A2.5.5.3 Reduce risk through engagement with stakeholders


Businesses can reduce financial, reputational and political risks by engaging with stakeholders. Understanding the concerns and interests of employees, customers, NGOs, politicians and business partners helps a company to manage environmental and social expectations better, resulting in reduced risk of civil action or brand assassination, improved access to capital and insurance, cost savings and reduced vulnerability to regulatory changes.

Risk is intrinsic to business and cannot be eliminated. But companies can improve their risk profiles for environmental and social performance by understanding the expectations of a broad spectrum of stakeholders. Engagement helps companies understand stakeholders’ changing expectations and needs. It allows companies to keep a finger on the pulse of the general social and political environment and helps to identify issues which could become crises or simply lead to changes in the way a business operates. Social and environmental problems can have serious impacts on financial performance and therefore on borrowers’ ability to maintain interest payments and repay capital. They can also extend to the lenders’ reputations, as institutions involved in controversial dam projects have discovered, or can generate specific financial liabilities if a borrower causes environmental damage and cannot meet its liabilities. The evidence for risk reduction through engagement and transparency is strongest for larger companies because regulators, international stakeholders and local communities expect more of them, but also because of the sensitive sectors in which many of these companies operate (e.g. mineral extraction).


Stakeholder engagement

Stakeholder engagement is essential to increasing community understanding of business operations. Community understanding of private sector activity, sometimes called a ‘local license to operate’, can sometimes be a major factor in a firm’s operations. Such acceptance can help with reputation and brand value, and failure to have such acceptance can raise operational and production risks, at times with very significant costs to the companies involved. To combat the climate of suspicion and mistrust companies must engage with stakeholders to learn their concerns and expectations.