For any business, large or small, it is vital to assess and understand strategic and operational risks. Indeed, understanding the true extent and nature of risk increasingly separates winners from losers.
As for sustainable viability (SV) and its relationship to enterprise risk management (ERM), think of it as a framework to better quantify strategic, financial and operational risks, and through this understanding how to create opportunity for cost efficiencies and revenue enhancement. How to capture, create and deliver more value and serve customers better.
The framework holistically manages resource, environmental and social risks confronting the enterprise to achieve its organizational objectives and minimize unexpected threats and volatility to revenue and costs. It too challenges organizations to view risk as an opportunity for growth.
Since companies must hold capital to absorb the risk of loss, logically, there is less capital to invest in other profit producing activities. Therefore, sustainable viability helps companies to determine the right amount they should direct toward risk through better, more informed decisions. For example, factoring actual risks to assets in capital calculation is likely to yield opportunity to free cash for investment and innovation.
Furthermore, to aid this movement, functional heads must work in an open and transparent manner. It is amazing what is found when people across different disciplines are in the same room for such conversations. For example, with an enterprise I worked with, I brought together several managers into a single meeting, and it took just a few hours to uncover an opportunity for a 20 percent reduction in fuel use with mitigation of other associated costs and risks as well as elevated efficiency and revenue gains. The parties involved had all worked together for ten years and, in their own contexts, were high performing functional managers. The point: allow functional heads to come to a consensus and aggregate the risk drivers.
Therefore, sustainable viability is understanding the full extent of risk — top-down and bottom-up. See the externalities and how these risks might affect customer demand, and how this might impact serving customers and how these risks will affect your revenue. Such environmental and social risks and costs are rarely accounted for: even by those who see themselves as having a mature sustainability program. The point being, a sustainable viability program should not be outside strategic and operational priorities.
Furthermore, for effective sustainable viability the risks must be understood at a tactical level in order to explore all the opportunities. There needs to be sufficient information about the risk (emissions, waste, human rights, climate, environmental etc.). Once accepted as a risk, it’s necessary to understand of how it will be managed. So once a risk profile has been developed, quantify the risks in metrics and take into account trade-offs. For example, if a supplier catches a cold, how quickly are you going to get the flu?
Moreover, once risk is formatted strategically, operationally and tactically, there needs to be a consistent strategy for managing and monitoring these risks and for reporting them. This is where an appropriate, and appropriately implemented, sustainable viability technology platform can add enormous value to organizations of all sizes. From the dashboard of a reliable SV platform, look for competitive opportunities and strategic advantages that will arise from the deft management of risk. It will act as an early warning system to both a vulnerability and previously unseen value destruction as well as operate as a road sign pointing to opportunity. Never forget, however, like all technology systems, the output is only as good as the data inputted and the processes created to report this data.
Ultimately, such sustainability risk profiles evoke greater confidence in the business to meet the expectations of investors, customers and employees — indeed all stakeholders who have a material interest in the long-term, sustainable viability of the firm1. This extra confidence derives its source from the organizations’ more secure ability to meet its corporate objectives.
And, today, a business needs to have the framework for sustainable viability at its heart to step beyond mere compliance; for compliance hardly allows an organization to distinguish itself among its peers and create a market advantaged position. So focus on preventative measures that help you avoid potential disasters and persistent value destruction. For example, the new dashboard can show extra resource burdens from changing consumption trends, from which your business can avoid costly equipment failure that might well result in a shut down, chemical spill or release of gases, exposing the company’s employees, communities and your reputation at risk — not to mention financial shock.
Additionally, sustainability reports taken from an ERM position have a different tone to the standard report one encounters on a daily basis. The information is refined and authentic, with proven, material and contextual data with relevant key performance and key risk indicators. After all, can reports that provide no proof be trusted? Indeed, the analysis of 40,000 CSR reports by the World Business Council For Sustainable Development suggests that 95 percent are no more than mere window dressing. This suggests the investment to produce these reports is seriously compromised.
Furthermore, in a recent report ‘ The Current State of Enterprise Risk Management: Update of Trends and Opportunities, by NC State ERM Initiative in partnership with the American Institute of CPAs, 2015 — there appears to be a further disconnect between perception and reality of risk. For example, executives indicate they are receiving increased calls for greater engagement by executives in risk oversight with 68 percent indicating that the board of directors is asking “somewhat” to “extensively” for increased senior executive involvement in risk oversight: large companies (86 percent) and public companies (88 percent). Yet only 23 percent declare their organizations level of risk management maturity as “mature” or “robust.”
In conclusion, robust environmental and social risk management positions a company and its operations positively with current and future customers — as well as the wider, material, stakeholder (shareholder) community — notwithstanding the harvest of opportunities such an enterprise risk management, sustainable viability strategy reaps.
1 The Financial Value of Sustainability and ESG
First Published: Finance Middle East, May 2015
Christopher Gleadle is author of Sustainable Growth Through Sustainable Business and founder & CEO of the sustainability performance agency The CMG Consultancy.
