Global risks

In today’s interconnected world, business can no longer afford to take a narrow approach to risk management. Warnings about the need to take a holistic approach to reporting are prevalent and organisations such as BlackRock and the World Economic Forum (WEF) have recently been actively sending this message.

When it comes to assessing risk, it is clear that general global risks and those that affect business are now interconnected and it is interesting to examine trends in this area.

The WEF’s Global Risk Report 2018 shows economic risks have been replaced at the top of the rankings by environmental risks. These include extreme weather events, natural disasters and the failure of climate change mitigation/adaptation, which are among the top five risks for both impact and likelihood. 

(Pictured: Larry Fink, Chairman and CEO of BlackRock, in an interview at the World Economic Forum in Davos, Switzerland, on January 21, 2015. Photo by: David A.Grogan/CNBC/NBCU Photo Bankvia Getty Images)

For businesses, however, the global risks of highest concern are still economic risks, according to the WEF’s Executive Opinion Survey. Australia’s top risks are environmental, with the highest concern for doing business being energy price shocks, closely followed by asset bubbles and cyber attacks. For New Zealand it is environmental risks followed by cyber attacks and asset bubbles.

Even so, as the WEF global risks interconnections map2018 shows that all of these risks are interconnected. For example, there is a link between degrading the environment and the risk of energy price shocks. Businesses cannot afford to take a narrow approach to risk management. As risks become more complex and interconnected, businesses will need to find new ways to identify and manage them. 

Investor focus

A wider focus for business was at the core of a 2018 letter from Larry Fink to CEOs. Fink is the CEO and chairman of BlackRock, the world’s largest investment firm with US$6.3 trillion in funds under management. In the letter he states: “Society increasingly is turning to the private sector and asking that companies respond to broader societal challenges … a company’s ability to manage ESG matters demonstrates the leadership and good governance that is so essential to sustainable growth, which is why we are increasingly integrating these issues into our investment process."

However, organisations struggle to understand how they can contribute to wider societal challenges and still create value for their shareholders. The sustainable development goals can help provide a link between the organisation’s strategy and these challenges. 

The UN’s 17 sustainable development goals (SDGs), or global goals, for 2030 include no poverty, clean water, decent work and economic growth and climate action. While responsibility for achieving these lie with national governments, they cannot be achieved without contributions from the private sector.

Integrated reporting can provide a means to publicly articulate your company's strategy to create value long-term. A report from Professor Carol Adams of Durham University in the UK presented to CA ANZ members last year shows how to do this. 

The SDGs can help companies

Last year, the Association for Chartered Certified Accountants (ACCA) released a paper, SDGs – redefining context, risk and opportunity. The SDGs provide a framework to understanding risk and the external environment. The paper notes: “The profession can take a leadership role in connecting the private sector, government and finance with the 2030 agenda.”  

An accounting professional’s skills, including their understanding of risk and reporting, will be increasingly important and technology will be critical as new data sources emerge to meet the measurement demands of the SDGs. 

A report by the Business & Sustainable Development Commission estimates that achieving the SDGs could open up US$12 trillion in market opportunities in food and agriculture, cities, energy and materials, and health and wellbeing, and create 380 million new jobs by 2030. 

Therefore, contributing towards the SDGs represents real opportunities for business develop solutions. 

At a Chartered Accountants ANZ event in December, Ian Woods, Head of ESG Investment Research, AMP Capital, outlined the four different perspectives that large institutional investors maintain on the SDGs.

First, at a very high level, institutional investors invest for the long term and therefore need functional societies in which the economy can operate. Second, they also want a productive economy. Even just viewed from a purely economic perspective, if half the population (for example, women) are not working, that is an ineffective use of a productive resource. Third, investment opportunities can free up capital through initiatives that support the SDGs. Finally at the business level, these macro issues reflected by the SDGs shape the environment in which companies operate. 

Reporting approach

Larry Fink’s letter encourages companies to “publicly articulate your company’s strategic framework for long-term value creation”. Integrated Reporting can provide a means to do this. Professor Carol Adams of Durham University in the UK presented The Sustainable Development Goals, Integrated Thinking and the Integrated Report to CA ANZ members at the same December event, which was co-hosted by the Institute of Chartered Accountants Scotland (ICAS). 

What she made clear is that the Integrated Reporting process is founded on integrated thinking that results in an integrated report. That report is a concise communication about how an organisation’s strategy, governance, performance and prospects in the context of its external environment can lead to the creation of value.

Adams advises organisations that are considering how to contribute to the SDGs to think about the big picture first. She outlines five steps to help them align their value creation process:

• understand sustainable development issues relevant to the organisation’s external environment
• identify material sustainable development issues that include value creation
• develop a strategy to contribute to the SDGs through the business model
• develop integrated thinking, connectivity and governance
• prepare the integrated report

Woods also encourages organisations to consider potential negative impacts: “What externality are you relying on which is not consistent with the SDGs?” and to look beyond the immediate business and into their supply chain. 

Alice Cope, executive director of the UN Global Compact Network Australia, speaking at the same Sydney event, noted that the SDGs were a great opportunity for business but what was also needed was a frank look at the impact of a business. “[For example] if we could get just human rights respected throughout all global value chains, the contribution that would make to the no-poverty goal would be immense.”

Have you considered your organisation’s strategy and its impact in relation to the SDGs? Which goals are you contributing to, and what are the impacts you can rectify?  

 

APRA sets a new green horizon.

Karen McWilliams FCA is the Chartered Accountants ANZ Ethics and Sustainability Leader.