Championing risk management through sustainability

The last two decades has shown that the globe is not static as major events such as the economic recession, the introduction of new technologies, terrorist attacks, environmental incidents, health emergencies and the introduction of new regulatory requirements occurred. These elements also impacted the corporate world and in fact, various studies found that 8 of the 10 most important business risks are directly related to environmental or social issues. For instance, risks in relation to reputation and brand, legislative change, the ability to attract top talent, and third-party liability are directly affected by sustainability issues. As a result, risk management and sustainability frameworks have become important tools for businesses to minimise potential losses as well as to retain competitive advantage. This notwithstanding, research has shown that these two frameworks are often implemented in a siloed approach which reduces the effectiveness of the intended results.

 

Integrating enterprise risk management (ERM) and sustainability

The integration of the two frameworks may assist companies in adequately identifying both short and long terms risks whilst evaluating emerging concerns. Subsequently, management may be in a better position to make sustainable and informed decision. Nonetheless, balancing sustainability and risk management may pose significant challenges that would require businesses to methodically address strategic, operational, collaborative and governance requirements.

Various models have been implemented by organisations to manage sustainable-related risks and the importance of such models was visible with the enactment of the EU Sustainable Finance Framework. The core of such models is to combine the assessment of the likelihood of an adverse event to occur and the impact of a present decision related to environmental, social and governance concerns on future individuals. For such models to be successful, organisations must ensure that sustainability is not only viewed as a risk but rather as a tool to better identify and manage risks. Furthermore, sustainability and risk management need to be incorporated in a company’s strategy and culture.

 

The future of this approach

The integration of sustainability and ERM frameworks by organisations is still deemed to be in its infancy. Nonetheless, such approach is expected to gain momentum as new regulatory requirements are being endorsed, stakeholders’ expectations for transparency is increasing and corporations are facing new challenges. In other words, managing risk in a sustainable manner has become a strategic priority rather than a social initiative.