Kirsten van Reisen (Grant Thornton): ‘Managing sustainability risks determines your future security’

Sustainability and climate change are contemporary themes. Managing the associated risks is becoming increasingly important for companies to ensure future security. Think of extreme weather disrupting production, changes in laws and regulations, and changing consumer awareness and buying behavior: things that can have an economic impact on the business. Where there are risks, there are also opportunities; eg around efficiency, positioning or raising capital. What risks and opportunities may be present for your business? Why is it important to map it? How do you respond to that and make your business future-proof?

Context sustainability risks

The annual Global Risks Report from the World Economic Forum (WEF) has for several years shown that sustainability-related risks dominate both in the top 5 most likely risks if in the top 5 of most effective risks to companies.

The financial sector is therefore increasingly encouraging companies to map their sustainability risks, report on them and focus more on them. Not for nothing, because with the conclusions of the WEF report in mind, the financial sector expects that the increase in size and impact of these risks will go hand in hand with higher financial costs and damage to business and the economy. Resulting in investment risk. This has led to the creation of the Task Force for Climate-Related Disclosures (TCFD), a framework of recommendations for integrating sustainability risks into governance and reporting.

Sustainability risk reporting becomes mandatory

At present, there are not many companies that structurally report on and manage sustainability risks. But that’s going to change. In the forthcoming EU Reporting Directive for large companies, CSRD, reporting on sustainability risks will therefore be a mandatory part, in addition to the company’s impact on people and the environment. The CSRD guideline is based on the TCFD framework. In addition to identifying risks, helping organizations better manage and avoid costs, there are also commitments in this area.

Sustainability risks

It is therefore undeniable that sustainability risk management is more important than ever for companies. So what risks should you consider? Sustainability risks are often divided into two categories: physical risks and transitional risks.

Physical risks have to do with changing weather patterns. E.g:

  • Acute risks
    Risks that are random and unpredictable, such as floods and more frequent storms and cyclones.
  • Chronic risks
    There are risks associated with changes in climate patterns, such as higher sea levels, heat waves and dry seasons, which can lead to crop failure e.g.

Transition risks are broadly related to the transition to a more sustainable economy. E.g:

  • Politics, legislation and case law
    Organizations are constantly confronted with climate policy, legislation and regulations. This entails risks of non-compliance and possible fines, but also CO2 taxes and legal risks such as climate problems.
  • Technological risks
    Technological innovations in connection with the transition to a cleaner economy can pose risks to business operations. Especially if an organization is very dependent on ‘old’ polluting technology or fuel.
  • Market risks
    Change in supply and demand due to, for example, changing customer satisfaction in terms of sustainability, but also the availability of certain raw materials and materials.
  • Reputation risks
    Social awareness of climate change and the responsibility of organizations to mitigate it is growing. If an organization does not respond to this, it runs the potential for reputational risks.

Sustainability opportunities

Where there are risks, there are also opportunities. Think, for example, of efficiency and cost savings, improving positioning and reputation, developing new business models and using new markets. All things that ultimately contribute to securing the future of the organization.

Where to start?

The TCFD framework, the most widespread framework for sustainability risks worldwide, distinguishes between 4 pillars in which risks are reflected: governance, strategy, risk management and indicators and targets.

Source: TCFD Recommendation Report

For an initial mapping of sustainability risks for your business, the following steps are relevant:

  1. Map your addictions (eg certain raw materials, water source, people).
  2. Map the possible sustainability risks (physical & transition) associated with this.
  3. Determine potential economic consequences associated with materializing these risks.
  4. Determine mitigation measures and strategy for managing risks and opportunities.

reading tips

In this article, we lift a corner of the veil when it comes to sustainability risks. But there is so much more to tell. More in-depth information on this topic can be found in our White Paper ‘How do I anticipate climate-related risks and opportunities for my organization?’.

Kirsten van Reisen, Social & Environmental Impact Consultant at Grant Thornton Holland

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