risk & focus on early warning
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Disruptive Energy “Dragon Kings”
The future is already here. It’s just not very evenly
distributed. - William Gibson
Alternatives
Divestment
Carbon Price
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Conclusions
1. See a Connected Picture of Risk
2. “Sense and Respond”
3. Amplify Social Intelligence
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