Risk Management and Sustainability Are Becoming Fellow Travelers

Stephen DeAngelis

November 13, 2013

Earlier this year, Steve Culp, Accenture’s lead in its global Risk Management practice, wrote, “In recent years, supply chains have become longer and more complex, while the severity and frequency of supply chain disruptions seems to be increasing.” [“Supply Chain Disruption A Major Threat To Business,” Forbes, 15 February 2013] Culp points to a number of things that threaten supply chains including natural disasters and extreme weather conditions. Climate change is the primary reason that risk management and sustainability efforts are now often linked together. Ernst & Young analysts report, “Companies are increasingly connecting the dots between risk management and sustainability by making sustainability issues more prominent on corporate agendas.” [“Increasingly, Companies See Sustainability and Risk Management as Related Issues,” SupplyChainBrain, 15 August 2013] That conclusion was drawn from a study by Ernst & Young LLP and GreenBiz. The article continues:

“Driven by trends such as extreme weather events and risks to natural resources, among other factors, the shift is evidenced by the increasing involvement in sustainability-related issues of shareholders and the C-suite. At the same time, the study finds, companies are not adequately aligning risk response to the scale of sustainability challenges.”

Dr. Mark C. Trexler, a climatographer, and Laura H. Kosloff, an environmental attorney, believe that companies need to adapt to changing climate conditions if they are going to survive in the decades ahead. “Developing a climate change adaptation strategy does not mean having to ‘climate proof’ a company’s operations against conditions that might not appear for decades into the future,” they write. “But it does suggest that near-term decisions consider future climate risk in order to minimize future stranded investments, and to hedge against potentially accelerating climate change.” [“6 steps to managing your company’s physical climate risks,” GreenBiz, 29 March 2013] They recommend taking what Peter Schwartz, the famous futurist, calls “the long view.” In his book, The Art of the Long View, Schwartz writes:

“To act with confidence, one must be willing to look ahead and consider uncertainties. … [Those who fail to look ahead] are at a loss for ways to act when upheaval continues. They create blind spots for themselves. Scenarios are a tool for helping us to take a long view in a world of great uncertainty.”

Trexler and Kosloff assert that taking the long view when it comes “to climate change should generate several benefits.” Those benefits include:

 

  • “The massive amount of ‘noise’ associated with today’s weather patterns complicates the process of figuring out what you are adapting to; clear conclusions can be hard to find. Taking a longer-term view as part of a climate change adaptation strategy can help in interpreting near-term trends as well.
  • Adapting to the weather, done at the local level by operational staff, can result in a patchwork of responses to changing climatic conditions that confuses stakeholders and complicates corporatewide investment decisions. A coherent climate change adaptation response will be based on corporatewide risk management principles, helping avoid such confusion.
  • Focusing only on ‘the weather’ may leave game-changing risks and opportunities unidentified. What if a company’s entire business model is at risk over the next 20 to 40 years due to ‘high confidence’ climate forecasts? Shouldn’t that information find its way to the C-suite before it finds its way to investors, allowing the company to consider and manage both climate and brand risks?

 

The single most important resource associated with climate change is, of course, water. All industries, to some extent or another, rely on water; but, water is especially essential for the food industry. Annie-Rose Harrison-Dunn writes, “Reducing water footprints is an environmental challenge food and beverage companies should be prepared to meet if they want to maintain their competitive position and build reputation among end consumers.” [“Water footprint: The food industry’s next big challenge?Food Navigator, 10 September 2013] Sarah Boumphrey, head of countries and consumers at Euromonitor International, writes, “Consumer goods companies, over-reliant on water, in water-stressed locales are at particular risk from competition for supplies and political risk. Added to which, with consumer demands for sustainability and transparency ever increasing they face pressure from end users as well as with supplies.” [“Why Consumer Goods Companies Should Worry About Their Water Footprint,” 9 September 2013] She notes, “Companies such as Unilever, Coca-Cola, Nestlé and PespsiCo have come to realise this and put resources into tackling their water footprint. As with other sustainability initiatives, reducing water consumption does not have to be costly and the best measures – based on reusing, improving efficiency and recycling – actually save money.” Tien Shiao and Paul Reig report, “Water risks such as floods, scarcity and pollution are increasingly chipping into corporate bottom lines.” [“Conflicting reporting systems may hinder companies’ water risk strategies,” The Guardian, 26 September 2013] They continue:

“More and more investors are clamouring for sustainability reports and disclosure initiatives to identify corporate water risks, but the process of actually evaluating water supply risks is challenging. Definitions and interpretations of several key concepts have proven to be difficult to define and track in a consistent way. … A growing number of corporate assessment tools – such as the World Resources Institute’s Aqueduct Water Risk Atlas, WWF Water Risk Filter, and WBCSD Global Water Tool – are available to help companies evaluate their water risks. The issue is that all of these tools were created using varying parameters, and their underlying methodologies continue to evolve. These differences have created a wide range of definitions and sometimes competing interpretations of terms such as water stress, scarcity and risk. This is problematic because consistency in reporting methods and terminology are critical if investors are to adequately compare water risks among their portfolio companies. Companies also need to identify their water risks as accurately as possible. Reporting more or less risk than they actually face could be misleading to investors and other stakeholders. It could also lead companies to make poor decisions around where and how to respond to risks.”

If C-level executives aren’t taking the long view and making decisions from that perspective, then the efforts of those involved in risk management or sustainability teams are unlikely to succeed. The Ernst & Young/GreenBiz study (mentioned earlier) concluded that “the ‘tone from the top’ is key to heightened awareness and preparedness for sustainability risks.” The report also noted that it’s really up to businesses to do something because “governments and multilateral institutions aren’t playing a key role in corporate sustainability agendas.” The report also concluded that “sustainability concerns now include increased risk and proximity of natural resource shortages.” Even so, “corporate risk response is not well paired to the scale of sustainability challenges.” Trexler and Kosloff recommend taking six steps to improve climate change adaptation planning:

 

  • Assess corporate vulnerability to climate change hazards, emphasizing the need to take a ‘broad brush’ approach to quantifying business vulnerabilities, focusing on those aspects of operations, investments and supply chains where vulnerability is most evident. …
  • Understand what, if anything, is already happening. Once important vulnerabilities are identified, compare recent and more historic trends in those variables to see whether relevant conditions are already changing. …
  • Assess corporate exposure to climate change hazards forecasted to occur over a business-relevant timeframe, casting a wide net over corporate operations, investment decisions and supply chains. …
  • Revisit corporate vulnerability to climate change hazards based on the earlier steps, again emphasizing the need to take a ‘broad brush’ approach to quantifying business vulnerabilities, focusing on those aspects of operations, investments and supply chains where exposure was judged to be real.
  • Structure business risk hypotheses around climate hazards for which vulnerability is judged to be potentially material. A company may conclude its vulnerability to changes in extreme summer temperatures could be business material given the nature of its work and workforce. …
  • Update hypotheses as well as exposure and vulnerability estimates.”

 

Pierre Mitchell writes, “The bigger story is that even after all the repeated adverse events in the supply chain, companies still seem to struggle with how to reduce supply risk and increase supply resiliency/integrity with limited budgets. It’s not easy. But even though risks continue to proliferate within our increasingly global, interconnected, digitized, and outsourced supply chains, I wonder whether the media fatigue surrounding these events de-sensitize management to the risks.” [“Bird Flu 2.0 – Inoculate Your Supply Base Against Supply Chain Risk,” Spend Matters, 15 April 2013] Climate change is certainly a subject that many people are tired of reading about. But media fatigue doesn’t change reality. As we look forward to the decades ahead, risk management and sustainability are topics that are only going to become more entangled.