Risk Management and Sustainability, Together Again
by Stephen Bushnell, Stephen Bushnell + AssociatesImagine a Plains Indian, on horseback, surrounded by tens of thousands of stampeding, 2000 pound beasts. The horse and bison are moving at literally breakneck speeds. He hunts with only a crude bow and arrow and has very little protective equipment. The brave fully understands the risks and through long years of training and shared tribal wisdom has mitigated them. He is an expert risk manager. He has to be if he wants to see the sun rise tomorrow.
The Plains Indians were also experts on sustainability. They only hunted when they needed food. When they killed a buffalo, they used every part of it, wasting nothing. They made tepee coverings, bedding, clothes, moccasins, and robes from the hide. The hair was used for rope and halters, the hoofs for rattles. The horns were used to make dishes and spoons and ladles. They made glues, toys, drums, belts, shields, boats, needles, thread and more from the carcass. And they ate very, very well.
Over the years this connection between risk management and sustainability faded. Each evolved differently, risk management gaining in importance as mankind entered the industrial and technological eras. Sustainability de-emphasized as we believed in the seemingly endless bounty of nature.
Today we face hard realities about the availability and cost of capital, natural, human and financial. Citizens, business people and governments have to make very hard decisions about how to run their lives and operations, design and construct the built environment and plan for the future. Sustainability has come back into style to help shape the economic, human and environmental decisions that must be made. Risk management has evolved into “Enterprise Risk Management” as it now considers managing risk but also maximizing opportunity.
Clearly, just like the Plains Indians, we need to integrate risk management and sustainability as we face our challenges. From living healthy lives to running a profitable business to responding to finite natural resources and dangerous climate change we face risks and opportunities that are best addressed in a framework that combines risk management and sustainable practices.
The sustainable risk management process has several distinct steps:
- Identify exposures to loss and opportunities. Ideally done in a charrette format, engage your experts and key stakeholders in an ongoing identification of the risks you face and the opportunities you strive for. Consider your physical and financial realities, your history, culture and operating environment. Brainstorm, reminisce about the future (more on this in a future blog) and construct scenarios. You’ll compile a “risk register” and an “opportunity manifest”, point in time summaries of risks and the opportunities. As you analyze the frequency and severity of the risks and the criticality and difficulty of the opportunities to identify those ones with the biggest impacts.
- Consider the techniques to manage risk and maximize opportunity. There are several classic risk management techniques; avoidance, mitigation, adaptation, transfer (usually contractually or to an insurance company) and retention. Each has financial implications, advantages and drawbacks which you should map. Achieving opportunities begins with identifying and removing barriers. A SWOT (Strength/Weakness/Opportunity/Threat) analysis is helpful. You might also consider a variety of ways to finance the activities needed to realize the opportunity.
- Select the best combination of techniques based on effectiveness and cost. Rarely does a single technique do the job. For risk you will often mitigate some aspects of the risk and then insure it. You may also retain part of the risk if your insurance policy has a deductible. The mitigation plan you select could generate new opportunities. Think about how energy efficient buildings mitigate financial risks of operating costs. As you remove barriers to opportunities you may be creating new risks that must be managed. If you perform green renovations to your building you create a financial risk that can affect the anticipate payback. Risk and opportunity are really two sides of the same coin.
- Monitor progress and make mid course corrections. Pretty basic management practices.
Risk and sustainability have always been intertwined. When humans deemphasized sustainability in times of perceived abundance we unwittingly increased the risks we face today and tomorrow. As the environment degrades, natural capital is stressed and the climate becomes unfriendly we will find the answers and actions we must take through the sustainable risk management process. Like the Plains Indians we will act to manage risk and become more sustainable to improve the quality of our lives and those of future generations.
About the author: Stephen Bushnell is a highly experienced insurance and risk management professional with more than 40 years of leadership experience at various property & casualty insurers. Steve is widely recognized as a risk-focused expert on green buildings, sustainable manufacturing and operations, and the broader business, economic and risk management implications of climate, energy and other sustainability challenges.
Stephen Bushnell + Associates advises property owners and managers, public entities, manufacturers and other enterprises on the enterprise risk management best practices to enhance green buildings and sustainable operations.