Top business risks are sustainability risks
December 08, 2016
Some see sustainability as a risk; some as irrelevant; and others still as both! Many seem to pigeonhole it as irrelevant though, not seeing the risk (nor the opportunity for that matter) that inattention brings. But being single minded and ignoring sustainability risks leaves a business’ risk exposure wide open.
In the World Economic Forum’s Global Risks Report 2016 the top five long-term risks (both impact and likelihood) are all sustainability risks:
The fact is that every one of these medium term Business Risks is a Sustainability Issue. CEOs clearly see the link between these environmental and social risks and their business productivity, performance and bottom line – they just don’t see them as sustainability risks.
But recognising a risk is only the first step towards understanding its impact on a business – risks need to be quantified, monitored and managed. I see this latter activity happening with varying degrees of success – there seems to be a disconnect between knowing about sustainability risks and knowing how to deal with them. According to our own survey of CEOs, 49% are making significant changes to how they define and manage risk so there is an awareness that the report card says “could be better”.
And that is because it goes beyond simple inputs, outputs and direct impact on the bottom line. It’s no longer just about having, for instance, enough water to produce your product, but also to incorporate into your planning the impact and the outcomes of your water usage on your stakeholders. Carrying on the water analogy, if a business’s activity results in a lack of water for farmers and local communities or its water stewardship is so poor it pollutes the supply, then its stakeholders, including employees and customers, will question its behaviour causing reputational damage and a potential indirect impact on the bottom line – and that is of interest to the shareholder! This is why business is ‘being encouraged’ to review their activities from a societal perspective and to understand the consequences of its actions.
And as social media becomes ever more prevalent, examples of exposing poor or ill-considered behaviour materialise everyday as pertinent data becomes more readily available. It results in reputational damage and a financial/valuation impact with share price fluctuations and a hit to the bottom line from reparation and compensation. Again, from our survey, 53% of CEOs indicate business should be doing more to measure and communicate key risk and their impact on shareholders. They see the need to manage all risk not just the traditional financial metrics.
And it is also worth a quick nod to the Sustainable Development Goals (SDGs) or Global Goals, too. All five of the top risks link straight back to the SDGs:
- Water crises –> SDG 6 Clean water and sanitation
- Failure of climate change mitigation and adaptation –> SDG 13 Climate action
- Extreme weather events –> SDG 9 Industry, innovation and infrastructure (it’s about business resilience)
- Food crises –> SDG 2 Zero hunger
- Profound social instability –> SDG 10 Reduced inequalities
Maybe those that think the SDGs are too complex or not relevant to business might want to think again.
It seems that Sustainability risks are at the top of the CEO’s agenda, albeit in nature not in name. The challenge now is how to evaluate them and their impact on business performance and value, both direct and indirect.
To hear my views on this and more, watch my interview with the Telegraph