Adding sustainability to the risk framework
Sustainability has become increasingly important to organisations across the world in recent years, as both a business objective and a necessary constraint. But what does it mean? And how should it be included in the risk process?
The word sustainability has changed its meaning significantly over time in the business world. At first it only referred to impact on the environment. Then in 1995 John Elkington from British consultancy SustainAbility introduced the idea of the ‘triple bottom line’ of ‘Profit/People/Planet’, suggesting that an organisation needs to be sustainable financially, socially and environmentally.
More recently, work on sustainability in 2007 by the Forum for the Future expanded this further, identifying five areas that contribute to the production of value by an organisation, and which need to be managed sustainably. They call these The Five Capitals of Sustainability. They are:
- Natural Capital: This represents the environmental and ecological resources that are needed to produce goods or deliver services. They include energy, water, fuels, raw materials and other natural resources, as well as the ecosystems from which these are taken.
- Human Capital: This is not just about individuals as resources, but it also covers their energy, health and wellbeing, knowledge and skills, motivations and emotions.
- Social Capital: This describes the way that people interact in the various teams within organisations. It is also about how people relate through other networks, partnerships and less formal groupings.
- Manufactured Capital: This covers material goods and infrastructure used by an organisation to generate its products and services, but which are not part of the delivered output. It includes buildings, machines, tools, communications networks, IT systems etc.
- Financial Capital: These are assets that exist in currency form, including cash, shares, bonds and loans.
Each of these Five Capitals forms part of the value chain which an organisation uses to generate its goods and services. The challenge is to use these different types of capital in a way that is wise, efficient, effective and sustainable.
The Five Capitals of Sustainability can also help us to identify and assess risks, because they describe elements that are required in order to create value. Too often we only consider risks that affect time and cost, with the possible addition of performance or quality impacts in some cases. But if risk is ‘uncertainty that matters’, then there are many other things that matter in addition to schedule and budget, especially when we are considering risk outside the project or program context.
In order to take a sufficiently wide view of ‘uncertainty that matters’, we should ensure that our risk approach considers risks to each of the Five Capitals, because any uncertainty that affects one of them would have a direct impact on our ability to create value through our products and services. This is particularly important at strategic or corporate level, if we wish to ensure sustainable value creation for the future success of our organisation or business.
This briefing was originally published as ‘Including Sustainability in the Risk Framework‘ and has been reproduced with permission.