Corporate Strategies for Managing Environment Risks

8/8/2019 Corporate Strategies for Managing Environment Risks

1/16


2/16

OUTLINE

INTRODUCTION

METHODS OF ASSESSING BUSINESS RISK

COUNTRY RISK ANALYSIS

POLITICAL RISK ANALYSIS

CORPORATE STRATEGIES FOR MANAGING

EVIRONMENTAL RISK


3/16

Types of Business Risk


4/16

Legal Risk

Arising from legal challenges or changes in law

(Law regulating Carbon emission)

Regulatory

Risk

Arising from regulatory design and its changes

(Law against converting forest land into realestate)

Political Risk Resulting from political changes (Coca-colabeing ousted when BJP came to power)

Social Risk

Emanating from social attitudes (The English

church objecting to outsourcing software jobs toIndia)

Direct

Environment

Risk

Resulting from those environmental risks that

have a direct impact on business firms

(Recession affecting many industries)


5/16

Indirect

Environment

Risk

Resulting from those environmental risks that

have a indirect impact on business firms

(Falling demand for goods, inventory piling up)

Natural Risk Associated with natural catastrophes likeearthquake floods an d fires (Tsunami)


6/16

Methods of Assessing Risk


7/16

Checklist of risks before a business firm

Counter-party Risk

Credit Risk

Settlement Risk

Industry Risk

Default Risk

Market Risk

Interest rate Risk

Exchange rate Risk

Transaction Risk

Availability Risk

Translation Risk

Price Risk

Liquidity Risk

Performance Risk

Spread Risk

Underwriting Risk

Fiduciary Risk


8/16

Credit Risk Borrower fails to pay interest or capital or both

Counter-party Risk

The risk of creating contractual obligations withthird parties

Settlement

Risk

The risk that a transaction will not be settled

when it becomes due

Industry

Risk

The risk of being in a particular industry

classification

Default

Risk

The risk that a debtor will not will not honor his

obligations as per contact

Market

Risk

The possibility of adverse changes in market

prices


9/16

Interest

rate Risk

The risk arising from changes in the market

interest rate

Exchange

rate Risk

The risk emanating from fluctuations in

exchange rate

Transaction

Risk

Risk resulting from dealing in different

currencies

Price Risk

Risk associated with movements in the prices

of various commodities

Liquidity RiskThe risk that convertibility of assets into cash

will be reduced


10/16

Availability

Risk

The risk that new funds will not be available

adequately at the time of need

Performance

Risk

Risk that assets & liabilities will not perform

as per normal expectations

Spread Risk Risks associated with hedging through cross-market or cross asset position

underwrite

Risk

The risk assumed in the process of

underwriting

Fiduciary RiskRisk associated with actions taken on behalf of

the clients


11/16

Expert based scoring system

Questionnaires

designed to assessenvironment risk

are sent to experts

Their opinions,

comments and

observations are

obtained

Differentparameters are

rated on the basis

of scores assigned

to each item in the

questionnaire

These scores areare averaged or

aggregated to

obtain a risk

index

These are used forinter-temporal or

cross national

comparisons


12/16

Economic Methods

Factors

(Independent variables)

Economic environment

(Dependent Variables)

Which affect

Establish a model of cause-

effect relationship

Stated as a

mathematical equation


13/16

Ranking and rating system

Country rating isdone on the basis

of a number of

factors

Economic,

financial, political

& social

parameters

Each parameter is

weighted

according to its

importance

Weighted

parameters are

assigned scores

according to some

preset guidelines

Different countries

or different sectors

are rated and

ranked on a scale


14/16

Assessment of countrys creditworthiness

Creditworthiness of a country figures among the leading

indicators of its business environment risks. Countrieswith large internal & external public debts are poor

destinations for investmentMexico, Argentina, Brazil.

High internal

debt

Higher taxationPublic sector disinvestments

..Reduced expenditure on infrastructure

Excessive bureaucratic control

High external

debt

Import control

Exchange controls

Restriction on outward remittances


15/16

CORPORATE STRATEGIES FORMANAGING ENVIRONMENT RISKS


16/16

Approaches to managing risks

Risk

Avoiding

Strategies

RiskShifting

Strategies

Risk

Reduction

Strategies

.. Avoid politically sensitive products

.. Avoid sensitive regions.. Contractual agreements

.. Tie-up with other firms

Risk can be shifted to other parties

through insurance. A firm must be able to

identify the magnitude of various

insurable risks and take suitable cover

. Establishing a risk assessment system. Developing the local economy

. Legal Equity participation

. Good corporate citizenship

. Maintaining good political

relationship

Documents

Corporate Strategies for Managing Environment Risks