Risk and Sustainability: A Perfect Pair
Each passing year, more companies are producing sustainability reports, and as of December 2013, at least 50% of companies from each major industry are publishing reports. With more reports coming out each year, there will naturally be a shift in trends. Over the past decade, there has been a shift away from a focus on environmental issues in reports to corporate governance and sustainability of the business model. The shift in reporting trends has lead to a shift in how companies are approaching sustainability; many companies are now finding was to integrate enterprise risk management (ERM) into the sustainability framework.
Workiva recognizes the importance of ERM, and last November they hosted a webinar discussing the driving factors behind ERM, why it is important to address risk within companies, and more. Here four are key takeaways from the webinar:
The four driving factors behind ERM
- Best practices - banks, corporations, and energy firms are some great examples of ERM being successfully implemented
- Corporate disasters - previous corporate disasters, such as Enron, WorldCom, and the global financial crisis, are proof of why more companies need to incorporate ERM
- Regulatory actions - regulations (Dodd-Frank, ORSA, the S.E.C., Sarbanes-Oxley) are also a driving forces for ERM within companies
- Industry initiatives - Treadway Report (US), Turnbull Report (UK), Dey Report (Canada)
Sustainability has critical risk implications for any organization
- Strategic risk can affect a company's business model, long-term economics, strategy and execution, and more
- Customer and product management, risk-based pricing, and cost management can all be affected from business risk
- Some outcomes of operations risk can have an effect on supply-chain management, operations and systems exposures to business interruptions
- If a company is not compliant with legal and regulatory requirements, they could be exposed to regulatory-compliance risk
- Financial risk can lead to exposures to energy and other commodity risks, as well as risk transfer implications
Good governance vs. poor reputation
Companies with good governance are seeing results. Unilever published their Sustainable Living plan, and the company has noticed significant growth. Proctor & Gamble, who also have a strong sustainability initiative, have seen their product sales increase substantially. A 2010 report by S&P noticed companies with ERM had a much better stock performance during the peak of the financial crisis as well.
But if a company does not have strong governance, it can lead to impacts stemming from poor reputation. Some of these impacts include:
- Litigation costs
- Legal fees
- Loss of license to operate
implementing erm in your company: the Questions to be asking
- Who makes what decisions within the company? Examine which committees, functions, people, etc. are the ones making critical decisions.
- How do we make more informed decisions? What steps do wen need to take in order to make better decisions?
- What decisions, strategies should we implement to optimize our risk return? Learn to integrate risk into your decision making.
- How did we do? Simple enough!
Want to learn more about how sustainability can help a company deal with risk? Read our blog post discussing the topic here.