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Unlocking Financial Growth and Resilience Through Sustainability Risk Management - Thought Leadership by #SustXGlobal50 Awardee Linda Y. Brewer, United States
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Summary
In this thought leadership article, "The Criticality of Monetizing Sustainability Risks and Opportunities" by Linda Y. Brewer, CEO, T-3 Strategies, United States, and a recipient of The SustainabilityX® Magazine Global 50 Women In Sustainability Awards™ 2024 explores the financial impacts of sustainability risks, from capital projects and supply chains to product design and corporate governance. It highlights the role of boards, investors, and employees in assessing and mitigating risks while leveraging sustainability for long-term growth and resilience. By operationalizing sustainability risks and opportunities, organizations can strengthen their financial standing, build stakeholder trust, and gain a competitive edge. Sustainability risks and opportunities are no longer just ethical considerations but fundamental financial imperatives. With increasing regulatory focus from the EU’s CSRD and the U.S. SEC, organizations must integrate sustainability into financial planning, risk management, and strategic decision-making.
Sustainability Risks and Opportunities are critical fiduciary responsibilities that must be considered in any organization; they are no longer viewed as simply altruistic considerations. However, while Sustainability Risks and Opportunities are not new, they continue to be under-examined and under-analyzed, creating organizational vulnerabilities. To combat this neglect, new policies from the European Union’s Corporate Sustainability Reporting Directive (CSRD) and the United State’s Securities and Exchange Commission (SEC) focusing on Sustainability Risks and Opportunities have significantly accelerated.
This increased regulatory focus on Sustainability Risks and Opportunities has led discerning investors to consider corporate inclusion of the same before offering organizations financial backing. The lack of a proven track record of assessing and mitigating sustainability risks and identifying and pursuing sustainability opportunities, and of projecting the actual monetary impacts of those risks and opportunities, is considered indicative of poor financial discipline. Increasingly, organizations must include sustainability risks as a part of their ongoing scan for existential threats to their survival and must include sustainability opportunities as part of their strategic planning.
Making the Case for Monetizing Sustainability Risks and Opportunities
Although the inclusion of Sustainability Risks and Opportunities in the financial management of organizations is becoming commonplace, examples of cases where ignoring their potential financial impacts, resulting in losses, are still emerging.
In major capital projects, not looking at Sustainability Risks and Opportunities early in the lifecycle of the project has been shown to decrease the net present value (NPV) of the project over time. In contrast, examining Sustainability Risks and Opportunities has been shown to preserve NPV or even increase it (1).
In strategic planning, failure to adequately consider climate change scenarios have resulted in poor to no planning for significant weather events, leaving organizations unable to anticipate, prepare for, or have the decision-making abilities necessary to operate during or recover from the event. Simply reacting to weather events is the most cost-intensive approach to incidents, which have dramatically increased in terms of frequency, duration, and repeat location impacts over the past decades.
In expansion efforts, lack of sustainable development stakeholder engagement or social risk approaches, while allowing organizations to move forward more quickly on regional development, can then result in either slowdowns or complete abandonment of efforts when local communities rise up and prevent the development effort, either partially or entirely. If the social risks are properly examined ahead of time, it becomes obvious where the development or project is not socially feasible, as was the case of buying leases to frack under historically significant major cities.
In supply chain management, inadequate consideration of supply chain effects from local or global sustainability impacts has caused operational shortages and even stoppages, disrupting or halting the flow of income and, over time, creating customer losses. The Covid-19 Pandemic underscored this, as supply chain limitations entered the common vernacular.
In financial management, investment cooperation with other organizations on specific sustainability challenges has emerged as a way to address the high costs of exploring Sustainability Risks and Opportunities. This cooperation has been approached directly with other organizations, through trade and industry associations, cooperative governmental initiatives, or sustainability collaborations.
In product design, sustainability considerations including facilitating the product’s ability to be repaired, recycled, and reused in either its whole or its component parts has proven to not only ensure an optimal product life and decreased waste, but to also have financial benefits in terms of operating efficiencies, decreased sourcing costs, and reduced time spent on repair. Further, products that are designed and created from a sustainable mindset both attract customers and build brand reputations, impacting the organization’s bottom-line.
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Overseeing the Monetization of Sustainability Risks and Opportunities by the Board of Directors
Boards of Directors (Boards) have a fiduciary duty of care for the organization, including the legal requirement to oversee, make decisions, advise, and promote its interests. In this role, Boards must examine the potential and significant impacts of Sustainability Risks and Opportunities on the future financial health of the organization and its ability to thrive.
Boards are pursuing a variety of methods to ensure that they are contributing responsibly when it comes to Sustainability Risks and Opportunities, including some combination of placing sustainability expertise on the Board, creating subcommittees focused on sustainability, working closely with organizational sustainability experts on sustainability initiatives and investigations, and sponsoring projects focused on sustainability issues and material risks.
Further, Boards are in the position to ensure that proper attention is paid to the potential negative high-financial impacts associated with poorly examined Sustainability Risks and Opportunities, by influencing leadership in adopting and integrating Sustainability Risks and Opportunities into the organization’s risk management processes, increasing the scrutiny of Sustainability Risks and Opportunities by the legal department, ensuring that supply chain functions look closely at Sustainability Risks and Opportunities, and encouraging other changes in operational processes.
Deploying Multi-Disciplinary Skillsets and Processes in Sustainability Risks and Opportunities
While studies that monetize the amount of the financial value at risk are not new, they are increasingly crucial input to decision-making at the executive levels with both investors and organizations. The forward-thinking leaders are using Sustainability Risk and Opportunity Assessments in their decision-making and are employing sustainability experts to perform those assessments.
These sustainability experts are often multi-disciplinary – being experts in sustainability and procurement, sustainability and operations, sustainability and finance, legal, and so on. This is a situation where cross-functional leadership actively demonstrates its ability to collectively manage overall financial responsibilities. Financially assessing Sustainability Risks and Opportunities offers a method of prioritizing focus areas, and of identifying which products, projects, and market segments are the most important and genuinely feasible.
Addressing Sustainability Risks and Opportunities by leadership is typically complex, requiring a broad set of expertise in identifying the risks and the opportunities, assessing the materiality of financial impacts, developing mitigation options and tracking the mitigation impacts on the financial outcomes, involving essential stakeholders in the process, and developing the optimal solutions. Every risk and opportunity tends to be unique and specific to an environmental and social context, requiring specific solutions dependent on industry, division, function, supplier, customer, and product.
Unlike the trend toward operational efficiency and replicable processes, sustainability initiatives must often consider key specialized characteristics. This does not mean, however, that there are not reusable practices that can be developed; but it does mean that these reusable practices are often designed to be flexible in their application and to encourage the involvement of the stakeholders critical for that specific initiative. Sustainability Risks and Opportunities often have a selection of options in their mitigation, and scenario planning can be a productive tool in approaching those options.
Leveraging the Critical Worker-Sustainability Relationship
The involvement of employees at all levels has emerged as imperative in the management of Sustainability Risks and Opportunities. The employees’ specific operational and functional knowledge informs the sustainability process through contributing sustainability data, and their experience informs the sustainability experts on materiality priorities essential in assessing Sustainability Risks and Opportunities.
Further, the relationship of the employees with the customers and the suppliers – two of the most critical organizational interfaces – places them as critical knowledge workers in the prioritization of Sustainability Risks and Opportunities, in the identification of new customer sustainability opportunities, and in the efficiencies and opportunities to be found within the supply chain.
Embracing employees as critical stakeholders and advisors in the assessment of Sustainability Risks and Opportunities for the organization reveals financial opportunities via new products, markets, and channels; and identifies logistical process efficiencies, product quality changes and options, and decreased carbon outputs by the organization.
Including the Non-Financial Operational Benefits of Sustainability Risks and Opportunities
Close examination of Sustainability Risks and Opportunities yields multiple benefits to the organization beyond the direct financial benefits. Such examination offers a competitive advantage within the industry, as intermediaries and customers view the organization as sustainable and become dedicated to the brand; it attracts, retains, and builds the capabilities of potential employees, particularly among the younger generations; and it contributes to productivity, enhances innovation, identifies emerging risks to the business, and supports a modern and aware organizational culture. This analysis can also strengthen the reputation of the organization through demonstratable sustainability commitments and actions.
Operationalizing the Monetization of Sustainability Risks and Opportunities
In conclusion, not knowing and incorporating an organization’s Sustainability Risks and Opportunities is increasingly being considered as inviting regulatory failure and investment rejection, and as acting irresponsibly toward fiduciary obligations. An example of this is spending monies in areas where not considering the financial realities of sustainability meant no possibility for the benefits to be realized. In contrast, where organizations’ have embraced Sustainability Risks and Opportunities analysis, they have built their reputation and attracted customers and unique and sustainable suppliers. One instance of this is in the case of an oil and gas company developing such a positive relationship with the local governments and communities that they got an exclusive invitation to develop within the region when another oil and gas discovery was made.
Understanding Sustainability Risks and Opportunities can also prevent or mitigate related potential financial losses, facilitating the tracking of trends, marketplace shifts, and possible impacts on the organizational health; and escalating time, progress, and efficiencies in the process. Further, it supports a focus on high-return activities, rather than scattered focus on multiple efforts.
Finally, understanding and integrating Sustainability Risks and Opportunities can only enhance the organization’s relationship with customers, suppliers, communities, investors, and other stakeholders. Looking at the multi-generational needs of the local community creates a tighter organization-community bond, resulting in attracting future employees, and assuring the community of the organization’s commitment to local sustainability needs and considerations.
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The SustainabilityX® Magazine is an award-winning, digital, female-founded, and female-led non-profit initiative bringing the environment and economy together for a sustainable future through dialogue, and now transforming the environment and economy for a sustainable future through the power of women's leadership. Founded on May 8, 2016, and inspired by the United Nations' Sustainable Development Goals by Canada's Top 30 Under 30 in Sustainability Leadership awardee, Supriya Verma, the digital media initiative focuses on approaching the world's most pressing challenges with a holistic, integrated, systems-based perspective as opposed to the traditional and ineffective siloed approach with a single lens on interdisciplinary topics like climate and energy. This initiative ultimately seeks to explore how to effectively bring the environment and economy together through intellectual, insightful dialogue and thought-provoking discussion amongst individuals across sectors taking an interdisciplinary and integrated approach to untangling the intricate web of sustainability while championing women's leadership in sustainability.
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