ERM’s focus initially was with internal control processes and the monitoring and management of market and credit risks. The banking industry laid the groundwork for the ERM function in 1988 with the release of the Basel Capital Accord, setting minimum capital requirements for banks. Since 1988, the evolution of ERM has been furthered by the need to calculate and manage market risks leading to the combined measurement and monitoring of market, credit and operational risks to ensure capital adequacy. The value-at-risk (VaR) methodology was introduced as a tool to measure the market risk of investment portfolios. In 1992, the Committee of Sponsoring Organizations (COSO) issued Internal Control – Integrated Framework, providing companies with practices for increasing the robustness of their governance structure and related accountability. From the late 1980s through the early to mid 1990s, energy markets were deregulating. Energy deregulation opened the door for trading natural gas and electricity. The timing of emerging ERM practices, with entities entering the portfolio markets for the first time with newly commoditized products, led to interest in applying the latest business practices to the latest business trend. Thus, the newly formed energy conglomerates quickly adopted ERM from the financial institutions, and the position of Chief Risk Officer (CRO) was created.
ERM implementation is an evolving process. Business schools, with support and prompting from the corporate arena, have begun addressing the need for ERM education. Corporate organizations, such as COSO, recently have published frameworks for ERM. The consulting arms of public accounting firms also are publishing material on ERM and offering services to companies initiating, further developing or fine tuning their ERM function. In 2002, the Committee of Chief Risk Officers (CCRO) was formed to study and report on best practices and emerging best practices for risk management within the energy...