A sustainability-centred approach to risk management

A sustainability-centred approach to risk management

Imagine you are on a plane and the pilot says that there is a malfunction (hopefully this never happens). The plane is about to crash and the only option you are left with is jumping off the plane with or without a parachute. What would be riskier: parachute or not parachute?

Probably you will take the parachute (I would do too), but is this option less risky? According to the ISO 31000 on Risk Management, a risk can be understood as the effect of uncertainty on objectives. The risk would be the part of uncertainty that we can somehow measure (frequently in terms of likelihood and impact).

So, let’s analyse the parachute situation for a minute. If you do take the parachute, let’s say you will face three potential outcomes: a) 80% chance you may do alright, b) 19% chance you will land and have an injury, and c) 1% chance that you will die. Now, if you do not take the parachute, you will most certainly die (100% chance). The most uncertain situation is therefore jumping with the parachute. Therefore, we could say that it is the riskier option, can we?

This analysis is incomplete. We are missing a key element in how we assess risks: what our objective is. We assess risks according to what we would like to achieve, not on the basis of empty data. This means that we take a goal-oriented approach to risk following a basic principle: we need to accept uncertainties to achieve our objectives. As we want to survive our jump off the plane, the option that gives us less uncertainty (and therefore less risky) is doing it with a parachute.

The same principle applies to the sustainability-related risks. However, sometimes the objective may be misplaced of even too narrow for a useful risk assessment to be implemented. Let me give you an example to clarify this point. Managers are increasingly concerned about the climate-related financial risks (and they should be). By focusing on reducing financial losses, companies may assume that climate change is happening to them while dismissing their own responsibility in the problem itself. A similar confusion may occur when assessing social risks such as those related with human rights. As a result, decisions aiming at managing the risks will be ineffective. While trying to shield the company, they will forget those facing the greater impacts.

Social and environmental risks will certainly have consequences on financial outcomes as well other objectives. But the focus of the assessment should not be placed on the company alone, but on those being impacted by the risks (people and the environment including its biodiversity). We can refer to that as a sustainability-centred approach to risks. If our objective is truly achieving greater sustainability, then our risk assessments and decisions should reflect that. The starting point? We need to understand what sustainability means for us and how we contribute positively and/or negatively to it. This is typically the scope of a materiality assessment, something we will discuss on another blog.