Tuesday, December 6, 2011

Rationale for Linking Sustainability to Risk Management

Arguably, sustainability is a risk management tool for dealing with some unprecedented developments in the world. The world population has tripled since 1950. In that same time period CO2 emissions from fossil fuels have increased by 7 times. Increasing global interconnectedness permit both disease and financial contagions to spread rapidly through the world. Identifying the risks associated with these kinds of trends, assessing their potential for harm, and developing holistic risk management strategies is becoming a critical leadership component. Many of the sustainability strategies help to mitigate these risks. At the same time, new strategies have the potential to introduce new risks which must also be addressed.

In today’s world leaders in every sector, including business, government, and non-governmental organizations (NGOs) must be able to identify and manage risks such as Economic Risks, Environmental Risks, Societal Risks, Geopolitical Risks, and Technological Risks. Many of these risks threaten the strategic competitiveness of businesses. Many of today’s risks stem from unsustainable growth in resource consumption, and the ability of diseases, economic failures, and political unrest to spread quickly around the world through increasing global interconnections. Some risks are due to climate changes that affect everyone, including businesses. Other risks are firm specific and are created by the legitimate changes in businesses practices such as cutting costs through sourcing of materials and labor from developing countries, and increasing their reliance on technology for operational performance.   

Risk is a  function of how poorly a strategy will perform if the “wrong” scenario occurs.
Michael Porter- Competitive Strategy

What risk does your business model pose if the "wrong" scenario occurs?

In this ever more complex world, the skills needed for successful business managers, especially risk
managers, underwriters, and brokers include the ability to:
  • Identify key economic and environmental risks facing businesses and explain the interconnections among these risks
  • Explain the common causes of risks stemming from “unsustainable” business, consumer, and government activities, 
  •  Explain the benefits to businesses of having sustainable business practices,
  •  Explain the relationship between sustainability, risk management, and insurance,
  •  Describe new risk management tools being developed to help address sustainability issues
Businesses are beginning to develop strategies beyond compliance and mere sustainability and into areas which will have a positive impact on system-wide risks. Examples include strategies for viable alternate energy, affordable transportation not based on fossil fuel, making a positive environmental impact through carbon reduction, developing treatments for poverty-induced diseases, alleviating food and water shortages, responding to disasters, and bringing products and services to ignored markets in developing countries (i.e. microfinance and microinsurance, and crop insurance). What are the risks associated with these new strategies? How do we manage those risks? These are important questions as we move forward with more sustainable business models.

Rodney Taylor, Managing Director for Aon Environmental Services makes the case for why risk maangement and sustainability should be integrated.  Taylor states, "For many corporate executives, sustainability is viewed as a means for survival of the enterprise as well as the planet.. Enlightened executives also point to sound business justifications for a focus on sustainability as a long-term corporate strategy. Chief among these is the growing evidence that sustainability can significantly improve corporate performance, with the growth in market capitalization of sustainable corporations outperforming entities with no formal programs by as much as 80% over the past six years.

An example illustrating this can be found in a recent study by Economist Intelligence Unit Ltd. and
reinsurer Swiss Re Ltd. on how the renewable power industry faces a growing range of risks and
significant challenges in managing those risks as that market continues to grow. 

Going Green” is a phrase we are hearing more often each year in the insurance industry.  The
 environment is under constant watch and the business world, especially within the insurance
 industry, is well aware of the endless benefits that are associated with “Going Green.”  By
 transforming buildings and other properties with green materials is not only helping in today’s
 current climate but is also benefit future generations.

WIth green buildings there are new issues to be considered.The Leadership in Energy and
Environmental Design (LEED) Green Building Rating System is the USGBC's benchmark for
designing, building and operating green buildings. To become certified, projects must first meet the
prerequisites designated by the USGBC then earn a certain number of credits within the six
categories: sustainable sites, water efficiency, energy and atmosphere, materials & resources,
 indoor environmental quality, innovation & design process.  The way in which fire
-detection and fire-suppression is handled can earn points toward LEED certification. Green building
yeilds societal benefits but with green buildngs come new risks which must be addressed. For
example, the mix of green roofing vegetation can affect the extent to which the roof is fire hazard.
Furthermore green roofs in a typhoon zone may turn loose plant matter, rocks, or landscaping
materials into projectiles.

Despite today’s troubled economy, the trend toward green commercial building continues to move forward. According to the 2008 Green Survey: Existing Buildings, funded by the U.S. Green Building Council (USGBC), Incisive Media and the Building Owners and Managers Association, more than 80 percent of commercial building owners have allocated funds for green initiatives in 2009.
Green buildings are designed to be more efficient in their use of energy, water and other resources and to create better working environments for their occupants. Despite the current economic environment and some perceived obstacles to green building, the benefits remain significant.
In addition to reducing energy costs and improving the health and well-being of occupants, green buildings have lower operating costs, higher building values and higher occupancy rates.  Green builders may also be able to take advantage of continued government incentives, such as tax breaks and abatements.
While there are continual benefits for a business going green there are also many risks associated with the transformation that worry insurance companies.  Claims can be made for any certain number of liability risks on costly green materials and these are the claims insurance companies are worried about.  For example, Alternative Energy Broker Holmes Murphy & Associates estimates that blade failure on one wind turbine on a wind farm can result in up to a $500K claim. That is a significant figure for a claim made on any one company and posses a threat on numerous others.



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