A reliance solely on reporting as a means to manage environmental risks could limit companies' future ability to thrive, write Forum's Director of Futures and Strategic Initiatives, Ariel Muller, and Forum's Principal Sustainability Strategist - Purpose of Business Transition, Gemma Bridgman.

First published on BusinessGreen and republished, with permission, here.

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A study published in September told the world that the Earth's life support systems have been so damaged that the planet is "outside the safe operating space for humanity." Of the nine planetary boundaries that enable a safe environment, humans have exceeded six: climate change, biosphere integrity, freshwater use, land system alteration, biogeochemical flows, and novel entities (meaning human-made pollution, such as microplastics and radioactive waste). While atmospheric aerosol loading and ozone depletion are still within acceptable limits, ocean acidification is nearing the threshold.

A planet that is no longer safe for living on today poses an existential risk to every person and organisation. But it's doubtful that, upon hearing the news, anyone adjusted their organisational risk register, changed their materiality matrix, or considered whether industry as a whole might need to rethink how it manages risk. Maybe it's time that we do. After all, a response that maintains the status quo is one that will continue to drive us over planetary thresholds.

For sure, in the last few years, new frameworks have been introduced that are prompting businesses to adopt a broader approach to understanding how businesses' contribute to and mitigate risks. Double materiality reporting, which considers both an organisation's impact on the environment and society - an outward focus - and the impact of external factors on the organisation - an inward focus - is certainly a step forward in the right direction. Moreover, the launch of The Taskforce on Nature-related Financial Disclosure (TNFD) framework encourages much-needed investments in nature-positive outcomes and catalyses business action to address biodiversity loss. If it achieves its full potential, TNFD should enhance transparency, accountability, and comparability for companies obligated to disclose information to regulators and stakeholders in regards to nature impacts.

These are all important and necessary steps, especially as they recognise the role of business in contributing to long-term risk creation for all. However, as we enter into unprecedented territory, a reliance solely on reporting as a means to manage risks may fall short of helping businesses and investors prepare for the decision ahead - particularly when those leading business transformation are charged with the dual objectives of adapting to a new climate reality, and transforming the current business models to regenerate natural resources and to address rising inequality.

How current approaches may fall short

There are three shortfalls we'd like to highlight.

The first is that approaches that rely on reporting materiality can fall short in their assessment of risks because they predominantly focus on immediate impacts, fail to account for long-term risks, and thus, in the new operating context, become quickly outdated. Furthermore, in many organisations, materiality assessments and financial risk assessments are conducted by separate teams, which can lead to a lack of coordination and alignment between these efforts - inadvertently undermining an organisation's ability to respond to unanticipated disruption with agility. This siloed-approach can miss the interplay between sustainability risks and financial risks, and potentially contribute to internal friction and underinvestment in material risks to the future of the business.

Secondly, risk assessments may aim to protect and strengthen ‘what is' within the current business model rather than catalyse investment into the much needed transformation into more resilient business models of the future. This is especially important as we face the dual challenge of navigating the need to respond to a new climate environment while also needing to transform our business models. We need to build the capability to anticipate what might happen so that we can restart from an improved position, rather than reinforce old systems that might continually set us back.

Thirdly, current risk assessment approaches often underestimate the inherent uncertainty of a more complex systemic risks environment we're facing in the decades ahead. Complex climate feedback mechanisms, uncertain timing and severity of climate events, and the cascading social and environmental impacts from these events are very difficult to predict. We can no longer use the past as a precedent for assessing risks in the future. Failure to understand the degree of uncertainty may result in underestimating the potential consequences and vulnerabilities associated with a rapidly changing climate.

From managing risk to building response agility

 These shortfalls speak to two key implications we'd like to emphasise in regard to managing change and transforming business models in the new risk environment: the importance of building an ‘anticipatory mindset' and the importance of understanding how governance models inform our ability to effectively respond.

An anticipatory mindset is a proactive approach that involves foreseeing, preparing for, and adapting to future developments and challenges - at its core it's about being aware of what the future might hold. Individuals with an anticipatory mindset are familiar with trends, analysing data, and thinking strategically to prepare for what might lie ahead. Building this capacity, whether it's across a team, an organisation, or even across a supply chain ecosystem, will increase the likelihood of being able to transform through disruption and crises rather than being set back.

The emphasis is on building the capabilities of people to be prepared to navigate the challenges that lie ahead - particularly, in an organisation's future ability to thrive as the climate crisis intensifies as the science indicates they will. Ikea provides a good example of a corporation taking an entirely new approach to managing risks. The company has adopted a more flexible approach to strategic planning by using "scenarios" instead of specific annual goals. This approach allows them to adapt to changing circumstances and recognise the possibility of various outcomes. Importantly, it's peoples' mindsets and cognitive agility that contribute to the company's long-term resilience.

The second key implication is to explore the internal and external governance structures for managing risks. Exploring how the future might unfold without exploring how decisions will be made in response to what's being observed will undermine any efforts to be forward thinking. Ensuring there is an integrated approach within the organisation to identifying risk, and the intensity of each risk, is essential. This prevents different yet complementary assessments being conducted in siloes, and allows the organisation to have a greater perspective of the nature of the risks that it's facing thus being in a better position to respond.

New governance models and deeper collaboration not only within organisations, but between organisations, across sectors, and across supply chains will help businesses to tackle and navigate the unprecedented nature of some of the risks that we're facing. Actions such as signing petitions or adding a name to a letter to lobby policymakers and governments are important, but they aren't sufficient enough to create the systemic change needed to reduce the risks from the climate crisis that businesses - and society - are increasingly being forced to face.

The requirement for businesses to report more about their risks is typically aimed at increasing transparency and accountability, both for the benefit of the business itself and its stakeholders, including investors, regulators, and the public. While enhanced reporting and transparency can provide valuable information about a company's risk exposure and risk management practices for its stakeholders, it may not necessarily prepare a business to survive - and crucially, to thrive. Systemic transformation is urgently needed to repair the damage to the Earth's life support systems so that once again, we can live in a safe, habitable environment.