Strategic considerations in risk management and sustainability

Peura, Heikki (2016) Strategic considerations in risk management and sustainability. Doctoral thesis, University of London: London Business School.

Abstract

This thesis provides new results relating to how firms' risk management is affected by strategic activities both within the organization and through markets. In particular, it focuses on risks related to goals of sustainability: clean energy required to meet climate targets may be unreliably available, such as wind power; or perceived unsafe, such as nuclear power. In these contexts, this research uses game-theoretic and optimization methods to analyse how balancing risk exposure against profitability affects firms' operational decisions over time. The first two essays study the impact of intermittent renewable power on electricity prices via risk management. The first essay shows how the mark-ups of less frequently operating conventional plants may depend upon the setting of financial performance targets, while the second shows how renewables may challenge the conventional view of electricity as a commodity, since prices will depend on operational constraints -- such as intermittency -- through producers' financial hedging. The third essay studies the mitigation of the kind of rare-disaster risk faced for example by the nuclear industry. While firms can use more frequent precursor events to manage this risk, disaster investigations often reveal a long history of unheeded near misses. The essay shows that this failure to learn may result from an incentive problem within the firm: providing the right incentives for plant operators to both mitigate risks and report incidents may be too costly. Finally, the fourth essay extends strategic considerations to supply-chain risk management by showing that the common financing tool of trade credit may benefit suppliers by softening competition through its inherent financial risk. Together, these essays show how risks related to technology and operational and financial constraints can shape market price formation through individual firms' decisions, and further inform policies for green technology adoption (such as subsidies tied to market prices) and safety regulation.