Mixing Sustainability with Risk Management: a Recipe for Long-Term Success

The relationship between sustainability and risk management is a critical aspect that companies must consider when environmental and social risks are prevalent and intensified. According to a study conducted by the World Business Council for Sustainable Development (WBCSD) in 2016, sustainability and risk management are often managed separately, leading to a lack of disclosure on material sustainability issues in risk disclosures. In fact, the study found that 71% of sustainability issues are not made known to investors.

In this blog, we will discuss three important reasons why sustainability and risk management should be integrated into the same process, as well as the challenges companies face in fostering this integration.

Firstly, embracing the concept of double materiality allows companies to gain a comprehensive understanding of the topics that are important to their stakeholders. Double materiality includes not only the risks that a company encounters but also the risks that the company poses to the world. By identifying and managing these risks, companies can ensure the long-term sustainability of their business (How ESG Cultivates a New Paradigm in Risk Management, 2024).

Building resilience is another key reason for integrating sustainability and risk management. Sustainability inherently aims to ensure the continuity of a business over time without negatively impacting the environment and society. Avoiding risk is just one piece of the puzzle. By understanding the risks that a company faces, proactive measures can be taken to increase the company's resiliency and strengthen its supply chain's ability to withstand challenges. It is important to note that our world is defined by planetary boundaries, and exceeding these boundaries can amplify risks. For example, extracting water without considering these boundaries can lead to an increased concentrations of minerals and salts, making water treatment costly while increasing the likelihood of floods and droughts, which were once rare unforeseen events (Galindo et al., 2022).

The new legislative taxonomy further emphasizes the need to understand the risks associated with sustainability, particularly in the European Union. The Sustainable Finance Disclosure Regulations (SFDR) propose a definition of sustainability that highlights the potential negative impacts on investments. The Corporate Sustainability Due Diligence Directive (CSDDD), approved in 2024, focuses on managing the risks of the company’s operations and supply chains. The Corporate Sustainability Reporting Directive (CSRD), which came into force in 2023, ensures that all company stakeholders have access to information regarding the company's impact on the environment, society, financial risks, and sustainability issues. These regulations increase the need for companies to track their sustainability risks alongside other risks. By complying with these regulations and actively managing sustainability risks, companies can ensure that their business remains resilient and adaptable in the face of changing regulations and market dynamics.

However, companies often face the challenge of balancing their sustainability efforts with the need to address unexpected risks - including sustainability risks. It can be challenging for companies to identify and include sustainability risks in their risk management programs due to perceived resource intensity. Additionally, sustainability risks and other financial risks may not always share the same timeframes, with sustainability risks often perceived as having longer time horizons. The lack of guidance in this area, further exacerbated by the lack of cross-functional collaboration between sustainability and risk management groups, adds to the difficulty (WBCSD's, 2016).

Technology plays an important role in the integration of sustainability and risk management. The introduction of regenerative AI into the market allows companies to leverage different data sources to identify various risks in their own operations and supply chains. Creating a supply chain digital twin also helps to strengthen visibility and better prepare for contingencies in all material aspects that the company deems important.

In conclusion, the relationship between sustainability and risk management is crucial for companies seeking long-term success. By embracing concepts like double materiality, understanding risks to increase resiliency, and complying with regulations like SFDR, CSDDD, and CSRD, companies can enhance resilience and ensure the continuity of their business. Having a robust risk management strategy in place is essential for businesses to effectively achieve sustainability goals. By proactively identifying and addressing risks, companies can allocate resources efficiently and focus on long-term sustainability initiatives instead of constantly reacting to immediate crises. Lastly, creating a culture of risk awareness and preparedness can help companies navigate challenges and prioritize sustainability.

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