The financial crash and events such as Hurricane Sandy and the flooding which engulfed parts of England and Wales illustrate the importance of companies ensuring they are resilient to possible shockwaves, as Mike Scott reports
The world of commerce has become much more complex in recent years, with supply chains becoming longer, more stretched and geographically diverse. These developments provide benefits for business, such as cheaper labour, access to a wider range of resources and increased flexibility. But they also introduce new risks, including a lack of transparency – think of the UK horsemeat scandal in 2013 – and increased opportunities for supply-chain disruption.
In addition, the range of issues considered material to companies has expanded to include factors such as climate change, labour conditions in the supply chain, conflict minerals produced in war zones to finance the fighting and resource scarcity.
“Profitability is not just about the amount you earn, it’s also about the costs you incur,” says Richard Waterer, head of risk consulting at Marsh, the insurance broker and risk management consultancy. “Resilience is about being nimble, flexible and able to react to whatever life throws at the business. This flexibility is vital for business. No company operates in isolation any more – they operate in very long and complex value chains.”
Resilience is the ability of a business to recover from an issue, whatever it might be, says Justin Lyon, chief executive of Simudyne, a company whose technology allows businesses to simulate a range of scenarios to enable them to plan for unforeseen events. “A lot of businesses pay lip service to it, but a lot of people are not considering all the scenarios they might face,” he says.
FOUR MATURITY LEVELS
There is a “maturity curve” when it comes to how companies deal with such sustainability issues, says PE International, a sustainability as a service firm, with businesses typically positioned at one of four places on the curve. There are those that are focused on complying with the growing number of rules and regulations related to energy use and carbon emissions; those that are starting to respond to requests from customers; those that are more engaged and pro-active and, for example, submit information about their emissions to organisations such as the Carbon Disclosure Project; and finally, those that are looking to shape the future.
It is effectively about future-proofing investment streams
“You can just take a compliance approach and make sure you do everything the regulators tell you to, but no more. However, if you take this approach, then the implications of change will be dictated to you and your company by regulators, your stakeholders and system boundaries. There is a good chance that in ten years’ time, you will no longer be in business or you will be struggling to survive,” says Jim Fava, PE’s chief sustainability strategist.
“But if you become truly engaged with the sustainability agenda and take a long-term approach to it, you will be in a good position to pursue the opportunities that sustainability offers and shape the future. We are beginning to see examples of companies that have taken this path, such as Unilever, reaping the rewards,” he adds.
The businesses that are most focused on business resilience are at the most mature end of the curve, says Julie Hirigoyen, UK head of sustainability at real estate consultancy JLL. “They are not just looking to de-risk their operations or reduce their impacts. More importantly, they are looking at longer-term business resilience and at how to turn business risks into opportunities. For these enterprises, by and large, their sustainability strategies will be the same as their core business strategies.”
She welcomes evolving accounting and reporting guidelines, such as integrated reporting, “which forces businesses to think about their reliance on the different types of capital – human, natural, social, manufactured and financial – and to analyse the key risks in their supply chains”.
In the last few years, company boards have become more interested in the idea of resilience because the tolerance of investors and customers to unanticipated losses has reduced, says Marsh’s Mr Waterer.
Investors are bringing more pressure to bear on the companies they invest in, partly because there is so much more sustainability information available than in the past and partly as a result of the increase in financial instruments such as green bonds, which ring-fence the money raised for sustainable activities, including installing renewable energy capacity or energy efficiency measures.
“This is not just attracting green investors,” Ms Hirigoyen says. “There are a lot of mainstream investors who just think these are more resilient investments. It is effectively about future-proofing investment streams.”
The proof of this was illustrated in the property sector during the financial crisis, according to Ursula Hartenberger, head of sustainability at the Royal Institute of Chartered Surveyors. “Everyone thought sustainability would be off the agenda because it was an add-on and people did not have time for add-ons. But actually, because the market was stagnant, those buildings that could provide better value for the future were easier to market and so more resilient,” she says.
“By contrast, buildings that are not performing so well are at risk of obsolescence and a whole bunch of existing building stock has been devalued. This is a big risk, and the larger investment houses and owners have tried to adapt their portfolios accordingly.”
Companies are recognising the value of spending more time focusing on resilience, Marsh’s Mr Waterer says. “The true test, though, will be when the next major catastrophe comes along, and we see which businesses recover fastest and which don’t make it,” he concludes.
TOP FIVE TIPS FOR A RESILIENT BUSINESS
- Identify your risks, but…
- Look for opportunities
- Know your value chain
- Expect the unexpected
- Take a long-term view