January 2011: When it comes to risk, businesses must be more open with their customers

By , January 14, 2011 12:42 pm

January 2011, Market Intelligence Article for Sustainable Business Magazine, reproduced with permission.

Peter Winters, President, Haddock Research & Branding

Double-click on the offprint below to see it in a larger size.

The notion of ‘managing risk’ is a powerful framework for decision-making. What really differentiates how actively people are engaged with climate change is not their awareness or belief in it, but their attitudes towards how the risks should be tackled. Businesses, and governments, are being encouraged to take more account of climate change risk. Maplecroft provides global non-financial risks information, and their analysis indicates that companies which are successful in implementing climate change innovations, tend to have better financial performance. Alex Bogusky argues that companies can better manage reputational risk by being more transparent with their customers.

 

The financial crisis of the last three years has made many of us rather more concerned about risk. We do not need to know the details of credit default swaps, the carry trade, or US sub-prime mortgages, to keep an eye on the reputations of things that might affect us – such as with the bank we choose to save with, the companies we invest in, and the property values in the area of the house we might choose to buy.

The world also faces many non-financial risks. In our Environmental Choices study amongst the general public from Canada, England and the USA, it is not awareness or belief in climate change which really differentiates how actively engaged people are about this issue, but their attitudes towards risk. If you believe that we should deal with any risk associated with climate change by focusing on changing the way we do things now, you are most likely a Climate Citizen. If you believe that there should be a balance between changing the way we do things now and dealing with climate change problems if and when they occur, you are probably a Mild Green. If you think that since we do not know (definitely) what is going to happen in the future we should mainly deal with any climate change problems if and when they occur, you are probably a Sceptic/Uninvolved.

Businesses are also being encouraged to consider the risks of climate change. The introduction to the 2007 CBI report ‘Climate change: everyone’s business’ makes this point well: “Are we sure that climate change exists? I am sorry, but that is not a question for us. The best question for the business community is whether we can be certain that climate change presents a substantial risk; a risk that will have a profound impact on society and the economy? To this the answer is clearly “yes”. And so, as with all substantial risks, it is vital to mitigate the danger.[1]

 

It is these specific risks which are prompting many large institutional investors, such as those represented by the PRI[2], to call for strong action on climate change – such as with a November 2010 press release prior to the Cancun summit (pdf[3]. These types of concerns are helping to create a growing demand for global non-financial risks intelligence. Investors and consumers can access information about which companies are acting well, and which are acting poorly, when it comes to acting responsibly about climate change.

Our Environmental Choices survey shows that General Electric is particularly well regarded by Americans and Canadians for their actions about climate change. General Electric is also rated highly by the Maplecroft Climate Innovation Index, which provides evidence that those companies which are more successful with implementing climate change innovations also tend to have better financial performance[4]. In contrast, according to our Environmental Choices survey, oil companies are the type of companies most poorly regarded for their actions about climate change, particularly amongst Canadians[5]. This implies that they are vulnerable to reputational and financial damage should accidents occur, such as happened to BP with the 2010 Deepwater Horizon oil spill.

From our Environmental Choices study, the companies most widely regarded positively for their actions on climate change, by the English, are Marks & Spencer (M&S) and the Co-Op. As regards disapproval on this issue, in addition to certain oil companies, some English respondents also mentioned specific car companies, supermarkets and airlines.

Companies also need to be aware of other non-financial risks. The Maplecroft Child Labour Index[6] describes how widespread the use of child labour is in countries such as Bangladesh, China, India, Nigeria and Pakistan.  As Nike has discovered, there is danger of long term reputational damage in not taking proper account of this issue.

How should companies such as BP and Nike manage their reputational risks? The ex-adman Alex Bogusky of the Fearless Revolution[7], argues that the detailed relevant information available online is changing consumer expectations. He believes that businesses must be much more open with their customers about the significant risks and challenges they face, and actively engage with consumers about how they should best be tackled.


[1] ‘Climate change: everyone’s business’, CBI, 2007 – http://climatechange.cbi.org.uk/reports/00051/

[2] Principles for Responsible Investment website – http://www.unpri.org/

[3] ‘259 Investors Representing $15 Trillion Call for International Action on Climate Change’, PRI et al, 16 November 2010, http://www.unpri.org/files/20101116_Europeinvestorstatement.pdf

[4] ‘Index of 350 biggest US companies reveals relationship between climate innovation and financial performance’, Maplecroft, 4 October 2010, http://maplecroft.com/about/news/cii.html

[5] ‘3.g – Carbon-offsetting and business reputations, Environmental Choices 2008’, Haddock Research,

[6] ‘Child labour most widespread in the key emerging economies – Climate change will push more children into work’, Maplecroft, 1 December 2010, http://www.maplecroft.com/about/news/child-labour-index.html

[7] ‘3 Minutes on Transparency’ Alex Bogusky, 2010,

http://fearlessrevolution.com/blog/3-minutes-on-transparency.html

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