Risk management and sustainability

A successful business makes every effort to maximize profit without upsetting all its stake holders (employees, customers, suppliers, investors, communities, governments, trade associations) and managing risks. This is impossible without four guiding plans in place. A business plan, a strategic plan, a risk management plan, and a communication plan.  With all such plans in place, still things go wrong without prior notice. One of the best ways of tackling such emergency preparedness is through contingency planning. We support our clients in developing a robust risk management strategy along with contingency planning for longterm sustainability. For further questions, please reach out to us. 



Risk management plan 
Operational Compliance is about integrating risk management into everyday business processes. If risk is not properly recognized, mitigated and or managed, and regularly monitored, no business can survive.



A risk management plan is built by identifying and assessing all financial risks, legal risks, strategic risks, and security risks associated with the business. Once analyzed, each of the risks are prioritized based on the impact each risk can create for the business (Business impact Analysis or BIA). Once prioritized, each risk needs to be mitigated or managed according to what the company cannot afford to ignore, and based on what it can afford (its capital and earnings). Once mitigated, a regular assessment and monitoring needs to be in place.



Contingency plan 
Emergencies happen and they happen when least expected. How do you prepare for something you cannot predict? Planning for unforeseen risks requires preparedness more than anything. This is where contingency planning comes into play. Contingency planning is the preparedness during an emergency. How do you prepare for an emergency when you do not even know what that emergency could look like? That is where training and preparedness comes in. Every time spent on contingency planning saves as much time in reacting during an emergency. Contingency is that important.

Contingency planning pretty much involves all the processes behind building all the plans discussed (a business plan, a strategic plan, a risk management plan, and a communication plan), plus one major additional element. It makes every effort to get buy in from the entire company. During the darkest hours, the company needs everyone in the company to cooperate and have all hands on deck to pull through. If any weakness is left in any of the plans mentioned above, it will show during an emergent event.

There is one situation however a company can never plan for or be prepare for. That is reputational crisis. Longterm investment into consistent value creation is the ultimate contingency plan. It is the hardest of all emergent situations a company can face and yet only few really think about it and only few companies have shown resilience in front of such adversity. When a reputation of a company is under attack, no amount of planning and preparedness helps. The only thing that supports a business during this phase is the love it has accumulated in its entire existence. As evident, such resilience does not only involve the entire company, it involves all stake holders and more. All the good it has done, all the goodwill it has accumulated, will come back to help as trust and loyalty. There is no replacement to doing good. Is there a framework that can guide a business to do good and in essence be prepared for the highest risk a company can ever face? How much would that be worth and now much investment needs to be set aside to create a scope and a framework? Doing good is a fluid concept, is there a way to measure it?


Sustainability
The value an organization earns through loyalty cannot be expressed in financial terms, and is often captured on financial statements as “intangible assets” or “Goodwill”. It is an arbitrary number, that has a definition something like “is the portion of the purchase price that is higher than the sum of the net fair value of all of the assets purchased in the acquisition and the liabilities assumed in the process”. In simple language, it is an arbitrary amount a company is additionally worth due to its brand, brand reputation, brand loyalty, solid customer service, good employee relations, and proprietary technology (that restricts others from competing, IP, etc…). However, this is a fictitious amount, as it is an integral part of the business itself. It is not a value separate from the business, and therefore has no “severability”. Therefore it should not appear on a balance sheet. Accountants however cannot balance their numbers without accounting for the premium attributed to a business, so they put a line on the balance sheet called Goodwill. In other words, it is a made up number to account for all the good things the company has done. There has to be a better way than this! 

To mitigate reputational risk through doing good, can be split into mainly three categories of causes that people care about. Doing social good (taking care of the people, employing good governance (fair legal frameworks that are applied impartially and preserves human rights, protecting minorities, transparent decision making, ethical conduct, etc…), and lastly how the company’s actions are impacting the planet (Environmental initiatives). With the rapidly evolving weather patterns, people are increasingly focusing on the environmental sustainability. 

Therefore companies that are actively trying to improve in these three causes should be better liked by society in general and therefore should be more resilient to reputational risk. Therefore, a framework has been built around measuring the investment companies do around these three causes, and called it “Socially Responsible Investing”, “ESG investing”, “Transition Investing”, or just “Sustainability”. These terms are not really used the same way, and do not stand exactly for the same approach either, but all mean almost the same thing, “How is the company being responsible for the Environment, for its people and the society at large, and how it supports ethical and impartial governance. Ultimately it is a better way to measure the real value a company is creating. All these efforts have both financial and non-financial elements to it, and now when captured properly, it can be measured and accounted for properly.

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Environmental

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Social

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Governance

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