Has sustainability become a risky business?

Has sustainability become a risky business?

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A new report released by Ernst & Young presents a disconcerting paradox when it comes to corporate sustainability efforts.

While more companies are concerned about increased risk and proximity of natural resource shortages, corporate risk response appears to be inadequate to address the scope and scale of some of these challenges.

The free report looks at six corporate sustainability trends with a strong focus on the internal influencers of corporate performance (CEOs and boards), as well as external forces ranging from governments to shareholders and investors.

The findings of the study were based primarily on a survey conducted late last year by GreenBiz Group of our roughly 3,600-member GreenBiz Intelligence Panel, consisting of executives and thought leaders in corporate environmental strategy and performance. The report analyzed the results from 282 respondents from 17 sectors employed by companies with annual revenue greater than $1 billion, mostly U.S.-based.

One key finding of the report is how the sustainability focus in a growing number of companies is moving from eco-efficiency efforts to a discussion concerning risk reduction and mitigation. As with other sustainability and CSR issues, language is critical and sustainability executives need to learn how to translate the issues they are tracking into the language of enterprise risk management (ERM).

I have written over the years about how the sustainability executive's job is to be the chief translation officer. Nowhere will this be more important than in helping the chief risk officer and CFO understand the importance of sustainability issues when it comes to long-term resiliency planning. Conversely, risk officers will need to help sustainability executives understand their tools and approaches.

According to the report, the survey found 79 percent of respondents said that sustainability risks are incorporated into their enterprise risk management framework, but only three in 10 companies said they had run scenario analyses and 36 percent said they had no plans to do so. This is revealing when considering that slightly more than half (51 percent) of those surveyed anticipate their company's core business objectives to be affected by natural resource shortages (such as water, energy, forest products and rare earth minerals/metals) in the next three to five years.

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CEO and board support highlighted, others not so much

It might not be front page news that there is much greater alignment in risk identification and disclosure when a company's CEO and board are significantly involved.

For example, companies that have a greater level of engagement from the CEO and board have much closer alignment between what they voluntarily disclose (such as CDP and DJSI) and what they are mandated to disclose (such as 10-K filings). When the CEO and board are actively engaged, 36 percent of those surveyed indicated total alignment of voluntary and mandatory disclosure.

As CEOs and boards gain a greater understanding of the risks posed by resource shortages and other sustainability issues, they will look to their chief risk officers and CFOs to help them plan for this future. According to the report, this may be a lonely place for corporates-to-be: Most survey respondents view governments and multilateral institutions as not playing a key role in corporate sustainability agendas. For many of the world's largest corporations, this is a source of endless frustration.

When asked which groups have a positive impact on advancing sustainability on a global basis, 68 percent of those surveyed identified large corporations as having significant influence, followed by consumers (61 percent) and non-governmental organizations (NGOs, at 55 percent). NGOs occupy a unique place, however: Only 5 percent of respondents said they drive a company's approach to sustainability while 28 percent said business customers and supply chain partners were the biggest influence on a company's sustainability efforts.

There's much more to be discovered in the report's six trends. Perhaps most encouraging is how the conversation inside companies is increasingly more sophisticated. This is critical as companies strive to become more resilient in the face of greater environmental, social and business stresses. As the report notes, companies are getting better at connecting the dots between risk management and corporate sustainability. That, as it turns out, is making sustainability issues more prominent on company agendas.