On a sunny Wednesday in May I went to the office of RiskQuest. A consultancy firm based in the city centre of Amsterdam. I was welcomed by Anne and Job at RiskQuest’s beautiful office at the Herengracht. The topic of the interview was Climate Risk, an area that RiskQuest is active in.
Hi Anne and Job. Could you tell us a bit about yourselves?
Anne: I am Anne Roeloffzen and I’ve been working at RiskQuest since September 2021, so for almost nine months. I did a bachelor in Econometrics at the University of Groningen and thereafter I wanted to gain some experience in the working field, which is the reason I started at RiskQuest. In the past nine months I have been working on several projects, mostly involving validations of models for several Dutch banks. In addition, I am a member of RiskQuest's marketing team which adds a nice variety to the substantive work.
Job: My name is Job Stekelenburg and I am 25 years old. I live in Amsterdam for almost 7 years now. I moved to this beautiful city because I applied for the bachelor and after that the Master (Financial) Econometrics at the University of Amsterdam. During this period, I was a member of the VSAE. So, I am excited to do this interview for the Aenorm. After my studies I was looking for a job where I did not lose the challenge of Econometrics out of sight. And next to that I really liked programming. The combination of the former two I found in my job at RiskQuest!
Can you tell us more about the company RiskQuest?
Job: RiskQuest is a consultancy firm active mostly in the financial sector. Currently there are 50 people working for RiskQuest. One thing I always like to mention is the fact that the average age of my colleagues is 28 years old. Due to this, the atmosphere at the office can be characterized as energetic and dynamic. It is always a pleasure to be at the office.
The common denominator of the projects we do is the quantitative challenge in there. As a result, my colleagues have a background in Econometrics, Physics and Mathematics. RiskQuest can be divided into four pillars: financial risk management, data science, data engineering and RiskQuest solutions. The latter is an overarching name for our own product development.
Anne: And important to mention is that internally we have an informal and non-hierarchical culture. We value interaction, each other's interest, and a good atmosphere a lot. To keep this up we organize many events. Two weeks ago, we had a ping pong clinic and next week we will be going to Croatia for four days with the entire company.
What do you mean by quantitative consulting?
Job: During your studies Econometrics you learn a lot of statistical models and techniques. If you really like this, but do not necessarily want to pursue an academic career, the work we do would really suits you. Within the sector financial risk management and detecting financial crime, we are doing most of the quantitative work. I think the word ‘quant’ would define our people. As mentioned, this involves using more traditional econometric methods but also more advanced machine learning techniques.
Anne: To add here at the bigger consultancy firms, usually more qualitative work is involved whereas RiskQuest is especially well known for its specialized and acknowledged quants. In addition, consulting also involves a large social aspect.
The main topic of this interview is Climate Risk. What is the current role of Climate Risk within Risk Management?
Job: Currently there are no mandatory guidelines in place that need to be followed by banks. There is however a climate stress test released in 2022 by the ECB. This test is a learning exercise for banks and the supervisors. The idea is to get more insight on data availability, assessing climate risk and best practices. Where a risk model needs to be validated and accepted by the supervisor, the climate stress test is not a pass or fail exercise. Moreover, the result of the stress test does not lead to an increase of the required capital levels of the bank.
Why is climate risk relevant for RiskQuest’s clients?
Anne: Our main clients are Dutch banks. Two types of climate risk banks want to incorporate are: physical and transition risk. Examples of physical risks are floods, extreme droughts and wildfires. Suppose there is a significant flood in the Netherlands and a large proportion of the houses in a bank’s mortgage portfolio is affected. The value of the bank’s collateral depreciates due to the flooding and hence increases the risk of the bank. The second form of climate risk is transition risk. Suppose the bank finances a lot of carbon-intensive businesses. If a new law is set in place that (financially) penalizes these businesses, for example a carbon-dioxide tax, then the default risk of these clients increases.
What is the added value RiskQuest can bring to the table regarding Climate Risk?
Job: At this moment, climate risk in the financial sector is to a large extent a qualitative exercise. However, currently a lot of climate risk related data is gathered. As a result, we see a shift towards more quantitative models to assess climate risk being developed. I think this is exactly where RiskQuest can make a big impact.
Can you elaborate on the climate risk related activities RiskQuest is currently working on?
Job: Currently we are working on three things. First, we are making an impact analysis of a flood on a Dutch mortgage portfolio. Based on data on flooding probabilities we aim to assess the impact on the Loss-Given-Default (LGD) of this portfolio. We are also involved in a project where we adjust risk models for businesses with a circular business model. These businesses are currently undeservedly penalized in the existing credit risk models. Therefore, these businesses are financed at a higher interest rate or not even financed at all. An example of such a business is Bedzzzy. Which is a company with a Payment-as-a-Service model for mattresses. After the subscription of the customer expires, the mattresses are fully recycled. If these businesses can be financed more effectively, they can contribute to a more circular economy. Thirdly, we are doing our own literature research, closely following developments, and keeping in touch with relevant stakeholders. We are for example organizing round table events where we connect relevant stakeholders and discuss current developments.
Talking about floods in the Netherlands, last summer there was a flood in Limburg. Is that why you are currently working on such as a case?
Anne: The flood that happened is a reality check. Where globally there are a lot of different climate risks to consider, flooding and rising sea levels are of course one of the main concerns and risks here in the Netherlands.
Job: This event is important in the awareness of climate risk. People have unfortunately the tendency to only act after an incident has happened. In other words, something bad needs to happen before people get into action. For example, the current regulatory framework for banks is a consequence of the 2008 financial crisis.
Climate risk is relatively new, especially in the quantitative domain. What are the major challenges in that domain?
Job: In my opinion the most difficult challenge is the fact that most models are based on historical data. This train of thought can already be doubted for financial applications. However, regarding climate risk this thought is just faulty. Because the effects of global warming are worsening and the effects are interconnected, we simply cannot deduct the worst-case scenario from historical data.
Anne: I agree that this is most challenging, but this is also what makes climate risk very interesting. New research and developments, requires a lot of pioneering and creativity.
If you cannot base models on history, what can you base them on?
Job: We need researchers and in general science to identify the likelihood and impact of climate scenarios. This addresses a second challenge, namely that the problems need to be solved by multidisciplinary teams.
How can the skills you acquire during the study Econometrics be applied in the field of climate risk?
Anne: First of all, perseverance is important, in other words, not avoiding and tackling difficult problems. Besides that, creativity and an entrepreneur's mindset are required. There are no clear solutions laid out for you. In my experience these are skills you do not learn in a course, but throughout your whole study. Next to that, the hard skill of getting useful insights from crunching large amounts of data is of significance in the field of climate risk that is becoming more and more data driven.
Job: To add to this, in principal climate scenarios are stochastic. As an econometrician you try to grip on processes that are stochastic. Hence, climate risk is in that sense an econometric problem.