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Albert Vilario Alonso Follow

Consultant in Corporate Social Responsibility, Sustainability, Reputation and Corporate Communicatio
Mar ; = min read

The incorporation of sustainability

risks into the risk culture.

Note: this article was first published in spanish and can be found here.

Knowing the macro trends in sustainability and its business risks derived
and integrating them into their risk management systems is key for
companies to overcome their challenges today and tomorrow.

Since 2005 economic risks had dominated the risk ranking to a large extent.
However, there has been a change in recent years, in which environmental
and social risks have become more prominent.

Which are the most pressing risks related

to sustainability?
The 11th edition of The Global Risks Report for 2016 published by the
World Economic Forum highlights that it only among the five main risks
facing the planet today, both by probability of occurrence and by
importance of the impact, there are several directly related to
environmental and social sustainability.

These risks include large-scale involuntary migrations, extreme weather

events, inability to mitigate and adapt to climate change or crisis, and water
scarcity.

We are facing a changing world that businesses must face. Sustainability

trends have ceased to be exceptional and infrequent to become growing
and important challenges.

It is therefore, necessary to incorporate sustainability risks into the so-

called risk culture of organizations.

What is the risk culture composed of?

Risk culture is a term that describes the values, beliefs, knowledge and
understanding of risks shared by a group of people with a common
purpose, in particular, the employees of an organization or the teams or
groups within an organization.

This applies to both private companies, public and non-profit organizations

and in any geographical situation.

A priori it does not seem a simple concept by the amount of intangibles

that it incorporates and by its depth. Not surprisingly, as the document
Risk Culture: Under the Microscope, Guidance for Boards
published by The Institute of Risk Management indicates, risk culture is the
result of the sum of different interactions.

Under the mantle or structure of the risk culture is the personal

predisposition to risk (from a lower to a higher level), which contributes to
creating the ethical stance of the individual, and this posture defines how
it involves this and how it makes its decisions within the organizational
culture of the company.

As it can be imagined, it is not an easy task to create such a risk culture as it

has to permeate through various layers and in a bidirectional way.

In addition, if we take into account the risks to which we are referring in

this article, sustainability risks that until recently were not taken into
account, the process of incorporation into the risk culture may be more
complex.

The reason for this is that there are differences between the risks
classified as traditional and those arising from these sustainability trends.

Traditional Risks vs. Risks of sustainability.

The study Managing Future Uncertainty: An introduction to
integrating risks resulting from macroeconomic trends into
business decision making by the A4S CFO Leadership Network is a
useful guide for integrating the risks resulting from the macro-trends of
sustainability in the organization decision making.

The reasons for integrating these types of risks are not very
different from those for other traditional risks. These include, for example:

Increase the resilience of organizations by preparing multiple future

scenarios to respond to and adapt flexibly to new circumstances.

Identify new business opportunities that can produce competitive and

commercial advantages.

Reduce future risks in terms of regulations, resources, and price.

Make decisions and risk responses with greater knowledge.

Create an attractive proposal for employees.

Facilitate building trust with key stakeholders.

The guide describes approaches for integrating sustainability factors into

risk management and decision-making frameworks, but none of them is
new, but rather describes how these frameworks can be improved to include
consideration of Long-term risks stemming from sustainability trends.

In addition, as detailed below, it explains the differences between risks

when it comes to identifying them, assessing their impact and integrating
them into decision making.

Identification of risks.
In contrast to the traditional risks of sustainability, in general, they may
be more difficult to identify because they are:

More complicated to define in a clear way.

Uncertain and of more medium and long-term nature.

Involved in different business units of the organizations (supply chain,

risks, strategy, etc.).

Historical background may not be a reliable predictor.

They are macro, multifaceted and interconnected risks, affecting the

business in many dimensions.

For this identification, the so-called horizon exploration technique is

proposed and explained in the guide. It explores new and unexpected
problems, as well as persistent problems and trends, and can help defy past
assumptions given by correct ones.

This technique can provide a sound basis for risk management and to
develop strategies to anticipate future developments.

Understanding and reviewing the impact.

Once sustainability risks that challenge the organization have been
identified, it is necessary to quantify its impact and what responses
should be developed.

At this point there are also differences with the traditional risks, since
those of sustainability:

Have an impact on the business at the macro level, and affect it at

different levels.

The way to measure them is usually qualitative and quantitative as

opposed to financial.

Its impact and probability of occurrence are difficult to assess, and its
modeling is based on external data and scientific information.

It requires a broader understanding of the interdependencies between

natural, human and social assets.

Their costs are difficult to predict because of the uncertainty

surrounding how the risk or opportunity will manifest itself.

In addition, there are potential problems in understanding and analyzing

these risks. For example, when the severity and likelihood of specific risks
or opportunities is uncertain, and for that reason they are treated with
indifference or evaluated as low, which would reduce the need for
proactive or integrated as something to take into consideration in decision-
making.

The guide proposes six different approach models to understand and

review the impact of risks, from the simplest to the most complex, from the
most traditional to the most innovative.

Integration in decision making.

With regard to this last part of the process, we are proposed a series of
recommendations so that the risks of sustainability are integrated into
the risk culture effectively.

It is advised, for example, that traditional risk management tools should be

adapted to respond more effectively to uncertainty and longer-term
horizons.

These tools should be more flexible in order to address the broader range of
risk categories that extend globally beyond the immediate control of
organizations and require a more coordinated response by business,
involving different stakeholders and multifunctional equipment.

Also articulating business decisions and business logic highlighting the

risks of inaction and their associated costs will be essential if the future
impact on company growth is to be beneficial.

Reliable data sources should be used to contribute to the development

of more robust information systems and the creation of agreed approaches
to address the new uncertainties.

In short, this is a very important guide to take into account the

unavoidable need to address these sustainability risks that will
increasingly be important and will inevitably enter the agendas of
responsible companies.

Sustainability Risk Management Corporate Responsibility Csr Erm

Albert Vilario Alonso Follow

Consultant in Corporate Social Responsibility, Sustainability, Reputation and
Corporate Communication,and integration of people with disabilities.

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