. 8
( 131 .)


Headline summary
An examination of the results in more detail shows a breakdown of this risk
level in accordance with the main section headings of the book, that is the three
main elements of sustainability: the economic, social and environmental pil-
lars of sustainable development. Research is still progressing on the measure-
ment of these risks and there will be much more evidence to increase the
economic risk component in the next volume. The methodology is described
below and in Appendices C and D.

Risk to value from Gross Risk management Net
sustainability issues (inherent) factor (RMF) (residual)
risk risk

Economic and socio-economic risk 2.9% / 1.4 2.0%
Social and ethical risk 9.0% / 1.8 5.1%
Environmental risk 8.2% / 1.55 5.4%
Combined risk issues 20.1% / 1.6 12.5%

This indicates that the analysed organisations have safeguarded approxi-
mately 7.6% of their collective market value through management of the rele-
vant risk issues (the variance/differences between the ˜gross™ and ˜net™ figures).
It also gives some measure of the level of resources which it may be appropri-
ate to utilise in those management activities. A review will take place as to how
these organisations are managing down their risk by use of the best practice
case study sections in each chapter.
The remaining risk can be seen in the following diagram: one aim of this
book is to reduce this 12.5% of risk to organisational value still further.
Chapter 1 “ Introduction 7

Economic &
Risk, 2%

Risk, 5%

Social & Ethical
Risk, 5.1%

The majority of operational risk from sustainability issues is derived from
environmental risks and social and ethical issues. These include indirect
effects such as increased resource/fuel costs and climate change impacts. These
summary sections can hide the relative importance of risk categories within
each of them; for example, health and safety element issues make up 3.8% of
the 5.1% net risk that constitutes the social risk category.
The primary sustainability risk within the organisations reviewed is still as
a result of environmental issues, representing a 5.4% risk to market value; fol-
lowed by social and ethical issues at 5.1% (including health and safety issues)
and economic ˜sustainability™ factors at 2.0%. We therefore need to view each
of the risk elements in more detail, and this is done in the chapters of this book,
we provide some summary overview in this chapter.

Overview of sustainability risk issues
The primary sustainability risks that the model has analysed have been ranked
according to their total level of net risk, as researched over the last 10 years of
loss experiences.

Sustainability risk issues Gross Reduction Net Risk
(inherent) management (residual) ranking
risk factor “ RMF risk to value

Environmental incident risk 1.8% 1.5 1.3% 1st
Health and safety “ historic liabilities 1.9% 1.5 1.2% 2nd
Safety external from workplace (public) 1.6% 1.6 1.0% 3rd
Health internal (workforce) 1.5% 2.1 0.7% 4th
Environment “ historical liabilities 1.1% 1.4 0.8% 5th
Human rights/resources (internal) 1.2% 1.8 0.7% 6th
Business practices 0.7% 1.4 0.5% 7th
Safety internal (workforce) 1.1% 2.2 0.5% 8th
Air pollution “ from transport 0.8% 1.5 0.5% 9th
Emissions to land “ waste generation 0.8% 1.7 0.5% 10th
Chapter 1 “ Introduction

Sustainability risk issues Gross Reduction Net Risk
(inherent) management (residual) ranking
risk factor “ RMF risk to value

Marketing practices 0.6% 1.4 0.4% 11th
Use of corporate power 0.6% 1.3 0.4% 12th
Resource use “ raw materials 0.6% 1.4 0.4% 13th
Resource use “ land and natural resources 0.7% 1.7 0.4% 14th
Resource use “ energy 0.6% 1.6 0.4% 15th
New technology use 0.5% 1.3 0.4% 16th
Health external (public) 0.6% 1.7 0.4% 17th
Air pollution “ from production 0.7% 2.0 0.4% 18th
Community investment/involvement 0.6% 1.4 0.3% 19th
Bribery and corruption 0.5% 1.6 0.3% 20th
Air pollution “ peripheral pollution 0.5% 1.5 0.3% 21st
(noise, light, etc.)
Human rights (external) 0.4% 1.4 0.3% 22nd
Resource use “ waste water pollution 0.4% 1.5 0.2% 23rd
Resource use “ water use 0.3% 1.5 0.2% 24th
Total risks quantified to date 20.1% 1.6 12.5%

Overview of sector risk
The sector risks are displayed according to their total level of net risk from a
range of business risk issues that are explored in this book. The six sectors with
the most risk exposure from non-financial related to environmental, health and
safety, product liability and social issues are displayed.
The sectors with the highest net risk (left-hand scale) are displayed,
this takes into consideration an organisation™s risk management activities
(resources, staff, systems and board-level support), which help reduce their
gross risk profiles (right-hand scale). For example, although the Tobacco sector
has a very high gross high-risk level of 60%, they are putting resources into
their risk management efforts, thus reducing their risk to a potential 25% of
organisational value. Some sectors, like Oil production do not make the top six
as they devote vast amounts of resources to managing their risks, which are still
substantial, but so is their value so these are proportional results.
Examples of the issues hitting some of the higher risk sectors include:
Construction companies have suffered from their worker health and safety
record with the government stating that those with poor performance will be
excluded from contracts;
Clothing companies have painful experience of how allegations over sweat-
shop labour can become reputational disasters, diminishing the value of
brands and making offerings appear overvalued;
Fast-food and confectionery companies are about to learn the lessons of the
Tobacco sector;
Chapter 1 “ Introduction 9



Net (Residual) Risk




0.0% 20.0% 40.0% 60.0% 80.0%
Gross (Inherent) Risk

Pharmaceutical companies suffered similar damaging coverage over access
to AIDS drugs in South Africa. Along with newer risks like Bayer facing
shareholder suits seeking compensation for the damage that the Baycol fall-
out did to its stock price;
There is also an increase in liability through indirect association, as it pos-
sible for companies involved with the Baycol lawsuit to be potentially liable
for 5% of all damages; and
Tobacco companies suffered grave reputational and financial damage from
society™s changing perception of the risks of smoking.
The risk issues of some sectors are more obvious than others, the product liabil-
ity issue of the Tobacco sector and the environmental impact of the Mining sec-
tor are well known as high-risk sectors with regards to these sorts of issues.
There are surprises like: the Steel and other metals sector that is exposed to
energy costs and safety risks; & the Aerospace & Defence sector, which has a
high gross risk level and sustainability risk management that is not as developed
as other elements of their business.
The highest risk sectors have been ranked.

Sectors Risk level Ranking

Industrial Metals High 1
Mining High 2
Tobacco High 3
Industrial Transportation High 4
Chapter 1 “ Introduction

Sectors Risk level Ranking

Aerospace & Defence High 5
Pharmaceuticals & Biotechnology High 6
Oil & Gas Producers High 7
Banks High 8
Oil Equip™, Services & Distribution High 9
Food Producers High 10
Beverages High 11
Forestry & Paper High 12
Chemicals High 13
Mobile Telecommunications High 14
Gas, Water & Multi-utilities High 15

A key issue for management therefore is how to identify the most signifi-
cant threats to corporate value, internally, externally and sector related and
how those threats can be managed most effectively. There are practical explan-
ations of how this can be achieved within this book.

Definitions of risk
In this section we explore some concepts and definitions to set the scene for the
sustainable enterprise risk management framework. Mainly we are reviewing
non-financial risk issues and how they can impact upon your organisation™s
sustainability. This approach examines how economic, social, governance and
environmental issues can: help or hinder the continued existence of your
organisation; improve competitiveness; and increase economic, social and
environmental performance thus assisting your sustainability.
There is no single accepted definition of risk; we explore some descrip-
tions of risk in terms of both positive and negative aspects:
˜Risk can be defined as the combination of the probability of an event and its
consequences. In all types of undertaking, there is the potential for events and
consequences that constitute opportunities for benefit (upside) or threats to
success (downside)™ (˜A risk management standard™, IRM/AIRMIC/ALARM,
2002 www.airmic.com/AIRMIC_RiskManagementStandard.pdf);
˜¦ “Risk” is defined as something happening that may have an impact on the
achievement of objectives ¦ It includes risk as an opportunity as well as a
threat™ (˜Supporting innovation: managing risk in government departments™,
National Audit Office, 2000);
˜Risk™ can be used to describe the uncertainty surrounding events and their
outcomes, which may have a significant effect, either enhancing or inhibiting:
operational performance;
achievement of aims and objectives; or
meeting expectations of stakeholders
Chapter 1 “ Introduction 11

(Charities and Risk Management, Charity Commission for England and
˜Any problem or disruption that triggers negative stakeholder reactions and
results in potentially damaging public scrutiny.™ This will be explored in
more depth in Chapter 9 (Institute of Crisis Management, Annual Report
2002, May 2003 from www.crisisexperts.com/); and
˜Operational risk is the risk of loss resulting from inadequate or failed
internal processes, people and systems or from external events™ (˜The next
frontier™, ISDA, 1999).
Notwithstanding the views of commentators such as those quoted above, in this


. 8
( 131 .)