Major Risks, Challenges and Mitigation

Financial Report Sustainability Report

In the Management, Discussion, and Analysis (MD&A) of the annual report, the organization discusses the results of financial statements in words. Information useful for assessing the organization’s operations include the following:

  • major financial risks;
  • their effect on financial performance; and
  • risk mitigation by the management team.

This section is similar to the MD&A but with more emphasis on environmental and social risks and challenges. Management will explain how risks impact not only environmental and social but also economic performance as well.  Controls are used to implement a risks strategy in several ways:

  • mitigate,
  • manage,
  • share or,
  • avoid.

What Happens in Practice?

RWE, an electricity and gas company located in Germany, has major business lines in mining, procurement and trading, electricity and generation. The company identifies its major impacts (challenges) in all lines. Click hereto view.
Canon, an imaging solutions company, illustrates how its five materiality themes fit the corporate goals and the stakeholders’ interests and expectations. Click here to view.
Fast Facts

Which industries are more likely to discuss risk?

Some industries are more likely to discuss risks than others. In a KPMG Survey of the Global 250 companies, the percentage of companies in the industry discussing risk range from almost none to 100 percent.

Top reporting industries are the following:

  • 100 percent of chemicals and synthetics;
  • 100 percent of mining;
  • 91 percent of electronics & computers;
  • 88 percent of food & beverage;
  • 78 percent of automotive.

– Source: KPMG International Survey of Corporate Responsibility Reporting 2008

What Stakeholders Say…about Risks

“We would like to see a new section on risk factors added to the Management Discussion and Analysis in the financial annual report as well as the sustainability report. Companies should be required to discuss financial and non-financial events, circumstances, and actions which adversely affect their ability to achieve their business objectives.”

“Social and environmental risks can affect profits just as economic risks can. Therefore, all risks should be discussed, including stakeholder issues with employees and customers. Material risks can arise with product quality, safety, community involvement, and human rights complaints.”

“Shareholders want to know what the risks are and how their money is being spent not from just a pure risk perspective but also from a conscience perspective.”

– Quotes from Stakeholders

Takeaway

All organizations face risks but best practice organizations will explain the control processes used to lessen the probability of suffering major impacts from those risks. Look for specific control processes in some industries: ISO 14001 or Responsible Care. (See the Assurance module for more detail.)