Risk, Value Chain, and Sustainability Connections

Seeing sustainability through the lens of risk and value chain impacts can contribute to long-term success, resilience, and strength. Think about links in a chain; each link is interconnected. Each link strengthens the overall chain. This is allegorical to risk, value chain, and sustainability intersection.

Identifying and managing corporate risks involves confronting environmental and social challenges, which in turn plays to the product lifecycle – including supply chain. These links build pathways to responsible business practices and enhanced performance.

Assess Risks Pertinent to Your Industry, Region, and Customer Segment While Mitigating Intersecting Sustainability and Value Chain Concerns

Below demonstrates the various risks with accompanying examples illustrating interconnectivity with sustainability and value chain.

Financial

Market volatility, economic downturns, interest rate changes, liquidity constraints, and credit risks. These risks impact a company's profitability, cash flow, and overall financial health. From a linked connectivity perspective, companies that do not demonstrate a commitment to sustainable practices may face challenges in accessing capital or may be subject to higher borrowing costs. Failure to meet investor expectations regarding ESG performance and reporting can impact stock prices, shareholder value, and a company's overall financial health.

Example: One of the world's largest publicly traded oil and gas companies faced higher costs of capital due to sustainability concerns. Investors have raised concerns about the company's approach to climate change, its emissions footprint, and its business model's long-term viability in a low-carbon economy. These concerns have resulted in increased scrutiny and pressure from investors, leading to higher borrowing costs and a potential increase in the company's cost of capital.

Operational

Operational risks refer to risks from a company's daily operations. This ranges from supply chain disruptions, to equipment or technological issues, to cybersecurity threats, and data breaches.

Industry Example: Automotive companies, during the height of the pandemic, saw disruptions in the availability of semiconductors necessary for manufacturing. Semiconductors have a pretty complex supply chain- from design to manufacturing. Those vulnerabilities were clear during the pandemic. Delayed production schedules and reduced vehicle output left car makers and other industries like electronics and tech scrambling for new solutions. A few of those solutions included reducing reliance on a small number of regions, diversifying suppliers, and increasing capacity. The hope is that this can prevent value chain issues- specifically supply chain and operational mishaps- we saw during the pandemic when production was slowed down.

Legal and Regulatory

Laws, regulations, and industry standards must be adhered to if you want to avoid fines, penalties, litigation, and reputational damage. Legal and regulatory risks can arise from changes in legislation, labor laws, environmental regulations, data privacy laws, intellectual property rights, and international trade regulations, among others.

Industry Example: Major chocolate makers were accused of child labor infringements in the recent past. Child labor survivors sued several “Big Chocolate” companies, but the Supreme Court ruled that since the child labor didn’t happen on U.S. soil, there wasn’t standing to sue in the U.S. Legal experts suggest that future regulations could result in U.S. companies being accountable for what happens in other countries when it relates to their value chain- and in this case sourcing (cocoa) is part of the value chain.

The connection between regulatory situations and how those situations impact public perception around a company is clear. It matters how a company deals with a supply chain that may use unethical practices-even if those practices are not yet considered illegal. While child labor is a social issue some regions still grapple with regulatory solutions to prevent it when voluntary measures aren’t working. Impacts on a firm’s reputation and finances can be severe.

Reputational

Reputational risks arise from negative public perception, damage to a company's brand, or loss of trust and confidence from customers, stakeholders, and the public. Reputational risks range from ethics concerns, product defects, environmental controversies, labor disputes, poor customer relations, and corporate governance issues. These issues can damage a company's market value, customer loyalty, and stakeholder relationships.

Company Example: VW’s "dieselgate" scandal in 2015, was when VW was found to have manipulated emissions data in its diesel vehicles, resulting in lawsuits, fines, and reputational damage. The company marketed their cars as having lower emissions and received ‘green car’ subsidies in the millions from the U.S. government. Financial risks accompanied reputational decline; VW's stock price dropped, while costs of capital borrowing rose. Environmental risks emerged from cars emitting a higher level of nitrogen oxide pollutants than allowed in the U.S., thus leading to greenwashing claims. VW has since brought in new senior executives, changed strategy (greater focus on electric vehicles) and improved its standing in the public. But it took time to move beyond the financial and environmental damage and the public backlash against the brand.

Solutions

Here are a few steps to consider when solving for interconnected corporate risk management, value chain, and sustainability challenges:

1. Look at the Big Picture and Connected Risks

Integrating sustainability into risk management practices allows organizations to identify and mitigate sustainability-related risks. For instance, climate change impacts, supply chain disruptions, regulatory changes, or reputational issues can pose significant risks to business operations. By considering these factors, companies can develop proactive strategies to address sustainability risks and minimize their potential impact.

2. Optimize Your Value Chain

Sustainability practices can be integrated into various stages of the value chain. From sustainable sourcing and responsible production processes (e.g. cocoa farms) to eco-friendly distribution and preventing greenwashing, optimize your value chain to reduce environmental impact, enhance efficiency, and align with customer expectations. This optimization enforces a holistic approach to sustainable practices and supports an evolved value chain.

3. Manage Reputation and Stakeholder Engagement

Sustainability and risk management can be the difference in a positive corporate reputation and fostering stakeholder trust or a declining business model and loss of revenue. Risk management that incorporates sustainability supports avoiding environmental disasters, ethical controversies, or social injustices. Engaging customers, employees, and investors delivers greater transparency, and may result in long-term partnerships and capital investment.

4. Focus on Innovation

Sustainability can promote innovation. Baking sustainability into risk management and value chain optimization supports identifying new products, cost efficiency, improved brand reputation, and new customer segments. Innovation with sustainability and risks in mind can also create opportunities for impact investment dollars for your company and partnerships with suppliers who share a commitment to climate and social awareness.

Conclusion

Risk management, value chain, and sustainability links create businesses that are evolved and able to withstand future challenges. Strategic approaches that integrate these considerations and solutions can reduce risks while strengthening innovation, societal and environmental impact, and revenue generation.