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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 • • • • • • • • • GE Toyota Swiss Re Allianz Shell 3M Baxter FedEx P&G • • • • • • • • • 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) • 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 • 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) © Dan R. Anderson, UW-Madison (ARIA) Sustainability Risks Global 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 © Dan R. Anderson, UW-Madison (ARIA) Sustainability Risks Global Warming/Climate Change • 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 © 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 – − − − − − − 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 − − − − − 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 - 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 © Dan R. Anderson, UW-Madison (ARIA) Sustainability Risks Boycotts 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 © Dan R. Anderson, UW-Madison (ARIA) Images: educatingforjustice.org Sustainability Risks Boycotts NGOs – Internet - send information • Instantaneously • Around the world • Large numbers of people • Virtually no extra cost © Dan R. Anderson, UW-Madison (ARIA) Sustainability Risks Boycotts • 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 © Dan R. Anderson, UW-Madison (ARIA) Sustainability Risks Environmental Liability 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 © Dan R. Anderson, UW-Madison (ARIA) Sustainability Risks Environmental 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% © Dan R. Anderson, UW-Madison (ARIA) Sustainability Risks Environmental Liability 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 © Dan R. Anderson, UW-Madison (ARIA) Sustainability Risks Environmental Liability 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 © Dan R. Anderson, UW-Madison (ARIA) Sustainability Risks Environmental Liability 3. Monsanto and Solutia − − − 4. Residents of Anniston, AL PCB contamination $700 million settlement, 2003 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 © Dan R. Anderson, UW-Madison (ARIA) Sustainability Risks Environmental Liability 5. General Electric − − − − 6. Cleanup of Hudson River PCBs in bottom sediment $500 million, estimated cost Agreed to begin cleanup, 2005 Litigation in the pipeline − − − 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 • • • • • Oceans Water Deforestation Biodiversity Ecosystem Services © Dan R. Anderson, UW-Madison (ARIA) Ecosystem 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 © 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 • 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 © Dan R. Anderson, UW-Madison (ARIA) Sustainability Risks Ecosystem Services 1. 2. 3. 4. 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 − − 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 © 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 − − − − 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 • 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 © Dan R. Anderson, UW-Madison (ARIA) Sustainability Risks Directors and Officers Liability • • 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 • • • • • • • 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)