What does risk management have to do with business ambition?
Heightened focus on the risks of not having sustainable business practices only continues in 2024 with growing crackdowns on greenwashing, a stronger onus on reporting and transparency through industry and regulatory imperatives and cultural awareness of climate change. Yet a blinkered focus on the risk and governance side of the equation means organisations fail to see the disruptive product and business innovations available to them from making the shift to sustainability, argues Tess Ariotti, Lead Consultant at Salterbaxter.
In the push towards sustainable business practices, disruption is coming to every industry in every market, starting now.
Disruption can already be seen across many industries. Automotive brands are moving into mobility, food brands are innovating to plant-based options, electrical brands are remodeling to offer repair and resale, and even fashion – an industry beleaguered by sustainability issues – is looking to embrace circular business models. Every business in every sector should be looking at how to move into this space of innovation, connected to their business model and business purpose.
So, why is it that when I recently hosted a panel discussion on ‘Why ambition matters and how to push the boundaries in corporate sustainability’, much of the discussion focused on risk, regulation and compliance with standards? What was going on? Were we off topic, or is risk management the ambition for business?
Firstly, let’s consider what ambition looks like for sustainable business. Kate Dundas, Executive Director at the UN Global Compact Network Australia, and one of the panellists, recommends that businesses assess their impact across a range of social and environmental issues and plan to reduce their footprint by using the Sustainable Development Goals (SDGs) as a tool for systems thinking.
Double materiality
Comprehensively understanding a business’ impact provides insight into how to minimise harm directly or indirectly caused by that company. To do this, corporate sustainability functions typically conduct a materiality assessment. The emerging double materiality approach includes analysis of those impacts while uncovering risks and opportunities, making it a vital resource for building business resilience.
In fact, double materiality assessments are now required by the Corporate Sustainability Reporting Directive (CSRD) under European regulation. It is a significant move from regulators to require not only an understanding of risks to the company, but of the impact that company will have on society. The work required to meet these regulations is significant, which poses the question:
‘Does regulation help or hinder ambition?’
Certainly, many of the companies I speak to are feeling the pinch, and that perhaps the focus is too much on mandatory disclosures and not nearly enough on the work that needs to be done. As Kate has pointed out, ‘Reporting is not the end game, the end game is impact’.
Governments are there to set the minimum standards – they are not pushing boundaries; they are rather codifying community expectation. I would add that regulation can also be used to stabilise markets. Either way, the approach is reactive, not proactive nor ambitious. Whereas business can be agile, innovative and influential to stakeholders, including governments.
The takeaway is regulation is the minimum standard; if your business’ focus is solely on meeting the requirements set by regulators, you’re missing the bold ambition and innovation needed to address this global issue.
Such ambition is usually tempered by comments about needing to be ‘realistic’. But what is realistic? Typically, organisations speak in these terms in order to limit action. There are fears about being too big or too bold, as the traditional view holds this will destabilise their organisation. But to manage risks appropriately we must consider what the science tells us is needed.
Managing risks might be very ambitious when compared to what has been traditionally business-as-usual. The businesses of the future will tackle the hard issues by knowing how to balance the risks and opportunities created by different capitals (financial, human, social, manufactured, natural and intellectual). Balancing the six capitals is necessary and absolutely possible, our socioeconomic system just hasn’t done it yet – and doing something for the first time can feel particularly ambitious.
There is a surge in the risks that businesses are currently facing. Only the most ambitious will seek out the opportunities lurking in the turmoil, and lead their companies to uncover their full value.
