Risk management continues to be a topic of interest for businesses, investors, and regulators alike. A new report from the World Bank details how businesses need to adopt risk management practices that include strategic thinking, transparent processes, and the identification of risk factors. While these are important, they don’t address the real issues around risk management. In its simplest form, risk management is about identifying risks and then taking steps to address them. This might involve putting in place policies or procedures to control risk exposure or using hedging strategies to mitigate risks that cannot be eliminated. The challenge is not just what is required but how it needs to be implemented in order for business sustainability to become a reality.
Globally there are three critical elements identified for successful risk management. These are:
- Strategic thinking – It is not enough to see the risk; you need to anticipate it and work on its prevention. This means understanding your business and how risks may affect it in the future.
- Transparency – A key element of risk management is being able to communicate information about a potential problem or issue with stakeholders. For example, if your company operates in a market where there is a high likelihood of conflict, you need to be able to share that information with investors and regulators as well as employees so they can prepare for any eventuality.
- Identification of risk factors – Risk management cannot be effective without first identifying all the potential risks that could affect your business. This will allow you to take control before risks escalate and threaten your business’s sustainability.
Interestingly, one of the reports by The World Bank on risk assessment highlights the need for businesses to adopt risk assessments that are robust and involve the identification of risk factors. The big challenge is, however, in implementing these assessments and then turning them into a strategic plan that can be communicated to all stakeholders. Achieving a sustainable business is not just about understanding risks but identifying which risks need to be managed and how they will impact what you do. For example, if your business is in the oil and gas industry, this could include assessing how changing fossil fuel prices affect your operations. It might also mean understanding how a new competitor entering the market could impact your profitability or where this new competitor may have the edge over you in terms of product quality or customer experience. Business sustainability requires effective risk assessment that identifies risks and then outlines strategies for mitigating them before they become problems.
Risk Treatment Plans
Risk treatment plans need to be designed to deal with the reality of the situation and not just what is theoretically possible. This means they should capture the current context, identify risks, assess their potential impact, and design a response plan that is aligned with the company’s objectives. A risk treatment plan isn’t about designing a policy or procedure but about designing a plan for how to address various issues that might arise from an event. The risk management process needs to start by identifying what it takes to make business sustainability a reality for your company instead of just trying to minimize some theoretical risks. It needs to be grounded in reality, not just theory.
Risk Advisory services are aimed at helping a business understand the risks it faces and minimizes such risks. It makes clearer how to address the risks that are inherent in any business. However, there is a need for risk advisory services that can provide tactical advice to help businesses manage and mitigate risk. Risk advisory services would also be key to addressing the challenges of business sustainability. They would ensure an effective approach to risk management strategy – one that includes strategic thinking, transparent processes and identification of risk factors. In today’s world, businesses cannot afford not to have access to such services. They offer the likelihood of sustainable business practices by integrating foresight into current practice.
The key question about risk management is how it is implemented. The reality is that businesses need to identify the risks they are exposed to and then understand the likelihood of them happening. They need to be able to quantify how much they might lose in terms of money or reputation if a risk were to occur and then decide on an appropriate response. For example, what would happen if a company didn’t have enough cash reserves? What would happen if there was a major problem with their distribution channels? What would happen if they had an environmental disaster? These are all things that brands should worry about and plan for ahead of time. If you want your business sustainability to be reliable, you need to have strategies in place for addressing major risks.
ISO 31000 Standard
The ISO 31000 standard is a benchmark for risk management and provides guidance on how to manage risk. The standard provides a framework of the key elements that should be included in effective risk management. This includes the identification and assessment of risks, their significance, and the likelihood that they will occur. It also highlights strategies for both prevention and mitigation, including the monitoring of risks on an ongoing basis. The ISO 31000 standard also recognises that business sustainability cannot be achieved by just focusing on what’s required as part of good risk management practice. Local, national, and global organisations need to work together to create an environment that supports business sustainability. Risk managers should demonstrate leadership by understanding their organization’s role in this ecosystem, promoting best practices, and encouraging feedback from all stakeholders.