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SERM rating model definitions
B SERM rating model definitions



Health and safety risk
Health and safety concerns relate to current adverse health issues, both acute
(short term) and chronic (long term), as they impact on the workforce. Also look-
ing at current adverse health issues, both acute (short term) and chronic (long
term), as they impact on users of the company™s products/services and the pub-
lic. Internal safety issues as measured by the extent of major/cumulative inci-
dents causing injury/death to the workforce/contractors, as a result of equipment
malfunction/human error. External safety issues concerning exposure to major/
cumulative incidents causing injury/death to customers/suppliers and the public,
as a result of equipment malfunction/human error. Health and safety liabilities
in terms of magnitude of historical chronic ill-health issues that can be attrib-
uted to the company™s operations (asbestosis, ˜black lung™, RSI, etc.), including
those continuing beyond cessation of operations. New health issues are coming
to the fore with potential large class actions, for instance against the long haul
airlines in relation to deep vein thrombosis (DVT).

1. Health internal: current adverse health issues, both acute (short term) and
chronic (long term), as they impact on the workforce.
2. Health external: current adverse health issues, both acute (short term) and
chronic (long term), as they impact on users of the company™s products/ser-
vices and the public.
3. Health and safety liabilities: magnitude of historical chronic ill-health
issues that can be attributed to the company™s operations (asbestosis, ˜black
lung™, RSI, etc.), including those continuing beyond cessation of operations.
4. Safety internal: as measured by the extent of major/cumulative incidents
causing injury/death to the workforce/contractors, as a result of equipment
malfunction/human error.
5. Safety external: exposure to major/cumulative incidents causing injury/
death to customers/suppliers and the public, as a result of equipment mal-
function/human error.

New health issues are coming to the fore with potential large class actions, for
instance against the long haul airlines in relation to Deep Vein Thrombosis
(DVT).
Appendix B “ SERM rating model definitions 671



Social/ethical risk
1. Poor corporate governance: extent to which a company™s overall manage-
ment is perceived not to reflect the perception of acceptable individual and
business behaviour.
2. Unrestrained corporate power: perception of excessive unrestrained
power held by corporate management manifesting itself by: e.g. the ability
to dominate an industry by imposing standards that competitors must
match, gaining concessions on major investment conditions, being the
major employer in a location: related to size and international reach.
3. Lack of corporate community involvement: extent to which an organisa-
tion neglects taking a participative community role and shows little con-
cern with its general problems/needs.
4. Adverse marketing practices: extent to which marketing/advertising of
products/services is misleading/morally dubious: e.g. marketing to chil-
dren, cartels, price fixing, incorrect labelling, potential environmental
damage, offensive to particular social groups.
5. Adverse business practices: extent to which company™s business practices
are exposed in terms of: e.g. not paying suppliers, exerting heavy pressure
on franchisees, pressuring agents to sell, stealing intellectual property and
other ˜sharp practice™.
6. Engagement in bribery and corruption: extent to which dubious practices
are used to gain business advantage: e.g. paying bribes, excessive corporate
entertainment/gifts, money laundering, complicity in smuggling.
7. Poor human resources management: extent to which the company™s HR
policies and practices are found wanting in terms of generating stress, dis-
crimination, harassment, impact on employee privacy.
8. Abuse of human rights: extent to which an organisation™s business prac-
tices are found wanting on issues such as working conditions, pay and
hours, child labour, right of trade union recognition and dealing with
oppressive regimes, use of local security forces.
9. Negative impacts of technology: extent of perception that adoption of new
technologies leads to effects on business practices and/or society (e.g. tele-
working), or carry unknown degrees of risk for present and future gener-
ations (e.g. GMOs).
10. Other: e.g. animal rights, high social dependence, cultural clash of differ-
ent value systems, etc.


Environmental risk
Environmental risk looks at the extent to which the following risk factors are
perceived as being principal environmental ˜aspects™ of a company, in terms of
significance of their impact. Environmental incidents (net of insurance claims)
relate to risk of emissions releases to air/land/water that causes a pollution
incident and meets with severe regulatory/public reaction “ net of insurance
claims. Not only is public perception playing an increasing role to an institution™s
Appendix B “ SERM rating model definitions
672



operational risk but is also resulting in regulatory pressure on environmental
risks that can have serious consequences. The US government™s decision to
order General Electric to remove toxic waste is the most recent example.
Energy consumption provides a ˜footprint™ throughout a company™s opera-
tions; both in-process and support services (e.g. office, business travel). The
degree of greenhouse gas (production), e.g. CO2, SO2, N2O, emissions generated
throughout the company™s operations as a result of production output is also of
concern, especially given the recent ratification of the Kyoto Protocol.
Water consumption, which also leaves a ˜footprint™ throughout the produc-
tion operations, both in-process and support services (e.g. office, truck cleaning,
etc.); wastewater generation in terms of volume/severity of wastewater, indus-
trial, wash water, municipal sewage, etc. Raw materials looking at the extent
(volume/type) of natural resources materials (excluding water) constituting
inputs into the company™s production operations; waste generation such as solid
waste ˜footprint™ generated throughout the production process “ both off-spec
product output and waste by-products of the production process; historical
liabilities in terms of magnitude of historical legacies of contamination/pollu-
tion, usually site specific: e.g. contaminated land, redundant/derelict structures,
spoil heaps, etc.; amenity issues and the extent of nuisance caused by any aspect
of the company™s operations, both internal (to workforce) and external (to public
off-site); others may include other controlled/uncontrolled emissions/releases
(VOCs, radiation, dioxins, etc.).
Environmental risk looks at the extent to which the following risk factors
are perceived as being principal environmental ˜aspects™ of a company, in terms
of significance of their impact.
1. Environmental incidents: risk of emissions releases to air/land/water that
causes a pollution incident and meets with severe regulatory/public reaction.
2. Energy use: energy consumption ˜footprint™ throughout a company™s oper-
ations, both in-process and support services (e.g. office, business travel).
GHG (production) “ degree of GHG (e.g. CO2, SO2, N2O) emissions generated
throughout the company™s operations as a result of production output.
3. Air emissions including GHG (production): degree of air pollution and
greenhouse gas emissions generated during production (whether internal or
outsourced) of an organisation™s products and services output.
4. Air emissions including GHG (transport): degree of air pollution and green-
house gas emissions generated during transportation (whether internal or
outsourced) of an organisation™s products and services output.
5. Water use: water consumption ˜footprint™ throughout the production oper-
ations, both in-process and support services (e.g. office, truck cleaning, etc.).
6. Wastewater generation: volume/severity of wastewater generated as a result
of the company™s operations “ industrial, wash water, municipal sewage, etc.
7. Raw materials: extent (volume/type) of natural resources materials (exclud-
ing water) constituting inputs into the company™s production operations.
8. Waste generation: solid waste ˜footprint™ generated throughout the produc-
tion process “ both off-spec products output and waste by-products of the
production process.
Appendix B “ SERM rating model definitions 673



9. Historical liabilities: magnitude of historical legacies of contamination/
pollution, usually site specific: e.g. contaminated land, redundant/derelict
structures, spoil heaps, etc.
10. Peripheral pollution and amenity issues: extent of nuisance caused by any
aspect of the company™s operations, both internal (to workforce) and exter-
nal (to public off-site).
11. Natural resources degradation: attitudes to the extent to which the com-
pany™s licensed operations disturb and/or degrade both environmental
(land, air, water) and ecological resources.
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APPENDIX
C


SERM risk analysis methodology
in brief
C SERM risk analysis
methodology in brief




Methodology overview
The SERM Rating Agency has developed a sustainable risk rating model. It is a
tool to assist in the measurement of non-financial risk issues, also known as
˜extra financial risks™, or corporate social responsibility (CSR) risks. The model
seeks to find if an organisation is ˜sustainable™ and has a functioning SERM sys-
tem in place. An overview is as follows.
SERM provides a consistent, quantitative assessment of how successfully a
company manages its risks in the following areas:

Economic indicators, including corporate governance;
Health and safety;
Social and ethical;
Environmental; and
Stakeholder risk issues.

The risk categories above are researched in detail, and are then assessed on a
positive and negative scoring system. The consistency comes from only using
public domain information for the SERM rating agencies™ public ratings.
The methodology has been tested and refined over 10 years, developed in
partnership with: the insurance industry, the United Nations Environment
Programmes (UNEP), the Association of Chartered Certified Accountants
(ACCA), the Association of British Insurers (ABI) and the Centre for the Study
of Financial Innovation (CSFI), among many others. It can be used to access any
size of organisation.
The rating process combines a wide variety of research, including: direct
and indirect risks of the company, its sector and subsectors of activity, the
countries of operation, stakeholders views and comments, the key CSR issues
of concern, as well as company specific risk management techniques.
Appendix C “ SERM risk analysis methodology in brief 677




Researching companies
The SERM Rating Agency uses approximately 34 000 public information
sources, including all publicly reported company information, to compile com-
panies™ risk reports. This research informs our stakeholder-based view of their
extra financial risks, or so-called ˜sustainability risks™ which can be described
as the uncertainty surrounding events and their outcomes, which may have a
significant effect, either enhancing or inhibiting:
Operational performance (direct risks as they are directly manageable);
Achievement of aims and objectives; or
Meeting the expectations of stakeholders (including shareholders), or dam-
aging the reputation of the organisation (indirect risks).

Research is conducted on the following extra-financial
indicators of operational performance:
Economic and corporate governance issues (Book Part B);
Social and ethical risks (Book Part C):
Business and marketing practices, including involvement in bribery and
corruption;
Human rights of the workforce (equal opportunities, etc.) and the general
public;
Community investment, involvement and complaints; and
The use of (or not) of corporate power.
Health and safety risks (Book Part C):
Workforce health and safety issues; and
Appendix C “ SERM risk analysis methodology in brief
678



General public and customer health and safety issues, including the level
of product recalls and product liabilities issues.
Environmental issues (Book Part D):
Environmental damage caused and resulting fines and clean-up costs;
Resource, energy, water and material usage and costs; and
Historical liabilities of land, processes and products.


Further analysis of all published data on stakeholders™
view of the organisation and an analysis of the companies™
corporate reputation, brand and shareholder value
are added to our reports
Corporate reputation “ the organisation™s reputation. This reflects key stake-
holders™ perception of the company™s strength and corporate governance. It
includes the credibility, reliability, trustworthiness and responsibility of the
organisation;
Individual brand values “ the product™s reputation. This reflects the relevant
customer™s perception of brand name and resultant loss of sales/increases in
returned goods/inventory costs; related to visibility; and
Stakeholder value and the potential for damage to an organisation™s reputation:
Academic and research organisations;
Business partners and suppliers;
Customers and their representatives;
Direct action and NGO interest;
Employees and their representatives “ employee morale and industrial;
Financial viewpoints “ investor, lender and insurer™s confidence;
Government and the regulatory regime “ changes to a company™s operating
environment beyond its control;
Local government;
International governments and regulatory regimes;
Journalist and media interest; and
Key competitors and the competitive environment.


The rating methodology outlined
The research is quantified and analysed by the SERM model, our starting point is
the development of a measurement of the ˜gross™ or ˜inherent™ risk borne by these
companies, by virtue of the nature of their subsectors of activity, geography of
operations, and potential for damage to their reputations. This ˜gross™ risk is
measured as a percentage of the total market value of the companies, if these risks
were left unattended. For the regulated companies this is measured at 33.8% of
the total capital of the companies, if these risks were left unattended.

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