The optimal management of threats and opportunities (or negative and positive risks) is the secret of a company’s success. It is also the purpose of Risk Management, and the highest responsibility of a company’s leadership.
Threats and opportunities are caused by the uncertainty of the operating context of each organization. This is why risk management is better defined as “uncertainty management”. The term “risk” is very generic and is usually considered in its negative component. In this case, only the possibility of damage caused by events is considered. The aim is to protect the organization against such damage, generally by means of controls, policies and procedures, often by means of insurance. The opportunities offered by uncertainty are rarely considered. In its meaning according to the ISO 31000:2018 Guideline, risk is the effect of uncertainty on objectives. It therefore concerns the consequences on the organization’s ability to achieve its objectives. These consequences can also be positive, i.e. they can provide opportunities for the firm to reach or exceed them more easily.
A deeper innovation
Pressure of climate change, ever tighter environmental standards and growing consumer awareness demand more. Globalization of markets, and with it of uncertainty, also makes its management more complex. Challenges facing the company are much more complex than in the past. Because of the speed of technological evolution and the changing markets, innovation must go beyond processes and products, extending to business models and value chains. Also the so-called VUCA characteristics, that is the great volatility and ambiguity of the global context, add further elements of uncertainty.
Why Embedded Sustainability
This is why traditional Risk Management no longer works today. The best way to manage such complex uncertainty is to adopt Embedded Sustainability strategy and practices. This alone ensures optimal management of threats and opportunities. What do we mean by Embedded Sustainability?
Let’s start with the “official” definition of sustainability. In 2012 our Chief Scientist Robert B. Pojasek defined it academically for the first time this way:
The ability of an organization to manage its responsibilities for environmental protection, the generation of shared economic value and social well-being in the long term, while being transparently accountable to its stakeholders.
In practice, for a company this means:
- to set up strategies to ensure the profitability of the company in the long term
- protect the ecosystem and natural resources for future generations
- contribute to the welfare of the communities in which it operates.
These objectives are well aligned to the well-being of the company and its ability to generate profits in the period in which we live, and for a long time in the future.
Where to start from
As we have seen, Embedded Sustainability is by far the best risk management in the current context. It allows the company to contain the negative influences and to take advantage of the many opportunities offered by the context itself.
The first thing to do is the so-called materiality analysis. This involves analyzing the business environment, both external and internal. The objective is to assess where the sources of uncertainty lie and what is their possible influences on the firm’s ability to achieve its objectives. The latter are derived from the company’s Vision and Mission. If they are not clear, they should be better defined, consistent with the Sustainability Vision.
Once this has been done, it is a matter of identifying the stakeholders, i.e. the stakeholders who represent the sources of uncertainty. Among these we can find, for example:
- internal collaborators
- civil society organizations
- the legislator (local, regional, national or supranational)
- the financial community
In practice, every person who can influence the company’s ability to achieve its objectives must be considered. In the same way must be its degree of influence and the likelihood of it being exercised.
The choices at this point
Now, in order to achieve the optimal management of threats and opportunities, it is a question of identifying the influences that can produce the greatest consequences. And how to deal with them. Typically, four main possibilities are considered:
- Uncertainty elimination
- Property Allocation
- Changing the exposure
- Active Surveillance
In the first case, we try to eliminate the cause of the uncertainty. It may be through an opportunity that offsets it, for example a transition in the energy used, a technological innovation that eliminates a certain substance from the processes, changing a location…
In the second, the “property” of the uncertainty is transferred to another subject: typically with an insurance or similar form. Sometimes an opportunity can be transferred to another organization that is better able to take advantage of it in exchange for a premium.
Third case: an attempt is made to mitigate the possible consequences of uncertainty, for example, by making a vulnerable supply chain more resilient, or by reducing the likelihood of events occurring by appropriate measures.
The last case applies when uncertainty is deemed to have minor consequences. So you write it down and “keep an eye on it” to see if it changes in magnitude in the meantime. For the time being, no action is taken, concentrating resources on more relevant uncertainties.
The ESIndex®’s approach to uncertainty management
ESIndex® has been built from the beginning to ensure optimal management of threats and opportunities, i.e. uncertainty. Consider that, essentially, half of its 36 factors concern the assessment of the business environment. The other half evaluates how much governance and strategies of the organization make it capable of ensuring this management. This tells you how focused the tool is on uncertainty management!
The Preliminary Index Report allows the firm to best assess what to prioritize in its response to uncertainty. From there it is possible to fine tune the global strategy. Subsequently an integrated Sustainability management system based on ISO will accompany the company in improving its performance.
If you want you can also analyze your integrated sustainability and get your ESIndex®.
Take advantage of our totally free tool!