Sustainability essentially means doing the right thing. Logically then, not doing the right thing would expose an organisation to risks, which is where the field of Sustainability Risk Management (SRM) comes into the picture. In my mind, there is no doubt about why organisations should be managing their sustainability risks, therefore I decided to put together my thoughts on what the key drivers are for organisations to adopt a risk based approach towards sustainability:
1. Reputation and brand strength – Sustainable performance fosters a strong corporate reputation, which has a significant effect on a company’s financial valuation. According to the UN Global Compact, reputation accounts for 10% of the marketing value of a company, and 45% of a company’s reputation is based on social performance. Nike is a classic example of a company which, faced with reputational damage in 1996 due labour and environmental practices, pioneered product-stewardship strategies and sustainability innovation to recover its reputation.
2. Competitive advantage and productivity – A survey of over 1,600 of the world’s largest companies in 16 industrialized countries revealed that as many as 53% of the companies surveyed indicated that much of their sustainability behaviour is motivated by innovation.
3. Improved shareholder value – SRM can contribute to increased profits in the long term and reduce weighted average cost of capital. Shareholders are increasingly demanding future-proofed financial investment strategies, and the inclusion of an early warning risk management process for risk factors such as climate change.
4. Operational efficiency – Not addressing sustainability concerns (including environmental legislative requirements, employee engagement, supply chain issues and customer demands) raises the risk of operational disruption through strikes, boycotts, and greater regulatory scrutiny, with often major financial implications.
5. Financial efficiency – Appropriately managing sustainability risks can result in cost reduction achieved through improved environmental and health and safety performance (resulting in fewer fatalities, accidents, non-compliance fines, and lost workdays). PUMA has recently announced that the economic value of its impacts due to water consumption and greenhouse gas emissions is Euro 94.4 million.
6. Improved human and intellectual capital – There is increasing evidence that a company’s environmental and social performance affects employee turnover rates. For example, Patagonia, whose motto is to “build the best product, cause no unnecessary harm, and use business to inspire and implement solutions to the environmental crisis”, has a turnover rate of 4.5%, compared to an industry-wide employee turnover of 20%.