Transcript I. Sustainability Risk Management

Sustainability Risk Management
ARIA 2007
Quebec City
Dan R. Anderson
Leslie P. Schultz Professor of Risk Management and Insurance
University of Wisconsin-Madison
School
© Dan R. Anderson,
UW-Madisonof Business
(RIMS-NO)
Image: NASA
© Dan R. Anderson, UW-Madison (ARIA)
Sustainability Risk Management
A.
B.
C.
D.
Management of emerging environmental and social
responsibility risks.
Corporations are being pressured to address
environmental and social responsibility
performance, in addition to the traditional financial
bottom line.
Make a business argument for companies
becoming more sustainable by using risk
management principles.
Sustainability risk management needs to be a
critical part of enterprise risk management.
© Dan R. Anderson, UW-Madison (ARIA)
Sustainability Risk Management
E.
Create Business Opportunities through Sustainability
Strategies
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GE
Toyota
Swiss Re
Allianz
Shell
3M
Baxter
FedEx
P&G
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Intel
Johnson & Johnson
SC Johnson
Johnson Controls
Hewlett Packard
Alcoa
Herman Miller
Kimberly-Clark
Veolia
© Dan R. Anderson, UW-Madison (ARIA)
Triple Bottom Line (TBL)
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Concept first articulated by John Elkington, author of
Cannibals with Forks, and Chair of SustainAbility, a leading
consulting firm (U.K.)
Financial (F)
Performance
Maximize
F
Environmental (E)
Performance
Social Responsibility (SR)
Performance
+
=
E
+
SR
TBL
Financial Performance F
- Risk Costs of E
- Risk Costs of SR
=
TBL
Maximize TBL by reducing risk costs of E + SR
© Dan R. Anderson, UW-Madison (ARIA)
Sustainability Risks
Global Warming/Climate Change
Boycotts
Environmental Liability
Ecosystems
Social Responsibility
Directors and Officers
© Dan R. Anderson, UW-Madison (ARIA)
Sustainability Risks
Global Warming/Climate Change
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Earth’s Atmosphere is getting warmer and will
continue to get warmer
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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)
© Dan R. Anderson, UW-Madison (ARIA)
Sustainability Risks
Global Warming/Climate Change
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Overwhelming scientific evidence
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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
© Dan R. Anderson, UW-Madison (ARIA)
Sustainability Risks
Global Warming/Climate Change
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Study in Science by Naomi Oreskes
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Examined 928 scientific articles on climate change
over 1993-2003
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696 (75%) – evidence supporting connection
between human activity and climate change
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232 (25%) – just dealt with methods
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0 – evidence supporting no connection
© Dan R. Anderson, UW-Madison (ARIA)
Global Warming
Combined global land and marine surface
temperature record from 1850 to 2006
The year 2006 was sixth warmest on
record, exceeded by 1998, 2005, 2003,
2002 and 2004
Climate Change
Source: Climatic Research Unit and the UK Met. Office Hadley Centre
Brohan, P., J.J. Kennedy, I. Haris, S.F.B. Tett and P.D. Jones, 2006
© Dan R. Anderson, UW-Madison (ARIA)
Global Warming
Source: IPCC, 2001: Climate Change 2001: The Scientific Basis. Contribution of Working Group I to the Third Assessment Report of
the 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.
Environmental Risks
© Dan R. Anderson, UW-Madison (ARIA)
Source: www.terradaily.com, March 8, 2007
© Dan R. Anderson, UW-Madison (ARIA)
Source: www.earthman.tv, March 13, 2007
© Dan R. Anderson, UW-Madison (ARIA)
Source: http://www.sfu.ca March 13, 2007
© Dan R. Anderson, UW-Madison (ARIA)
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
© Dan R. Anderson, UW-Madison (ARIA)
Aletsch glacier at Belalp, Canton Valais, 1900 and 2005
Source: www.swissinfo.org March 20, 2007
© Dan R. Anderson, UW-Madison (ARIA)
The images show the ice cap as it was in 1979 and the ice cap in 2003.
Source: awitness.org
© Dan R. Anderson, UW-Madison (ARIA)
Property Risks
Global Warming/Climate Change
• Catastrophe Losses
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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)
© Dan R. Anderson, UW-Madison (ARIA)
Property Risks
Global Warming/Climate Change
• 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
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more intense rainfall
stronger storms
stronger hurricanes
sea level rises
more severe droughts
© Dan R. Anderson, UW-Madison (ARIA)
Liability Risks
Global Warming/Climate Change
• 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
© Dan R. Anderson, UW-Madison (ARIA)
Liability Risks
Global Warming/Climate Change
• 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
© Dan R. Anderson, UW-Madison (ARIA)
© Dan R. Anderson, UW-Madison (ARIA)
Life and Health Risks
Global Warming/Climate Change
• Heat stress
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France, 2003
15,000 deaths
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Malaria spreads north/south from Equator
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Insect borne diseases spread more easily
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Impacts poorer countries (Africa, Bangladesh)
more, even though they have contributed little
to global warming
© Dan R. Anderson, UW-Madison (ARIA)
Sustainability Risks
Boycotts
Nike
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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
© Dan R. Anderson, UW-Madison (ARIA)
Images: educatingforjustice.org
Sustainability Risks
Boycotts
NGOs – Internet - send information
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Instantaneously
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Around the world
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Large numbers of people
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Virtually no extra cost
© Dan R. Anderson, UW-Madison (ARIA)
Sustainability Risks
Boycotts
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Revenues – profits and stock prices adversely
impacted
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Low Employee Morale
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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
© Dan R. Anderson, UW-Madison (ARIA)
Sustainability Risks
Environmental Liability
Litigation Risks
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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
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Even if your current actions are within regulations and
have not developed into actual liabilities, events can
abruptly change your risk situation
© Dan R. Anderson, UW-Madison (ARIA)
Sustainability Risks
Environmental Liability
Asbestos
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Big Event: Dr. Irving Selikoff’s studies at Mt. Sinai Hospital in
New York City in 1960s of asbestos workers.
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$100s of billions
2nd wave of litigation
Insurers paying 60%
Hazardous Waste Disposal
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Big Event: 1980 Superfund (Comprehensive Environmental Response,
Compensation, and Liability Act – CERCLA)
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$100s of billions
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To date, just clean up costs
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Natural resource damages not resolved
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Insurers pay 50%
© Dan R. Anderson, UW-Madison (ARIA)
Sustainability Risks
Environmental Liability
Litigation with Other Harmful Substances
1. Exxon Valdez
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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
© Dan R. Anderson, UW-Madison (ARIA)
Sustainability Risks
Environmental Liability
2. Pacific Gas and Electric
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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
© Dan R. Anderson, UW-Madison (ARIA)
Sustainability Risks
Environmental Liability
3.
Monsanto and Solutia
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Residents of Anniston, AL
PCB contamination
$700 million settlement, 2003
DuPont
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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
© Dan R. Anderson, UW-Madison (ARIA)
Sustainability Risks
Environmental Liability
5.
General Electric
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Cleanup of Hudson River
PCBs in bottom sediment
$500 million, estimated cost
Agreed to begin cleanup, 2005
Litigation in the pipeline
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MTBE (methyl tertiary-butyl ether) – an additive in gasoline
Perchlorate – main ingredient in rocket fuel
Both found in groundwater systems
© Dan R. Anderson, UW-Madison (ARIA)
Sustainability Risks
Ecosystems
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Oceans
Water
Deforestation
Biodiversity
Ecosystem
Services
© Dan R. Anderson, UW-Madison (ARIA)
Ecosystem Pressures
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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
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1,000s of world’s scientists
Ecosystems under major pressure
© Dan R. Anderson, UW-Madison (ARIA)
Water
Water
Former shoreline
Vegetation
Disappearance of
Lake Chad in Africa
Images provided by NASA Goddard Space Flight Center
Ecosystem Risks
Source: United Nations Environmental Programme (UNEP)
© Dan R. Anderson, UW-Madison (ARIA)
European Union
Environmental Liability Directive
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Corporations Responsible for Damages to
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Protected species
Natural habitats
Biodiversity
Water systems
Natural resources
Within 3 years, possible compulsory environmental liability
insurance for these damages
© Dan R. Anderson, UW-Madison (ARIA)
Sustainability Risks
Ecosystem Services
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Robert Costanza, et.al., study in Nature, 1997
• Annual value of Ecosystem services: $33 trillion
Loss of ecosystem services impacts peoples and industries
dependent on ecosystems
Firms may be held accountable for damages to these systems
Liability starts with damages, and then proceeds to find
accountable or negligent parties
“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
© Dan R. Anderson, UW-Madison (ARIA)
Image: conservation.org
Sustainability Risks
Social Responsibility
1. Texaco
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Race discrimination employees
$176 million
2. Morgan Stanley
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Gender discrimination – female employees
$54 million settlement, 2004
3. Boeing
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Gender discrimination – female employees
$72.5 million settlement, 2004
© Dan R. Anderson, UW-Madison (ARIA)
Sustainability Risks
Social Responsibility
4.
Dresdner Bank
− 6 female workers – class action
− Discrimination in pay and promotion plus sexual harassment
− $1.4 billion
5.
Wal-Mart
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Gender discrimination
1.6 million female workers
Largest class action gender discrimination suit ever filed
If each employee gets $10,000 - $16 billion settlement
© Dan R. Anderson, UW-Madison (ARIA)
© Dan R. Anderson, UW-Madison (ARIA)
Source, BusinessWeek, March 3, 2003.
© Dan R. Anderson, UW-Madison (ARIA)
March 19, 2007
© Dan R. Anderson, UW-Madison (ARIA)
© Dan R. Anderson, UW-Madison (ARIA)
Sustainability Risks
Directors and Officers Liability
• 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
© Dan R. Anderson, UW-Madison (ARIA)
Sustainability Risks
Directors and Officers Liability
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Transparency
• Carbon Disclosure Project – Investors
• Carbon Risk Disclosure Initiative – Investors
• Global Reporting Initiative – Sustainability Reporting
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World’s 250 largest companies - 67% have made
sustainability reporting a part of risk
management
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Swiss Re includes in D&O underwriting
© Dan R. Anderson, UW-Madison (ARIA)
Sustainability Risks
Directors and Officers Liability
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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 publiclytraded 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
© Dan R. Anderson, UW-Madison (ARIA)
Sustainability Risk Management
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
© Dan R. Anderson, UW-Madison (ARIA)
Sustainability 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
© Dan R. Anderson, UW-Madison (ARIA)
University of Wisconsin
School of Business
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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 (ARIA)
© Dan R. Anderson, UW-Madison (ARIA)
© Dan R. Anderson, UW-Madison (ARIA)