Sustainability: Reducing risk is the reward

by Dan Chow, MEM/MBA ’15

This article was written in response to a seminar given by Terry Yosie, PhD, President & CEO of the World Environment Center, in an EDGE Seminar on Oct. 2, 2013 at Duke University’s Fuqua School of Business.

Many companies have reached the point where they need to switch from a low-hanging fruit approach to sustainability and begin making changes that reimagine entire industries. Unfortunately, our current economic, political, and educational institutions are not geared towards creating that kind of shift in thinking. Our recent seminar speaker, Terry Yosie, did an excellent job of re-framing that problem as an opportunity for up-and-coming business leaders. Most importantly, he talked about how the greatest value that sustainability offers often comes from reducing uncertainty and risk rather than the “win-win” cost savings that seem to be the focus of sustainability departments today.

I worked in the sustainability department of a large Fortune 500 company this summer, and my team needed to build a business case for every project that was proposed. More often than not, that requirement led to a robust analysis of the expected economic benefits and a much more qualitative assessment of the “intangible” benefits such as positive PR or a reduction in environmental impacts. Predictably, that approach led to the economics of a project being weighted more heavily since they could easily be compared to other projects at the company. A glaring issue with that process is that risk reductions usually represent the largest source of value for the system-wide sustainability efforts that will actually change an industry, and they are usually categorized in the intangible section of a business case.

This happens because risk is very difficult to quantify. In fact, humans are actually hard-wired in a way that makes us bad at understanding risk. On top of that hurdle, the complex analytical techniques that are being developed to measure environmental risk reduction are often not granular enough to act on at a company level. For instance, sea level rise represents a huge concern for businesses, coastal cities, and even countries, but Dr. Yosie explained that models that predict sea level change are regional and imprecise. Lastly, the challenges that sustainability leaders are trying to address are hugely complex and multivariable, which means that a single change is unlikely to have an impact no matter how big it is relative to the firm.

For those reasons, the perception that the risks associated with the most pressing environmental challenges can’t be controlled is very real in all parts of society. Dr. Yosie mentioned that “ignorance is bliss,” and there are many instances where that way of thinking is still applied. The problem is further exasperated by how the system is set up; currently, there are few considerations for the interconnectivity between sectors and industries. For example, Dr. Yosie talked about our education systems churn out individual problem solvers instead of system thinkers and builders; he discussed how businesses’ largest environmental impacts are actually their customers’ actions; and he even walked us through the adverse legal implications if companies work together to set up industry standards due to antitrust laws. Working within that framework, it is very easy to see why people often throw up their hands, characterize risk-reduction as an intangible benefit, and look to the cost savings for an apple-to-apple comparison of projects.

The good news is that forward-thinking individuals and organizations realize that a lot of value is being left on the table, and they are coming up with innovative solutions to the structural and technical issues. Specifically, Dr. Yosie used the example of how the World Wildlife Fund (WWF) is bringing together key players in order to integrate sustainability throughout their industries. By doing this, WWF allows businesses to avoid legal challenges, make large-scale changes, and split the costs of implementation across a wide group of people. WWF is also part of The Natural Capital Project, which aims to solve the challenges around measuring environmental risks while also providing tools that allow businesses and local governments to quantify the risk-reductions that a given project creates at a level they can act on.

In the end, Dr. Yosie’s presentation provided a road map for moving away from small, token actions to large systematic changes based on understanding of risks and the value of addressing them at an industry level or higher. However, he also cautioned that the road he described is difficult to navigate due to the fast pace of change and the huge amount of disruption that it requires. To survive and thrive, companies will increasingly need leaders who understand environmental risks and can address problems at a system level. This will not be an easy task, but in this case knowing your risks and minimizing them is the greatest reward.

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