The Limitations of Linear Thinking

Most businesses rely on risk management frameworks rooted in local and international standards. Leading businesses create detailed risk registers and risk appetite statements, embedding risk management into governance and executive remuneration. These are rigorous, dependable and replicable systems. However, they reflect a linear bias, inherent to human thinking, that is embedded in how most of us monitor risk and measure performance. Risk management frameworks slot risks into static categories and track their rising or falling threat to an organisation, much like a water gauge measures a canal’s rising water line.

Like most cognitive biases, this linear bias is useful enough under stable, predictable circumstances. But faced with a ‘polycrisis’ of climate change, nature decline, geopolitical flux and rapid technological transformation, we may need a fundamentally broader approach to understanding risk.

Believe it or not, nature can help.

Learning From Nature

Nature is stubbornly complex: variables interact dynamically, making it impossible to evaluate any single one in isolation. Nature strategists know this: to understand nature-related risks, they engage meaningfully with complexity. Hence a ‘nature lens’ delivers unique insights for handling complex, systemic risks.

A key insight is the ‘systemic implications’ of nature-related risk – the way in which small, localised risks can multiply and evolve exponentially. These include:

• Compounding effects: a decline in a given ecosystem may trigger a decline in others, building over time and giving the impression of an eventual ‘sudden’ system-wide collapse.
• Cascading effects: nature-related risks can spread and amplify via value chains, manifesting across diverse risk categories.
• Contagion effects: nature-related risks may ‘leap’ into distinct risk categories via feedback loops. For instance, financial risks may become risks to the real economy, and nature-related risks may affect a business’ social license to operate.

Case Studies: When Water Risks Flow

To illustrate these systemic implications, let’s consider water scarcity. If you had to pick, is it a nature-related risk, a climate-related risk, a legal risk, a political risk, a social license risk, or all of the above?

In fact, water scarcity can result in cascading, compounding and contagion effects across risk categories. Consider the following examples.

• In the United States, rights to water from the Colorado River are apportioned between seven U.S. states and Mexico under legal agreements dating to the early 20th century. These are based on unrealistic assumptions of river flow that have been dashed against the reality of an ongoing 25-year drought.  As reservoirs dry up, U.S. states are for the first time considering re-baselining their agreements on actual river flows – even as they prepare to fight for their water allocations in court. Water scarcity is raising the likelihood of inter-state (and even international) legal contests, with material risks for downstream cities and major farm businesses.
• In Mexico, global beverage manufacturer Constellation Brands abandoned a nearly-complete brewery in Mexicali at a cost of USD 900 million in 2020. Despite earlier political support, a public outcry amid severe water shortages compelled the Mexican President to allow a referendum that voted to deny vital water permits for the new project. Here, water scarcity triggered a chain reaction, across social license and political risks, and ultimately to a material financial loss.
• In Australia, as a growing data centre pipeline hit AUD 20 billion, a Melbourne council voted in August this year that new data centre approvals should be subject to an ESG screening. It joins other city councils and researchers calling for more stringently assessments of data centres’ impacts on water, energy and land – the very resources Australian cities need to house a growing population. For data centres, a worst-case scenario may pit their growing footprint against housing, the hot-button socio-economic and political issue of the decade.

Traditional risk frameworks consider varied risk categories, but in isolation. In so doing, they may fail to predict the speed or severity with which these risks may evolve, converge and result in material financial impacts.

Three Lessons From Nature Strategy

So then: how are businesses to navigate this complexity without losing their focus? How can you discern the signal from amid all the noise? Here are three tips you can apply from nature strategy.

1. Map your impacts and dependencies.

Mapping your unique impacts and dependencies on nature reveals the nature-related risks that will hit your bottom line, and the risk transmission channels that will affect your value chain. This causal link is at the heart of the TNFD’s LEAP assessment framework, and essential for any nature strategy.But this lesson applies beyond nature. By pinpointing your critical impacts and dependencies (on natural capital and other vital resources) you will shift from watching outcomes to managing root causes. The value of these innovative approaches is reflected in recent work from the Capitals Coalition and the World Business Council for Sustainable Development aimed at empowering leaders to address the drivers of risk, reward and resilience.

2. Integrated scenario analyses.

As we have argued recently, scenario analysis can help boards and senior executives embed systems thinking into enterprise strategy. Nature strategists also use scenario analyses; but crucially, they integrate climate and nature scenarios, an approach proven to yield superior results.In 2024, Norges Bank’s nature-climate scenario analysis found material risks ‘generally not captured in traditional climate scenario models’. This included a modelled climate-related collapse in ecosystem services that could result in 30% losses in its basic materials sector equity portfolios, and a 2% decline in global GDP by 2030 – a stark reminder that a narrow linear focus can leave colossal risks hidden in plain sight.

3. Assess your nature-related risks and opportunities.

Over half of global GDP (and about half of Australia’s economy) is moderately or highly dependent on natural capital. Legal and regulatory expectations for nature risk management are mounting globally. In Australia, nature is increasingly a part of our official political and economic discourse.Against this backdrop, investing in your nature journey now can help you capture significant efficiencies and distinct competitive advantages later. Executive workshops on nature can quickly raise awareness and reveal critical, organisation-specific insights. Also, despite misconceptions, the TNFD’s LEAP assessment framework is both rigorous and lends itself to modular application. Limited scope pilots can build familiarity and ‘stress test’ interactions with nature at a reasonable pace and budget.

The companies that thrive in the next decade won’t be the ones with the most sophisticated risk registers. They’ll be the ones that learn to embrace complexity like nature strategists do, and manage risks in an interconnected system where small changes can have massive consequences.

About the Author

Josue Castro is a Senior Strategy Manager and Nature Lead at BWD Strategic, with extensive experience in urban strategy, economic development, and geopolitics.