This article is part of the “Business case for Sustainability” series on the Zerwaste blog. In this post, we will try to establish the contribution of risk management in the business case for sustainability.
Welcome back to the Business case for Sustainability Journey!
Climate change and geopolitical crisis create risks for all businesses and will impact profitability and growth due to the:
- Increasing carbon emissions
- Lack of access to natural resources and necessities such as water or reliable electricity
- Supply chain shortages in response to COVID-19 or another crisis
- Increasingly monopolistic business alliances
Therefore, all companies need to build a strategy including sustainability to be part of the solution, to build resilience, and improve profits, while reducing risk and negative financial impacts.
1. Regulatory Management
As mentioned in a previous article, it is key to mitigate risks by adhering to government mandates and capturing opportunities from regulation.
Restricted license to operate or reputational damage based on perceived misuse of resources could lead to a 70% negative impact on EBITDA.
2. Operational Risk Management
As mentioned before, global supply chains are vulnerable to natural disasters and civil conflict, there is therefore a risk of operational disruptions coming from:
- Resource/water scarcity.
- Climate change and emissions impact.
- Inefficient waste management.
- Misuse of fossil energy or natural resources.
- Disrespect for local wildlife.
- Poor labor conditions; or
- Community risks.
It can therefore pay off to manage risk through sustainable practices even if it means making investment decisions today for longer-term capacity building, e.g., investing in renewable energy to secure energy sources and to avoid energy price fluctuation in the future.
Resources are used as free raw material, even if there is still an internalized natural capital cost until they experience the actual cost of using the resource. It disrupts production processes or commodity prices.
Social conflict related to disruptions to water supplies in Peru has resulted in the indefinite suspension of $21.5 billion in mining projects since 2010.
3. Reputation Management
If you do not invest in sustainability practices, your reputation is also at risk. It is therefore important to take action and get credits for it. If you manage to have positive publicity (press releases, announcements…) about your company being/becoming greener, more ethical, or responsible, it is a great opportunity to:
- Improve your overall brand identity and nothing is more important than your brand.
- Build employee pride,
- Attract sustainably-minded job applicants,
- Increase customer loyalty and referral rates.
- Be perceived as an elevated and reliable brand.
- Show you provide higher quality products and services.
- Charge more and increase bottom line profits
Major Brands with purpose report double sales growth compared to those with no perceived purpose.
Measuring the financial ROI on reputation is called the reputational ROI and can be achieved using a survey-based measurement or via analysis of earned media, the value of content generated by editorial, digital, or word of mouth.
4. Proper Stakeholder Management
Traditional business models aim to create value for shareholders, often at the expense of other stakeholders. It can lead to increased conflict and reduced stakeholder cooperation, which can disrupt the firm’s ability to operate on schedule and budget, e.g., bad stakeholder relations in the gold mining industry influencing land permitting, taxation, and regulatory environment
As the “Spinning gold” study authors wrote, stakeholder engagement “is not just corporate social responsibility but enlightened self-interest.”
Sustainable business practices seek to protect the planet, treat employees with respect, and engage with the community in a positive manner, which will benefit customers, employees, partners in the supply chain, civil society, communities, AND shareholders. According to Michel Porter and Mark Kramer, businesses can generate economic value by identifying and addressing social problems that intersect with their business, meaning “creating shared value”.
As mentioned in the part about reputation management, being a sustainable company can attract sustainably-minded job applicants who share those values and focus more on work-life balance. Nevertheless, it also retains employees by creating a nice workplace, improving morale, creating a purpose-driven culture, and improving employee health and well-being.
Over 70% of potential workers reported that they prefer to work for an employer with a meaningful environmental plan and that they are more likely to remain with this employer.
Hiring and retaining the right team saves your organization time and money from having to rehire for multiple roles. It will also reduce absenteeism and increase employee engagement, satisfaction, efficiency, and productivity. This is called the talent ROI.
Studies regarding companies with strong sustainability programs found an increase of 55% in morale, 38% in employee loyalty, around 15% in productivity and reduction in turnover by 25-50%, annual quit rates by 3-3,5%, and replacement costs up to 90%-200%
See you soon for more information on the sustainability business case!
