It seems that investors and other stakeholders in public companies are now realizing that companies need to do a much better job at risk management. A major reason for change in attitude is driven by a series of scandals (which also led to the enactment of a series of reforms in corporate governance laws as part of Sarbanes-Oxley Act), but more importantly, it is becoming obvious to analysts that no matter how much a company denies the realities, irresponsible behavior and poor risk management can hurt the firm and the shareholder. This is particularly true when it comes to the cost to society either in form of damage to the environment or other social impact.
A report by Innovest Group has found that a vast majority of fund managers and analysts across Europe firmly believe that firms that manage social and environmental risk better will create higher shareholder value. In another study by the same company, they found that a company's strategic response to environmental risk provides investors an opportunity to assess the capabilities of the management. The companies that Innovest analyzed and found to be environmentally responsible returned a 6% premium and it was directly related to their environmental strategy. State Street Global Advisors, in another study, found that between 1997 and 2003, environmentally responsible companies outperformed S&P500 by approximately 7%.
A report by Innovest Group has found that a vast majority of fund managers and analysts across Europe firmly believe that firms that manage social and environmental risk better will create higher shareholder value. In another study by the same company, they found that a company's strategic response to environmental risk provides investors an opportunity to assess the capabilities of the management. The companies that Innovest analyzed and found to be environmentally responsible returned a 6% premium and it was directly related to their environmental strategy. State Street Global Advisors, in another study, found that between 1997 and 2003, environmentally responsible companies outperformed S&P500 by approximately 7%.
There is a tendency among firms to deny existence of environmental problems or the harm that their products can cause to the environment. This, of course, results in poorly designed frameworks for risk management. However, it is only up to a point that one can do so. We have seen dozens of companies forced into bankruptcy because of their irresponsible risk management policies. Yes, putting all the systems in place to reduce environmental damage means higher costs of doing business but results of studies performed by Innovest, State Street Global Advisors, and Erasmus University clearly show that in the long run denying your environmental responsibilities does not pay.
I would also like to recognize the excellent transformation happening at BP. While their initial "green" campaign sounded like PR and I was not convinced about their intentions, but as I have spent more and more time studying what they are doing, I am seeing that Lord John Browne means business. The manner in which BP, an oil company, is driving the push towards the "Hydrogen Economy" (a more environmental friendly alternative) clearly shows that it is best to recognize that certain risks exists when a firm does business and as long as these are managed in a responsible way (showing responsibility to society and environment means showing responsibility to investors' money), shareholder value is created.
I would also like to recognize the excellent transformation happening at BP. While their initial "green" campaign sounded like PR and I was not convinced about their intentions, but as I have spent more and more time studying what they are doing, I am seeing that Lord John Browne means business. The manner in which BP, an oil company, is driving the push towards the "Hydrogen Economy" (a more environmental friendly alternative) clearly shows that it is best to recognize that certain risks exists when a firm does business and as long as these are managed in a responsible way (showing responsibility to society and environment means showing responsibility to investors' money), shareholder value is created.
Innovest Group also polled a group of risk management experts and has compiled a list of top risks that firms need to manage:
- Brand and reputation protection
- Asset vulnerability due to greater emphasis on intangibles
- Changing markets
- Political, social and economic instability
- Terrorism and sabotage
- Human capital
- Vulnerability of infrastructure
- IT and communication risks
- The development and application of new technology, including its acceptability to the market and society in general
Suggested link: Risk management frameworks