Risky business Understanding what can destroy

Transcript:Risky business Understanding what can destroy:
Risky business Understanding what can destroy value Risks Two sorts of risks The risk to the value of your investment if you do not understand what risks management is bringing into the business and how it can affect financial performance down the track The risk of not understanding that the community increasingly does not view shareholder value maximisation as a reasonable rationale for how directors make decisions or corporations behave. Risks to value of investment ESG risks – this not not socially responsible investment It is the inclusion of environmental, social, and governance factors into financial analysis to evaluate risks and opportunities AMP Capital research shows that only around 26% of a company’s true value lies in physical assets such as stock or buildings Intangible assets make up the other 74% A number of studies show that ESG principles positively affect long-term, risk-adjusted returns Risks to the value of investment Understanding non-financial drivers provides deeper insights into how well a company or asset grows and protects company value – let’s consider some examples Retail companies, management of supply chain and labour issues and bribery and corruption exposure are key drivers, particularly for those entities with offshore operations Insurance companies, staff management practices including absenteeism, training, professional development and turnover rates are important indicators of overall company value and management quality Risks to value of investment While there might be relatively weak links between individual intangible drivers and short-term earnings or share price overall ESG performance can be a good proxy for management quality In addition, ESG analysis can detect investment risks before they blow-up and identify cases where current business models are not sustainable in the long-term Environment risks (Blackrock) Carbon emissions Air quality Energy management Fuel management Water and wastewater management Waste and hazardous materials management Biodiversity impacts Social capital risks (Blackrock) Human rights and community relations Access and affordability Customer welfare Data security and customer privacy Fair disclosure and labelling Fair marketing and advertising Human capital risks (Blackrock) Industrial relations Fair industrial practices Employee health, safety and wellbeing Diversity and inclusion Remuneration and benefits Recruitment, development and retention Business model & innovation (Blackrock) Lifecycle impacts of products and services Environmental, social impacts on assets & operations Product packaging Product quality and safety Leadership & governance (Blackrock) Systemic risk management Accident and safety management Business ethics and transparency of payments Competitive behaviour Regulatory capture and political influence Materials sourcing