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Assessing and Forecasting Sustainability Risk

By September 1, 2023September 12th, 2023No Comments

Sustainability is not going to be easy. It is a strategic imperative that is outside the experience and competency of most organizations. It was not in prior strategies and not in the budget. Simply put, it was not the plan.

Sustainability is faced with new regulations that will drive public disclosure and comparability, an emerging measurement regime, unreliable carbon markets, uncertain economic models, deep political divisions, and consumers that have not yet translated concern for climate change to buying habits.

It seems overly obvious to say that risk management will be critical, especially as 81% of Boards see ESG/sustainability as a strategic priority but also carry the primary role to deliver shareholder value.

But sustainability is a rapidly evolving environment. There will be stark differences in the nature and magnitude of risks in the 2023-2025 and 2025-2030 time frames. Other than those that overplayed their hands in claiming offsets from voluntary carbon markets, today’s risks are relatively muted. The risk picture changes in the 2025-2030 time frame; for example as:

  • Regulations starting in 2024 will drive public disclosure and comparability – and therefore reputational risk
  • Downstream companies will pursue Scope 3 emission reductions – creating financial risk for companies in supply chains
  • Consumers, witnessing the human and economic toll of severe weather, are likely to shift buying habits enough to impact financials
  • Cleantech and climate tech increasingly evolves from good ideas to difference-makers, lessening risk for those able to capitalize on them.

The changing risk picture between 2023-2025 to 2025-2030 creates an immediate funding challenge. The wolf is not at the door today – and funding may reflect that. We are already seeing this as more than 33% of CFOs in a recent survey are already pulling funds away from sustainability to address immediate financial needs.

This means the funds needed to get in front of escalating risks may not be sufficient. But how do you argue for funding today against tomorrow’s risk?

One option is to time-phase risk to the two timeframes and show how (and why) the risk profile materially changes.

Isolating two risks – reputational and financial – shows that the likelihood and impact change for risks from 2023-2025 to 2025-2030.

  • Reputational risks increase as the customers are increasingly sensitized to the impact of climate change and hold companies accountable to do their part – while being able to scrutinize and compare company sustainability progress
  • Financial risk from customer churn increases as reputational damage translates to either/both customer and spend churn.

The critical factor here is that investment needs to take place in 2023 and 2024 to reduce escalating risks expected in 2025 and beyond. Waiting for risks to materialize to act creates unnecessary and avoidable impact to both financial performance and company reputation. In other words, by forecasting risk, companies can methodically invest to minimize expected risk.

Sustainability presents real and growing risks to enterprises. Yes, there is a tough balancing act between financial and sustainability performance, but underfunding sustainability today creates avoidable and possibly acute financial and reputational risk tomorrow.

We would love to get your thoughts on this and see how we can help you minimize risk on the critical path to sustainability.