Model Risk and the Energy CRO…

Our members have long appreciated the risk associated with reliance on complex models to perform valuations, risk assessments, monitor limits, and broadly support decision making. This initiative seeks to help participants develop an understanding of practical ways that the risks of their company’s internal models may be assessed and mitigated.

The banking industry has for many years had regulatory mandates for model risk management. Those frameworks, though designed specifically for the banking industry, may provide insights for CCRO members to discuss the intersection between an energy company’s model risks and useful components from the banking framework. Several members have past experience with banking industry model risk management processes & they shared some of that expertise at our March 2023 meeting (see video “Model Risk Management Framework”)

In addition, some of our Advocate members have developed processes for assessing the sources of model risks in an energy company. Understanding these processes can bring our members valuable insights into their own next steps towards mitigating their model risks (see video “Our Starting Point: Overview of Model Risk Concepts)

*Results from a live meeting poll about model risk management*

By 2023, our members have enjoyed numerous discussions exploring the concepts of model risk and the energy industry’s modeling practices. During a recent meeting, we asked members where they believed model risk management belonged in their organization.

As you can see in the live meeting poll chart, the majority of our Chief Risk Officers agree that model risk management is a risk process that their function should own. This established risk-relevance for our on-going model risk initiative, which ushered our plans for more discussions and development of a white paper to establish best practices. (see more from that poll in the video “Early Member Poll Results”)

Publication Discussion with Members, March 2025

The discussion centered on the first edition of our new white paper, which focuses on model risk management and its significance for organizations in the energy sector. The final draft of the white paper was presented, with acknowledgments to key contributors.

The leadership team outlined how the paper adapts banking standards to create a framework for managing model risk at an energy company with a voluntary, value-added basis to motivate implementation. The paper includes guidelines on model risk and aims to facilitate practical implementation within organizations. It was pointed out that managing model risks is increasingly pertinent due to changing practices in today’s energy industry. Challenges related to data integrity and model governance were acknowledged, along with the necessity to further investigate the implications of AI on model risk.

The meeting attendees expressed enthusiasm for the practical recommendations presented in the paper and the potential for ongoing discussions regarding AI-related topics. The white paper is positioned as a foundational resource for organizations aiming to improve their model risk management strategies.

A Second Edition to Come

The feedback received from several members was mentioned as a driver for CCRO plans to edit the paper and develop a second edition that incorporates those ideas. However, the team did not feel the feedback received was of a nature that should delay the publication of this first edition. We plan to discuss:

How should we gather and collate feedback on this version?
What would be the best process for editing and developing the second edition?

Developing the AI Model Risk Topic

While the leadership team explained that they felt AI models and their risks were outside the high-level scope of this first edition paper, they do want to address AI in a comprehensive manner. The rapid pace of AI implementation in models and its subsequent impact on model risk was highlighted. Several participants around the table agreed that a team of members should be formed very soon to address AI and its impact on model risk.

putting a structure and PMO around the new AI initiative.

We will reach out to determine which members would like to join an initiative to establish best practices for mitigating model risks arising from AI deployment in models.

First Edition, March 2025 Now Available

We congratulate the Model Risk working group’s leadership team, and all the contributing members for completing this excellent documenting. Risk professionals will find many insights into specific policies and methods that manage the often overlooked risks that an organization’s models bring.