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SEBI Securities Exchange Board of India
SEC Securities and Exchange Commission
SEE Social, Environmental and Ethical Risks
SEPA Scottish Environmental Protection Agency
SERM Safety & Environmental Risk Management
SERM Sustainable Enterprise Risk Management
SF6 Sulphur Hexafluoride (greenhouse gas)
SIF Social Investment Forum
SIR Standard Information Return
SME Small and Medium Enterprise
SMS Supplier Management System
SOx Sulphur dioxide
SOE State-Owned Enterprises
SOX Sarbanes-Oxley Act of 2002
SPE Special Purpose Entities
SRI Socially Responsible Investment
SSSI Sites of Special Scientific Interest
SWOT Strength, Weaknesses, Opportunities and Threats analysis
T Tera: 10 to the power of 12
Tce Tonnes of coal equivalent
TI Transparency International
Toe Tonnes of oil equivalent (Mtoe “ mega tonnes of oil equivalent)
UDHR UN Universal Declaration of Human Rights
UK United Kingdom
UKSIF UK Social Investment Forum
UN United Nations
UNCED UN Conference on Environment and Development
UNDP UN Development Programme
UNECE United Nations Economic Commission for Europe
UNEP UN Environment Programme
UNEP FI UN Environment Programme (UNEP) Finance Initiative
UNFCCC UN Framework Convention on Climate Change
US$ United States Dollars
US/USA United States (of America)
US CCSP United States Climate Change Science Programme
US EIA United States Energy Information Administration
Abbreviations and acronyms xliii



VAT Value Added Tax
VOC Volatile Organic Compound
W Watt Joule/second (International Standard unit of power)
WB World Bank
WBCSD World Business Council for Sustainable Development
WCED World Commission on Environment and Development
WEC World Energy Council
WEO World Economic Outlook
WG (I“III) Working Group (One to Three) of the IPCC
Wh Watt hour
WHO World Health Organisation (UN)
WMO World Meteorological Organisation
WRI World Resources Institute
WTO World Trade Organisation
WTP Willingness To Pay
WWF World Wildlife Fund
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1
Introduction
1 Introduction



Business risk overview

CHAPTER OVERVIEW
Organisations are always aiming to balance their risks and reward ratio
but the implications of not managing these risks seem to be increasing
exponentially. Competitive pressures are leading organisations to become
more proactive in their management of issues, often after learning the les-
sons the hard way. More is required of managers in the future than just fire
fighting and being reactive. Practical methodologies are necessary. With
newly emerging risks there needs to be improved preparation to:
Help understand and reduce these risks;
*
Seek them out;
*
Measure; and
*
Manage them.
*




General introduction
In order to be competitive, organisations must constantly review their methods
and models to check that they are operating correctly. In addition, they must
examine new areas of emerging risk and develop sustainable systems of risk
analysis and management.
These increasingly significant risks traditionally fall into non-financial
areas of business activity, often referred to as environmental, social and govern-
mental (ESG) issues. Experience and case studies demonstrate that they do
have financial impacts upon organisations, both positively and negatively.
This book seeks to help minimise the risks and exemplify the opportun-
ities that can be followed as a result of SERM™s new thinking, and more sustain-
able and external risk management appraisal techniques.
SERM™s view is that what is needed is for the understanding of the term
˜risk management™ to be greater than the currently accepted meaning and for a
more diversified approach to be accepted.
Chapter 1 “ Introduction 3



For this purpose, and to assist the review of the emerging risk issues within
a framework, a Sustainable Enterprise Risk Management (SERM) system is
explored for its use in supporting an organisation™s stability in this fast moving
era. The need to incorporate more enlightened systems of risk management,
new models and methods of interpreting the risk ˜environment™ is essential to
becoming ˜sustainable™.
The main difference in the SERM approach to risk over time is the ability
to include newer risks and their relevant probabilities of occurrence into our
systems, and the ability to be risk takers in the first place, without which
progress would be lethargic at best. Peter Bernstein in his risk classic, Against
the Gods: The Remarkable Story of Risk, summarises this as:
The revolutionary idea that defines the boundary between modern times and the past is
the mastery of risk. (Peter L. Bernstein, John Wiley & Sons Inc., 1996)

Essentially the SERM system is an Enterprise Risk Management (ERM) system
that includes more external and contemporary risk issues than is traditional. It
covers a portfolio of risk issues which can then be managed by many elements
of the organisation, as opposed to risk management generally falling on the
shoulders of a SRO (senior risk officer).
It is important to recognise that the board is responsible for monitoring all types of risk.
It is not just a matter of financial risk. Operational risks are at least as important. (Tolley™s
Corporate Governance Handbook, 2nd Edition (2003) by Andrew Chambers)

By bringing together various risk issues the system helps to develop the execu-
tive view of strategic risk and the appetite for it. The sustainable risk concept
may also assist in achieving a common risk culture and language that should
improve the understanding of the importance of managing a variety of risks. It
should help with the inclusion of all elements of the organisation into the risk
management system. It has the potential to facilitate the unifying of corporate
visions and objectives with their risk management systems.
In some cases, firms may be practicing good risk management on an exposure-by-
exposure basis, but they may not be paying close enough attention to aggregation of
exposures across the entire organisation. (Susan Schmidt Bies, ˜A bank supervisor™s per-
spective on enterprise risk management™, from RiskCenter (www.riskcenter.com), 3 May
2006)

Risk management practitioners understand the importance of not being blinded
by the internal risk aspects of an organisation alone. Bearing in mind the old
adage of what gets measured gets managed, SERM has sought to measure these
newer elements of the sustainable risk matrix. The type of risk issues taking
centre stage as defining the new competitive environment are:
The external environment in which organisations operate (Chapters 4 and 9);
The organisational culture (Chapters 6 and 13);
Staff recruitment and retention and human rights in the workplace (Chapter
14); and
Health and safety considerations (Chapters 16 and 17).
Chapter 1 “ Introduction
4



Organisations are now transferring more expertise to their supply chains as
they recognise their indirect, as well as direct, employee count is a major com-
ponent in distinguishing themselves from other organisations.
Risks that previously seemed operational are now being recognised as
strategic as issues change their level of importance and probabilities of occur-
ring. A good example is the importance of preserving your organisation™s repu-
tation and brand value (Chapter 9), which can now make up a large proportion
of the value of companies. This is deemed to be such a strategic issue among
global business executives that reputation risk is often considered as the most
problematic issue, more so than the risks posed by terrorism, foreign exchange,
natural hazards and political risk.
Related issues include how it is critically important to look after the health
and safety of customers, ensuring brand integrity and the retention of cus-
tomers™ loyalties (Chapter 17). Customer retention is now a key element of
many business strategies. It is recognised to be economically sound since the
costs of retention are small compared to the cost of recruiting replacement cus-
tomers. Indeed there has been a deluge of loyalty schemes and other methods
to understand and communicate with this stakeholder group, demonstrating
that it is too risky to lose customers. Other risk management techniques to build
customer loyalties have been Cause Related Marketing (CRM) and Community
Investment (CI) initiatives. These are designed to foster a belief in stakeholder
groups that the organisation supports human rights for their customers, local
communities and the public as a whole, thus maintaining brand value(s) and
organisational reputation.
These are just a few examples of how new or emergent components of
today™s risk ˜landscape™ or risk ˜environment™ are interconnected and a holistic
approach can have additional benefits than just the sum of the parts.
One point that is for certain is that change is always with us: a SERM sys-
tem seeks to help an organisation to become truly sustainable via a wider view
and interpretation of the risk management ˜landscape™ through the prism of a
SERM system, a Sustainable ERM methodology.
The type of benefits that can be achieved through a functioning sustain-
ability (corporate responsibility, corporate citizenship) system that includes
the management of ˜sustainability™ risks as well as more traditional ones
includes:

Protecting and enhancing corporate reputation and brand;
Recruiting, retaining and protecting talented staff;
Reducing risk; and
Developing innovative products and services.

The book aims to develop these and additional themes that highlight the
changing risk ˜environment™ over successive editions. The requirement exists
as it is recognised that most large companies concerned with corporate respon-
sibility issues acknowledge that they lack an active strategy to develop new
business opportunities based on those concerns. According to the Center
Chapter 1 “ Introduction 5



for Corporate Citizenship & Sustainability at Boston College (http://www.
bcccc.net/):
A total of 90% of participating companies confirm that their company™s
approach to corporate citizenship and sustainability issues reflects at least
some belief in the potential rewards of a CSR or sustainability approach.
To assist companies to meet this need we have set out the SERM objectives in
the box below.



SERM objectives
SERM aims to help an organisation to:

* Achieve existing goals and objectives and develop new ones;
* Improve an organisation™s business capabilities by seeing emerging
risks as new opportunities for activity;
* Reduce risk to the organisation through:
Analysis and reduction techniques across a wide range of risk issues;
The provision of case studies;
Best practice suggestions;
Checklists; and
Methodologies for specific tasks like due diligence operations;
* Assist an organisation to become more stable and sustainable;
* Enhance profitability potential as there can be real rewards from:
Minimising non-compliance;
Improving the quality of business operations;
Enhancing the quality of life of staff and customers; and
Reducing the use of resources by minimising ecological ˜footprints™,
that is the impact that humans have upon the planet.




SERM seeks to achieve these objectives by bringing contemporary research and
analysis, new regulations and risk management suggestions and the SERM model
to the attention of the readers. Evolving standards, codes, regulations, compli-
ance and governance issues are monitored and SERM seeks out which ones are
useful in order to maintain a licence to operate. A functioning SERM system
should help maintain stability and the confidence of stakeholders (investors, cus-
tomers, staff, governing bodies, etc.) in organisations that demonstrate a commit-
ment to being sustainable and to playing a constructive role in society.


Risk overview summary
Traditional scientific risk assessments can often fail to take into account the
stakeholders™ view of organisations which: in the context of investors, affects
Chapter 1 “ Introduction
6



their market and brand value; in the case of customers their market share; or the
general public™s perception of the organisation and the risks it faces. They will
not necessarily be based upon objective criteria.
With so much value being of a non-, or extra-financial nature, i.e. brand
value, a new method of risk assessment is required to include various
approaches to viewing value. It has been estimated that, among the companies
analysed by the SERM risk rating system (UK, EU and US markets), non-finan-
cial issues alone put at risk an amount equivalent to 20.1% of the total market
capital if left untreated. This represents the ™gross™ or ˜inherent™ risk borne by
those companies by virtue of the nature of their current operations. The risk
management measures actually adopted by those companies are taken into
account to mitigate this risk, the sustainability of their risk management sys-
tems, and the value threatened falls to 12.5% “ a measurement of the ˜net™ risk
to market value of the organisations.

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