The world is in a state of flux, and the changes that most affect businesses pose greater commercial risks than ever. Environmental and social change—like global energy demand, limited water and food resources, and population increases—now top risk management priority lists. Why the growing concern among CEOs and other business leaders? The global environment is changing faster than ever; companies are used to dated solutions for risk management; and businesses now realize they must plan well ahead of time to locate future risks.
Risk management must evolve to help their organizations track these issues and respond. In fact, some 83 percent of S&P 500 companies report they’re integrating one of the biggest issues—climate change—into their enterprise risk management processes.1 Companies are searching for new approaches because the speed and scale of risk events seem to be escalating: In 2008, for example, the world experienced a major price spike in wheat, driven largely by chaotic weather. In 2012, droughts rocked more than 50 percent of the US. And severe weather— triggered by a changing climate or not—can be costly: The impact of 2011 flooding in Thailand led to a 9 percent drop in Q4 GDP, cutting growth in 2011 overall to just 0.1 percent.2
Environmental and social changes are greater than ever, including
Common operational and value chain risks include resource scarcity and regulatory change; exposures in the surrounding landscape create an overall impact as well, through events like natural disasters.
Companies must rethink how they confront future risks:
Assess exposures more broadly
Greater reliance on corporate value chains means companies are thinking about risk beyond what’s within their own operational control. They’re canvassing key suppliers and other stakeholders to find where exposures exist.
Businesses will go beyond merely measuring and prioritizing various risks. They have a new focus on building the resilience of whole systems that they rely on to create value. For example, energy use accounts for almost half of water withdrawals in the US and Europe today.3 Understanding how water conservation could prevent local water shortages and, as a result, provide a measure of control over rising energy costs can help companies see how their actions relate to overall system stability and corporate health.
Enlist those who know
External stakeholders with different perspectives can spot cause-and-effect relationships that sometimes get missed otherwise. In fact, those who consider themselves environmental specialists rate the likelihood and impact of environmental risks higher than do those without expertise.4
Extend time horizons and improve data quality
Using long-range scientific models can help companies see beyond the next two or three years and lead to an understanding of how the probabilities of events are changing. For example, new climate models indicate rising sea levels, and coastal flooding could change assumptions about site selections.
Move quickly to harvest opportunities
Companies that have assessed how environmental and social issues relate to business value increasingly see the opportunities to profit from what they’ve learned. Such opportunities include process efficiencies, new product or service offerings, and vertical expansion.
1 The Carbon Disclosure Project, S&P 500 Report, September 2012.
2 Oxford Economics, Country Economic Forecast: Thailand, February 2012.
3 World Economic Forum Water Initiative, The Bubble Is Close to Bursting, January 2009.
4 World Economic Forum, Global Risks Report 2011, Sixth Edition.