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%.
Priti
It is only when a sound business case is made combined with the moral/ ethical perspective that business will adopt a company wide approach to sustainability rather than as many currently do which is to focus only on what can easily be measured. This is about recognising performance based not on what we can measure but on what we want to achieve.
I absolutely agree. In the limited space allowed for the blog article, I was trying to convey that there is a much stronger business case for organisations to adopt SRM than the usual ‘greenwash’ or perceived PR benefits. Although the sustainability indicators that organisations choose to address would be specific to a particular organisation (and this is where the issue of ‘what an organisation wants to measure’ would come into the picture), the 6 key drivers would be common factors encouraging the adoption of a risk management strategy that goes beyond conventional ERM.
Mariel and I have written a book chapter on Sustainability Risk Management which addresses some of these issues and we would be very happy to send it to you if you’re interested!
I would be interested in that chapter if it is available…I am doing a dissertation on sustainability in the financial sector and of course risk management is a big issue.
A 7th Key driver – Social and environmental responsibilities
Like you say, “sustainability essentially means doing the right thing”. The right thing should not only focus on business itself and should also have postive influence on society and environment.
Hi Yunjie,
I completely agree with you that social responsibility should be a driver, however, and maybe this is a bit cynical of me, I do not think organisations in general are mature enough yet in their approach towards sustainability to voluntarily adopt sustainability purely out of motives to do good.. There are always exceptions, of course, and organisations such as The Body Shop are founded on principles of social responsibility, but I still think the drivers today for organisations to be sustainable are based on slightly selfish motives..that said, I do believe things have changed quite a bit in recent years, with organisations realising that adopting social responsibility and sustainability is an investment for the future.
Priti,
I largely agree with your drivers. In addition I would put in policy/regulatory risks as a separate category, in particular related to climate change. Sort term next 20 years, carbon risks such as a carbon price/tax/cost/duty/fee/incentive is a sustantial risk for investors and companies. Also, technology risk is an important driver for climate change risk management.
A question. What is really meant with: PUMA has recently announced that the economic value of its impacts due to water consumption and greenhouse gas emissions is Euro 94.4 million.
Hi Narve, Thank you for you comments, i completely agree with the importance of the technological and legislative aspects, but I believe that Climate Change risks deserves to be a separate category, as it has very specific risks associated with it, and therefore specific drivers as well, although it definitely sits within sustainability.
I will send you the Article on PUMA to clarify.
Operational and financial efficiency are probably the easiest for an organisation to measure and, therefore, manage. What organisations need to then is understand the actions and behaviours they want from their staff, and the inactions they want them to avoid, so that the value drivers aren’t negatively impacted.
Love the image – can I use it? For what? – potentially the logo of a reasearch project on energy efficient factories.