Sustainability Risk Management – Essential for Organisational Longevity

In the current competitive environment, companies are under increasing pressure to excel, and are beginning to realise the need to move away from growth in revenue at any cost, and more towards developing a value driven approach. The management of sustainability risks is being adopted by leading organisations as a methodology for achieving such value. 

Sustainability Risk Management’s fit with other disciplines of risk management is as an overarching, complementary discipline as risks influence an organisation’s sustainability, both from an upside and downside risk perspective. This is reinforced in King III which states that the essence of sustainability risk management is to protect the value of intangible assets by combining various elements of risk management into a sustainable and economic enterprise risk management system.  

The main focus area of sustainability risk management is the management of environmental, social, and economic impacts in an organisation.  Attention must be given to all three areas. If emphasis is only on economic performance risks will arise in the environmental and social areas and potentially lead to cost ‘surprises’.

Some examples of sustainability risks from an economic perspective could be business interruption, boycotts or fraud.  From an environmental perspective: Global Warming, environmental non compliance and use or production of hazardous substances. From a social perspective: litigation from inequitable treatment of employees, class action from accusations such as discrimination, or simply, lack of social investment by organisations.

Accompanying the potential downside risks or negative impacts, sustainability is an important source of opportunity, or upside risk for businesses.  Opportunities may include cost savings through innovative efficiencies in business, environmental conservation and social upliftment, which will all contributes to brand promotion.

The process that may be followed to integrate Sustainability Risk Management with other disciplines of risk management include:

  • Integrating Sustainability into the organisation’s Strategy and Risk Management Policy.
  • Obtaining the commitment of the Board and appointing the CEO accountable and making members of staff responsible for the execution of Sustainability Risk Management.
  • Integratingdata from varioussources to determine the maturity of environmental, social and economic sustainability managementand setting targets such as
    carbon footprint reduction, increase in CSR spend or commitment to sustainability reporting.
  • Identifying sustainability risks enabling management and anticipation through implementing appropriate risk mitigation and financing strategies. 
  • Develop plans for reducing environmental exposures or impacts, anticipating competitoractions, and implementing social and environmentally driven strategies.
  • Sustainability Scorecards, such as the JSE’s SRI Index may be implemented for measuring the performance of the three pillars of Sustainability Management.

Some of the benefits that may be realised on successful implementation of Sustainable Risk Management include:

  • Board / senior management are able to make more informed, sustainable strategic decisions
  • Board / senior management confidence that reputation risks are properly managed and the brand is protected.
  • Enhanced ability to recruit, develop and retain staff.
  • Improved innovation, competitive advantage and market positioning.
  • Enhanced operational efficiencies and cost savings
  • Improved ability to attract and build effective and efficient supply chain relationships
  • Enhanced ability to address change and respond appropriately.
  • Meeting regulatory and good governance requirements.

While some companies develop sustainability risk management for ethical reasons, most do so for business reasons as risk costs are reduced, competitive positions strengthened, reputations promoted and bottom lines improved.

Nature, society, and business are interconnected in many ways which have not been a focus in business strategy, so a fundamental shift is required in the way directors make decisions and businesses operate towards the management of sustainability.

By Vanessa Payne