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Of course, there is active management of a lot of operationally important areas
of business; examples include: the promotion of workforce health and safety; as
well as good labour relations as standard norms of running a successful business.
Appendix C “ SERM risk analysis methodology in brief 679



SERM then evaluates the quality of the management across a range of
issues, the people in place, policies, processes, performance indicators and
programmes for improvement. This is translated into a risk reduction factor
(RRF), a proxy for the quality of the management of extra financial risk issues.
These risk reducing activities by the companies (the RRF) reduce their ˜gross™
risk to leave a company with a ˜net™ risk level, which is the potential financial
exposure of the company to these risks.
The resultant risk figure is the ˜net™ risk to market value, and this includes
direct and indirect costs and loss of assets due to fines and non-compliance
with regulations. The resultant risk scores are provided in the next section of
this report, with an overview in Table 1.
In effect the risk rating is an analysis of the potential for damage to ˜tangible™
and ˜intangible™ assets, and potential goodwill (viewed by SERM as the value of
an organisation™s reputation) the three components of companies™ value.
Market value tangible assets (less debt) goodwill intangible value
The extent to which both tangible and intangible risk factors influence
share price is vital information. These risk factors include: corporate reputation
and individual brand values; regulatory regime and government reaction to
public pressure; media and NGO interest; employee morale; and investor,
lender and insurer confidence.
This research is then turned into a net risk level, which corresponds to the
ratings, which cover a scale from AAA to E.


SERM rating scale

As a percentage of combined net (residual) risk

Up to 3.9% AAA 12.0%“12.9% BBB 21.0%“21.9% CCC 30.0%“30.9% DDD
4.0%“4.9% AAA 13.0%“13.9% BBB 22.0%“22.9% CCC 33.0%“33.9% DD
5.0%“5.9% AAA 14.0%“14.9% BBB 23.0%“23.9% CCC 36.0%“38.9% D
6.0%“6.9% AA 15.0%“15.9% BB 24.0%“24.9% CC 39.0%“75.0% E
7.0%“7.9% AA 16.0%“16.9% BB 25.0%“25.9% CC
8.0%“8.9% AA 17.0%“17.9% BB 26.0%“26.9% CC
9.0%“9.9% A 18.0%“18.9% B 27.0%“27.9% C
10.0%“10.9% A 19.0%“19.9% B 28.0%“28.9% C
11.0%“11.9% A 20.0%“20.9% B 29.0%“29.9% C




Rating analysts™ scoring system
Scoring methodology
A SERM rating process requires different types of inputs:
1. Company overview information;
2. Company performance information “ collected by researchers: information
that is published by the company. Look for evidence of how well or badly a
Appendix C “ SERM risk analysis methodology in brief
680



company is at managing its risk within the SERM categories. Usually posi-
tive news;
3. Company performance information “ collected by researchers: articles from
around the world on the company. Usually negative news;
4. Sector information: inherent risks associated with the company™s subsectors
and sectors of activity;
5. Regional information: Inherent risks associated with the countries™ the com-
pany is operating in. It is important to check on: specific national laws;
emerging policies; natural hazards and risk associated with human rights
interest as examples of particular areas for attention.
The rating analysts take all these information and data sources and create a risk
report of the company with scoring of different risk categories for environmen-
tal, safety and social risks. These are:
Economic indicators, including corporate governance;
Health and safety;
Social and Ethical;
Environmental; and
Stakeholder risk issues.
Each of these main categories has at least five subcategories. For example,
Environment is made up of GHG production, Waste Water, Historic Liabilities
and more. In total, there are 38 subcategories. On each of the subcategories, it is
possible for a company to perform well (Positive) or badly (Negative) “ or a
combination of the two.
The SERM analyst allocates a positive and a negative score for each subcat-
egory of the company they are analysing “ and to justify their score with writ-
ten evidence.


Positive and negative scoring: general patterns


Positive Negative
1 1
Generalised policy No policy
2 2
Measurement No response
3 3
Targets No response (2)
4 4
Implementation Refusal to provide data
5 5
Some success Incidents
6 6
Growing Growing
7 7
success seriousness of
8 8 incidents
9 9
10 10
Zero risk
Appendix C “ SERM risk analysis methodology in brief 681



A more detailed scoring example is as follows, in this instance for external
human rights risk scoring.


Table 1

Positive

0 No data available
1 General policy statement has been made
2 Positive statements and detailed policy on protection of human rights
3 Detailed policy statement with evidence of some improvement programmes and/or
people have responsibility
4 Evidence of management systems and procedures to counter human rights abuse.
This includes policy, people and processes in place
5 Evidence of management systems and procedures to counter human rights abuse, as
above, with additional programmes of improvement
6 As above with additional evidence of action being taken against human rights abuse
7 The above with extensive evidence of action being taken against human rights abuse
and support for enforcement programmes
8 Significant historical evidence (more than two cases) demonstrating that action is
taken against offenders in a consistent and severe manner
9 As 8 with the addition over 2 years of proof of improvements
10 As 9 above with the 3 years™ evidence of improvements. Recognised as leader in this
field by external bodies

Negative

0 No data available
1 Minor health and safety hazard/land contamination; no damage or injuries at present
2 Denial of responsibility or existence for the above
3 Major health and safety hazard/contamination; no damage or injuries involving
death of wildlife
4 Denial of responsibility or existence for the above
5 Minor human illness and/or injury resulting from incidents/contamination, includ-
ing products
6 Denial of responsibility for above
7 Major human illness resulting from contamination
8 Denial of responsibility for above
9 Human death/s or terminal illness resulting from contamination
10 Denial of responsibility for above




Evidence for the scores
Naturally, each score must be supported by evidence, so SERM™s clients can
understand our reasons for scoring each company.
Analysts are required to record detailed references to support the ratings
that have been issued to companies. In the online database, there is a text box
provided for this purpose.
The text box should be a short summary of the reasons for the score, either
in prose or in bullet points. The source, and date of source, should be provided
Appendix C “ SERM risk analysis methodology in brief
682



and underlined. The page of the source and, if appropriate, relevant section of
the report should also be included.



Example 1:

Environmental incidents (positive score)
6 There is evidence that the company actively seeks to manage and
mitigate or clean up environmentally damaging incidents. Examples
are provided by the analyst to support this rating statement.
OilCo™s open and proactive approach to an oil spill in Australia near
Sydney Harbour won public support. OilCo accepted responsibility
for the clean-up, even though they were not directly liable, a third
party shipping company was.
Greenpeace have publicly congratulated OilCo on their efforts to
clear up the site: ˜We accept that the Shell management have done
everything in their power to mitigate the harm of this incident ¦™
(p. 18, ˜quotes title™, source documents name, date of source)




Example 2:

Environmental incidents (negative score)
There is evidence that the company has been directly and indirectly
involved with the causing of environmentally damaging incidents.
5 For our sample company, OilCo was involved in over 34 spillages to
water and 7 to groundwater, causing the death of wildlife and some
minor disruptions to communities™ water supplies. These count as a
cumulative number of minor incidents of polluting land and water,
which together count as a major incident well managed, and there-
fore mitigated in part. Specific incidents are then described for
the rating reviewer to decide if they are considered minor, major,
mitigated and correctly scored. A serious incident well mishandled
would be 7, numerous major incidents 8, numerous major inci-
dents mishandled 9, and numerous incidents involving the loss of
human life 10.
For example, the Sydney harbour oil spill was a minor incident, for
which OilCo was only indirectly responsible. Furthermore, due to
OilCo™s rapid response, little damage was done to wildlife. (Source
name, source date, source year)
Appendix C “ SERM risk analysis methodology in brief 683



Rating the company
There will be numerous stories within each risk category; these are in either a
positive and negative section of the risk analysis. Once each of these has been
attributed a score all the wide ranges of scores are computed through the SERM
risk analysis model, with the addition of sector and subsector influences. The
algorithm for factoring each category™s risk exports this into a template which
shows each risk™s threat to the market value of the organisation. This research
is then turned into a net risk level, which corresponds to the ratings, which
cover a scale from AAA to E, as explained above.
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APPENDIX
D


SERM sample report methodology
D SERM sample report
methodology


This appendix demonstrates how the summary tables and graphs are achieved.

The SERM rating system has been developed to compare companies™ risk expo-
sure and performance across selected peer groups and/or constituents of an
investment portfolio.
The SERM ratings are constructed from a wide range of subsector/regional
operations and any selected group of companies can be analysed under the system.
SERM conducts extensive research from over 37 000 journals, government,
non-government organisations (NGOs), prosecution records and any other pertin-
ent publicly available information sources. SERM does not rely on interaction
with the selected companies and the completion of lengthy questionnaires/
interviews.
SERM™s in-depth desk-based research is designed to provide an informed
and consistent external perspective of how a company is managing its corporate
social responsibility (CSR) issues and associated ˜reputational risk™.




British Gas/Scottish Gas (Centrica plc)
Stage 1
E.ON UK (Powergen)
EDF Energy plc
Selection of the RWE npower
peer group listed in Scottish & Southern Energy
alphabetical order. Scottish Power plc
Appendix D “ SERM sample report methodology 687




Combined

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