Balancing Current Impact Risks and Achieving Potential Future Rewards

Investments are traditionally considered along a spectrum of risk and return, whereby the decision to take on higher risk usually translates to achieving a higher potential return. As investors and businesses navigate a changing risk landscape, the complexity of new risk factors has pressured stakeholders to reconsider values and activities. Particularly, recent crises have weighed the importance of building businesses that are resilient to unforeseen events and to take the long-term approach.

Companies that identify its risks and develop relevant risk management strategies are often more seen to be more innovative, efficient and resilient. These companies are more likely to be better positioned to adapt to changes in regulations, market trends and consumer preferences, and to take advantage of new opportunities at a quicker pace. This can lead to better financial performance and increased shareholder value over time.

The following indicates some scenarios considering people-related impact risks and potential future rewards:

Employees Impact Risk: Companies that have poor labour practices, such as low wages, unsafe working conditions, or discriminatory hiring practices, may face reputational damage, boycotts, and legal action that can negatively impact their performance.

Potential Future Rewards: Companies that prioritise social responsibility, such as promoting diversity and inclusion, providing fair wages and benefits, and investing in community development, may benefit from a positive reputation, increased customer loyalty, and reduced turnover, which can lead to higher stakeholder value.

Board of Director Impact Risk: Companies that have poor governance practices, such as conflicts of interest, inadequate board oversight and lack of transparency, may face regulatory action  and reputational damage.

Potential Future Rewards: Companies that have strong governance practices, such as independent board oversight and transparency in financial reporting, may benefit from reduced risk of fraud and unlawful misconduct, increased investor confidence, and improved long-term financial performance.

Shareholder Impact Risk: Companies that are not transparent and accountable in their reporting may manipulate shareholders through impressions, leading to loss of confidence from shareholders. In addition, shareholders may find it difficult to assess social or environmental returns of investments, which could lead to a misallocation of capital, particularly for investors seeking to maximise impact.

Potential Future Rewards: Both traditional and impact investors are progressing towards their own desirable financial return targets which also integrating measurable social or environmental benefits, encouraging companies to manage shareholders expectations beyond just financial returns.

Regulator Impact Risk: Regulatory requirements can also add complexity to companies and investors. If companies do not keep up with the changes of laws and regulations, they may face challenges such as increased costs of operating a business and altered competitive landscape, leading to reduced attractiveness of an investment.

Potential Future Rewards: Through compliance with the latest governance, environmental and social regulations, as well as setting standards for transparency and accountability, companies are able to build trust and confidence among stakeholders.

Beneficiaries Impact Risk: Managing resources for growth isn’t easy for most entrepreneurs. Managing this kind of complexity puts a lot of pressure on entrepreneurs, so there is always the risk that they will start caring more about resource providers, shareholders and other stakeholders, than about their targeted beneficiaries.

Potential Future Rewards: By considering their beneficiaries at every decision-making points, entrepreneurs can prevent mission drift and remain true to their missions.

By identifying and managing current risks, both businesses and investors can future-proof themselves by integrating these identified risks in their risk management framework.