Closing the gap between risk management and sustainability

Companies striving to maintain a competitive edge today can gain a lot by tying sustainability-related risks and opportunities to their financial and strategic goals, but exactly how to go about achieving that still eludes many.

That was just one of the key takeaways discussed in “Unlock Growth by Integrating Sustainability: How to Overcome the Barriers,” from global services firm Marsh & McLennan Companies, which analyzes the intersection between sustainability assessments and financial modeling and enterprise risk management (ERM) strategies and processes. “I was very surprised at how many companies were not looking at sustainability issues in the same way that they were looking at long-term business issues or that they weren’t aligned in the same way and within the same processes,” said Alex Wittenberg, executive director of Marsh & McLennan Companies’ Global Risk Center, during a recent webinar discussing the report.

Many companies are making progress on this front, but slowly. In fact, several external factors are increasingly driving more companies to change the way they think about sustainability-related risks and opportunities, including growing regulatory requirements for disclosure around sustainability practices; customer preferences cascading through supply chains; and growth in responsible investing.

In this evolving and increasingly competitive global marketplace, companies that do not incorporate sustainability into their financial modeling and ERM strategies and processes may find themselves at a competitive disadvantage. It would appear that many companies, however, still have a long way to go.

Opposing expectations between finance and risk executives and sustainability executives is one significant factor that often undermines effective collaboration. According to Marsh & McLennan’s report, financial and risk executives were more than twice as likely as sustainability executives to agree that sustainability risks are “effectively integrated into risk management and risk reporting in our organization.”

Financial and risk executives also were more than twice as likely as sustainability executives to agree that the company’s finance and risk management teams are “effectively integrated into sustainability programs,” the report stated.

One factor that undermines greater collaboration between sustainability leaders and financial and risk leaders is a lack of clear ownership and organizational leadership for sustainability risk management. Dialogue between these functions often is minimal, at best.

“I was very surprised at how many companies were not looking at sustainability issues in the same way that they were looking at long-term business issues or that they weren’t aligned in the same way and within the same processes.”


Alex Wittenberg, Executive Director, Global Risk Center, Marsh & McLennan Companies

Developing a collaborative relationship will go a long way toward improving each function’s understanding of joint metrics and key performance indicators. “Sustainability professionals—and most of the ideas and issues they deal with—will get more traction the more they are embedded and linked to the processes, function, and metrics that currently exist within the organization,” Wittenberg said.

At Campbell’s Soup Company, for example, the sustainability team depends on annual risk assessment and response plans to integrate sustainability strategy with that of internal audit and enterprise risk—such as addressing “resiliency in the supply chain” by reducing waste in the supply chain or making the agricultural practices of key vendors more transparent.

Aligning risk management with sustainability strategies cannot be achieved, however, unless sustainability leaders are included in risk discussions with business leaders across the company. The best time to talk about sustainability-related risks, Wittenberg said, is when the management team is going through its three-year strategic planning process, as opposed to a separate issue that gets presented to the board once a year.

Let’s consider, for example, a global clothing retailer that is weighing emerging-market growth plans on where to lease or build new factories. What potential issues in business continuity could arise if that retail company were to enter into a 10-year lease for a factory in a country or region that poses a sustainable risk like water scarcity? How might that affect the supply of raw materials, such as cotton, and the consequential business operations of the company? What cost and regulatory impact could result?

Broadly speaking, discussing and forecasting sustainability-related risks relative to potential operational and financial risks will prove especially beneficial when presenting these issues to the board and executive team. In the food industry, as another example, framing a conversation around issues such as “how to increase operational resiliency in the supply chain” is more likely to gain traction than an ambiguous discussion around “sustainable agriculture.” Campbell’s Soup Company aligning its sustainability strategy with the company’s risk management strategy is an example of that.

KEY TAKEAWAYS

Below is a summary of eight key takeways from the report, “Unlocking Growth by Integrating Sustainability: How to Overcome the Barriers.”
1. The rising pressures of a changing physical environment present a wide array of strategic and operational risks to many companies. Executives must ask themselves: How sustainable is our business, and are our strategies and operations at risk? Customers, capital markets, and regulators are increasingly examining corporate sustainability risk profiles.
2. The focus on sustainability and climate-change-related practices will affect both the cost and availability of financing for many companies.
3. Companies must identify, assess and respond to the strategic and operational risks and opportunities presented by the changing business environment.
4. There are often disconnects between established corporate finance modeling and enterprise risk management processes and the discourse and expertise surrounding sustainability.
5. Three factors contribute to the organizational gap between finance and enterprise risk management and sustainability: unclear terms, unclear roles and risk responsibilities, and unclear corporate leadership and engagement on sustainability.
6. Companies that do not close this gap may find themselves losing ground in an increasingly competitive global marketplace.
7. Leading companies have leveraged sustainability initiatives to raise capital and reduce operational volatility.
8. Finance, enterprise risk and sustainability leaders must integrate their efforts to provide real value in helping their organizations respond to evolving risks and capture competitive advantages.
Source: “Unlocking Growth by Integrating Sustainability: How to Overcome the Barriers.”

With this in mind, creating a language that can be understood by finance, risk, and sustainability executives alike will help bridge the communication gap between these groups. Sustainability executives need to speak the language of the business. “They need to translate the firm’s language into the sustainability world, not the other way around,” Wittenberg said.

Emerging trends

A growing interest in so-called “sustainability bonds” is another trend that is helping to bolster the link between corporate sustainability strategy and ERM strategy. U.S. companies increasingly are recognizing the benefits of using bonds in financing corporate sustainability projects, and even securing new investors.

In May 2016, Starbucks Coffee Co. became the first U.S. corporate issuer of a “sustainability bond.” Broadly speaking, such bonds are used to finance social, agricultural, and environmental initiatives.

“Issuing a bond focused on sustainable sourcing, demonstrates that sustainability is not just an add-on, but an integral part of Starbucks, including our strategy and finances,” Starbucks Chief Financial Officer Scott Maw said in a statement.

Through this initiative, Starbucks yielded 40 new investors for a $500 million, 10-year bond, Drew Wolff, treasurer at Starbucks, said during Marsh’s webinar. That bond was then used, in part, to finance a network of farm support centers around the world to help farmers grow coffee more sustainably, he said.

Starbucks also is using the bond proceeds to expand its Coffee and Farmer Equity (CAFE) Practices, Wolff said. Developed in collaboration with Conservation International, CAFE practices is a third-party verified program for farmers to ensure certain human rights and environmental standards are met.

In a second example, Apple in February 2016 issued a $1.5 billion “green bond,” making it the largest issue ever to be undertaken by a U.S. company. Unlike sustainability bonds, green bonds are exclusively designated to fund new and existing qualifying green investments or projects that result in positive environmental benefits.

According to its prospectus, Apple said it will spend its green funds on projects that meet one or more of the following criteria:

Solar and wind projects, or associated energy storage solutions;

Buildings that have received, or are expected to receive, “green building” LEED or BREEAM certification;

Environmental upgrades for new or existing buildings;

Projects that enhance recycling, material recovery and reuse, and landfill waste diversion for products and facilities; and

Projects and technologies that facilitate the use of greener materials in our products through the use of bio-based materials, or the use of recyclable materials, or through the elimination of toxic substances.

Satisfying customer preferences as a competitive advantage is another factor that is driving sustainability initiatives through smarter financial innovations, consequently improving discussions and collaboration among both finance and sustainability teams.

At technology company Akamai, an expanding segment of its corporate customer base seeks low-carbon content delivery, which is one reason why Akamai has committed to reduce by 2020 its greenhouse gas emissions below 2015 levels, company Treasurer David Neshat said during the webinar.

This will be achieved through the creation of a low-carbon-powered global delivery network by sourcing renewable energy for 50 percent of its network operations. “Our goal is to put more renewable energy on the grid,” Neshat said. Akamai expects that, over time, these agreements will serve as a hedge against rising energy prices, which was an additional bonus when presenting the case to the executive team and board, he said.

Creating this energy procurement solution required a close working relationship among Akamai’s head of sustainability and the finance team, Neshat said. The finance team considered the various accounting treatment, market risks, and tax implications of the agreement, while treasury examined the counter-party and pricing risk. Such collaborative efforts also helped the sustainability team better define and understand sustainability goals in terms of financial measures, he explained.

Akamai is just one of dozens of companies over the last couple of years to make the business case for renewable energy. Many are members of RE100—a collaborative, global initiative of the world’s leading companies across a wide variety of industries committed to 100 percent renewable electricity, working to increase demand for, and delivery of, renewable energy.  

One thing is for certain, shareholders, investors, regulators, and customers are all demanding greater disclosure and expecting higher standards of companies’ sustainability efforts. Those companies that are able to effectively identify, assess, and manage sustainability-related risks and opportunities and tie them to the company’s financial and strategic goals will be best positioned to gain a competitive edge and long-term, sustainable growth in the process.