Mon 11 Dec 2017
News - Directors' Day 2017 - Why Risk is a Non-Financial Matter - Turning Risks into Opportunities
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Directors' Day 2017 - Why Risk is a Non-Financial Matter - Turning Risks into Opportunities

Although financial risk is central in business calculations, non-financial threats are more numerous. Confronting these not only makes firms more resilient, but opens new opportunities. Hedda Pahlson-Möller, business angel, impact investor, adjunct professor and board member explained.

Asked about the ten most significant risks faced, businesses (in a survey by the insurers Allianz) cited eight non-financial risks and two financial risks. Supply chain interruption, cyber incidents, natural catastrophes, legislation/regulation, new technologies, loss of reputation/brand value and so on out-numbered concerns about market and macro-economic developments. Taking an holistic approach to risk is at the centre of managing environment, social and governance risk, with its focus on regulatory and reputational matters.

Ms Pahlson-Möller quoted the Harvard Business Review which said: “sustainability is an emerging business megatrend.” She believes it is a mistake to see this purely as a regulatory question, but that it should be an approach to business of seeking to “do the right thing” in its broadest sense. That said, legislation is having an effect, as well as pressure from the court of public opinion. For example, directive 2014/95 requires disclosure by large publicly listed companies of non-financial and diversity information from 2018 onward.

But what of the opportunities? Building a reputation for sustainable development will generate good press, which in turn will help with recruitment of the staff required for innovation, growth, and efficiency. Some activists complain of companies seeking to apply “greenwash” to mask a lack of engagement with a sustainable agenda. Ms Pahlson-Möller is less concerned, believing all action in this direction helps drive the message, and “sometimes good habits stick and policies develop further,” she said.

Firms have the opportunity to tap into a growing appetite for sustainable investing. Around 20% of all assets under professional management in the USA are classified as socially responsible investment. Part of this were the USD114bn assets under management globally in more strictly focused impact funds in 2016. This sum is due to have grown by a quarter in 2017. Fund managers are always on the look-out for new projects to support, with this flow of new investment often hard to match with available projects. Companies should be alive to these opportunities.

To this end, firms need to benchmark their achievements through the variety of tools available on the market. Boards need to put on different lenses to understand different layers of risk. Once captured then these can be assessed for opportunities.