Transforming enterprise risk management for sustainable and climate-friendly businesses

Entrepreneurs and businesses need to transform their risk management frameworks and proactively adapt to a changing climate

In an increasingly complex and convoluted landscape of risks, entrepreneurs and businesses need to transform their risk management frameworks and proactively adapt to a changing climate. Especially in climate-vulnerable developing countries such as Sri Lanka, climate-smart enterprise risk management (ERM) is both a necessity and an opportunity. Building on traditional cultural heritage, rich natural resources, and new technologies, enterprises can turn sustainable, climate-friendly, and resilient business models into unique advantages and become part of emerging green or blue economies.

Understanding enterprise risk management

Traditional enterprise risk management (ERM) focuses mostly on identifying, assessing, and mitigating financial, operational, and compliance-related risks. However, in the context of climate change and sustainability, entrepreneurs and businesses increasingly need to consider environmental and social governance (ESG) criteria, resource efficiency, and other aspects related to resilience-building and sustainable development in their short- and long-term planning.

A critical component of ERM in this new environment is the ability to evaluate and understand the risks posed by climate change as well as their interactions with other kinds of risks. For businesses in developing countries, this includes assessing vulnerabilities to extreme weather events, sea-level rise, and changing climate patterns, as well as a deeper understanding of their supply and value chains and the vulnerability of up- and downstream actors to climate impacts.

Incorporating ESG criteria into ERM ensures that environmental and social impacts are considered in decision-making processes. This involves setting measurable goals, such as reducing carbon footprints, minimising waste, and ensuring fair labour practices, as well as optimising the efficient use of energy, water, and other resources to reduce costs and improve overall resilience to both climate- and market-related shocks. ESG-conscious and climate-smart ERM frameworks not only mitigate risks and provide crucial safety nets, they can also help businesses to enhance their reputation and attract new investors and sources of finance. Diversifying business activities and revenue streams further helps to spread risk while also opening opportunities for growth and sustainability.

The means of implementation

To successfully transform ERM and integrate climate resilience, businesses need access to the necessary tools and resources as well as an enabling environment that allows them to be agile and rewards investments into sustainability and climate-friendliness. 

Securing funding for sustainable initiatives is often a challenge for businesses in developing countries. Green financing refers to financial investments that support environmentally friendly and sustainable projects and encompasses a range of instruments and innovative mechanisms from both the public and private sector. For example, this can include low-interest loans, grants, and tax incentives, but also green or blue bonds, sustainability-linked bonds, catastrophe bonds, or risk transfer tools, all of which can help building resilience and ensuring business continuity or growth in the face of climate risks. Similarly, advancements in technology and innovation can play a crucial role, with technologies such as artificial intelligence, digitisation, and the internet of things offering businesses new approaches to monitor environmental impacts, predict climate-related risks, and optimise their resource footprint.

Supportive regulatory frameworks are also essential for fostering a climate-smart business environment, including through emission reduction targets, mandating environmental impact assessments, or providing guidelines for sustainable practices. A robust regulatory framework can create a level playing field and incentivise enterprises to incorporate elements of sustainability and resilience into their core business case.

Skill development and mindset change

However, for entrepreneurs to effectively implement sustainable and climate-friendly ERM, they need to develop specific skills and adopt a risk-aware mindset. Education and training play a vital role in this transformation, as entrepreneurs require a diverse set of skills to navigate the complexities of climate risks and incorporate sustainability into their business. A risk-aware mindset also involves understanding the long-term implications of climate change and recognising the value of sustainable practices, viewing sustainability not as a compliance issue but as a strategic advantage that can drive innovation and growth.

By providing entrepreneurs with a solid foundation in these areas, the education system as well as other training opportunities can help them to make informed decisions and implement effective strategies. Flexible learning options at all levels could include online courses, mobile applications, and community-based workshops that are available in local languages, as well as radio programmes and printed materials that are accessible and available in rural areas through collaborative efforts between the public sector, educational institutions, and the private sector.

Developing climate-smart entrepreneurs and raising public awareness on climate change and sustainability requires a long-term commitment to education and training. This includes embedding sustainability and climate resilience into formal education systems, from primary education to higher education, and building a foundation for long-term sustainable development. Media can play a significant role in this by highlighting success stories, promoting sustainable practices, and educating the public about the impacts of climate change. By creating a culture of awareness and responsibility, media can help drive the adoption of sustainable practices across society.

Transforming ERM and incorporating climate resilience into the core of the business case for sustainable and climate-friendly enterprises is imperative for developing countries such as Sri Lanka. If entrepreneurs can benefit from an enabling environment for innovation and gain the necessary skills to navigate complex risks and harness blue-green opportunities, it will pave the way for a more resilient and prosperous economy.

(The writer works as Director: Research & Knowledge Management at SLYCAN Trust, a non-profit think tank based in Sri Lanka. His work focuses on climate change, adaptation, resilience, ecosystem conservation, just transition, human mobility, and a range of related issues. He holds a Master’s degree in Education from the University of Cologne, Germany and is a regular contributor to several international and local media outlets.)