Risk and Sustainability

There has been conventional wisdom that ERM or risk management is a subject of finance officers and auditors. IRR, Cash flow, DCF, Options etc were few of the tools to asses risk. But now a mango tree, a well, a lake etc have also been added to the risk assessment equation.

Consider the following facts-

1.   Companies who have added sustainability in their ERM , enjoy 16.5 % premium in market valuation.

2.   Companies that downplay or ignore sustainability run a serious risk—sooner or later, they are likely to encounter avoidable problems with regulators, investors, ornon-governmental organizations, or inflict lasting damage to their reputation because of questionable operating practices.

3.   Banks were thought were clean till 2008. After 2008 the perception about banks have changed just because of their poor risk policy.

4.   Standards in statutes and rules, such as Sarbanes-Oxley, Dodd-Frank, Solvency II, Basel III, and ORSA have come into picture to enforce risk management.

If companies have to prosper in long term they have to incorporate sustainability in their curriculum. Whether it is bank lending a loan to a mining company in Africa, or a manufacturer reduces its carbon emission, a factory hiring local people and a company planting trees as a CSR activity, companies can no longer ignore the importance of environment and communities in their BUSSINESS PLAN.

Sustainability leaders recognize a symbiotic relationship between the market for their products and their roles in society at large. Integrating sustainability into ERM puts companies in control of their destinies, enabling them to be proactive and forestall stakeholder pressures that might otherwise pose a threat to existing operations or future growth.