Generation Strategy

When You Don’t Know What You Don’t Know

In general, managing risks is all about expecting the unexpected. Managing corporate responsibility and sustainability risks involves knowing what you don’t know. Sounds tricky, but savvy business leaders can take deliberate steps to identify those unknown risks. Doing so provides companies the ability to develop and execute effective initiatives to mitigate risks, reduce potential liability, increase transparency, and in many cases increase profitability through improved efficiency and reduced costs.

Supply chain is an area ripe with opportunities for corporate responsibility missteps. The recent revelation that popular metal water bottles from SIGG were lined with an epoxy resin containing the controversial chemical bisphenol A (BPA) until August 2008 is a case in point. Riding the green wave to grow 250% between 2006 and 2007, the company marketed its lined bottles as “Eco Logical” with consumers turning from plastic bottles to what many assumed to be a BPA-free alternative. Although studies conducted by the company indicated no detectable BPA leaching from these liners, SIGG began working on a new “EcoCare” BPA-free liner in 2006.

SIGG CEO Steve Wasik explained the contradiction by pointing to a non-disclosure agreement with their manufacturer. His subsequent apology in a September 1, 2009, website posting for the “lack of clarity” in their previous communications is likely to prove too little, too late. Whether SIGG can recover from the barrage of negative media stories and the end of lucrative deals with highly respected outfitters such as Patagonia remains to be seen.

Clearly supply chain considerations are not exclusive to manufacturing businesses. In the SIGG case, along with the retailers who sold the products, hundreds of organizations from various product, service and institutional sectors offered co-branded SIGG bottles as promotional give-away items to their clients, prospects and other stakeholders. The steps they take in response to the new information and the level of transparency with which they communicate on this issue will be key to maintaining trust and goodwill.

Supply chain risks go beyond product health and safety to include a range of environmental and social considerations. Environmental impacts include everything from office waste and indirect greenhouse gas emissions from the power used to keep the lights on, to more significant impacts on ecosystem services such as oceans, fresh water resources, forests, soils and wetlands. As discussed by Dan Anderson in Corporate Survival: The Critical Importance of Sustainability Risk Management, with an annual potential market value estimated at $33 trillion, these resources have been severely compromised by past corporate activities. And the potential for future liabilities is enormous as more attention is directed to these issues. Superfund liabilities alone are expected to total in the $100 billions.

Social sustainability broadly encompasses issues such as fair trade, living wages, safe and healthy working conditions, and gender and racial equity. As with environmental issues, corporate social responsibility missteps can result in significant financial liability stemming from lawsuits, boycotts, damaged reputation and diminished brand value. Dell Inc. recently settled a gender discrimination lawsuit for $9.1 million. Smith Barney settled a similar case last year for $33 million. More and more, stakeholders are holding organizations accountable for negative social impacts that result from their operations.

The good news of course is that organizations can, and do, successfully manage environmental and social sustainability risks to mitigate financial risks and optimize long-term financial success. As Anderson puts it, assessing such risks is “the first step in the risk management process.” Assessment is an important component of a robust corporate responsibility program that will help ensure the long-term sustainability of an organization.  An effective risk assessment will consider both developing and past loss risks, across environmental, social and financial arenas.

Sustainability reporting frameworks such as that provided by the Global Reporting Initiative (GRI) provide a useful platform for corporate responsibility risk assessment. The GRI is “a network-based organization that has pioneered the development of the world’s most widely used” reporting framework (www.globalreporting.org).
Organizations use the framework not only in the creation of formal reports to communicate sustainability results with stakeholders, but as a reference guide for determining principles and setting relevant sustainability performance indicators for their sector.  Fairmount Minerals, based in Chardon, Ohio, and one of the largest producers of industrial sand in the US, produces an exemplary annual Corporate Social Responsibility Report.

The GRI framework provides core and additional indicators in economic, environmental and social performance. Following are some core examples from each aspect of the framework:

Economic Sustainability Indicators

• Policy, practices, and proportion of spending on locally-based suppliers at significant locations of operation.

• Financial implications and other risks and opportunities for the organization’s activities due to climate change.

Environmental Sustainability Indicators

• Location and size of land owned, leased, managed in, or adjacent to, protected areas and areas of high biodiversity value outside protected areas.

• Total direct and indirect greenhouse gas emissions by weight.

Social Sustainability Indicators

• Composition of governance bodies and breakdown of employees per category according to gender, age group, minority group membership, and other indicators of diversity.

• Percentage of significant suppliers and contractors that have undergone screening on human rights and actions taken.

• Life cycle stages in which health and safety impacts of products and services are assessed for improvement, and percentage of significant products and services categories subject to such procedures.

Your organization may or may not be ready to produce a sustainability report following a protocol such as that provided by the GRI framework. Whether or not your company produces a report, measuring performance for the core and relevant additional indicators will provide a highly detailed picture of your organization’s sustainability risks, and will identify areas in need of attention to minimize developing risks and prevent recurrence of past losses. A risk management plan, ideally as part of a comprehensive strategic corporate responsibility plan, can then be developed to:

• set goals,

• define mitigation initiatives,

• improve environmental, social and financial performance, and

• chart a course for the long-term success of your organization.

Take a proactive approach to identifying the unknowns that can potentially haunt your company. Investing in resources for education, risk assessment tools, and implementation of a corporate responsibility program is a prudent business management approach that goes beyond compliance to building value for the future.