Let’s make friends with non-financial risk assessment systems

Антонина Левашенко Антонина Левашенко Chief of Center Russia-OECD published in Investments · Financial markets
Let’s make friends with non-financial risk assessment systems

Today, the standards of responsible business conduct (hereinafter - RBC) are not only a sign of good tone, but also a social license of any corporation for its activity, a green light for entering third markets, the possibility of listing on decent exchanges, as well as a guarantee to get a decent investor in your project and send it (the project) for export.

Why? Look at argument number 1.

All this made the RBC standards essentially obligatory, leaving them technically voluntary. Proving that they are also profitable - because you are launching a system of continuous monitoring of non-financial risks of your own business - is quite boring. This has already been done for us by many reputable organizations, ranging from Standard and Poors to the OECD.

By the way, it was the latter that created the algorithm for implementing such standards, consisting of 6 non-consecutive, constantly repeating steps. In fact, this represents a cyclical process of internal “check in” with questions ranging from the risk of an environmental catastrophe at the enterprise to not overpaying of taxes in the future and tax penalties avoidance.

Total of 9 directions.

Just a couple of days ago (June 8, 2019) we had the coolest session at the SPIEF (delicious coffee, nice people) on this boring (in fact - no) topic. I wanted to hear the pros and cons (there weren't any) to the following question - Do we need standards for responsible business conduct for development institutions?

Let me remind you that development institutions are parastatal institutions with a special status (similar to banks), which should finance such projects, that will make our life better. Well, for example – not to build a waste incinerator, but a waste recycling plant. At the same time, such projects should be justified from the point of view of their further independent "financial" life. In another way - they should not be subsidized. Of course – most of the projects here are infrastructure projects. The long-term nature of infrastructure investment can increase the risks associated with sustainability. Moreover, such projects may initially become the subject of co-financing of several development institutions at once. Or even if it is a national project, sooner or later its products/services will be exported, where it will be evaluated regarding their transparency, sustainability and other quality characteristics for contracting, investing money, etc. As they say, the sooner you put the right attitudes into a child, the easier it will be to go through the process of socialization.

Therefore, we are talking about harmonized standards for a responsible business conduct of development institutions, or in other words - similar methods for assessing non-financial risks of projects where the money is invested, as well as similar methods for introducing the RBC standards into the internal policy of the project so that it can actually be resilience.

Without a doubt, the timely and adequate disclosure of the operating and financial activities of the company and its management contributes to the understanding by interested parties of the prospects of this company. However, openness with respect to non-financial results (for example, taxation) is also a key to the understanding of significant risks.

Here are 6 reasons why you need uniform standards for responsible business conduct for development institutions:

  1. The infrastructure asset class, if we are talking about projects in this area, is heterogeneous among the institutes for development, which means that non-financial risks can be assessed differently.

  2. The type of access to infrastructure investments is different - private/public. The standards used to measure sustainability will vary depending on how you access. Well, if you can classify them uniformly and uniformly bind to them and priority non-financial risks.

  3. Today, there are many certification initiatives whose services in different countries/regions are used by development institutes to determine the risks in a project. Accordingly, the creation of a single standard limits the subjectivity of the evaluation of international projects.

  4. The final source of information in determining how a particular aspect should be implemented in a project is often national legislation. And it, as we know, can be different. For example, the “Air Pollutant Reduction” indicator for many certification companies today is based on US national atmospheric air quality standards or California air quality standards. A unified methodology for assessing non-financial risks among development institutions will allow harmonizing information sources by various indicators.

  5. Most of the methodologies of institutes for development are geographically linked (which is logical, but not always justified). The creation of a unified methodology will allow highlighting exactly those types of non-financial risks of projects that do not depend on the region where the project is being implemented or the development institution is based.

  6. Finally, similar standards of responsible business will precisely simplify the process of project appraisal, which is the subject of co-financing of various institutes for development and reduce the costs of such an appraisal.

The OECD is launching a new project in 2019 - the creation of a Responsible Business Guide for development institutions. And this means that the same standard that we are talking about will be created. Things are easy - take part in its development.

The OECD is launching a new project in 2019 - the creation of a Responsible Business Conduct Guide for development institutions. And this means that the same standard that we are talking about will be created. Things are clear - take part in its development.