Sustainability Risk Management

Article excerpt

This article features a panel discussion on sustainability risk management organized by Dan R. Anderson for the American Risk and Insurance Association 2007 annual meeting. The moderator, Mr. Dan Anderson, is the Leslie P. Schulz Professor of Risk Management and Insurance at the University of Wisconsin-Madison School of Business and author of Corporate Survival: The Critical Importance of Sustainability Risk Management. Anderson is a past president of the American Risk and Insurance Association (ARIA) and the 2007 winner of the Geneva Association/International Insurance Society Research Award, including a $10,000 stipend, for his paper, "Sustainability Risk Management as a Critical Component of Enterprise Risk Management (ERM): Global Warrning-Climate Change Risks." He also was recently presented with the Risk Innovator Award by Risk and Insurance magazine for his work in sustainability risk management. The next panelist is Kenneth E. Anderson, Director of Aon's Environmental Services Group. Mr. Kenn Anderson is a graduate of the University of Wisconsin's Risk and Insurance Management program and has spent the last 20 years advising organizations about their exposure to environmental risk and designing, negotiating and implementing appropriate environmental insurance programs to meet specific client needs. He will emphasize business opportunities associated with sustainability risk management and the availability of insurance coverage for sustainability risks.

Dan R. Anderson: Sustainability risk is a newly emerging risk area and, I believe, one of the critical risk areas of the 21st century. During this discussion I will introduce the general area of sustainability risk management and talk about the identification/ assessment function.

I have been thinking about sustainability risks probably for my entire career, but especially during the last 10 years. Sustainability risk management is concerned with environmental and social responsibility risks. That is, corporations are being pressured to address their environmental and social responsibility performance, in addition to the traditional bottom line. I have long tried to make a business argument for companies to become more sustainable by using risk management principles. There are several informed authors who have written exceUent books on sustainabiUty, but no one has really approached it from a risk management framework or recognized that it needs to be approached in this manner. Further, sustainabiUty risk management needs to be a critical part of enterprise risk management (ERM).

Table 1 contains a list of companies that are financiaUy successful and have strong sustainability records. Of course, this Ust is not meant to be an exclusive one. Improving environmental conditions inside the company and improving the social conditions of workers used to be thought of as a social cost. Now, the argument can be made that the firm will buUd a better reputation, enhance financial performance and improve competitive advantage by pursuing sustainabiUty risk management.

Sustainability risk management can be thought of in terms of the "triple bottom Une" (TBL) developed by John Elkington, a leading consultant in the United Kingdom and author of Cannibals With Forks. The TBL can be articulated as follows:

Maximize: F + E + SR = TBL,

where F = financial performance, E = environmental performance, SR = social responsibility performance, and TBL = F - risk costs of E - risk costs of SR.

According to Elkington, you need to consider aU three areas to get to maximize the triple bottom line. You can see the risk management aspect of the TBL because the costs of risk are subtracted from profit (or financial performance). Obviously, if you reduce the environmental and social responsibiUty risk costs, everything else held constant, the TBL will increase.

To provide a background to the scope and exposure associated with sustainability risk, I am going to discuss six areas of sustainabiilty risk very briefly: global warming/climate change, boycotts, environmental liability, ecosystems, social responsibility, and directors and officers liability. …