Adapting to the Evolving Business Terrain: Managing Sustainability Risks & Opportunities
2023 has been a phenomenal year in the business world and Nigeria. The Russia-Ukraine war has stressed and disrupted the global supply chain. It has brought to light the power dynamics created by the distribution of natural resources and re-emphasized the significance of demand and supply to decision-making and development. In Africa, Coups in certain countries tested the peace and security in the region. There is increasing attention on sustainability and climate risks as the global temperature peaks. Indeed, there is a stronger call for corporate sustainability and the need for organizations to deliver value for all stakeholders. Looking at it holistically, the business focus is shifting, and the changes to the business world must be anticipated. In Nigeria, the business environment has to deal with increasing inflation, unstable forex, and changes in the political and regulatory environment. What is clear is that the shifts in all spheres pose both risks and opportunities to business. Indeed, you can refer to this as sustainability-related risk and opportunities, a term used by the International Sustainability Standard Board (ISSB) in its IFRS standards.
So how does a business prepare for the changes in the business environment? This article will explore the sustainability-related risks and opportunities and how businesses can prepare for the new year.
Source: CIM (OROM),2020
Before going into the specific sustainability risks and opportunities to be discussed in the article, let’s understand the risks and opportunities. According to the International Organization for Standardization (ISO), risk is the effect of uncertainty on objectives. Simply before something can constitute a risk, it must affect an objective. Suppose the objective of a business is to achieve less than 2% downtime for production. Then, poor health and safety culture causing accidents will affect that objective. Thus, a poor health and safety culture is a risk. To properly contextualize this, it is a negative risk. According to the Committee of Sponsoring Organizations (COSO), risk is defined here as the possibility that an event may occur that adversely affects the achievement of enterprise objectives. It is important to understand that risk is a constant in the business world. Market risks, credit risks, financial risks, legal risks, etc., exist and can affect the business objectives. These objectives to follow Milton Friedman is to maximize profits. So, if risks are constant, one can infer that the core duty of a business is to manage risks to achieve the business objectives. In this regard, we can look at how risks (negative risks) can turn into positive risks and opportunities. Again, using the example of the poor health and safety culture we identified as a negative risk, you can consider activities to remedy these as opportunities for business improvement. If, through proper risk management, the health and safety culture is improved, then there will be limited disruption to the business. Business can satisfy their stakeholders, which translates to better outcomes. Businesses do not occur in a vacuum but face both financial and non-financial risks.
Climate-related risks and opportunities
Climate change has emerged as a significant challenge of the 21st century. A basic understanding of the science will elucidate why this is so important. The planet functions optimally as a stable system. However, that equilibrium is changing due to our activities, and the interconnectivity of earth systems means we can expect unprecedented changes in our core systems. In 2023, we witnessed increased climate-related disasters such as drought, flooding, wildfire, and other events causing loss of lives and livelihood. The task force on climate-related financial disclosures (recently disbanded at COP28) has identified two ways this can constitute business risks. In the first instance, climate-related disasters disrupt business operations and supply chains and lead to loss of finance. Imagine you own a poultry farm with 1000 birds, and due to excessive rainfall, the pens are flooded, and all the birds are lost. Without sugar-coating it, you have incurred a lot of debt. One may argue insurance should cover it, right? However, insurance is designed to mitigate risks that can be foreseen, and climate-related disasters cannot often be captured in the present insurance framework. This risk that affects business operations and infrastructure constitutes the physical risks of climate change.
Let’s consider transition risk. A consensus is the need for the world to transition to a low-carbon economy to deal with climate change. This involves using other sources of primary energy and innovations in low-carbon technologies. This poses a challenge for the high carbon-dependent economy. For instance, the COP 28 consensus advised nations to transition away from fossil fuels with a cap on 2050, 27 years from now. Think of coal power plants and petroleum companies; what happens to their assets? Yes, it seems there will come a time when they are no longer needed or valuable and become economically obsolete. So, it becomes stranded assets. What of the workforce in those industries? They may not have a job if they cannot adequately upskill. There are also challenges with the adoption of new technologies, which can cause operational risk. These are the transition risks from climate change due to the anticipated shift to low low-carbon economy.
How can businesses manage these risks and capture the opportunities associated?
There is a time bomb on the fossil fuel industry. The COP28 outcome is said to be the beginning of the end of the sector. So, it is an excellent idea to de-risk the investment portfolio away from the high-emitting industry. For instance, as a financial institution, the focus should be on sustainable investment and creating value for all stakeholders. Indeed, a good risk management strategy for climate change will be comprehensive carbon management. This includes stress testing and reducing carbon emissions in business operations and the supply chain. So, the opportunities exist in renewables, carbon markets, and climate financing. The way forward is to have a strategy to integrate these risks into the organization’s enterprise risk management.
The regulatory environment constitutes certain risks to business activities. The Opay-ride hailing business and ban from the Lagos State Government are good examples of this. It could also posit opportunities; Touch and Pay Technologies and Lagos BRT come to mind. Regarding expectations for 2024 regarding sustainability-related risks and opportunities, we know Nigeria has passed the Climate Change Act 2021, which placed expectations on businesses with more than 50 employees on emissions reduction. The Student Loan Act if operationalized, will also require firms to do certain things and other regulatory frameworks around tax. Notably, the carbon market was activated, and the Electricity Act 2023 also means some changes to the business environment in those sectors. Managing these means thoroughly analyzing how these can affect the business and developing risk management strategies to avoid the risks and maximize the opportunities.
In 2024, new regulations may come in place on managing environmental aspects such as waste management. Either way, a sustainable model for business is compliance.
Focus on renewables
The Federal Government of Nigeria has a 30:30:30 target to generate 30 % of electricity from renewables by 2030. The COP28 saw declarations to triple investment in renewables to at least 11,000 GW by 2030. There are expectations that the Decentralized renewable energy sector will see more investment as financial institutions attempt to capture value in the low-carbon economy and green their investment portfolio. The Electricity Act 2023 has provided a suitable environment for investment in DRE by removing the bottlenecks. 2023 also saw the commissioning of the solar manufacturing plant in Nigeria, Auxano Solar, a 100MW capacity solar panel manufacturing plant in Lagos. As businesses are looking to participate in sustainable investment and increase the share of renewables in their electricity mix, the renewable energy sector signals much optimism in the new year.
Workplace health and safety
Health and safety fall into the social dimension of sustainability and ESG. It is about the people and how the business impacts them. Are people safe at the workplace? What is the quality of life? How well is the organization managing the hazards in the work environment? Stories abound in Nigeria on our workplace’s poor health and safety management. Health and safety should be considered a moral obligation; you don’t need the law to say, hey, don’t let any worker get their hand cut off due to lack of machine safeguarding. Towards the end of this year, we saw some clampdowns on manufacturing companies and closure by the Ministry of Labour and state regulators. Some organizations were also affected by the fire outbreak. The risks and opportunities associated with health and safety are always unmistakable, and managing them offers better returns for organizations.
Organizations must implement measures to improve the health and safety culture in the new year.
The present model of production generates enormous waste as a negative externality. We have the plastic waste problem, industrial waste, and managing residential waste. Interestingly, there is a concern about the end-of-life management of low-carbon technologies. A solar panel will work for 20 years, 25 years at most, so what happens? Wind blades also have a lifespan, as do solar energy system batteries.
In July 2023, Norfund, a Norwegian Investment Fund, committed EUR 2 million as a convertible loan to Wecyclers Nigeria Limited, a recycling company based in Lagos. This represents a significant investment in the recycling industry in Nigeria and hopefully will increase the recycling rate of plastic in Nigeria.
There are enormous challenges with waste management, and opportunities exist for organizations to adopt sustainable waste management principles of 3R and partner with the right firm to recycle waste from their operations.
What are you thinking of doing differently in your waste management in 2024?
From impact material to financial material, sustainability reporting informs various stakeholders on how the organization manages sustainability-related risks and opportunities. This information is meant to enable the decision-making of these stakeholders with an investor-driven decision at the forefront. In 2023, the IFRS published the ISSB S1 and S2 as financial material disclosure standards based on the work of SASB and the TCFD. The Financial Reporting Council of Nigeria in November 2022 expressed interest in adopting the standard expected to commence in 2024. So, the sustainability reporting landscape in Nigeria will most likely see the adoption of the ISSB standards for reporting once the FRCN has issued a comprehensive guideline. The operationalization of the Climate Change Act and requirements on reporting emissions also forecast a change in the reporting landscape in Nigeria.
Customers are the lifeline of the business. They pay for services or goods and represent the source of revenue to cover the OPEX and the company’s profit. Thus, a good company prioritizes the customer and clients and meets quality, affordability, and satisfaction requirements. Customers are becoming more aware of their rights, and the advent of social media means it is easy to express dissatisfaction with an organization. Companies must, therefore, consider engaging and satisfying the customer as more than a business imperative but a crucial part of sustainability strategy. Creating value for customers has good returns on investment, and socially responsible organizations must consider customer satisfaction a necessity.
In conclusion, sustainability-related risks and opportunities represent an increasingly important dimension in the business landscape. Risk management has evolved beyond the financials but must include the non-financials and the ESG risks. Therefore, forward-looking and proactive organizations must evolve to anticipate these risks, deploy risk management measures, and track performance toward contributing to the triple bottom line. 2024 will bring a new focus to corporate sustainability, responsibility, and expectations, and managing risks and opportunities is the key to delivering value to all stakeholders.
Thank you for reading, and feel free to reach out and see how we can support you in integrating and capturing values from sustainability.