The challenges posed by sustainability are unprecedented in their complexity. They cover a diverse range of issues including climate change and water scarcity, demographic shifts and resource availability, land use and labour rights. And they can affect all areas of your business, so evaluating the inter-relation of risks is crucial.
Which risks are most material to your business? How could they affect your business and the value chain in which it operates? What potential damage to your reputation could they cause? These are all vital questions you need to be asking.
Types sustainability risk
There are three main areas of sustainability risk:
Regulatory and complicance - from mandatory greenhouse gas emissions trading and reporting, to waste obligations and chemicals registration, sustainability regulation continues to proliferate.
Operational - availability of resources (whether raw materials, water, energy, skilled workforce, or supplier inputs) may create exposure to cost volatility, while assets and distribution links may be affected by weather events or longer-term climate change. These risks need to be considered across the whole value chain to determine how they could affect your own operations.
Stakeholder relationships and reputation - investors, customers and employees have increasingly high expectations of the way businesses act. The responsibility of company directors to consider these relationships in respect of the long term success of the business is now a legal requirement.
Getting it right
Corporate strategy needs to recognise new trends and drivers that will affect the long-term viability of the business. From hedging against fluctuating energy costs to reinventing products and services, companies will need to ensure they remain competitive in an increasingly volatile marketplace. So you need to ask: what will drive your performance in the future?
Aligning corporate and sustainability strategies means ensuring that supporting processes and controls are in place, with information systems and KPIs that allow you to measure and manage sustainability risks. Are your systems and reporting processes well defined and do they ensure consistent measurement?
Answering those questions will mean you are well placed to meet the needs of regulators. And that means minimising the costs associated with carbon taxes and emissions trading as well as fines associated with non-compliance. Do you have processes in place to monitor new regulatory developments and assess operational impacts?
As well as having adequate controls and monitoring in place, a key part of ensuring compliance is managing the "behavioural challenge". Do current policies and incentives encourage or discourage taking risks, and how are you getting your people to change? Are you considering the attitudes of your suppliers? Does your company assess the socioeconomic impacts of your business on the communities in which you operate, especially in the developing world?
Awareness, and subsequent action, can deliver a whole cluster of benefits. As well as helping to forecast and control costs, it can boost employee retention and improve your attractiveness in the recruitment market. And it can aid reputations at risk from accusations of poor ethical and labour standards. Managing sustainability is an integral part of creating long term value.