Understanding ROI_a Results

Understanding ROI_a Results

ROI_a provides an indication about how sustainability/environmental risk management expenses compare to the risk profile. It can help justify a company’s current expenses and programs, and identify ways to optimize the sustainability/environmental risk/cost balance.

As shown in the example, ROI_a results can be unrealistic, or at least awkward. For instance, the table above shows two instances of ROI_a greater than 100%. While that may be the mathematical result of the calculation, it is not reflective of reality and not credible. Examples of why results may not be as expected (or hoped):

• Unreasonably high ROI_a
  • ESG/sustainability operating costs are low in comparison to a very high risk profile. This can happen when there are a large number of high severity events or catastrophic events. This may be an accurate representation of costs versus the actual risks.
  • Not all relevant ESG/sustainability risk management operating costs were captured, accounted for or properly allocated to ESG/sustainability risk management. Review the operating costs to ensure they are as complete as possible.
  • Potentially undervalued loss estimates. This may indicate losses or risk types/events were not captured in the process. Review your risk inventory, loss estimates and where they are plotted against the severity thresholds.
  • Severity threshold ranges may need to be reviewed and realigned.
  • The risk program is intentionally structured to address high or catastrophic losses. When a company focuses on managing multimillion dollar values assigned to High and Catastrophic loss estimates, that can make low operating costs present as extremely high ROI.
  • There may be a mix up in using time-based scenarios versus loss-based scenarios without time parameters. For instance, a single-year probability-weighted loss scenario is typically much lower than high/catastrophic losses. It may be best to stay with one or the other.
• Unexpectedly low ROI_a
  • ESG/sustainability operating costs are high in comparison to the risk profile. This can happen when the number or severity of events is low. This may be an accurate representation of costs versus the actual risks.
  • Excess costs were allocated to ESG/sustainability risk management operating costs. Review the operating costs to ensure they are correct.
  • Potentially undervalued loss estimates. This may indicate losses or risk types/events were not captured in the process. Review your risk inventory, loss estimates and where they are plotted against the severity thresholds.
  • Severity and/or frequency threshold ranges may need to be reviewed and realigned.
  • The deductible or self-insured retention on applicable insurance may be high compared with the loss value.
  • The risk program is intentionally structured to address small losses. When a company emphasizes managing low cost values (for instance, regulatory fines and penalties more often than not are small), that can make operating costs appear outsized by the risk value.
  • There may be a mix up in using time-based scenarios versus loss-based scenarios without time parameters. For instance, high/catastrophic losses are typically much higher than a single- year probability-weighted loss scenario. It may be best to stay with one or the other.
• Negative ROI_a. If the result is negative, start by checking the above possible scenarios and omissions. If the result is still negative, this indicates there is an opportunity to optimize the balance between ESG/sustainability operating costs and the risks. Consider:
  • Internal cost allocations. Is the ESG/sustainability department accepting too much operating cost — or perhaps not enough? Are there opportunities for other functions to take on some of the costs for activities most relevant to them?
  • Loss estimates used in the analysis or those used by risk management. It is possible some realignment may be appropriate.
  • Insurance coverage needs, retentions and deductibles. They may not be appropriate based on the results of the analysis. Many risk management departments rely on their insurance brokers to offer guidance on insurance programs which may not accurately reflect the company’s specific situation.
  • The structure of the program. Here, we get into typical cost management questions of staffing, expenditures for resources, consultant use, etc. Either the risk is too low to justify all the costs, or the cost is inappropriately high for the risk level — they are both the same thing. If you recorded or tracked risk drivers during your inventory development, that information can be helpful in evaluating whether your program is structured appropriately as well as where costs might be increased or decreased.