- What is the ethical principle that underpins risk management concept and how does a listed company’s board manage enterprise risk? Explain with the help of an example from the annual report of any ONE listed co (from NSE top 500 companies by market capitalization) the key initiative taken by the selected company in FY2021-22 to manage ONE financial risk and ONE non-financial risk.
The ethical principle that underpins the risk management concept is the principle of accountability. This principle emphasizes the responsibility of organizations to identify, assess, and mitigate risks in a transparent and ethical manner. By being accountable for risk management, companies aim to protect the interests of their stakeholders, including shareholders, employees, customers, and the broader community.
Listed companies’ boards play a crucial role in managing enterprise risk. They are responsible for overseeing the company’s risk management framework and ensuring that appropriate strategies and controls are in place to mitigate risks effectively. The board provides guidance, sets risk tolerance levels, and monitors the implementation of risk management practices throughout the organization.
Example: Reliance Industries Limited (RIL)
RIL is one of the top listed companies in India by market capitalization. In its Annual Report for the financial year 2021-2022, RIL highlights key initiatives taken to manage financial and non-financial risks.
Financial Risk Management Initiative: RIL’s Annual Report mentions a key initiative to manage financial risk in the form of currency risk hedging. The company acknowledges the exposure it faces to foreign currency fluctuations due to its global operations. RIL employs various financial risk management strategies, including the use of derivatives, to hedge against adverse currency movements. These strategies aim to minimize the potential impact of exchange rate fluctuations on the company’s financial performance and ensure stability in cash flows.
Non-Financial Risk Management Initiative: In terms of non-financial risk, RIL’s Annual Report highlights its commitment to sustainable business practices and environmental stewardship. The company recognizes the potential risks associated with climate change and the need to mitigate its environmental impact. As part of its risk management approach, RIL has undertaken initiatives to reduce greenhouse gas emissions, enhance energy efficiency, and invest in renewable energy sources. The Annual Report outlines specific targets and progress made in areas such as carbon emissions reduction, waste management, and water conservation.
By implementing these initiatives, RIL demonstrates its commitment to managing financial and non-financial risks responsibly, aligning with the ethical principle of accountability. It shows how the company’s board plays a vital role in overseeing risk management practices and promoting sustainable business strategies to protect stakeholders’ interests and enhance long-term value.
- From the Sustainability Report (FY2021-22 or 2022-23) OR Business Responsibility & Sustainability Report (FY2021-22 or 2022-23 Annual report) of any one listed company from across the globe, select any ONE Carbon Emission reduction initiative adopted and practiced by the company. Explain the initiative in your own words and analyse if it is effective/outcome driven or not, if yes provide quantitative proof for the same. (No diagram/graphic or table required).
Students can find the SUSTAINABLITY report of any company in google. It measures the various initiative taken by the company for the environment and society at large. Few general example one can take from sustainability report of a company is of a carbon emission reduction initiative adopted by companies and analyze its effectiveness.
Example Carbon Emission Reduction Initiative: Transition to Renewable Energy Sources
Many companies globally have been adopting initiatives to transition from fossil fuel-based energy sources to renewable energy sources, such as solar or wind power. This shift aims to reduce carbon emissions associated with their operations and contribute to mitigating climate change.
To assess the effectiveness of this initiative, quantitative proof can be provided through metrics such as:
- Reduction in Carbon Footprint: The company can report the reduction in its carbon emissions resulting from the transition to renewable energy sources. This can be measured in terms of metric tons of CO2-equivalent emissions reduced annually compared to the baseline.
- Renewable Energy Usage: The company can provide data on the proportion of its energy consumption sourced from renewable energy. Higher percentages indicate a successful transition and a decreased reliance on carbon-intensive energy sources.
- Energy Efficiency Improvements: Alongside the transition to renewable energy, companies may implement energy efficiency measures to reduce overall energy consumption. Quantitative proof can be provided through metrics such as reduced energy intensity (energy consumed per unit of production or revenue) compared to previous years.
- Renewable Energy Capacity: The company can share information on the installed capacity of renewable energy sources, such as the total megawatts of solar panels or wind turbines deployed. This demonstrates the company’s commitment to long-term sustainable energy practices.
- Renewable Energy Certificates or Offsets: Companies may also purchase renewable energy certificates or invest in carbon offset projects to further mitigate their carbon emissions. Quantitative proof can be provided by reporting the number of certificates or offsets purchased and the corresponding impact in terms of carbon reduction.
By analyzing these metrics, the effectiveness of the transition to renewable energy can be assessed. The quantitative proof provides evidence of the company’s commitment to reducing carbon emissions and transitioning to more sustainable energy practices.