The risk management dialogue

00:00:02: Big welcome or welcome back to the Alfie Next Gen Finance podcast, a place where we discuss developments in Luxembourg's fund industry.

00:00:09: Today, we'll be jumping into such an important topic when it comes to finance, and that would be risk management and how we can navigate uncertainty with both resilience and clarity.

00:00:18: I'm your host independent journalist Natalie Gerritstein, and would like to welcome today's solo guest for first, Luigi Stefanizzi.

00:00:25: Welcome.

00:00:26: Thank you for having me.

00:00:27: Thanks.

00:00:28: You're a senior administrator in risk and valuation at JTC Group.

00:00:31: Can you tell us a little bit more about yourself and your role?

00:00:33: Yes, of course.

00:00:34: Thank you all for having me.

00:00:36: First of all, my name is Luigi Stefanizzi.

00:00:38: I came from Italy and then moved here in Luxembourg two years and a half ago.

00:00:42: And honestly, this is a choice that I do not regret at all.

00:00:45: I'm super happy to be here.

00:00:46: I joined.

00:00:47: I came here in Luxembourg because I won a scholarship.

00:00:49: for a master in private equity and investment funds, and then I started to work as a union risk manager in a real estate investment fund.

00:00:57: And then after that, I had the chance to join JTC, the IFM entity of JTC, where I'm covering, as you say, Natalie, the risk management and evaluation function.

00:01:08: On a daily basis, I deal with private equity and real estate funds, and I'm super happy to do it.

00:01:13: Okay, wonderful.

00:01:13: And congrats on your on your scholarship as well.

00:01:16: Thank you.

00:01:16: Thanks.

00:01:17: So let's first define risk management and what it means today.

00:01:20: Has it meaning sort of evolved in recent years for your generation of professionals?

00:01:25: Oh, well, let's start with the definition that the Harvard Business School gave about risk management.

00:01:31: What is that?

00:01:32: is the systematic process of identifying, assessing and mitigating threats or uncertainty that can affect your organization.

00:01:40: So The risk management definition changed over the years?

00:01:43: No.

00:01:44: What changed, in my opinion, are the risks.

00:01:47: So we saw a sort of evolution of those risks.

00:01:49: Let's consider about the nineties, when the first time the var developed risk comes out.

00:01:54: With the time, new risks evolved, came out.

00:01:58: Let's think about the liquidity stress.

00:02:01: that now have been implemented after the financial crisis of two thousand seven two thousand eight or maybe what we are experienced now with ESG risk and AT risk.

00:02:11: so as we can see every time in my opinion there are new technologies.

00:02:15: there are of course new opportunities but at the same time there are also new threats.

00:02:20: practical case internet if today we are here is thanks to internet.

00:02:25: at the same time we are every day, every day we're receiving phishing, cyber attacks, cyber risk.

00:02:31: This is something that the risk manager has to deal with on a daily basis.

00:02:36: Another example, let's talk about satellites.

00:02:39: You know, if before they were mainly used for military... They were military equipment, let's say.

00:02:48: Now they are the best tool to assess environmental risk and to monitor how our weather is changing.

00:02:54: So as we can see, technology can be really helpful, but at the same time can bring additional risk.

00:03:00: Thank you.

00:03:01: And you talked about the internet, but we just actually also did a podcast, our last podcast on AI.

00:03:05: Oh, cool.

00:03:07: Risk there as well, I suppose.

00:03:09: The industry feels like it's managing risk on multiple fronts.

00:03:12: Cyber, like you mentioned, geopolitically.

00:03:14: with regulation, ESG as you mentioned, also AI as we mentioned.

00:03:18: From your perspective, which of these risks is most underestimated right now and why would you think that?

00:03:23: Okay, to answer to this question, I will try to split up the question.

00:03:26: What do I mean?

00:03:27: First of all, which one are the risks, in my opinion, that a risk manager is facing?

00:03:31: The first one is to don't be update the risk of falling behind and to don't be part of the change.

00:03:38: because these means will be outdated and this can be a risk for your company, for yourself, as a professional.

00:03:45: The second point is, operationally speaking, which one is my opinion the biggest risk is the regulatory risk.

00:03:51: Because if you don't follow the rules, you are in breach.

00:03:54: If you're in breach, this means that is a reputational risk for your company and this is something that you don't want, of course.

00:04:01: Then, if we have to consider that the risk that you mentioned before, in my opinion, there are all connected, all interconnected, but the most important for me is geopolitical risk.

00:04:12: This is something that we saw in the previous years with the different wars.

00:04:16: that can be economically war, but economic war, but also real unfortunately war.

00:04:22: This can lead to supply and chain destruction, liquidity destruction.

00:04:27: The energy can change, the source of energy can change, and most important can change the Emotions, the feelings of the investors, if there is uncertainty about the future, these will affect all the market and all the economy.

00:04:42: Great points, thank you.

00:04:44: They say the culture often influences more than process.

00:04:46: How can firms maybe build a stronger risk-aware culture internally, especially when risk is really seen by some as a sort of compliance checkbox?

00:04:53: Well, I think that's in a company, what everyone should do first of all, like if I was the boss of a company, my intention would be first of all to increase the knowledge about the topic.

00:05:04: So how you can do that?

00:05:05: First of all, through certification.

00:05:07: On Luxembourg, there are several certification, let's take the case of GFR, Global Fund Risk Certification, that has the goal to speak not only to risk managers, but to all the players in order to increase the knowledge about the topic.

00:05:21: Because once that everyone is aware of what is the risk, everyone can act about a risk manager, because this is the main point.

00:05:29: In my opinion, everyone in the company can be a risk manager if It's understood the why of the function.

00:05:36: Then, of course, it's going to be the duty of the permanent risk management function to assess the how and the what.

00:05:43: Thank you.

00:05:45: You mentioned some certification and training.

00:05:47: It's probably a good time to mention that, of course, ELFI events are a good way to do that as well.

00:05:50: They have a risk conference of actually the ELFI European Risk Management Conference that will be taking place on the sixth of May next year.

00:05:58: So mark your calendars.

00:06:01: We'll add something more because it's super cool I'll feel now is allowing also to the unit risk manager actually to join the conference if they are accompanied with senior manager risk manager and they can come offer feel with huge discounts.

00:06:16: So these are good incentives that Luxembourg gives to Make closer the the real industry to to the young people to the young generation.

00:06:26: Yep Perfect.

00:06:27: Thank you.

00:06:28: In an organization, we all know that communication is key, but it's often broken.

00:06:32: How can we improve the way risks are communicated between operational teams and leadership?

00:06:36: And you kind of already mentioned one, but you have some others, I guess.

00:06:39: Yes.

00:06:40: I think that

00:06:41: communication is essential for every business or every relationship to shine.

00:06:47: Sometimes I feel that, of course, the main Haha, way to assess communication is to speak with other people, no?

00:06:54: So to organize different meetings, regular meetings in which different problems are assessed.

00:06:59: Simply because what I feel is that sometimes the second line of defense is completely touched from the first line of defense.

00:07:08: And these can create some problems.

00:07:12: can create new risk that maybe the companies doesn't want.

00:07:15: So what is really important to do, or at least what we try to do in our company?

00:07:19: First of all, the risk manager try to listen and speak with the operational team, but at the same time, physically speaking, we sit close to them to see which one are the operational activities that they perform day to day.

00:07:33: Because in this way, first of all, we can monitor better the risk, and we can understand the challenges that the operational teams have day by day.

00:07:41: then we are also aware about the fact that dealing with risk data numbers is not easy.

00:07:49: And maybe not everyone are able to understand those data because there is not their competence.

00:07:54: So it's crucial for me the simplification in order to translate this complex data into actionable insights, in which way, in a visual way, so through hitmaps, through dashboards, something that can transform something complex in something very easy.

00:08:10: Does something very visual?

00:08:12: Indeed.

00:08:13: Do you feel risk management methods have kept pace with the speed of change?

00:08:17: Natalie, thank you for the question.

00:08:19: I think no.

00:08:21: In my view, risk manager should try to forecast potential risk.

00:08:26: However, what I'm seeing is that sometimes we tend to follow the risk and maybe sometimes, as we can see later, we are even in delay.

00:08:34: What do I mean?

00:08:35: Every time that there is a new regulation, Of course, there is a lot of uncertainty on the market and this uncertainty, in my opinion, it means slow assimilation of the new rules in the market.

00:08:48: I can give some practical case and example for this.

00:08:51: Imagine when we were covering the ESG risk.

00:08:54: So back in the days, I was going to some events about sustainability and I had the chance to speak with some of the risk managers.

00:09:03: When I posed them the question, are you assessing the risk, the sustainability risk in your analysis?

00:09:08: The answer, the common answer was yes, perfect.

00:09:11: Then I was continuing saying,

00:09:13: but

00:09:13: how you are going to assess the physical risk and the transition risk?

00:09:17: And even in that case, all of them gave me some answer.

00:09:20: with different models, methodologies, they were doing essentially effectively something to assess this risk.

00:09:27: But then the final question, it was the one that really surprised me when I asked, so how you are going then to really transform those analysis in real action?

00:09:37: It's here that the uncertainty comes out.

00:09:40: No one was able to give a real answer to this question.

00:09:44: Another case that is very recent, let's say, is about DORA.

00:09:49: So what is related about cyber risk?

00:09:51: In the beginning of the year, the new regulation came out and obliged, let's say, all the financial entities in Europe to follow these rules that knew the new regulation.

00:10:04: However, As of today, forty percent of the financial entities in Europe, they are still not compliant with this new regulation.

00:10:12: So as you can see, Natalie, yes, we have something, we need to keep up the pace with the regulation and we are still behind on some specific points.

00:10:22: And

00:10:23: do you think there's some fragmentation with the players here in terms of their...

00:10:27: I think that Luxembourg is a special case because it's a small place, it's a small country and we are somehow.

00:10:33: the lobby industry is very strong so somehow we can influence each other and we can try to keep up as much as we can with the regulation.

00:10:42: but if we take in consideration other European states where the fund industry is really not so strong there is where there is some lack and the regulation can be a bit behind, let's say.

00:10:55: Let's talk about resources.

00:10:56: Risk management isn't always the most funded function, and how can organizations maybe do more with less?

00:11:02: I think that this decade is going to be the decade of the artificial intelligence.

00:11:07: It will be possible thanks to this new tool to automatize a lot of checks, a lot of controls, and make the process faster.

00:11:16: At the same time, it will be necessary to assess the quality of the outcomes, to continue to assess those outcomes, because it's really important to embrace the new technologies, to keep up the pace, but always having a mind that is detached by this technology would mean you need always to challenge the outcomes.

00:11:38: You need always to have a critical thinking about the outcomes that AI can give to you.

00:11:44: In a funny way, let's say, unfortunately, who is going to be hit harder by the transition, these new technologies will be the young generation.

00:11:55: That at the same time are the generation that will be able to communicate in the best possible way with AI.

00:12:02: However, I'm confident that Luxembourg will still be able to attract the right talent that will be able to manage this transformation in the best possible way.

00:12:12: Good news.

00:12:13: Thank you.

00:12:14: For asset managers and service providers alike, visibility is crucial.

00:12:18: How does your company approach gaining a holistic view of its risk profile?

00:12:22: Oh, thank you for the question.

00:12:24: As an employee of an Alternative Investment Fund Manager, so an IFM within JTC, our approach is truly holistic.

00:12:33: The IFM is recognized within the group and across the Luxembourg market as the center of the expertise and is a sort of trusted advisor.

00:12:43: We leverage these expertise not just for our own process, but also to support other entities within the group.

00:12:52: For example, we try to have an integrated approach.

00:12:56: to risk modeling across all the different entities.

00:12:59: What do I mean?

00:13:01: We have dedicated working groups that bring together different specialists from different entities from every department, let's say, to develop a common framework.

00:13:10: I can give a practical case on this.

00:13:12: Imagine when there is the onboarding of a new client that is the same among all the JTC entities.

00:13:20: Essentially, what we do is when we have to create the client's risk profile, we discuss jointly in our business acceptance meeting with all the different entities, ensuring that each entity perspective is considered.

00:13:35: This process allows us to spot interconnected risk and opportunities that maybe single department might miss.

00:13:43: Okay, thank you.

00:13:44: Good practices.

00:13:46: Looking ahead, what skills or mindsets would you say would define the next generation of risk?

00:13:51: Okay, well, I think that the set so soft skill will remain the same.

00:13:56: So curiosity, the ability to see the problems from different angles, from different perspective, but at the same time, the risk manager being the second line of the fans has to know all the company's process in order to understand the different risks that are related with the different, with the different process, let's say.

00:14:18: Then if I have to have a looking forward view, artificial intelligence will be crucial.

00:14:24: So being able to communicate in the most efficient way will be essential for the new risk managers.

00:14:30: The ability to extract the maximum from this new technology, posing the right question, analyzing the proper way.

00:14:37: different typology of data will be the key of the success for the new risk managers.

00:14:41: Okay, wonderful.

00:14:43: Thank you so much for your time today.

00:14:44: The risk of us going over.

00:14:46: Let's wrap things up now.

00:14:47: Thank you.

00:14:48: It's been a real pleasure to learn a little bit more about the work you're doing as well.

00:14:52: Thank you to our listeners as well.

00:14:54: As a reminder, all episodes of this Alfie Next Gen Finance podcast are available on the Alfie website at alfie.lu, as well as on paperjam.lu, plus all the usual podcast broadcasters like Spotify, Apple Podcast, and so on.

00:15:07: Wishing you a merry Christmas and a joyful season from Alfie.

00:15:11: Alfie Next Gen Finance, connecting today's talent with tomorrow's investment fund leaders.