1. Introduction
2. Data sources
3. Calculation
4. Current RRI, Peak RRI, and RRI Change
5. Back-calculations
1. Introduction¶
The RepRisk Index (RRI) is a proprietary algorithm developed by RepRisk that dynamically captures and quantifies a company’s or project’s risk exposure to business conduct issues.
The RRI facilitates an initial assessment of the business conduct risks associated with investments or business relationships, allows the comparison of a company’s exposure with that of its peers, and helps track risk trends over time.
The RRI ranges from zero (lowest) to 100 (highest). The higher the value, the higher the risk exposure:
- 0-24 generally denotes low risk exposure
- 25-49 denotes medium risk exposure
- 50-59 denotes high risk exposure
- 60-74 denotes very high risk exposure
- 75-100 denotes extremely high risk exposure
2. Data sources¶
The RRI draws on the RepRisk dataset - the world’s largest database of risk incidents associated with companies and projects. To gather information on incidents, RepRisk leverages machine learning and curated human analysis to screen a large number of public sources and stakeholders daily. Reports on risk incidents are synthesized based on a strict, rules-based methodology. Read RepRisk’s full methodology.
Each incident in the RepRisk dataset is rated based on severity, reach, and novelty:
- Severity [1, 2, 3] reflects the harshness of the risk incident or criticism; where [3] denotes a very severe risk incident or criticism and [1] denotes low severity.
- Reach [1, 2, 3] of the information source (influence based on readership/circulation as well as by its importance in a specific country); where [3] denotes high reach and [1] denotes low reach.
- Novelty [1, 2] reflects the newness of the issues addressed for the company, i.e., whether it is the first time a company/project is exposed to a specific issue in a certain location; where [2] denotes the first time a company is exposed to this issue and [1] denotes repeated occurrences.
| Company ID | Story ID | Incident Date | Unsharp Incident | Related Countries | Related Countries Codes | Severity | Reach | Novelty | ENVIRONMENT | SOCIAL | GOVERNANCE |
|---|---|---|---|---|---|---|---|---|---|---|---|
| 71 | 52826 | 2013-07-31 00:00:00 | 0 | United States of America | US | 2 | 1 | 2 | F | F | T |
| 7111 | 61844 | 2013-10-24 00:00:00 | 0 | Unspecified | nan | 2 | 3 | 1 | F | F | T |
| 71 | 7820275 | 2021-03-17 00:00:00 | 0 | United States of America | US | 1 | 2 | 2 | F | T | T |
| 2 | 2481999 | 2020-07-07 00:00:00 | 0 | South Africa | ZA | 2 | 1 | 1 | F | F | T |
| 2 | 41698 | 2012-05-31 00:00:00 | 0 | United States of America | US | 1 | 1 | 2 | T | T | F |
3. Calculation¶
The RRI combines two factors:
- Average Incident Value
- Incident Intensity
$$ \text{RRI} = \text{Average Incident Value} \times \text{Incident Intensity} \times 100 $$
The RRI takes two key insights into account:
- It commonly takes two years for a company to significantly reduce its risk exposure - either through strategic, organizational, or managerial measures.
- The media attention to a particular risk incident or scandal typically levels off in six to eight weeks' time.
These insights are reflected in the time windows applied in the calculation (two years for the Average Incident Value and two months for the Incident Intensity).
3.1. Average Incident Value¶
The Average Incident Value reflects the average impact of the risk incidents on the corporate reputation of an organization. It considers all the organization's incidents in the past 730 days (approximately two years). The impact of an incident depends on its severity, the influence of the reporting source, and whether the organization was involved in similar incidents before.
An example of the calculation for a company with three incidents is described below:
| Company ID | Story ID | Incident Date | Unsharp Incident | Related Countries | Related Countries Codes | Severity | Reach | Novelty | Incident Value | weight as of 2007-08-30 | Incident Value x weight |
|---|---|---|---|---|---|---|---|---|---|---|---|
| 71 | 761 | 2007-02-08 00:00:00 | 0 | Mexico | MX | 3 | 2 | 2 | 0.76 | 0.87 | 0.66 |
| 71 | 1535 | 2007-08-12 00:00:00 | 0 | China | CN | 2 | 3 | 2 | 0.76 | 0.99 | 0.75 |
| 71 | 2365 | 2007-08-21 00:00:00 | 1 | China | CN | 2 | 1 | 2 | 0.33 | 1 | 0.33 |
| Average Incident Value as of 2007-08-30 | |||||||||||
| 0.58 |
3.2. Incident Intensity¶
The Incident Intensity captures the frequency of the risk incidents (i.e., the rate at which risk incidents occur), and increases with the number of risk incidents the company was associated with in the past two months.
The relationship between the number of recent incidents and the corresponding Incident Intensity is illustrated in the graph below:
3.3. Decay and progression over time¶
During the decay process, the RRI remains constant for the first 14 days after its last increase. It then decays at a rate of $\frac{25}{60}$ ($\approx$ 0.42) per day until it reaches 25 (the low risk exposure range). It then phases out at a lower rate of $\frac{25}{548}$ ($\approx$ 0.046) per day until it reaches 0. If new incidents occur and cause $\text{RRI recalculated} \gt \text{RRI yesterday}$, the RRI will increase again / exit the decay pattern.
The decay pattern is illustrated in the graph below:
4. Current RRI, Peak RRI, and RRI Change¶
The RRI, or "Current RRI", reflects the current level of media and stakeholder attention business conduct issues are being given in connection to a certain company.
The Peak RRI is equal to the highest level of the RRI over the last two years – a proxy for the overall business conduct risk exposure related to issues of a company.
The RRI Change or Trend shows the increase or decrease of the RRI within the past 30 days.
5. Back-calculations¶
To ensure an optimal risk estimation, the RRI is based on all data points currently available in the RepRisk dataset. Back-calculations may thus be performed in case new, previously not considered incidents, are added. For example, the RRI of company $A$ on day $t$ will first be calculated on day $t$ but may be recalculated later, if new incidents impacting the initial calculation are added.
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