In a recent 2degrees article Could collecting supply-chain data put your reputation at risk?, author Martin Chilcott looks at how reputational risk affects shareholder value, and how sustainability issues can affect both. It's an interesting look into "horsegate" (remember a couple of months ago when European retailers found horse meat in their burgers?), but what piqued our interest was this summary of Freshfields Bruckhaus Deringer's four main types of reputational damage - and impact- on stock prices.
* Behavioural crises (the company, its suppliers or employees acting questionably or illegally) have the greatest immediate impact on shares and can cause shares to crash by 50% or more on the day they become public. However, if the company responds and no significant damage is done to the business’s ability to trade in the real world, then these losses are usually regained fairly quickly, within 6 months or so;
* Operational crises (when the company’s functioning is halted due to a major product recall or environmental disaster) have a modest impact in the first two days of the crisis breaking but the greatest long-term effect on share price – down almost 15% after six months. One quarter are still down one year later. These types of crises strike fear in companies and reputations are hit for the longest period of time;
* Corporate crises (where the financial wellbeing is affected by such issues as liquidity or material litigation) made up more than one quarter of companies experiencing a share drop on day one. Most often, these companies recovered quickly; and
* Informational crises (when companies IT such as system failures or hacking) were of moderate concern to the markets. They did not fall more than 3% on day one. According to the research, none saw shares fall more than 30% within a year of when the crisis struck. Possibly, investors figure these can be resolved and its everywhere today, not necessarily at the core of the company’s business).
The key take-away for us is that sustainability issues -- and the crises that result when they are not properly managed -- fall into the top two categories, and can have a major impact on stock prices. Whether you're caught using a supplier with human rights abuses, or have to delay production because your environmental permitting isn't in order –the facts show that sustainability matters, and matters A LOT.
If you'd like to talk with us about developing a sustainability strategy to identify and mitigate your social and environmental risks, give us a call today!