Tuesday, December 6, 2011

Introduction to Sustainabilty and Risk Management

Introduction to Sustainability 
Sustainability in a general sense, is the overall capacity to maintain a certain process or state indefinitely. The issue of sustainability and human activity surfaced in the 1980′s as developing countries began to experience adverse long-term consequences from short-term gains in their development. The Brundtland Commission coined the term sustainable development to mean “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” The field of sustainable development can be conceptually broken into three constituent parts: environmental sustainability, economic sustainability and sociopolitical sustainability. The Dow Jones publishes a Sustainability Index of businesses based these criteria. James Strong, Chairman and CEO of Insurance Australia Group , stated “there is one central consideration for our shareholders in fully understanding why business must engage in sustainability. Simply put, no business will survive unless it takes into consideration the community in which it operates, delivers consistent value to customers, maintains the highest standards of governance and ethics, and mitigates its overall impact on the environment.”
With a rapidly increasing global population and corresponding increases in demand for natural resources, scientists, forward thinking corporations, and thought leaders are acknowledging the importance of understanding and minimizing the impact that business has on the natural environment.   Currently, the nexus of business and the environment compels firms and their employees to carefully consider and develop answers to the following important questions:
·         How can we minimize our firm’s impact on the environment?
·         How should sustainability be incorporated into our firm’s mission and vision?
·         What is the current environmental context in which firms operate?

Benefits of Sustainability
Research suggests that firms that have embraced sustainability enjoy many benefits.bcg sustainability report

Sustainability and Risk Management 

Sustainability and risk management was studied by Dr. Dan Anderson, Ph.D, CPCU, Professor of Risk Management and Insurance at the University of Wisconsin. In his book entitled, Corporate Survival: The Critical Importance of Sustainability Risk Management, he coined the term “sustainability risk management” to mean risk management dealing with risks emanating from the environmental and social justice areas.

In it's simplest context, risk management has a role in helping organizations identify, quantify, and find ways to mitigate any risks associated with new sustainable products and practices. To be fair, many risks are avoided by adopting sustainable practices but the reality is that new risks are introduced. In the following posts several examples will be included about risk management as it relates to green technologie, and new, sustainable business processes.

Consider for example the product cycle and how risk management and sustainable work with it. A traditional product materials cycle begins with the use of raw materials extracted from the land. These are then brought into a manufacturing operation where the product with energy and labor is created, along with waste product and scrap. From there the product is packaged and shipped to a retail outlet, or consumer for sale. Once the product is used it is discarded into trash and ends up in a landfill. This linear process is less than ideal. In becoming more sustainable fewer raw materials will be extracted from the land and instead will begin with recycled materials. Next a sustainable manufacturing process would use less energy(or more renewable energy)  and produce less waste product, and less scrap. The packaging for the product would also be more environmentally friendly. The transportation from manufacturing to the retail outlet or consumer might also change. Instead of trucks or planes, the products might be shipped (at least partially) by rail or river barges. Finally, instead of the discarded product going into a landfill, more of the product components could be recycled and put back in the product material cycle.

In improving to make processes more sustainable some risks have reduced but some other new risks have been introduced. Deliberately thinking through what those new risks are, how they can be quantified, and how they can be mitigated is essentially what is meant by Sustainability and Risk Management. Part of risk management includes financing the risks as well as controlling the frequency and severity of risk. This is where insurance comes into play. More on the role of insurance and the insurance industry will be discussed in future posts. (A new blog post "The Insurance Industry and Sustainability" addresses this aspect of risk management as it relates to unstainable business practices.)

Business Schools, Risk and Insurance Programs, Educators and Sustainability Issues

Business schools, and especially risk management and insurance programs at businesses schools have a unique opportunity for facilitating sustainability issues as part of the overall social responsibility efforts that business schools are currently undertaking. In December of 2011, the Illinois State University approved a new minor in Business Environment and Sustainability. One course included in the minor is a course on Sustainability, Risk Management, and Insurance. A syllabus for the course is attached.
The University of Cambrige has a center called Program for Industry whose mission is “to help present and future leaders deepen their understanding of the social, environmental and economic context in which they operate and respond in ways that benefit their organisations and society as a whole.” Their program addresses a number of Sustainability issues including a Sustainability Research Digest.
Earthwatch have interesting expeditions and educator programmes (ebarker@earthwatch.org)
http://www.earthwatch.org/ .
Illinois State University’s College of Business is among the first business schools in the United States to be signatories to the United Nations-sponsored Principles for Responsible Management Education (PRME), a framework for academic institutions to advance socially responsible corporate behavior. The Principles for Responsible Management Education are part of the United Nations Global Compact, an international initiative for businesses that are committed to aligning their operations and strategies with universally accepted principles in the areas of human rights, labor, the environment and anti-corruption. The Global Compact is the world’s largest corporate citizenship initiative and is committed to fostering social responsibility in business and world markets.
Providing solutions and examining risk and insurance concepts as they apply to sustainability is one important role RMI programs at business schools can perform. As mentioned earlier, Dan Anderson’s work at the University of Wisconsin, and Kenneth Arrow’s workserve are examples of what academics have done. A multidisciplinary team at the Illinois State University’s Katie School of Insurance has been doing work on microinsurance in Ghana and weather-indexed insurance for agricultural risk in Africa. Students at ISU have won writing contests sponsored by the insurance industry. See attached winning papers.
Dana White – Insurance Sustainability-2009
Jake Hanki – Insurance Sustainability-2009
Ben Delinski Sustainability in Insurance- 2010 Contest Winner
Jeff Viccone-Insurance and Sustainability- 2010 Contest Runner UP
Global Climate Change Arrow 2007
Goran Svensson from Oslo School of Management, (Oslo, Norway), and Greg Wood Bowater School of Management and Marketing, Deakin University, (Warrnambool, Australia), developed and described a conceptual framework of sustainable leadership ethics which could be taught in business schools.
.Impact Development Training Group – aimed at business training/transformation and with some very innovative approaches linking training to sustainability related issues have some highly credible training solutions .
Emerald Insight Full Text Article
Stanford also has a program that considers these overarching social issues:
Stanford’s Business and society programs


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