Several risks are associated with business sustainability including strategic, operations, compliance, financial, and reputation. Four more emerging risks that currently is threatening sustainability of all types and sizes of organization are risk of potential cyberattacks and security breaches and the 2020 COVID-19 pandemic, climate change, and litigation risks. Consideration of and proper assessment and management of those nine risks are becoming increasingly important and play an effective role in achieving financial and nonfinancial sustainability performance.
Sustainability risks reflect the likelihood that an organization is not meeting its sustainability performance targets of achieving financial economic sustainability performance (ESP) and nonfinancial environmental, ethical, social, and governance (EESG) sustainability performance. Several risks are relevant to business sustainability including strategic, operations, compliance, financial, and reputation.
Investors, in general, use EESG disclosures provided by public companies to monitor management and assessment of EESG risks and to make investment and voting decisions. The most important risk relevant to business sustainability is strategic risk. Strategic risks should be identified, assessed, and managed with a keen focus on minimizing their negative effects and building up on the opportunities provided by addressing these risks.
Operations risks are also relevant financial ESP and nonfinancial EESG dimensions of sustainability performance, the integration of all sustainability performance dimensions into operating activities across operational units, operation technology, supply chain, information technology, and other functional areas. Many companies are facing the challenges of complying with these regulatory measures and noncompliance may cause significant risks of interruption and/or discontinuation of their business. Compliance risks need to be assessed, managed, and their negative impacts be minimized to attain sustainability performance. To achieve this objective, many companies have created either the board compliance committee or an executive position as compliance and risk officer. All financial ESP and nonfinancial EESG dimensions of sustainability performance are associated with business reputation, customer satisfaction, and the ethical workplace. The company’s reputation and its related risk should be evaluated on an ongoing basis and any damages to reputation be minimized. The financial risk of issuing materially misstated financial reports is detrimental to sustainability of corporations. Sustainability reports are expected to be value-relevant to both external and internal users of such reports. Cyber hacking and security breaches of information systems are becoming a reality for many business (e.g., Sony, Target, Morgan Chase) and their risk assessment and controls demand significant IT investment and commitment by directors and offices to prevent their occurrences.
Businesses are constantly changing and becoming more volatile, unpredictable, and complex, particularly during and in the aftermath of COVID-19 pandemic. In this challenging business environment, identification and assessment of risks are crucial to business survival, continuity, and sustainability. Investors typically consider sustainability risks when integrating financial ESP and nonfinancial EESG sustainability performance into their investment decisions. The majority of responding investors to a survey reported that consideration of nonfinancial EESG sustainability issues reduce investment risk and other drivers are enhancing performance and avoiding firms with unsustainable performance and unethical conduct.