Why sustainability is a risk management issue

As leader of the  Federation of European Risk Management Associations’ (FERMA) sustainability group, Valentina Paduano believes that risk managers have a key role to play in promoting sustainability in their organisations. Sustainability risks need to be managed just like other types of risk, and that includes breaking down silos and promoting a joined-up approach to the issues they present.

Paduano, who is chief risk officer and sustainability director at Sogefi Group, a multinational company producing components for the automotive industry, says the problem is often that companies do not take an active approach to managing sustainability risks.

“Sustainability is often perceived by companies as a box-ticking exercise, and this can be a problem because no real attention is being placed on how the responsibility is relevant for the company and can create added value,” she says.

“Risk managers can help sustainability colleagues. Our main target is to adopt a risk-based approach to the sustainability process—and this means you should have a sustainability risk assessment.

“Sustainability topics must be considered as well as other business topics. They are not something different—they are at the same level as issues such as operational risk or financial risk.”

FERMA is developing sustainability guidance that explains how achieve this integration, with the aim of demonstrating that it is not as complex to apply as it might appear—as long as risk managers have the commitment of other colleagues in the organisation.

In Paduano’s opinion the biggest issues relate to a limited knowledge of sustainability risks within organisations, and the fact that these risks require a set of competences drawn not only from the risk manager, but also from colleagues in other departments. As it is a relatively new area of risk, Paduano likens sustainability to cyber risk.

“We have the same situation as when we were assessing cyber risk for the first time,” she says. “In the beginning nobody had the knowledge to understand cyber risk. With this example we needed to have the cooperation of the IT dept, and now we are in a similar situation: the matters that are relevant for sustainability require specific competences in order to understand how we can manage this type of risk.

“When we speak about carbon dioxide emissions, or water management, or energy consumption, these require specific expertise—from operations staff and technical engineers, for example.”

Financial concerns
A more recent layer of complication has been created by COVID-19, which has placed a large number of companies in financial difficulty, making financial recovery their main priority.

“This means that other investments and other activities that are not strictly linked to the financial coverage automatically became second or third priority—and within these there are some sustainability markers,” says Paduano.

However, many companies are missing the relevance of sustainability to their current situation.

“When we speak about flexible working, we are in reality speaking about all the sustainable matters,” says Paduano. “Companies do not understand that in reality we are discussing implementing actions that have relevance to sustainability.”

As risk managers work to keep sustainability on the agenda, they have the added complication of keeping up with European regulations.

“The context is very dynamic and there are a lot of regulations,” says Paduano. “It is very difficult first to understand in concrete what these regulations are asking of the companies, and then to understand the impact on the business of the company.

“They require, for example, that companies perform a risk assessment—but the way they should do this is not clear, so each company has to think about how to approach it in an individual way. There’s also the issue that some of the information is not comparable between different companies, and each has to decide how and when collect specific information—there is a lack of clear instructions on that.”

With this in mind, one of the purposes of FERMA’s sustainability committee is to keep pace with European sustainability regulations.

“One of our activities is to follow the European agenda on these topics and provide a clear message on that—within FERMA we have a member of staff who is specialised in EU matters and very helpful on clarifying these regulations,” says Paduano.

Looking to the future, she believes that risk managers need to find opportunities to communicate the importance of the risk management approach in providing value to the business around sustainability.

“Risk managers should try to create the opportunity to start such discussions, stimulating management to address these considerations,” she says. “Management are busy and don’t always have the time to think out of the box—but the COVID-19 crisis has opened the door to new ways of working.”