Managing Environmental and Resource Risks

Environmental risks are one of the five key challenges facing the world today, according to the Global Risks Report 2017, and yet many of the underlying challenges could be mitigated or prevented through proper management.

As an example, the World Bank calculates that water scarcity due to climate change could cost up to six percent of global GDP by 2050. The scarcity of water is partly due to a failure to value it appropriately, especially in inefficient agricultural use. One European study found that a one percent improvement in resource efficiency could increase GDP by up to EUR 23 billion and significantly boost employment. But as with any public sector initiative, success is more likely when the private sector is on board.

Improved water stewardship has huge benefits for human wellbeing and economic progress since poor sanitation can impair cognitive and physical development. Because businesses rely on a secure supply of water it makes sense for companies to also make a commitment to water stewardship through steps such as appointing a champion from senior management and implementing a water management and conservation plan. (See further recommendations in Zurich’s Risk Insights on Water Scarcity)

Resource scarcity is only one of the many dimensions to environmental risks. The impact of severe weather events, climate change and the related potential disruption to supply chains is an area that is hard to address in a practical sense – especially when seemingly localized problems in one country can cause major challenges in other parts of the world.

In 2011, floods in Thailand disrupted the supply of parts to a number of industries globally, causing a knock-on effect across the global supply chain. Companies around the world, including some of the world’s largest automobile makers, had to idle production lines for months. The World Bank estimated the economic losses were around USD 46.5 billion globally.

Through its work with partner companies the World Business Council for Sustainable Development (WBCSD) has become aware that businesses in many sectors remain surprisingly reliant on a few supply sources in a single region despite globalization – adding to their vulnerability. The council believes companies that fail to understand their exposure and mitigate the environmental risks to their operations are likely to be challenged by shareholders.

Zurich’s Global Catastrophe Management team uses sophisticated models to assess the probability and severity of extreme events. Diversifying supply chains is desirable but adds that pinpointing potential problem areas is often challenging. Especially large companies with thousands of suppliers or fast growing companies lack “perfect knowledge” of their supply chains and others are reluctant to list all their suppliers for reasons of confidentiality. There’s also the technical challenge and cost of getting all the information in a standardized form when it might be spread across papers, websites and tables.

But organizations need to understand that this process is crucial to mitigating their risk exposure. It has to be viewed as an investment in avoiding larger potential losses. When you get the data you need, you get a deeper insight.

Companies should audit all their supply chains for vulnerabilities before deciding which actions are appropriate for them. Risk management is becoming ever more important as a success factor for any company. This data-led and financially measurable approach to managing risk around extreme weather events and water scarcity means companies and investors now have sophisticated tools to analyze and quantify their risks.

Environmental risks have the potential to snowball from a local resource problem to a global supply chain problem resulting in operational issues and financial losses. In other words, any company neglecting its environmental risks are not only exposing itself to operational risks – but also financial risks as investors lose confidence.

Companies that recognize the interconnected nature of global and local risks on the one hand and environmental and financial risks on the other are empowered to put top-down strategies in place to protect their operations. Combined, their efforts should also help mitigate the potential for environmental devastation. While insurance is an efficient tool to protect against risks, it still makes sense to identify and mitigate the risks because the cost of buying protection is directly proportional to the level of exposure.