Performance

Performance Risk Management

By PALLE ELLEMANN KNUDSEN

Risk is Driving Performance

Risk is an essential part of doing business. If you are not taking risks, you probably don’t have a very good business. Pushing limits and driving people and a company into the unknown is what it means to create advantages.

“I’ve learned over the years that when you have really good people, you don’t have to baby them. By expecting them to do great things, you can get them to do great things.” - Steve Jobs, Apple

If a company cannot highlight 3-4 major risks it is facing, one needs to be seriously worried about the sustainability of that business. Either the business is not pushing itself hard enough or it is not aware of the risks that it is facing. From an investor perspective the thumb rule is that high risks in an investment have to be connected with the opportunity for an extraordinary high yield. Investors are looking for companies that can manage high risks.

RISK MANAGEMENT

Serious and integrated risk assessment is the point of departure for creating successful and sustainable businesses. Sustainability is in this perspective not “just” green sustainability, but rather the broader understanding of the term including both financial as well as non-financial risks. The course of the world shows that financial and non-financial risks are closely connected. And an increasing number of companies are doing integrated risk assessments to address and mitigate the risks that they are facing. The Brazilian beer producer AMBEV takes on the broad and long perspective when assessing the risks of the business. The company expects to be around for the next 100 years, so this is the starting point for assessing risks and developing strategy. Even though water is currently plenty and cheap in Brazil, AMBEV is focusing on and investing in reducing water consumption in the beer production. Clean water is already a huge problem in some areas of the world and it is in the future will become a global problem that AMBEV, with a long term sustainability perspective, has realized it is important to address.

REPORTING IS A KEY DRIVER FOR SUSTAINABILITY

Global Reporting Initiative (GRI) is a highly influential NGO promoting economic, environmental and social sustainability and GRI is instrumental in helping companies to adopt a broader and more comprehensive risk assessment and report performance more consistently. It is actually a key instrument that: • Helps companies putting structure to a sustainability strategy • Helps a company finding the right key performance indicators • Helps companies linking the non-financial and financial issues • Makes companies more accountable to the process • Encourages companies to track performance with key performance indicators and produce real results • Helps companies addressing stake holders’ interest. Additionally, reporting on a company’s performance from an integrated sustainability perspective is essential for the market’s valuation of the company. Unless the company reports about the non financial as well as the financial performance in a clear and transparent way, the company will not be credited for the effort made to build a sustainable business strategy. More than 1,000 institutional investors and ESG service providers have signed the UN Principles for Responsible Investing (PRI), which means that these investors have committed to taking environmental, social and governance (ESG) issues into account when investing.

TURNING RISK INTO OPPORTUNITY

The integrated risk assessment process will identify the material financial and non-financial risks for a specific company. Most companies will consider this exercise a matter of playing defense – building preparedness to prevent risks to have a negative impact on the business. But this is often missing an important point, where companies may turn risks into opportunities. The obvious ones are when companies concerned about reducing the carbon footprint find creative ways to reduce the use of energy and thereby save costs. Or when AMBEV reduces the consumption of water in the production and saves costs by putting this out as a goal for the beer production. Similarly, large shipping companies have been able to cut down billions of dollars of fuel costs and reduced the carbon footprint just by reducing the speed of the large container ships. Other companies think out of the box and start producing clean energy from the waste products in their production or build partnerships in the supply chain of electronics in order to reduce the amount of packaging, which will reduce costs at the supplier side and reduce amount of waste materials for retail and consumers. These ideas will not very often come out of risk assessment processes or board committees on sustainability, but rather pop up like mushrooms, when ordinary employees become engaged in thinking sustainability.

EMBRACE RISKS! Talking about and embracing risks will also make employees less risk aversive and more dynamic in finding new, innovative ways of building sustainable business. Companies can effectively build sustainability into the business strategy

02

04

FIFTY ONE FINE ART PHOTOGRAPHY, based in Antwerp, Belgium, is the only major art gallery in Belgium devoted exclusively to fine art photography. Upcoming Exhibitions: Jacques Henri Lartigue | Istants de Vie September 6, 2012, September 7, 2012 - October 20. Fair Paris Photo | Grand Palais Paris (Booth B38), November 15, 2012 - 18. Friederike von Rauch, December 6, 2012, December 7, 2012 - January 26, 2013. [W gallery51.com] . 01 (Studio) — 02 (Stairs) — 03 (Reflected)— 04 (Fence). Copyright Kerry Skarbakka and courtesy Fifty One Fine Art Photography.

and turn risks into opportunity by following a systematic process: 1. Perform an integrated risk assessment of the business taking both financial as well as non-financial factors into account. Consult all stakeholders for their view on what risks the company needs to address. 2. Use internationally recognized standards, like the UN Global Compact and Global Reporting Initiative, as a framework for the overall policy structure with regards to environmental, social and governance issues. Make sure to have corporate policies on all key elements of the framework. 3. Identify the material environmental, social and governance (ESG) risks and opportunities and use the Global Reporting Initiative for inspiration in finding relevant and comparable key performance indicators on all risks and opportunities. 4. Engage employees and management in developing innovative programs or changes to address material risks and turn opportunities into competitive advantages. Use relevant key performance indicators for integrating sustainability in variable pay or bonus systems. 5. Report consistently about performance and involve all stakeholders on a regular basis. The opportunities emerge, when a company consistently and proactively starts addressing risks. But the starting point is to understand both financial and non-financial risks.•