© dan r. anderson, uw-madison (rims-no) sustainability risk management aria 2007 quebec city dan r....

© Dan R. Anderson, UW-Madison (RIMS-NO)

Sustainability Risk Sustainability Risk ManagementManagement

ARIA 2007ARIA 2007Quebec CityQuebec City

Dan R. AndersonDan R. AndersonLeslie P. Schultz Professor of Risk Management and InsuranceLeslie P. Schultz Professor of Risk Management and InsuranceUniversity of Wisconsin-Madison School of BusinessUniversity of Wisconsin-Madison School of Business

Image: NASA



A. Management of emerging environmental and social responsibility risks.

B. Corporations are being pressured to address environmental and social responsibility performance, in addition to the traditional financial bottom line.

C. Make a business argument for companies becoming more sustainable by using risk management principles.

D. Sustainability risk management needs to be a critical part of enterprise risk management.



E. Create Business Opportunities through Sustainability Strategies

• Intel• Johnson & Johnson• SC Johnson• Johnson Controls• Hewlett Packard• Alcoa• Herman Miller• Kimberly-Clark• Veolia

• GE• Toyota• Swiss Re• Allianz• Shell• 3M• Baxter• FedEx• P&G


• Concept first articulated by John Elkington, author of Cannibals with Forks, and Chair of SustainAbility, a leading consulting firm (U.K.)

Financial (F) Environmental (E) Social Responsibility (SR)Performance Performance Performance

Maximize F + E + SR = TBL

Financial Performance F- Risk Costs of E- Risk Costs of SR= TBL

Maximize TBL by reducing risk costs of E + SR

Triple Bottom Line (TBL)Triple Bottom Line (TBL)


Global Warming/Climate Change

Boycotts

Environmental Liability

Ecosystems

Social Responsibility

Directors and Officers

Sustainability RisksSustainability Risks


• Earth’s Atmosphere is getting warmer and will continue to get warmer• 24 of 25 warmest years since 1980• Warmest 1998, 2005, 2003, 2002, 2004,

2006

• The main driver is human activity increasing greenhouse gas (e.g. CO2, methane) emissions and concentrations by burning fossil fuels (oil/petroleum, coal, natural gas)

Sustainability RisksSustainability RisksGlobal Warming/Climate ChangeGlobal Warming/Climate Change


• Overwhelming scientific evidence• Intergovernmental Panel on Climate Change

(IPCC) 4th assessment (2007)• 100s to 1000s of the world’s leading

scientists representing over 120 countries• 90% plus certainty, “unequivocal,” that

human activity the main driver in global warming

• Major scientific organizations (e.g., National Academies, American Geophysical Union, American Meteorological Society) also support



• Study in Science by Naomi Oreskes • Examined 928 scientific articles on climate

change over 1993-2003

• 696 (75%) – evidence supporting connection between human activity and climate change

• 232 (25%) – just dealt with methods

• 0 – evidence supporting no connection



Global WarmingGlobal Warming

Source: Climatic Research Unit and the UK Met. Office Hadley CentreBrohan, P., J.J. Kennedy, I. Haris, S.F.B. Tett and P.D. Jones, 2006

The year 2006 was sixth warmest on record, exceeded

by 1998, 2005, 2003, 2002 and 2004

Combined global land and marine surface temperature record from

1850 to 2006

Climate Change


Global Global WarmingWarming

Environmental Risks

Source: IPCC, 2001: Climate Change 2001: The Scientific Basis. Contribution of Working Group I to the Third Assessment Report ofthe Intergovernmental Panel on Climate Change [Houghton, J.T., Y. Ding, D.J. Griggs, M. Noguer, P.J. van der Linden, X. Dai,K. Maskell, and C.A. Johnson (eds.)]. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA.

Source: IPCC, 2001: Climate Change 2001: The Scientific Basis. Contribution of Working Group I to the Third Assessment Report ofthe Intergovernmental Panel on Climate Change [Houghton, J.T., Y. Ding, D.J. Griggs, M. Noguer, P.J. van der Linden, X. Dai,K. Maskell, and C.A. Johnson (eds.)]. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA.


Source: www.terradaily.com, March 8, 2007


Source: www.earthman.tv, March 13, 2007


Source: http://www.sfu.ca March 13, 2007


Source: Top image: Original photograph taken in 1928 of the Upsala Glacier. ©Archivo Museo Salesiano. Bottom image: January 2004, Composite image of Upsala Glacier, Patagonia, Argentina. © Greenpeace/Daniel Beltra


Aletsch glacier at Belalp, Canton Valais, 1900 and 2005

Source: www.swissinfo.org March 20, 2007


The images show the ice cap as it was in 1979 and the ice cap in 2003.

Source: awitness.org


Property RisksProperty RisksGlobal Warming/Climate Global Warming/Climate ChangeChange

• Catastrophe Losses – Hurricane Andrew, 1992

− Poland (floods, 1997)− China (floods, 1998)− Central Europe (floods, 2002)− Korea (Typhoon Maemi, 2003)− Florida (4 hurricanes in 2004)− Gulf Coast (Hurricane Katrina, Rita, Wilma,

2005)


Property RisksProperty RisksGlobal Warming/Climate Global Warming/Climate ChangeChange

• Munich Re, since 1960s− Frequency of weather disasters has tripled− Natural disaster damage = $200

billion(2005); $90 billion(2004)− Insured losses = $75 billion(2005); $35

billion(2004)• Research predicts

− more intense rainfall− stronger storms− stronger hurricanes− sea level rises− more severe droughts


Liability RisksLiability RisksGlobal Warming/Climate Global Warming/Climate ChangeChange

• Sue countries and industries

• U.S. and fossil fuel industries (coal, oil)

• Coalition of environmental groups− Greenpeace; WWF; NRDC; FOE; Climate Justice

• Island States− Maldives, Tavalu, Kiribati

• Inuits sued U.S. (2006)− Human rights violations – threatens their existence


Liability RisksLiability RisksGlobal Warming/Climate Global Warming/Climate ChangeChange

• Katrina victims sued oil companies (2006)

• Eight States (CA, CT, IA, NJ, NY, RI, VT, WI) and NYC sued 5 utilities (2004)

• California sued six major auto makers (2006)

• Business Insurance Poll – How serious is global warming liability risk? (2007)− 28.3% - very serious− 30.4% - somewhat serious


• Heat stress- France, 2003- 15,000 deaths

• Malaria spreads north/south from Equator

• Insect borne diseases spread more easily

• Impacts poorer countries (Africa, Bangladesh) more, even though they have contributed little

to global warming

Life and Health RisksLife and Health RisksGlobal Warming/Climate Global Warming/Climate ChangeChange


Nike• Outsourcing to sweatshops• United Students Against Sweatshops• Stock price and revenues dropped• Employee morale down• Today – disclosed the names and

locations of their 700 outsourcing factories

• Greatly improved sustainability efforts

Sustainability RisksSustainability RisksBoycottsBoycotts

Images: educatingforjustice.org


NGOs – Internet - send information

• Instantaneously

• Around the world

• Large numbers of people

• Virtually no extra cost



• Revenues – profits and stock prices adversely impacted

• Low Employee Morale

• Reputation damage and brand tarnished

“Targeting brands was like discovering gunpowder for environmentalists”

- James Allen and James Root “The New Brand Tax,” Wall Street Journal, September 7,

2004



Litigation Risks

• Potential environmental liability risks often build up or accumulate over a long period of time, thus when liability established, firm (or industry) faces a huge inventory of claims

• Even if your current actions are within regulations and have not developed into actual liabilities, events can abruptly change your risk situation

Sustainability RisksSustainability RisksEnvironmental LiabilityEnvironmental Liability


Asbestos• Big Event: Dr. Irving Selikoff’s studies at Mt. Sinai Hospital

in New York City in 1960s of asbestos workers.• $100s of billions• 2nd wave of litigation• Insurers paying 60%

Hazardous Waste Disposal• Big Event: 1980 Superfund (Comprehensive Environmental

Response, Compensation, and Liability Act – CERCLA)• $100s of billions• To date, just clean up costs• Natural resource damages not resolved• Insurers pay 50%



Litigation with Other Harmful Substances

1. Exxon Valdez− Oil spill – 11 million gallons− Prince William Sound – Alaska, 1989− $3 billion cleanup costs− $900 million settlement with U.S. and Alaska

governments− $5 billion punitive damages award – still being

appealed



2. Pacific Gas and Electric− Erin Brockovich− Poisoned water with Chromium 6

around Hinkley, CA− $333 million settlement− Negative publicity – movie – Julia

Roberts won Oscar− 11/03/05 – Another similar

lawsuit – Contra Costa Times



3. Monsanto and Solutia− Residents of Anniston, AL− PCB contamination− $700 million settlement, 2003

4. DuPont− Contaminated water in Ohio and West Virginia− PFOA (Perfluo-rooctanoic Acid)− Chemical used in manufacture of Teflon− $340 million settlement, 2003− $16.5 million fine by EPA – largest ever



5. General Electric−Cleanup of Hudson River−PCBs in bottom sediment−$500 million, estimated cost−Agreed to begin cleanup, 2005

6. Litigation in the pipeline−MTBE (methyl tertiary-butyl ether) – an additive in

gasoline−Perchlorate – main ingredient in rocket fuel−Both found in groundwater systems



• OceansOceans• WaterWater• DeforestationDeforestation• BiodiversityBiodiversity• EcosystemEcosystem ServicesServices

• OceansOceans• WaterWater• DeforestationDeforestation• BiodiversityBiodiversity• EcosystemEcosystem ServicesServices

Sustainability RisksSustainability RisksEcosystemsEcosystems


Ecosystem PressuresEcosystem Pressures

• Fishing stocks of large ocean fish down 90% in last 50 years• Possible collapse of all fish species by 2050• Half the world’s population will suffer water shortages by

2025• At current deforestation rates, the Amazon Rainforest will be

gone in 80 years• Great Barrier Reef may bleach out, die and collapse by 2100• 20-30% extinction rates in next 20-30 years; rates 100-1,000

higher than before humans• Millennium Ecosystem Assessment, 2005

− 1,000s of world’s scientists− Ecosystems under major pressure


WaterWater

Ecosystem Risks Source: United Nations Environmental Programme (UNEP)

Disappearance ofLake Chad in Africa

Images provided by NASA Goddard Space Flight Center

Water

Former shoreline

Vegetation


European UnionEuropean UnionEnvironmental Liability DirectiveEnvironmental Liability Directive

• Corporations Responsible for Damages to− Protected species− Natural habitats− Biodiversity− Water systems− Natural resources

• Within 3 years, possible compulsory environmental liability insurance for these damages


1. Robert Costanza, et.al., study in Nature, 1997• Annual value of Ecosystem services: $33 trillion

2. Loss of ecosystem services impacts peoples and industries dependent on ecosystems

3. Firms may be held accountable for damages to these systems

4. Liability starts with damages, and then proceeds to find accountable or negligent parties

Image: conservation.org

“Negligence is described as doing the same thing over and over even though you know it is dangerous, stupid or wrong. Now that we know, it’s time for a change. Negligence starts tomorrow.”

– Bill McDonough & Michael Braungart, authors of Cradle to Cradle

Sustainability RisksSustainability RisksEcosystem ServicesEcosystem Services


1. Texaco − Race discrimination employees− $176 million

2. Morgan Stanley− Gender discrimination – female employees− $54 million settlement, 2004

3. Boeing − Gender discrimination – female employees− $72.5 million settlement, 2004

Sustainability RisksSustainability RisksSocial ResponsibilitySocial Responsibility


4. Dresdner Bank− 6 female workers – class action− Discrimination in pay and promotion plus sexual

harassment− $1.4 billion

5. Wal-Mart− Gender discrimination− 1.6 million female workers− Largest class action gender discrimination suit ever

filed− If each employee gets $10,000 - $16 billion

settlement

Sustainability RisksSustainability RisksSocial ResponsibilitySocial Responsibility


March 19, 2007


• Shareholders resolutions, boycotts and reputation risks “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”

– Warren Buffet, CEO, Berkshire Hathaway

• Loss of market value in investments

• Carbon Disclosure Project report estimated that the market value of some heavy carbon emitters could be slashed by as much as 40 percent

• Innovest Strategic Value Advisors report found similar results with as much as 45 percent of earnings and 35 percent of market capitalization being at risk

Sustainability RisksSustainability RisksDirectors and Officers Directors and Officers LiabilityLiability


• Transparency• Carbon Disclosure Project – Investors• Carbon Risk Disclosure Initiative – Investors• Global Reporting Initiative – Sustainability

Reporting

• World’s 250 largest companies - 67% have made

sustainability reporting a part of risk management

• Swiss Re includes in D&O underwriting



• Fiduciary Duties“The “prudent fiduciary” equation is being turned

on its head. Since there is now evidence that superior environmental and social performance improves the risk

profile, profitability, and stock performance of publicly- traded companies, fiduciaries can be seen to be derelict in their duties if they do not consider sustainability.”

- Matthew Kiernan,

CEO, Innovest Strategic Value Advisors• Sarbanes Oxley

− CEO & CFO must certify• Financial statements• Internal controls are in place

− Increased pressure on disclosing environmental liabilities

− Increased pressure to develop environmental risk management control systems



A. Sustainability Risk Management is just high quality environmental and social responsibility management

B. Prepare a Sustainability Report

C. Waste Reduction

D. Voluntary reduction of greenhouse gases

E. More efficient energy systems

F. Incorporating more fuel efficient vehicles into transportation systems

Sustainability Risk ManagementSustainability Risk Management


G. Green Building (LEED Certification)

H. Partnerships with NGOs (e.g., Environmental Defense)

I. Products - Design for Environment and Life Cycle Assessment

J. Anticipate Regulatory Changes

K. Certifications (e.g., ISO14000), Organizations (e.g., CERES), Programs (e.g., UN Global Compact)

L. Worker Based Programs

Sustainability Risk ManagementSustainability Risk Management


University of WisconsinUniversity of WisconsinSchool of BusinessSchool of Business

• GB 600 – Environmental Strategy and Sustainability• GB 601 – Systems Thinking and Sustainable Businesses • RMI 650 – Sustainability, Environmental and Social Risk Management

Cross-listed with the Nelson Institute for Environmental Studies • BASE – Business Action for Sustainable Enterprise student organization• Net Impact – MBA student organization• Environmental Risk Management Conference

− Fluno Center for Executive Education− Business and Environmental Professors

• Joint Nelson Institute – School of Business faculty committee− Conferences− Research− Joint degree− Proposed Center on Business, Environment and Social Responsibility

© dan r. anderson, uw-madison (rims-no) sustainability risk management aria 2007 quebec city dan r....

Documents

risk costs of sr

risk costs of e srtriple

risk management principles

enterprise risk management

climate change ipcc

climate change houghton

chair of sustainability

climate change232