RISK MANAGEMENT & SUSTAINABILITY
Risk and Social Impact Assessment
Warren Buffet once said that “risk comes from not knowing what you are doing.” In short, the job of risk managers is to know what the enterprise is doing and therefore reduce risk or at least control for it. Due to the complexity and global nature of modern business operations, one of the areas where many companies may “not know what they are doing” is social risk.
Social risks are compounding and impacting economic growth and business value. For example, inequality has cost the U.S. economy $22.9t since 1990, according to research on the financial risk of inequality in Bloomberg from the Federal Reserve Bank of San Francisco and others. International Monetary Fund (IMF) research shows “the wealth gap between American whites and Blacks is projected to cost the US economy between $1 trillion and $1.5 trillion in lost consumption and investment between 2019 and 2028. This translates to a projected GDP penalty of 4 to 6 percent in 2028.”
Meanwhile, Deloitte’s Global Human Capital Trends survey has shown CEOs name social impact as “the top success factor for annual performance.”
Clearly these figures represent risks–social risks–that arise because we don’t know what we are doing–or at least we are not seeing it, not measuring it and not managing it. Therefore, enterprise risk managers are uniquely capable of helping to identify, evaluate and mitigate these types of social risks.
ERM can help us to know what we are doing and thus lower risks to the enterprise and society.
Case Studies of Social Risk
Cambodian Sugar Plantation: Adding Jobs but Subtracting Livelihoods
A Cambodian sugar plantation and processing plant in Cambodia created much needed jobs but at a cost. The investment in the operation appropriated grazing land, restricting access to forest land where locals had previously harvested non-timber products. Moreover, serious water pollution resulted from the discharge of chemicals from the plant.
Source: World Bank “Environmental and Social Impact Assessment”
Mining Lithium in Chile: electrification at what cost?
The mining of lithium is critical for vehicle electrification but comes with steep environmental and social costs which must be identified and assessed. The president of Chile saw this as an economic opportunity and invited bids from private companies to grow lithium production to 400,000 metric tons a year. However, there are significant concerns over environmental and social risks from deforestation to pollution to indigenous peoples’ rights.
Source: NY Times “Mining of Lithium, Key to the Climate Fight, Faces New Scrutiny in Chile”
Identifying Social Risks
Social Impact Assessment (SIA) is “the process of analyzing, monitoring and managing the social aspects and consequences of development” and has been a field of study for many decades (Environmental Impact Assessment Review).
What are “social impacts”?
The International Association for Impact Assessment (IAIA) states that “social impact” refers to “consequences, both positive and negative, of planned interventions (policies, programs, plans, projects) that affect one or more of the following:
- people’s way of life – that is, how they live, work, play and interact with one another on a day-to-day basis;
- their culture – that is, their shared beliefs, customs, values and language or dialect;
- their community – its cohesion, stability, character, services and facilities;
- their political systems – the extent to which people are able to participate in decisions that affect their lives, the level of democratization that is taking place, and the resources provided for this purpose;
- their health and wellbeing – health is a state of complete physical, mental, social and spiritual wellbeing and not merely the absence of disease or infirmity;
- their personal and property rights – particularly whether people are economically affected, or experience personal disadvantage which may include a violation of their civil liberties;
- their fears and aspirations – their perceptions about their safety and the safety of their community
Returning to Warren Buffet, if risk comes from not knowing what you are doing, it is incumbent upon enterprise risk managers to know the full range of social risks within an investment, project or product. The list above is a good place to start. Professional will need to deeper into standards for impact measurement and management such as by Global Impact Investing Network (GIIN) and the work on social impact measurement from Epstein and Yuthas.
Social Risk Assessment in South America’s Lithium Boom: A Blessing Or A Curse? (3:37)
Learn about more sustainability concepts within this major.
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