Enterprise risk management (ERM) has long been a growing priority of corporate executives and boards — not a surprise since political, economic and social change can occur quickly. But a study issued by the business reporting firm Workiva suggests sustainability-related risks should be part of a company’s core ERM analysis. Climate is an obvious reason, as many businesses learned after Hurricane Sandy two years ago. But other factors, from supply chain management to confronting water scarcity, are behind why the study’s authors insist businesses need to take sustainability seriously if they are to remain viable for the long term.
Sustainability is more than highlighting environmental and social risks, however. The Workiva report insists that in order for sustainability to be part and parcel of a company’s risk management plan, buy-in has got to start at the top, board- and executive-level, with a solid corporate governance structure. And before those groans start coming out of the boardroom, it’s important to remember that many reports already out there prove that a company focused on being sustainable and socially responsible is one that also enjoys an improved financial performance.
But how should sustainability-related challenges be implemented and monitored?
A study conducted earlier this year by the Investor Responsibility Research Center (IRRC) and the Sustainable Investments Institute revealed that two-thirds of large companies who monitor sustainability at the board level do so via the public affairs or governance committees. But a successful integration of sustainability and ERM would be more likely to occur if such responsibilities were tasked to an audit or risk committee—yet only 11 percent of large companies (as in those ranked by Standard & Poor’s) do so. It is these senior managers who are best tasked with the daily monitoring of sustainability performance can set goals and key performance indicators, whether they are related to water, carbon or social responsibility within a supply chain.
Naturally, any plan to enmesh sustainability awareness throughout a company’s structure will require the breakdown of silos. While chief financial officers are focused on numbers, procurement on the supply chain and sales on product reliability, all departments have got to focus on how sustainability affects their day-to-day performance. Some companies have succeeded with this “all hands on deck” approach, such as Microsoft, which involved all departments when the company declared it would become carbon neutral two years ago.
Above all, a robust risk management strategy incorporating sustainability is about more than being compliant. Knowing how sustainability can affect a company’s prospects can become an effective management tool. Insurance companies, for example, can develop new products related to climate change. Bottling companies such as PepsiCo can save money and improve their brand reputation by assessing water risks. And Unilever’s assessment of its supply chain correlates with its improved sales in recent years. Knowing your risks is about more than protecting your company; understanding threats can also lead to new business opportunities…
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