Monday, March 4, 2013

Makower on Sustainability as a Risk Management Tool

This article was written by Joel Makower, the Chairman and Executive Editor of GreenBiz Group. Joel is one of the Web's most prolific and widely respected authors on the subject of sustainability. This article was excerpted from the 2013 State of Green Business report and originally appeared in GreenBiz on February 25th 2013 under the title "The State of Green Business: Coping with Mother Nature's fury."

Risk and resilience haven’t typically been part of most companies’ sustainability vocabularies. But Mother Nature’s fury is changing that, as droughts, floods, hurricanes and wildfires disrupt companies and their supply chains.

Around the world, extreme has become the new normal. Weather was a major factor for many companies in 2012, connecting the dots between sustainability and risk. At the top of the list was Hurricane Sandy, which ravaged the U.S. East Coast in October. It wasn’t necessarily the planet’s biggest storm last year, but its location — in the heart of a heavily populated center of global finance, commerce and media — brought forth a relative tsunami of media attention, compared to an equivalent storm in, say, Bangladesh.

Sandy shined a light on how well companies, cities and communities in one of the world’s richest countries were prepared to cope with an anticipated rise in turbulent, even violent weather, most likely linked to a changing climate. The design and resilience of everything from roads and traffic lights to gas stations and hospitals came under scrutiny — at least for a while. And the cost to business, in terms of disruption, relocating and rebuilding, was in the tens of billions of dollars.

But Sandy was far from the only weather event that upended business and society. Last year saw drought conditions in 56 percent of the lower 48 United States, the worst since the 1950s. Wildfires consumed close to 10 million acres across the U.S. mainland. In the Philippines, more than 300,000 people lost their homes when Typhoon Bopha struck in December. Fifty major wildfires burned in central and southern Chile, fueled by intense heat, dryness and high winds, causing thousands to evacuate, creating millions of dollars in damages, and destroying hundreds of homes. A severe drought impacted more than 1,000 towns in Brazil, leading to “water wars” and massive livestock deaths.

Europe suffered its worst cold snap in a quarter-century, killing more than 650 people, the majority in Russia, Ukraine and Poland. Record-breaking flooding in southwestern Queensland and northern New South Wales in Australia led to the isolation of entire towns and the abandonment of thousands of homes. Almost 5 million people were evacuated in China due to the rains and flooding, resulting in losses of $2 billion.

Globally, five countries, including the United States, set heat records in 2012. None set cold records.
The economic toll from such events is growing, say experts. In the U.S., the National Oceanic and Atmospheric Administration calculated 11 extreme weather and climate events that reached the billion-dollar threshold in losses during 2012. While that’s down from 14 such events in 2011, the economic losses grew, from $60 billion in 2011 to $100 billion from Sandy alone. That makes 2012 the second costliest in 30 years, trailing only 2005, the year of Katrina. The trend isn’t likely to abate; in fact, it could worsen in lockstep with the growing effects of climate change.

It’s not just the weather. Sustainability and risk issues rising up through investor communities, from so-called socially responsible investors to mainstream pension funds and university endowments, Wall Street stock analysts and the regulatory agencies that oversee publicly traded companies. All are concerned with the risks facing companies in a world of constraints related to the availability of energy, water and other resources; where the toxicity of products or manufacturing processes present perils all the way up the supply chain; and where climate shifts can disrupt the availability of raw materials and threaten the well-being of employees and customers.

A 2011 report by the McKinsey Global Institute and the McKinsey Sustainability & Resource Productivity practice, which focuses on growing resource constraints in a world of more middle-class consumers, put it succinctly: “The deterioration in the environment, itself driven by growth in resource consumption, also appears to be increasing the vulnerability of resource supply systems.” Food is the most obvious area of vulnerability, but there are others. For example, changes in rainfall patterns and greater water use could significantly impact the 17 percent of world electricity supplied by hydropower, as well as fossil fuel and nuclear power plants and water-intensive methods of energy extraction, like hydraulic fracturing, or fracking.

Keeping an eye on this is becoming part of the job of a growing handful of sustainability executives in global companies. They see risk management as a new part of their role, in addition to all the usual eco-efficiency stuff. For them, understanding risk and sustainability means learning a new language and translating it into their companies’ far-flung operations.

Climate remains the No. 1 risk. The insurance industry has been concerned about the impacts of climate change for years. In a 2011 white paper about the risks of climate change for business by the insurance and risk management firm Marsh, CEO David Batchelor writes, “Climate change should be amongst the top considerations companies will need to take into account when making long-term capital investment decisions.”

Businesses, which think regularly about risk mitigation, are just beginning to think about climate change and resource constraints like other business risks. They are starting to deploy the same set of tools, such as enterprise risk management, business continuity planning and scenario planning. As the World Economic Forum wrote in a paper, "Global Risks 2012," “rising greenhouse gas emissions” and the “failure of climate change adaptation” are in the same risk quadrant as food shortages and terrorism.

Some pension funds and other institutional investors are helping move companies to act, or at least better disclose their potential risks related to climate change, water scarcity and other things. (Many of these investors are members of the Investor Network on Climate Risk, a project of the nonprofit Ceres.) But it is unclear whether and how such efforts are pushing companies to become more proactive.

It’s only a matter of time. The attacks of 9/11 weren’t the first time terrorists had violently disrupted civilians and their institutions, but it had a lasting impact. Among other things, it changed the way we design buildings and spaces. Today, while we may grumble at long airport security lines or other inconveniences, we generally accept our more security-centric world as a given, along with the investment it takes to secure the places we live, work, shop, travel and play. It’s hard to imagine ever going back.

At what point will climate, extreme weather and resource constraints be similarly seen as a potent threat that requires changes to the design and operation of our businesses and supply chains? What will be the dramatic event(s) that provide the tipping point? How much disruption and inconvenience will the public be willing to tolerate?

The answer to such questions will help determine how sustainability is viewed inside companies — whether it’s “only” a matter of environmental responsibility or a much broader and more strategic topic that cuts to the very core of a company’s ability to survive and thrive in the face of a changing, challenging world. 

Source: GreenBiz

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