Managing Risk in an Uncertain World: ESG and The Gray Rhino

Multinational corporations face a growing number of risks that can significantly impact their operations, finances, reputation, and ability to fulfill their missions. From pandemics to climate change to cyberattacks, these risks are often obvious yet go ignored until a crisis hits. How can organizations better recognize and manage these "Gray Rhino" risks before they charge? 

Recently on the Inside ESG Podcast, I spoke with Michele Wucker, a leading thinker on risk and author of the bestselling book "The Gray Rhino: How to Recognize and Act on the Obvious Dangers We Ignore." Our conversation covered how professionals can spot Gray Rhinos and take action before getting trampled.

What is a Gray Rhino?

Unlike "black swan" events that come as a surprise, Gray Rhinos are highly probable, high-impact yet neglected threats. Climate change is a prime example - the dangers are clearly visible yet many fail to take meaningful action. Gray Rhinos are not distant concerns but urgent forces that warrant our immediate attention. 

As Michele explains, "You can see the Gray Rhino in front of you. You can't see the black swan in front of you. You can see it behind you." The key is to identify obvious risks and act decisively before incurring greater costs down the road.

Spotting Risks in the Boardroom

For corporate boards, common Gray Rhinos include cybersecurity, geopolitics, technological change such as AI, and the resulting disruption. Michele has seen many boards use the Gray Rhino lens to re-examine enterprise risk management and decision making. As Michele advises, "Take a fresh look at the things that are right in front of us and be brutally honest about your responses, and how well they are working."

The pandemic has made organizations more attuned to risk, providing an opportunity to build risk resilience. By scanning the horizon for risks and having open conversations, boards can avoid getting blindsided. Michele encourages moving from a reactive to proactive mindset focused on value creation through "positive governance of risk."

Managing Climate Risk 

Michele calls climate change an “inconvenient truth Gray Rhino” that demands urgent action across sectors. As extreme weather intensifies, organizations must properly account for climate risks and invest in mitigation strategies.

As Michele explains, putting a price on carbon emissions and other ecological impacts is essential, though pricing mechanisms remain imperfect. The good news is that climate risk management can yield significant cost savings and open up new opportunities. For example, improving energy efficiency cuts costs while reducing environmental impact.

Financial Risks on the Horizon

In financial markets, loose monetary policies have stoked asset bubbles and excessive risk taking. Now, sharp tightening could spur market turmoil and threaten financial stability. Recent bank failures have prompted concerns about small banks struggling under higher rates. And major central banks seem to have missed some warning signs.

Here too, Michele sees obvious risks that demand a proactive stance: "Lots of banks, lots of the smartest people on Wall Street and elsewhere, following markets around the world, have also been talking about that for quite some time." Financial institutions must carefully monitor systemic risks and adjust strategies accordingly.

Communicating Risks More Effectively 

For risk managers, getting leadership to pay attention to Gray Rhinos can be an uphill battle. As Michele notes, risk officers are often perceived as naysayers focused on downside scenarios.

To get more traction, she advises framing risk in a balanced manner - weighing both upside and downside potential. Risk taking can create value just as risk avoidance protects value. Rather than seeing risk as merely perilous, leaders should view prudent risk taking as essential for innovation, competitiveness and growth.

Michele also encourages adding a "costs avoided" line item in financial statements and plans, to capture savings from mitigating risks proactively. By quantifying risk reduction benefits, it becomes easier to justify necessary investments.

Developing a Risk-Aware Culture

With fast-evolving risks like cybercrime, improving technical defenses isn't enough. As Michele stresses, "Everybody should think of themselves as a risk manager."

Organizations need a culture in which every employee takes responsibility for managing risks in their domain. Michele notes that using storytelling and relatable examples can spur behavioral change. For instance, simulated phishing campaigns keep cyber risks top of mind. A risk-aware workforce is an organization’s first line of defense.

A Systemic View of Risk 

In our interconnected world, risks converge and compound in unpredictable ways. Michele's latest research examines “risk ecosystems” - how norms, policies, and cultural attitudes shape risk taking. By taking a systemic view, we can cultivate environments that encourage prudent risks and discourage reckless speculation.

We must also grapple with “meta-risks” like political polarization and digital fragmentation that prevent us from cooperating on shared challenges. In addition, Michele observes, there’s the “structural Gray Rhino" of how groups make decisions, whether they have a diversity of perspectives, whether they have a demographic diversity that helps to connect with their various stakeholders.

Looking Ahead

While daunting, Gray Rhinos also represent opportunities to build a resilient future. As Michele affirms, “Anybody involved with sustainable development is a fantastic Gray Rhino Wrangler.” By following their lead in tackling obvious dangers, we can create value and protect what matters most. Even mammoth challenges become surmountable when broken down into practical steps.

In our era of compounding crises, we cannot afford to ignore risks in plain sight. Leaders must have the courage and wisdom to confront Gray Rhinos head-on before they rampage out of control. By taking a broad, proactive and collaborative approach to risk governance, organizations can navigate uncertainty and secure a prosperous tomorrow. Though Gray Rhinos seem imposing, with foresight and persistence we can steer these massive forces in a more promising direction.

Photo: Michele Wucker recording session for Korea EBS. Credit: Michele Wucker.