Direct relationship between higher risk maturity and better return on equity: Aon

There is a direct relationship between a higher “risk maturity rating” and better relative stock performance, as well as higher return on equity for an organization, according to a new report from Aon.

The Aon Risk Maturity Index Insight Report looks at how an organization’s rating relates to its overall operational performance. Overall, the report includes a sample of 361 publicly-traded companies and uses Bloomberg market data from March 2011 to March 2013.

To determine a company’s index rating, Aon analyzes 10 risk maturity characteristics (such as transparency of risk communication) that are then broken down in 40 specific components scored on a 1 to 5 scale similar to the overall index.

The highest overall risk maturity rating (level 5.0 or “advanced”) is defined as an organization with “well-developed ability to identify, measure, manage and monitor risks, across the organization,” according to Aon’s report.

The global average for companies’ in Aon’s report is a level 3.0, or “defined.”

“Organizations with the highest Risk Maturity Rating of 5.0 (Advanced) as a group exhibited a stock price performance of +18% while organizations with the lowest Risk Maturity Rating of 1.0 (Initial) as a group exhibited a negative stock price performance of -10%,” the report says.

Those with the highest rating also had stock price volatility 38% lower than those rated 1.0, according to the report.

The report also stress tested companies based on the Bloomberg Scenario function, which demonstrates how securities would respond in the aftermath of significant risk events to the financial markets, based on historical data.

In the case of the Lehman Brothers default, organizations with higher ratings showed a -21% stock price performance, which represents a 30% enhanced stock price performance when compared with the low risk maturity rating group.

Between March 2012 and March 2013, organizations with a 5.0 rating also showed a return on equity performance of +37%, which those with a 1.0 rating showed a negative ROE (-11%), according to the report.