SUSTAINABILITY AND RISK – TWO SIDES OF THE SAME COIN
The commercial and economic world has reached a point where it is imperative that economic activity meets the needs of the present generation without compromising the ability of future generations to meet their own needs. Global challenges of climate change, epidemics, income inequality, urbanization, migration, and an ageing population has led commercial enterprise to consider sustainability as a key strategic priority, ensuring longevity of business and survival amongst an ever-growing planet conscious consumer and stakeholder base.
Risk is defined as the potential inability of companies to achieve their stated objectives. While certain risks could occur directly and indirectly as a result of business operations (internally created risks), certain risks could also emanate from the external environment for which the organization would need to have sufficient defenses either to mitigate or at the very least minimize their impact.
While predictable risks (both internal and external) can be mitigated by organizations using timely preventive action, sound processes, compliance and monitoring, risks emanating from uncontrollable unexpected events provide very little ability to maneuver and may result in organizations having no choice but to face it as and when such events occur. The latter has been very evident in the past weeks such as global warming resulting in devastating forest fires previously unheard of pandemics impacting entire economies, including global trade and supply chains.
Therefore, while an organization may feel confident in identifying and preparing for predictable risks as part of its Enterprise Risk Management (ERM) process, , it is imperative that organizations put in place early warning mechanisms to trigger response action, corrective action and damage control in a timely manner in the face of unexpected uncontrollable events.
Risks that are of a catastrophic nature but may be extremely irregular are known as black swan events. Over the past decades the world has witnessed these ‘one-off’ events becoming ever more regular. In this light it is prudent for organizations to realize that what may have been categorized as black swan events two decades ago may transform to be a more regular and predictable risk that could occur once or many times in the medium to short term time horizon. The impact of black swan events by its nature are quite significant. For example, Climate change related occurrences such has heat waves or devastating floods which were considered negative but unlikely events in the past, has now become more frequent and almost predictable in the past few years.
Such occurrence of extreme events and their devastating impacts on people, families, organizations, societies and countries are being discussed regularly. Various fora consider the challenges posed by such situations from their unique perspectives. Whatever that perspective is, the ability to sustain families, societies and countries rely on revival of economic activities after a disaster. Revival of economic activities lies squarely on revival of business organizations. Hence, striving to establish sustainability of organizations through disasters supports sustainability of societies.
Therefore, overall organizational sustainability goes beyond environmental conservation and social responsibility, which is currently the most common modus operandi for an organization’s sustainability journey today. Organizational sustainability needs to include the above said two elements without a doubt, but it also needs to include Enterprise Risk Management (ERM) in order to mitigate predictable operational risks, and also include Business Continuity Planning (BCP) to mitigate black swan events. Therefore, it is important to note that a corporate sustainability strategy can no longer be practiced in silos such as environmental sustainability, social sustainability, ERM and BCP. The corporate Sustainability Strategy and the management framework utilized to implement such strategy needs to have a comprehensive and holistic approach to each of these components. Organizations with a winning Sustainability Strategy will have established sound interrelationships between each of these components and will effectively manage each of these components towards achieving economic sustainability.
Thus, by identifying and analyzing the various types of risk factors, the management of an organization will be able to establish certain topics anchored to overall organizational sustainability, which if implemented will not only promote sustainable development but also importantly mitigate enterprise risks and better prepare the company to face shocks of black swan events.
For this reason, risk and sustainability become inextricably bound. Acute awareness of risks and their implications will result in specific policies, processes and standards which redefine the traditional ways of business, leading change, often by challenging accepted practices. Be it topics of Energy, Waste, Climate Change, Water, Effluent, Health & Safety, Grievances, Gender balance, Well-being, Community, resilience of supply chains, Compliance etc.; Sustainability performance (assessed through continuous review of relevant Sustainability KPIs) becomes the litmus test of the organization’s risk mitigation capability and resilience to rare negative events.
As organizations begin to realize the risk management potential of sustainability, more companies are now seeking to implement organizational specific Sustainability Management Frameworks (SMF) that cover all of the components mentioned above, moving away from a silo-based approach to Sustainability and creating holistic and interwoven process within the organizations business model.
A typical SMF covers a basic Plan, Do, Check and Act cycle, which covers Materiality Assessment, Development of relevant Sustainability KPIs, Development of Policies and Management Approaches, Development of Management Information Systems for Sustainability Data, Establishing targets, development of Sustainability SOPs, identification of suitable Sustainability Initiatives and communication of progress of the organizational sustainability journey.
With risk and sustainability being looked at as two sides of the same coin, it is clear that the way forward is more an individualistic case study of each SBU through a materiality assessment exercise which enables the identification of SBU specific risks, which could then be prioritized based on impact and likelihood of occurrence. Key Sustainability Performance Indicators (KSPIs) can then be established for this prioritized topics, which in turn also become the organizations Key Risk Indicators (KRIs).
Monitoring of these KSPIs on a continuous basis then enables the organization to identify frontier risks and establish measured steps to mitigate the negative impacts, thereby automatically entrenching sustainability and risk management within the corporate strategy.
Thus, the most significant output to the organization from a true Sustainability management process would be the quantifiable nonfinancial information, which would enable process optimization, risk management and decision making. By virtue of having access to such information, and with such information being disseminated to the relevant decision-making bodies, the organization will be able to identify opportunities to reduce its cost base, manage risks, be better prepared to face black swan events, improve stakeholder relationships, ensure compliance and create a culture of innovation across the organization.
The organizational Sustainability strategy thus moves away from the current perception of it being a ‘nice-to-have’, or an unrelated ‘environmental or social initiative’ or it being only ‘needed-for-annual-reporting-purposes’, and becomes a continuous management approach towards reassessing and improving its organizational processes, risk mitigation controls, its business continuity plans and ensuring constant compliance with regulations. This in turn will result in organizations being recognized as a planet conscious and as responsible corporate citizens, thereby ensuring that they will sustain and thrive in the future.