The risk-mitigating effects of CSR
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Corporate social responsibility (CSR) is often named in connection to corporate risks. Specifically, one of the continuously repeated benefits of implementing a CSR strategy is risk mitigation.
But – given that the risks to which corporations are exposed are manifold – which types of risks actually decrease with the implementation of a CSR programme?
The risks, which a corporation faces, are often categorised into pure and speculative risks.
If pure risks materialise, the outcomes can only be negative, i.e. a loss. Examples: the risk of a fire on a corporation site or natural disaster risks, such as flooding or earthquakes.
Speculative risks can result in both a loss or a gain. Example: investments.
Here are three thoughts about how a well thought-out and executed CSR strategy is suitable to mitigate corporations’ exposure to both pure and speculative risks whilst also holding the capacity to turn risks into opportunities.
Hazard and operational risks (pure risks)
Both hazard and operational risks can be subsumed under the heading of pure risks.
Hazard risks: potential loss of property, liability, or personnel. Examples: Health and safety issues, hazardous raw materials.
Operational risks: risk of failures of people, processes, controls, or systems. Examples: IT failures, inadequacy of internal control procedures.
What can CSR do?
The adoption of (voluntary) social responsibility standards mostly brings along monitoring and reporting duties.
Consequently, a CSR strategy urges a corporation to lay a greater emphasis on the examination of existing procedures, processes and standards at all stages of the value chain to determine their environmental and social impact, and to detect potential human rights abuses.
These reporting duties, in turn, can bring potential hazard risks, such as insufficient safety procedures, to light.
Moreover, they can reveal previously undiscovered inefficiencies in the corporate system and operational risks arising from processes and controls.
Strategic risks (speculative risks)
In contrast to pure risks, speculative risks can have a negative or a positive outcome once they materialise; they are not necessarily controllable by the firm.
One type of speculative risks are strategic risks. Strategic risks are related to (unpredicted) societal or economic changes, for example political power shifts, demographic changes, or changes in the competitive environment.
Other speculative risks are, for example, market risks and, relatedly, financial risks, which concern the effect of market changes on financial assets or liabilities.
What can CSR do?
Corporate social responsibility programmes provide both internal and external stakeholders with information about the processes, operations and socio-economic impact of the firm’s business operations as well as of their supply chains.
The reporting of a firm’s operations, consequently, requires a thorough analysis of the firm’s stakeholders, since they are the ones demanding a certain level of transparency and accountability.
It is exactly this thoroughness in analysing internal and especially external stakeholders (for example, customers and consumers, or non-governmental organisations) which makes CSR crucial for mitigating several speculative risks: the in-depth understanding of stakeholders facilitates a firm’s understanding of economic, social and potentially even marketplace trends.
Reputational risks
Sometimes, reputational risks are referred to as a type of speculative risks.
However, a recent Deloitte study emphasised that, in fact, the loss of reputation is not a risk per se but rather a result of a specific incident, an activity or the behaviour of a corporation.
The same study revealed that 73 per cent of the survey participants named corporate reputation as their most vulnerable area.
What can CSR do?
With the implementation of a well thought-out CSR strategy, a company generates reputational gains. This generation of gains present a business opportunity.
A well-communicated CSR strategy can turn the risk of reputational losses into a competitive advantage by attempting to improve exactly those areas, which are perceived the most critical by stakeholders.
Reputational gains do not mean that a firm will be totally resilient to any potential crisis or that reputational risks are reduced in any case. However, in the event of a crisis, stakeholders might be more benevolent, knowing that the firm had attempted to tackle socio-economic or governance related risks.
Given the evident benefits of the risk-mitigating effects of CSR, it can be considered essential that your company embrace and nurture the development of a high quality CSR strategy. Making this your company's New Year's Resolution may just be the best way to kick off 2019.