Impact At Scale

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Risk and Opportunity, Inc.

By: Amit Sharma, Founder, Empowerment Capital; and Michael Chodos, Senior Fellow, Beeck Center for Social Impact + Innovation

May 10, 2016

In the corporate sector, there has been a long-standing tension between social-mindedness and financial performance. Some believe that social impact is “irrelevant” to the pursuit of profits, while others believe shareholder value should be subordinated to social impact.

As social enterprise proponents, we believe this tension is breaking down, and seems that recent corporate behavior highlights that such a tension may be misguided and misplaced.

Pioneering corporations are increasingly incorporating social, environmental and governance (ESG) issues into business operations and strategic planning. This new outlook has been driven by a recognition among corporate risk professionals that enterprise-wide risk management (ERM) needs to be a dynamic and executive-level strategic imperative. ESG factors and other systemic threats — “sustainability risks” — disrupt supply chains, shift markets, increase investment volatility, and materially influence a company’s operational performance, reputation, and financial health. Companies are realizing that they need to take a new approach in a world increasingly affected by social, political, environmental and economic considerations.

Today Georgetown University’s Beeck Center for Social Impact & Innovation is releasing Risk and Opportunity Inc.: Managing Sustainability Risks as Profitable Opportunities co-authored with Steve Bachar. The study identifies innovative ways corporations can proactively use risk management as a tool to uncover profitable business opportunities that have meaningful social and environmental impact. By using this approach, corporations are giving the business of impact a needed boost.

How did risk management come to play such a central role in corporate strategic decision-making? Companies historically viewed risk management as a defensive exercise—to protect against potential losses and economic damages. As risks evolve, more companies recognize that new and dynamic threats need to be proactively mitigated, not just avoided. Hence, many have started to take a more “holistic” portfolio approach to address risk as an enterprise-wide exercise. This evolution has continued, and we are on the cusp of the next wave of risk management where risks are not just viewed merely as a threat to corporate and investment performance. Rather, there are seen as a way to identify potential opportunities to build more dynamic and resilient business models that yield profit (not just save costs) and increase shareholder value.

In the paper, we propose the “Risk and Opportunity Framework,” a guide for corporations to identify new business opportunities by actively engaging the market for social good. Viewed through the lens of risk management, this strategy can help re-shape traditional threats to the business as profitable endeavors while advancing social and environmental objectives.

So, what does this mean? Here are some examples. In 2005, Walmart’s corporate strategy and business sustainability group invited suppliers, vendors, distributors, local and national non profits, and policy makers to help them identify opportunities where they could have greater impact on the environment. A departure from the company’s traditionally closed strategic management philosophy, this effort generated valuable insights into its supply chain, production, vendor related energy use, and natural resource consumption—all of which have stimulated risk-mitigating innovation, business process efficiencies, and new revenue streams for the firm.

In another sector, we show how Lockheed Martin, the world’s largest defense contractor, launched a flurry of new initiatives to deal with climate change—identified by its largest customer, the US Department of Defense, as a national security priority. Recognizing the economic opportunities to address environmental challenges, the company invested in tidal energy projects, water purification, nuclear fusion, and sustainable fisheries. This has diversified the firm’s portfolio risk and leveraged Lockheed’s engineering competencies to capitalize on new business opportunities in a greening economy at a time when defense spending may be in relative decline.

The Risk and Opportunity Framework is an evolution in risk management. It provides a simple, actionable template that companies can use to find profitable opportunities as they address the most fundamental social and environmental risks that are material to their businesses.

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Amit Sharma is a founder of Empowerment Capital and an Adjunct Professor at Georgetown University. He is a former official of the US Department of the Treasury under Secretary Hank Paulson, and held international roles for Mitsubishi UFJ Securities, the investment bank and broker dealer arm of the Bank of Tokyo.

Michael Chodos is a Senior Fellow at the Beeck Center. Previously, Michael served as the Associate Administrator for the Office of Entrepreneurial Development in the US Small Business Administration. He also served as the Small Business Administration’s Deputy General Counsel and Chief Negotiator.

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