Financial institutions state that the “non-financial risk” of their business customers is often related to compliance failure, misconduct, technology or operational challenges.
These financial institutions describe non-financial risks as only having a downside. At the same time, ESG investor groups are seeking businesses that use harmonized international standards to improve the environmental, social and governance situations at all facilities and their supply chains.
What Do Investor Organizations Know?
It seems that these ESG investor organizations understand something that the financial institutions are missing. Let’s take the perspective of an organization seeking some level of financial assistance to expand their operations. This organization uses several management system standards that are use the harmonized high-level structure of the International Organization for Standardization. Let’s also assume that the standards include: ISO 14001:2015 (environmental), ISO 45001:2018 (occupational health & safety); ISO Guide 82 (sustainability); ISO 19600:2014 (compliance), ISO 31000;2016 and ISO 26000:2010 (social responsibility guidelines).
After all, it is now easy to integrate management system standards to improve the sustainability of the organization. If a financial institution were to invest in an organization with a sustainability management system, as described above, that financial institution could experience a significant upside to risk for that customer.
Risk and Context
Risk is defined differently based on the perspective of the organization. Business operations that use management system standards see “risk” as the “effects of uncertainty” on meeting their strategic objectives. Compliance failure, misconduct, technology or operational challenges are “effects of uncertainty.” There are many more such effects of uncertainty that are caused by an external operating environment that is subject to volatility, uncertainty, complexity, and ambiguity (i.e. VUCA).
All of the international management system standards require the users to conduct a scan of the external and internal operating environment of each of their facilities. They use well-established tools like PESTLE and TECOP to define the context of the operations (i.e. Clause 4.1). The opportunities and threats that are identified using these tools are managed in the planning portion of the international standard (i.e. Clauses 6.1 and 6.2). These harmonized high-level structure management systems are relatively new and the users of these systems are still learning how to address the effects of uncertainty in their plan-do-check-act (PDCA) programs. Fortunately, these management system standards are written to support the PDCA systems.
So, we have learned that the financial institutions and the businesses have different perspectives on risk. In fact, there are many different perspectives on risk in the legacy management systems that still need to be resolved. However, with a management system designer that is well-versed in spotting and resolving these inbred perspectives, it is possible to create a management system that would support an application for a loan from a financial institution. They certainly would become a darling investment opportunity for an ESG investing group.
The problem with “perspectives” is that organizations are reluctant to part ways with their inbred perspective or to put it aside in situations like a financial institution asserting “non-financial risk” as the reason for not permitting a business loan to a company that is using international management system standards and understands risk as the “effects of uncertainty.”
We have not even touched upon the enterprise risk management (ERM) perspective that both parties must deal with on top of this situation. Perhaps the biggest problem here is “risk” itself. Why does risk perspective have to be so difficult to understand and use, to the mutual advantage, by organizations that seek to do business with each other? Understanding different perspectives of risk rather than just arguing for a selected perspective of risk would be a great start!
Bio:
Robert B. Pojasek, Ph.D.
Harvard University & Pojasek & Associates LLC
Risk Management & Organizational Sustainability
rpojasek@sprynet.com
(781) 777-1858 Office
(617) 401-5708 Mobile & Text
www.linkedin.com/in/bobpojasek
Organizational Risk Management and Sustainability:
A Practical Step-by-Step Guide
Now available as an e-book
http://tiny.cc/xz3fhy
Also available as an online action learning course
Expert as environment, health & safety, and sustainability professional with a record of providing leadership, training and operational support to all levels of the organization; Implements new and revised management systems to drive EHS/sustainability program conformance throughout the operation; Integrates organizational systems of management using the ISO harmonized high-level structure; Provides support for organizations implementing sustainability/risk management practices featured in my book.