Strategy and the Sustainable Enterprise

P D Jose
How can we visualize risks?

How can we visualise risk? Consider this small cube. Let's assume that this represents one unit or
element of a unique risk. I can characterize that risk along three dimensions—likelihood, severity and
scope. As I said before, likelihood refers to the probability that an incident would occur. Severity refers
to the impact of the event and the scope refers to the scale of impact, for instance, local or global. We
can even assign a value to this say likelihood from very unlikely to very likely, impact from low to high
and scope from local to global.
Let me complicate this a little bit more. One of the concerns that we have when we talk about
sustainability is how reversible is the change. So, I'm going to add one more dimension on the
reversibility of change, reversibility in terms of ease and in terms of timeframes. We represent
reversibility on a scale of one to six where one represents easily reversible events, whereas six
represents irreversible events. So, if I draw this and so we have now combined likelihood, severity,
scope and reversibility into this one piece of block that represents a unique aspect of risk that a firm
faces. I will now roll the dice. This cube represents one such risk, but for a business, multiple risks may
manifest in numerous ways. Now imagine what if I had a whole set of this put together. That makes
managing the risk a lot more complex. To make matters more complicated, we now need to be able
to predict the interactions between these different individual elements. So, what if we have numerous
such risks? We can refine this for instance by adding other dimensions of environment, economics
and social and cultural factors that the risk manager must consider. In fact, I am going to assume that
each colour denotes a different category of risk. Our risk cubes now represent a medley of risks with
each cube representing a unique risk consequence with respect to probability, impact, scope and
reversibility.
As I said before, to make life a wee bit more complicated, the business is also to account for the
interaction effects. For instance, as we will see later, water scarcity and water pollution lead not just
to higher prices for the industrial use of water but may even lead to conflicts with local communities
over the use of water.
Consider a chemical company. How does one characterize the risk arising from, say, possible release
of effluents to nearby water bodies? Under normal circumstances, the probability of an accidental
release may be low, but if this does happen, the impact can be high. Remember, consequence is a
function of likelihood, severity, scope and reversibility. In this case, the impact may be limited to the
nearby geographies and so the scope is local. On the other hand, greenhouse gas emissions coming
out of an energy company that generates power by burning coal has a different risk profile—one that
is highly likely, severe, global in its scope and irreversible at least in the short run.
Not understanding the interactions can also create blind spots for the organisation to certain aspects
of risk and, therefore, a firm may need to systematically identify risks. There are number of
methodologies used for this including Delphi techniques, workshops, risk registers and scenario
planning. You need to place sustainability risk management or environmental risk management at the
heart of the strategy-making process to manage risk and to help build corporate resilience.
Managing these risks is somewhat like solving a Rubix cube. You start with a set of variables and a
simplified framework, but pretty soon it gets really, really complicated. You can solve one side very
quickly and be lulled into false sense of security, but not appreciating the interactions can give you
serious trouble just as not understanding the alignment can give you a single side of the same colour
but totally mixed up on the other sides.
In the next segment, we look at two such risks, climate change and water scarcity, and explore how
these risks can potentially impact corporate performance.

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