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Under the spotlight: The transition of environmental risk management
Under the spotlight: The transition of environmental risk management
Under the spotlight: The transition of environmental risk management
Under the spotlight: The transition of environmental risk management
Under the spotlight: The transition of environmental risk management
Under the spotlight: The transition of environmental risk management
Under the spotlight: The transition of environmental risk management
Under the spotlight: The transition of environmental risk management
Under the spotlight: The transition of environmental risk management
Under the spotlight: The transition of environmental risk management
Under the spotlight: The transition of environmental risk management
Under the spotlight: The transition of environmental risk management
Under the spotlight: The transition of environmental risk management
Under the spotlight: The transition of environmental risk management
Under the spotlight: The transition of environmental risk management
Under the spotlight: The transition of environmental risk management
Under the spotlight: The transition of environmental risk management
Under the spotlight: The transition of environmental risk management
Under the spotlight: The transition of environmental risk management
Under the spotlight: The transition of environmental risk management
Under the spotlight: The transition of environmental risk management
Under the spotlight: The transition of environmental risk management
Under the spotlight: The transition of environmental risk management
Under the spotlight: The transition of environmental risk management
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Under the spotlight: The transition of environmental risk management

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The Economist Intelligence Unit surveyed 320 executives around the world in March 2008 about their attitudes to environmental risk management. The survey was sponsored by ACE, KPMG, SAP and Towers …

The Economist Intelligence Unit surveyed 320 executives around the world in March 2008 about their attitudes to environmental risk management. The survey was sponsored by ACE, KPMG, SAP and Towers Perrin. Respondents represent a wide range of industries and regions, with roughly one-third each from Asia and Australasia, North America and Western Europe. Approximately 50% of respondents represent businesses with annual revenue of more than US$500m. All respondents have influence over, or responsibility for, strategic decisions on risk management at their companies. The Economist Intelligence Unit's editorial team conducted the survey and wrote the paper. The findings expressed in this summary do not necessarily reflect the views of the sponsors. Our thanks are due to the survey respondents for their time and insight.

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  • 1. Under the spotlightThe transition of environmental risk management sponsored byAn Economist Intelligence Unit report ACE, KPMG, SAP and Towers Perrin
  • 2. The Economist Intelligence UnitThe Economist Intelligence Unit is a specialist publisher serving companies establishing and managingoperations across national borders. For 60 years it has been a source of information on business developments,economic and political trends, government regulations and corporate practice worldwide.The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where thelatest analysis is updated daily; through printed subscription products ranging from newsletters to annualreference works; through research reports; and by organising seminars and presentations. The firm is a memberof The Economist Group.About this researchThe Economist Intelligence Unit surveyed 320 executives around the world in March 2008 about their attitudes toenvironmental risk management. The survey was sponsored by ACE, KPMG, SAP and Towers Perrin.Respondents represent a wide range of industries and regions, with roughly one-third each from Asia andAustralasia, North America and Western Europe.Approximately 50% of respondents represent businesses with annual revenue of more than US$500m. All respondentshave influence over, or responsibility for, strategic decisions on risk management at their companies.The Economist Intelligence Unit’s editorial team conducted the survey and wrote the paper. The findingsexpressed in this summary do not necessarily reflect the views of the sponsors. Our thanks are due to the surveyrespondents for their time and insight.Copyright© 2008 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication norany part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means,electronic, mechanical, photocopying, recording or otherwise, without the prior permissionof The Economist Intelligence Unit Limited.All information in this report is verified to the best of the author’s and the publisher’s ability. However, theEconomist Intelligence Unit does not accept responsibility for any loss arising from reliance on it.
  • 3. Under the spotlight The transition of environmental risk managementExecutive SummaryT here is a growing consensus that business increased complexity in business. A successful compa- should bear a greater responsibility towards the ny now depends on an intricate web of global supply environment and pay closer attention to the chains and partner networks, while an international“externalities” that its activities create. Non- reach – through alliances, acquisitions and greenÞeldgovernmental organisations, customers, govern- investments – has become a prerequisite for growth.ments and investors have all begun to scrutinise the Given these two parallel trends of greater businessactivities of business more carefully and demand complexity and scrutiny into environmental perform-a more responsible and sustainable approach. In ance, it was only a matter of time before companiesresponse, the business community has implemented would seek a more rigorous way of identifying andcorporate social responsibility programmes with assessing their environmental liabilities, and of man-the aim of improving its social and environmental aging the risks associated with them in a more coher-behaviour and portraying itself as a more responsible ent manner. Companies now seek greater visibilitymember of society. not just of their own activities, but of those that take External pressure to improve environmental per- place in countries to where they have outsourcedformance has coincided with a trend towards manufacturing, logistics or assembly. In addition, as Key points from the survey: organisations increasingly seek overseas acquisitions to further expansion plans, there has been a growing 1) Environmental risk management is frequently managed in an ad hoc fashion. realisation of the need to scrutinise environmental performance of target companies more carefully as 2) There is no clear consensus about who should be part of their due diligence processes. responsible for environmental risk. But while the general trend is towards a more 3) Many companies conduct strategic activities rigorous evaluation of environmental risk, this is by without a formal assessment of environmental risk. no means universal. Many companies have only just 4) Respondents see compliance with environ- embarked on this journey and have a long way to go mental legislation as a key strength. before they reach their destination. In order to assess 5) Managing environmental risks associated with the extent to which environmental risk management suppliers and partners is a key area of weakness. has become part and parcel of modern business strat- 6) Better reputation with customers and inves- egy, the Economist Intelligence Unit conducted a tors is seen as the main benefit of environmental survey of senior professionals with responsibility for risk management. risk on behalf of ACE, KPMG, SAP and Towers Perrin. 7) Climate change is an opportunity as well as a From this survey, a number of key Þndings emerge: risk. 8) Lack of certainty – about the impact of environ- Environmental risk management is frequently mental liabilities and the future scope of legislation managed in an ad hoc fashion. For a number of – are the main obstacles to effective environmental years, the trend in risk management has been risk management. towards a formal, co-ordinated and consistent © The Economist Intelligence Unit 2008 1
  • 4. Under the spotlight The transition of environmental risk management How is environmental risk managed in your organisation? risk management, there is no such consensus. Just Please select the answer that is most appropriate. under one-quarter of respondents say that the chief (% respondents) executive is responsible, and just under one in five In an ad hoc way 33 cite the chief risk officer as having ultimate sway. In a co-ordinated way as part of an overall risk management framework But beyond these two senior executives, the range of 31 In a co-ordinated way, but separate to the overall risk management framework responses given is extremely wide. At 14% of respond- 26 ent organisations, no one has overall responsibility Not at all 10 for environmental risk, while 17% leave it to regional approach that aggregates all categories of risk at directors, heads of business unit or line managers. the enterprise level. Yet for many companies, envi- This Þnding suggests that the management of en- ronmental risk management seems to have escaped vironmental risk is often decentralised and that many this trend. One third of respondents say that they organisations lack a bird’s eye view of their exposure manage environmental risk in an ad hoc manner, to the threats they face and their cumulative liabili- while 31% say that they manage it in a co-ordinated ties. This piecemeal approach may enable companies way as part of an overall risk management frame- to identify isolated problems, but without oversight it work. Just over one-quarter say that they manage it will be difÞcult for them to obtain an overall picture in a co-ordinated way, but separately from the main of the risks they face. risk framework, while one in ten says that they do This is not to say that it is impossible for manage- not manage environmental risk at all. ment of this risk to be delegated to a layer below This Þnding suggests that, despite media, board level. With clear lines of responsibility and investor and regulatory scrutiny of environmental accountability, along with the ear of a top execu- performance, this category of risk has still not be- tive should it be required, this approach may well be come part and parcel of the main risk management sufÞcient. There are likely to be problems, however, agenda. Parallels can be drawn with the corporate Who in your company has overall responsibility for managing social responsibility movement in general: initially environmental risks? (% respondents) seen by many companies as an extension of their public relations department, it gradually assumed Chief executive officer 24 greater importance and has now, for many compa- Chief risk officer nies at least, become a central strand of corporate 19 Heads of business units strategy. One might expect environmental risk 12 Chief sustainability/corporate social responsibility officer management to make a similar transition over the 10 coming years. Chief financial officer 4 Chief legal officer/general counsel There is no clear consensus about who should be 3 Regional directors responsible for environmental risk. In previous 3 surveys in the Global Risk Briefing series – for exam- Line managers 2 ple on reputational risk – there has been widespread No one has overall responsibility 14 agreement that a board-level executive, and usually Don’t know the CEO, should assume ultimate responsibility for 7 Other, please specif managing that risk. But in the case of environmental 32 © The Economist Intelligence Unit 2008
  • 5. Under the spotlight The transition of environmental risk managementIn which of the following business activities does your company are slightly higher for manufacturing and heavyconduct a formal consideration of environmental risk?Select all that apply. industry – for example, 52% of energy and natural(% respondents) resources companies conduct such an assessmentDeveloping new products and services when developing new products and services – but the 41 numbers are not strikingly different. Given the poten-Marketing new product or service 32 tial scale of environmental liabilities that companiesSelection of suppliers and partners 32 might face, and the reputational damage that can beSelecting new business location caused by poor consideration of these issues, these 28Planning geographical expansion Þgures seem surprisingly low. 26 The survey also looked speciÞcally at aspects ofPlanning market expansion 23 environmental risk management undertaken whenPlanning mergers and acquisitions respondents are planning an acquisition. Again, 19None of the above there is only limited use made of formal due diligence 21 processes, such as assessing environmental liabilitiesif responsibility is decentralised or left to a depart- of the target company or its compliance with environ-ment or regional head who does not have visibility mental legislation. Indeed, 37% of respondents sayinto other areas of the business. The lack of a process that they conduct none of the activities put forwardto communicate problems to the board will also cre- in the question when planning an acquisition.ate difÞculties because, without such a structure in One aspect that the survey does not capture isplace, executive management cannot have conÞdence the extent to which, having selected a supplier orthat information about serious risks is being passed partner or sealed an acquisition deal, companiesup the chain to them. monitor environmental risk on an ongoing basis. The suspicion has to be that, with so few companiesMany companies conduct strategic activities with- conducting formal assessment of environmental riskout a formal assessment of environmental risk. when they embark on these activities, even fewer willBlind-spots in the risk management of partners and keep track of these risks on a regular basis once thesuppliers have the potential to cause serious reputa- due diligence period is complete. Clearly, both aretional damage. Although such a task is by no means essential if the management of these risks is to beeasy, careful scrutiny of the practices of partners and effective over the long term.suppliers has become essential to prevent problemsfrom taking place. When planning an acquisition, which of the following steps do According to our survey, however, a high propor- you take to evaluate environmental exposure of your target?tion of companies do not conduct a formal assessment Select all that apply. (% respondents)of environmental risk when undertaking a wide range Formal due diligence to assess environmental liabilitiesof strategic activities, including the selection of part- 38ners or suppliers. Just 41% say that they conduct such Formal assessment of compliance with environmental legislation 35an assessment when developing new products and Assessment of long-term liabilities related to climate changeservices, 32% when selecting partners or suppliers, 21 Formal assessment of environmental exposure within supply chain26% when planning geographical expansion and just 1919% when planning mergers and acquisitions. Figures None of the above 37 © The Economist Intelligence Unit 2008 3
  • 6. Under the spotlight The transition of environmental risk management Supply chains and the environment a similar problem. The complex, highly distributed nature of supply chains and partner networks fosters a A recent Economist Intelligence report entitled Doing decentralised approach – even if this is inappropriate. Good: Business and the Sustainability Challenge identified As with environmental risk, then, companies should the supply chain as being an area of particular weakness pay careful attention to lines of responsibility and for companies seeking to improve their sustainability per- accountability for supply chain issues. formance. The problem is one that has plagued companies Asked how successfully they manage aspects of for decades – it is very difficult to obtain clear visibility environmental risk related to their supply chain, into practices carried out by external companies, and respondents tend to perform most successfully at responsibility for environmental performance in these those aspects that are either regulated or for which outsourcing relationships is often blurred. For example, a they will be seen to have clear responsibility if things company might consider that, because it has outsourced go wrong. For example, just over half think that they logistics or manufacturing, the partner company should are successful at managing issues related to water be responsible for ensuring that environmental problems pollution, the transportation of hazardous waste or do not arise, and for dealing with the fall-out should an chemicals, or the potential use of toxic and hazardous accident occur. In theory, that may be true but, from a substances in manufacturing. reputational perspective, the media, pressure groups and In most countries, all three activities are closely customers will be unlikely to draw a distinction between regulated and hence it is compulsory for companies activities conducted by a supplier and the parent company. to pay attention to these areas. Moreover, an accident Businesses increasingly realise this and are making related to a spill of hazardous substances, water greater efforts to scrutinise the environmental pollution or the use of toxic chemicals in manufacturing performance of their suppliers and partners. But many is specific and can be directly traced back to the company companies are still at the early stages of their journey that is responsible. An oil tanker that runs aground, the to improve visibility into the supply chain and there use of lead paint in products, or the pollution of a town’s continue to be weaknesses that have yet to be addressed. water supply by a factory are all directly attributable to One of the difficulties is ownership of supply the offender. As a result, these are areas that companies chain risks that are related to the environment. need to monitor extremely carefully, as the reputational Just as responsibility for environmental risk is often implications of such environmental risks are substantial. decentralised, so too supply chain risk suffers from How successfully does your company manage the following environmental risks related to its supply chain? Rate on a scale of 1 to 5, where 1= Very successfully and 5=Not at all successfully. (% respondents; Charts shows responses 1 and 2 on scale only) Very successfully Successfully Water pollution 7 47 Potential use of toxic/hazardous substances in manufacture 15 37 Transportation of hazardous chemicals or waste 12 40 Air pollution 8 42 Impact of manufacturing or other operations on local communities 4 38 Water scarcity 11 32 Emissions from factories, warehouses and other facilities 8 32 Emissions from transportation 4 30 Disruption to supply chain from extreme weather events 6 214 © The Economist Intelligence Unit 2008
  • 7. Under the spotlight The transition of environmental risk management The areas where companies say that they perform less What is your company doing to improve the management of its supply chain in light of these risks? well are those that might be considered general, and Select all that apply. for which no direct responsibility can be assumed by an (% respondents) individual company. The biggest weakness, according Use of more fuel-efficient vehicles to respondents, is the management of disruption to the 20 supply chain from extreme weather events. Not only are Collaboration with logistics providers 16 these events external and unpredictable, they affect all Defined risk indicators / risk thresholds for environmental risk within companies in the vicinity and, usually, no company can be the supply chain singled out for handling the crisis poorly. 14 Implementing third-party audit of suppliers and partners Equally, just one-third of respondents say that they 13 manage emissions from transportation successfully. Use of route optimisation technology 13 Again, this is a general issue – while collectively, Made formal assessment of interdependencies of environmental risk emissions might cause major problems in terms of across the supply chain pollution and climate change, no single company can 11 Introducing redundancy into supply chain be identified as a major culprit. There is therefore less 9 incentive to make improvements to performance in Increased use of "nearshoring" 8 terms of emissions – doing so tends to be done either to Relocation of factories, warehouses and other businesses improve the efficiency of operations or to demonstrate 8 corporate social responsibility to customers. Implemented formal process to assess environmental liabilities within the supply chain In the absence of strong incentives to improve 8 performance, areas that depend on collective responsibility Mandating suppliers to disclose carbon footprint 7 are best addressed by regulation. Without the obligation of compliance, the potential for “free riders” to take as their number one priority (although it is notable advantage of the actions of others is too great. that, in all cases, only a small minority of respondents This is not to say, however, that companies are was undertaking any of these initiatives). This finding not thinking about these general problems. Asked suggests that some companies have recognised that about the initiatives they were taking to improve the fuel efficiency in the supply chain is an area that needs management of environmental risk in the supply chain, improvement – and that it is one where modifications can respondents cite the use of more fuel-efficient vehicles have a positive impact on the bottom line.Respondents see compliance with environmental with speciÞc expertise and training. This processlegislation as a key strength. Asked how success- requires considerable resources from which it is dif-fully they thought they managed different aspects Þcult to derive economies of scale.of environmental risk, respondents considered that Yet is it interesting to note that companies seedealing with environmental regulations was their key their key strength as the one aspect of environ-strength. Just over half of respondents thought that mental risk that is compulsory – other areas thatthey performed this activity either successfully or are voluntary, but where competitive advantagevery successfully. may more easily be gained, are less well developed. The complexity of environmental legislation For example, companies may not be compelled toand the lack of regulatory harmonisation between improve their energy efÞciency, but to do so canregions makes compliance a difÞcult and costly task. create sustained competitive advantage in terms ofIn seeking to comply with legislation within each greater operational efÞciency over those companiesof the jurisdictions in which it operates, a company that have not yet considered this course of action.will require multiple, national compliance teams © The Economist Intelligence Unit 2008 5
  • 8. Under the spotlight The transition of environmental risk management How successfully do you think your company manages the following aspects of environmental risk? Rate on a scale of 1 to 5, where 1= Very successfully and 5=Not at all successfully. (% respondents; Charts shows responses 1 and 2 on scale only) Very successfully Successfully Dealing with environmental regulations 14 37 Identifying environmental liabilities 13 36 Increasing energy efficiency 9 34 Assessing scale and scope of environmental liabilities 11 30 Exploiting opportunities arising from changing public perception of environmental issues 11 28 Understanding impact of climate change on business locations 6 31 Reporting on environmental performance to investors 11 21 Decisions over environmental risks to bear, transfer or manage 7 25 Due diligence of partners and suppliers environmental performance 5 21 Applying hedging contracts to transfer environmental risks 5 18 Optimising supply chain to reduce carbon emissions 4 19 Managing environmental risks associated with Better reputation with customers and investors suppliers and partners is a key area of weak- is seen as the main benefit of environmental risk ness. The main weaknesses of environmental risk management. The survey provides a clear indication management, according to respondents, seem to that companies see an enhanced reputation with cus- centre around dealing with partners and the sup- tomers as the key benefit of effective environmental ply chain. Less than one quarter of respondents risk management. Almost six in ten said that this was consider themselves to be successful at optimising one of the main benefits to be gained – a considerable the supply chain to increase energy efficiency and margin ahead of better reputation with investors, just over one quarter consider themselves to be suc- which was cited by 30%. cessful at due diligence of partners’ and suppliers’ Companies that operate in consumer markets environmental performance. Given the complexity have recognised the need to burnish their environ- of today’s supply chain and the interconnected web mental credentials for a number of years. In the of partner organisations that support most busi- UK, the Plan A initiative operated by retailer Marks nesses, this is perhaps not surprising. The finding & Spencer (so called because the company says suggests, however, that more needs to be done to there is no Plan B), which commits the company to assess these liabilities which, from a reputational numerous environmental and ethical principles, point of view, will be perceived as being the respon- provides a good example of a strategy that poten- sibility of the parent company as well as the sup- tially has the outcome of strengthening reputation plier. A supply chain or partner network is only as in this way. strong as its weakest link; it is therefore imperative Consumers may select a brand in part on the that companies scrutinise their relationships to basis of its environmental credentials, but busi- assess where potential faults may lie. ness-to-business customers may be less inclined to6 © The Economist Intelligence Unit 2008
  • 9. Under the spotlight The transition of environmental risk managementdo so. As mentioned in an earlier Þnding, less than Despite this apparent focus on customers as theone third of companies say that they consider envi- driving force behind environmental risk manage-ronmental issues when selecting a partner or sup- ment, it is interesting to note that, when askedplier. With these relationships, it seems, it is still about the stakeholders who were exhorting compa-the core metrics of cost, service and performance nies to improve their performance in this area, theythat matter most. In addition, business to business come some way down the list. Respondents say thatrelationships are generally more long-term and tied the main force behind the initiative is executiveinto contracts. This means that, unlike a retailer management, followed by regulators and govern-that can measure an upswing in sales as the result ment. Customers come fourth on the list – againof a high-proÞle environmental initiative within a providing evidence that compliance is frequentlymatter of days, B2B companies must wait longer to the main driver behind more effective environmen-assess the results of such an approach. tal risk management. This is not to say, however, that environmental The second biggest beneÞt of effective environ-performance will not become a more important mental risk management – although it scores wellconsideration in business to business relationships. behind reputation with customers – is enhancedAs scrutiny by customers, regulators, employees reputation with investors. Certainly, investors areand others intensiÞes, companies will Þnd them- becoming more interested in environmental risk.selves having to pay more attention to the environ- Shareholder resolutions Þled against companies tomental performance of their suppliers. Moreover, it protest at some aspect of environmental performanceis likely that good environmental performance and are becoming more commonplace – according to areporting will come to be seen as a proxy for good December 2006 article in the Harvard Business Re-overall management – and that in itself will prove view, there were 360 resolutions Þled around corpo-attractive for potential customers. rate social responsibility issues in 2005. There is alsoWhich of the following stakeholders currently exerts the most What are the biggest benefits that your company expects topressure on your company to improve environmental risk derive from more effective environmental risk management?management? Select up to three.Select all that apply. (% respondents)(% respondents) Better reputation among customersExecutive management 59 23 Better reputation among investorsRegulators 30 15 New business opportunitiesGovernment 28 13 Greater operational efficiencyCustomers 27 11 Enhanced competitive positioningEmployees 27 9 Improved shareholder valueNon-governmental organisations 20 8 Stronger ability to attract and retain employeesInvestors 18 8 Improved relations with regulatorsLocal communities 18 7 Increased profitabilityNon-executive management 17 5 Reduction in overall carbon footprintPartners and suppliers 12 1 Enhanced ability to influence government policy 11 © The Economist Intelligence Unit 2008 7
  • 10. Under the spotlight The transition of environmental risk management a growing interest in reporting that takes account of Which of the following factors most hinder your ability to these metrics, as evidenced by the Global Reporting manage environmental risk? Please select up to three. Initiative, a voluntary sustainability reporting frame- (% respondents) work, which has been adopted by more than 1500 Lack of certainty about impact of environmental liabilities major companies since it was launched in 2002. 35 Lack of regulatory harmonisation between regions Yet despite these trends, investors do not seem 34 to be exerting huge pressure on companies to Cost of managing environmental risks 30 address their environmental risk management, Difficultly establishing benchmarks of key performance indicators according to our survey. They trail behind most 28 Constantly changing regulations other stakeholders at seventh place on the list. 23 Even when segmenting the results to consider only Tendency for issue to be overly emotive 20 board-level respondents, who are most likely be in Potential for liabilities to be hidden within supply chain 19 the Þring line for wrath from shareholders, inves- Complexity of supply chain/partner relationships tors continue to lag behind most other stakehold- 18 Lack of awareness among employees of liabilities ers. Looking at the larger companies in the survey, 18 however, investors do feature more prominently. Commitment from senior management 18 Greater scrutiny from investors, it seems, is far Lack of awareness among employees of legislation 15 more likely to come with size. Uncertainty over carbon price 10 Climate change is an opportunity as well as a new commodity market. Energy companies, mean- risk. There is a widely held view that, while climate while, have opportunities to develop new sources of change could have a devastating effect on economic energy that are less dependent on fossil fuels – the growth and the business community at large, there styling of BP as “Beyond Petroleum” is a striking ex- will be new and emerging opportunities associated ample of that particular company’s long-term inten- with society’s efforts to address the problem. One tions. And automotive companies have opportunities company’s risk is an another’s opportunity, and so to develop new, low-emissions engines, just as Toyota it is with climate change, according to our respond- has done so successfully with its Prius hybrid model. ents. Asked to rate the significance of opportunities and risks associated with climate change, 44% saw Lack of certainty – about the impact of environmen- the risks as significant but a slightly higher propor- tal liabilities and the future scope of legislation tion of 49% saw the opportunities as significant. – are the main obstacles to effective environmental For Þnancial services companies, for example, the risk management. trading of permits to emit carbon as part of the Euro- Asked about the factors that stood in the way pean Emissions Trading Scheme has created a buoyant of more effective environmental risk management, How significant does your company view the opportunities and risks associated with climate change? Rate on a scale of 1 to 5, where 1= Very significant and 5=Not at all significant. (% respondents) 1 Very significant 2 3 4 5 Not at all significant Opportunity 17 32 26 15 9 Risk 17 27 34 14 78 © The Economist Intelligence Unit 2008
  • 11. Under the spotlight The transition of environmental risk managementtwo issues stood out. First, respondents feel thatthey lack certainty about the potential impact ofenvironmental liabilities, and second, they are con-cerned about the lack of international regulatoryharmonisation. At their heart, these two issues are concernedwith a lack of certainty. If we look at the top threerisks cited by respondents for which they face po-tential environmental liabilities – extreme weatherevents, the potential impact of climate change overthe long term and water scarcity, it is clear thatthe timing and scale of these threats is inherentlyunpredictable. Faced with such a high degree ofuncertainty, and the huge challenge of quantifyingthese threats, it is perhaps unsurprising that envi-ronmental risk management remains at a relativelyearly stage of its development. The lack of regulatory harmonisation aroundenvironmental risk management also creates un-certainty for companies. The current Kyoto Protocolon climate change expires in 2012 and there is, asyet, no successor. Although in Europe, the emis-sions trading scheme is certain to continue in someshape or form, it remains unclear whether thescheme will broaden to encompass more industriesand countries, or whether the US, China and Indiawill sign up to a similar cap-and-trade approach.Without the policy steers that they need to setlong-term strategy, and with divergent approachesbeing taken to regulation in different parts of theworld, it inevitably becomes difÞcult for compa-nies to manage environmental risk coherently on aglobal platform. © The Economist Intelligence Unit 2008 9
  • 12. Under the spotlight The transition of environmental risk management Conclusion ! Companies should ensure that environmental risk ! Environmental risks can also be a source of oppor- is managed in a co-ordinated way and forms part of tunity. In the coming years, it is almost certain their overall risk management framework. The survey that environmental risk will rise up the corporate suggests that too many companies are managing agenda as concern about climate change and the environmental risk in an ad hoc manner. If the activ- impact of business on the environment increases. ity is to be successful, it must be considered as part of This presents challenges for companies, but it also the overall risk management strategy and not man- offers opportunities. Depending on their industry, aged as a separate process only when problems arise. companies may be able to develop products or services that offer better environmental perform- ! Executives should put in place clear lines of respon- ance than those of their competitors, or that help sibility and ensure that a senior person has respon- to address some of the risks that companies are sibility for this risk. Only a minority of companies now facing. in our survey hand responsibility for environmental risk to the chief executive of chief risk officer. All too often, it is delegated to regional directors, line managers or no one has overall responsibility at all. It is not essential to have the chief executive in charge of environmental risk but if he or she is not, there must be clear lines of accountability and appropriate channels through which problems can be elevated and discussed. ! Environmental risk does not stop at the company walls. Our survey suggests that one of the main weaknesses among corporates with this aspect of risk is a lack of scrutiny into the environmental performance of partners and suppliers. Given the number and geographical range of the external partners with whom companies collaborate, it is essential that they consider environmental risk not just within their own organisation, but also among those with whom they work. They must ensure that they ask the right questions when evaluating poten- tial partners, but the process should not end there. It is just as important to monitor environmental performance on an ongoing and regular basis.10 © The Economist Intelligence Unit 2008
  • 13. Appendix Under the spotlight The transition of environmental risk managementAppendix: Survey resultsHow significant a threat do the following risks pose to your companys global business operation today?Rate on a scale of 1 to 5, where 1=Very high risk and 5=Very low risk.(% respondents; Charts shows responses 1 and 2 on scale only) Very high risk High riskHuman capital risks (eg, skills shortages, succession issues, loss of key personnel) 16 35Market risk (risk that the market value of assets will fall) 19 31Reputational risk (eg, events that undermine public trust in your products or brand) 24 25Regulatory risk (problems caused by new or existing regulations) 14 31Credit risk (risk of bad debt) 14 31Financing risk (difficulty raising finance) 12 26Foreign exchange risk (eg, risk that exchange rates may worsen) 11 25IT risk (eg, loss of data, outage of data centre) 11 23Country risk (problems of operating in a particular location) 9 24Political risk (danger of a change of government) 10 16Natural hazard risk (eg, climate change, hurricanes, earthquakes) 4 20Environmental risk 3 20Terrorism 6 15Crime and physical security 5 15In each of the following regions, are the majority of risks to your business considered to be general(eg, likely to affect many other companies operating in the same location or industry) or specific(eg, relating to your company’s internal systems, processes or people)?(% respondents) General Specific Don’t know/Not applicableAfrica/Middle East 51 17 33Asia Pacific 53 24 23Eastern Europe 48 18 34Western Europe 58 21 21North America 58 25 17Latin America 46 18 36 © The Economist Intelligence Unit 2008 11
  • 14. AppendixUnder the spotlightThe transition of environmental risk management How has your organisations assessment of risk in each of the following countries and regions changed over the last three months? (% respondents) Significant increase in risk Slight increase in risk Overall global risk 5 56 USA 23 38 Middle East 11 29 China 8 30 Russia 12 24 UK 7 28 India 7 25 Latin America 5 22 Other Eastern Europe 3 25 Other Western Europe 2 25 France 3 20 Rest of Asia Pacific 3 19 Germany 2 19 Canada 2 18 Japan 2 14 What are the biggest benefits that your company expects to Which of the following stakeholders currently exerts the most derive from more effective environmental risk management? pressure on your company to improve environmental risk Select up to three. management? (% respondents) Select all that apply. (% respondents) Better reputation among customers 59 Executive management Better reputation among investors 23 30 Regulators New business opportunities 15 28 Government Greater operational efficiency 13 27 Customers Enhanced competitive positioning 11 27 Employees Improved shareholder value 9 20 Non-governmental organisations Stronger ability to attract and retain employees 8 18 Investors Improved relations with regulators 8 18 Local communities Increased profitability 7 17 Non-executive management Reduction in overall carbon footprint 5 12 Partners and suppliers Enhanced ability to influence government policy 1 1112 © The Economist Intelligence Unit 2008
  • 15. Appendix Under the spotlight The transition of environmental risk management What change has there been to the amount of attention and financial resources that your company dedicates to environmental risk in the past three years, and what change do you expect in the next three years? (% respondents) Significant increase Slight increase No change Decrease Past three years 12 47 38 2 Next three years 27 48 23 2What change has there been to the scale of your overall environmental liabilities over the past three years, and what change do youexpect in the next three years?(% respondents) Significant increase Slight increase No change Slight decrease Significant decreasePast three years 7 33 57 3Next three years 13 45 38 3 1Over the past three years, which of the following initiatives has In the past three years, what change has there been to theyour company undertaken to improve its management of amount of time the board spends on discussing environmentalenvironmental risk? issues?Select all that apply. (% respondents)(% respondents) Significant increaseDeveloped new products or services to help address environmental problems 14 35 Slight increase 47Considered environmental/climate issues at Board level 31 No change 37Engaged/trained employees on environmental risk issues 31 Slight decrease 2Conducted review of insurance policies to protect against environmental risk 26 Significant decrease 0Set targets for reducing carbon emissions 22Engaged with non-governmental organisations to implement and assessenvironmental policy 21Set environmental standards and controls for suppliers to meet 20Conducted scenario planning to consider potential impact of climate change 19Implemented an internationally recognised framework for reportingenvironmental performance 17Conducted a review of carbon offsetting activities to manage reputational risk 15Developed a climate change strategy 12Cancelled or postponed new investment because of concerns aboutenvironmental risk 11Terminated supplier/partner relationship because of concerns aboutenvironmental risk 9Received external assurance over environmental performance 8None of the above 18 © The Economist Intelligence Unit 2008 13
  • 16. AppendixUnder the spotlightThe transition of environmental risk management How significant a concern are the following issues associated with environmental risk for your company? Rate on a scale of 1 to 5, where 1=Very significant concern and 5=No concern at all. (% respondents; Charts shows responses 1 and 2 on scale only) Very significant concern Significant concern Rising energy and fuel prices 27 36 Potential impact of climate change over long term 18 34 Potential for extreme weather events 17 33 Damage to reputation and brand 20 28 Water scarcity 15 26 Industrial pollution 8 30 Failure to meet reporting obligations 9 25 Failure to comply with environmental regulation 11 22 Accessibility of raw materials due to extreme weather events 8 23 Impact on biodiversity 6 23 Failure to meet emissions targets 7 16 Over/under payment of environmental taxes 5 18 Carbon trading losses 5 15 How successfully do you think your company manages the following aspects of environmental risk? Rate on a scale of 1 to 5, where 1= Very successfully and 5=Not at all successfully. (% respondents; Charts shows responses 1 and 2 on scale only) Very successfully Successfully Dealing with environmental regulations 14 37 Identifying environmental liabilities 13 36 Increasing energy efficiency 9 34 Assessing scale and scope of environmental liabilities 11 30 Exploiting opportunities arising from changing public perception of environmental issues 11 28 Understanding impact of climate change on business locations 6 31 Reporting on environmental performance to investors 11 21 Decisions over environmental risks to bear, transfer or manage 7 25 Due diligence of partners and suppliers environmental performance 5 21 Applying hedging contracts to transfer environmental risks 5 18 Optimising supply chain to reduce carbon emissions 4 1914 © The Economist Intelligence Unit 2008
  • 17. Appendix Under the spotlight The transition of environmental risk managementHow would you rate the following aspects of managing supply chain risk in your organisation?Rate on a scale of 1 to 5, where 1= Very significant and 5=Not at all significant.(% respondents) 1 Very significant 2 3 4 5 Not at all significantDegree of visibility and transparency regarding the interdependencies of risk across our supply chain 9 45 30 11 5Level of dependency on technology to manage supply chain related risks 9 35 42 11 4How successfully does your company manage the following environmental risks related to its supply chain?Rate on a scale of 1 to 5, where 1= Very successfully and 5=Not at all successfully.(% respondents; Charts shows responses 1 and 2 on scale only) Very successfully SuccessfullyWater pollution 7 47Potential use of toxic/hazardous substances in manufacture 15 37Transportation of hazardous chemicals or waste 12 40Air pollution 8 42Impact of manufacturing or other operations on local communities 4 38Water scarcity 11 32Emissions from factories, warehouses and other facilities 8 32Emissions from transportation 4 30Disruption to supply chain from extreme weather events 6 21 © The Economist Intelligence Unit 2008 15
  • 18. AppendixUnder the spotlightThe transition of environmental risk management What is your company doing to improve the management of its Who in your company has overall responsibility for managing supply chain in light of these risks? environmental risks? Select all that apply. (% respondents) (% respondents) Chief executive officer Use of more fuel-efficient vehicles 24 20 Chief risk officer Collaboration with logistics providers 19 16 Heads of business units Defined risk indicators / risk thresholds for environmental risk within 12 the supply chain Chief sustainability/corporate social responsibility officer 14 10 Implementing third-party audit of suppliers and partners Chief financial officer 13 4 Use of route optimisation technology Chief legal officer/general counsel 13 3 Made formal assessment of interdependencies of environmental risk Regional directors across the supply chain 3 11 Line managers Introducing redundancy into supply chain 2 9 No one has overall responsibility Increased use of "nearshoring" 14 8 Don’t know Relocation of factories, warehouses and other businesses 7 8 Other, please specif Implemented formal process to assess environmental liabilities within 3 the supply chain 8 Mandating suppliers to disclose carbon footprint 7 Which of the following indicators does your company use in its How is environmental risk managed in your organisation? formal environmental reporting? Please select the answer that is most appropriate. Select all that apply. (% respondents) (% respondents) In an ad hoc way Initiatives to mitigate environmental impact of products and services 33 30 In a co-ordinated way as part of an overall risk management framework Materials used 31 28 In a co-ordinated way, but separate to the overall risk management framework Waste to landfill and recycling 26 22 Not at all Greenhouse gas emissions 10 20 Emissions targets and progress on reaching those targets 16 Total water withdrawal What types of supply chain risks do you perceive as having the 15 potentially greatest environmental impact to your organisation? Impact of activities, products and services on biodiversity (% respondents) 15 Emissions of ozone-depleting substances External factors 11 39 None of the above Internal (enterprise) factors 33 32 Other, please specify Partner factors 3 2916 © The Economist Intelligence Unit 2008
  • 19. Appendix Under the spotlight The transition of environmental risk managementWhen planning an acquisition, which of the following steps do In which of the following business activities does your companyyou take to evaluate environmental exposure of your target? conduct a formal consideration of environmental risk?Select all that apply. Select all that apply.(% respondents) (% respondents)Formal due diligence to assess environmental liabilities Developing new products and services 38 41Formal assessment of compliance with environmental legislation Marketing new product or service 35 32Assessment of long-term liabilities related to climate change Selection of suppliers and partners 21 32Formal assessment of environmental exposure within supply chain Selecting new business location 19 28None of the above Planning geographical expansion 37 26 Planning market expansion 23 Planning mergers and acquisitions 19 None of the above 21Which of the following factors most hinder your ability tomanage environmental risk?Please select up to three.(% respondents)Lack of certainty about impact of environmental liabilities 35Lack of regulatory harmonisation between regions 34 In your reporting, do you apply any of the following guidelines?Cost of managing environmental risks Select all that apply. 30 (% respondents)Difficultly establishing benchmarks of key performance indicators 28 Global reporting initiative 27Constantly changing regulations 23 Eco-management and audit scheme 23Tendency for issue to be overly emotive 20 Carbon disclosure project 16Potential for liabilities to be hidden within supply chain 19 Greenhouse gas protocol 11Complexity of supply chain/partner relationships 18 Sector specific guidelines, please specify 7Lack of awareness among employees of liabilities 18Commitment from senior management 18Lack of awareness among employees of legislation 15Uncertainty over carbon price 10How significant does your company view the opportunities and risks associated with climate change?Rate on a scale of 1 to 5, where 1= Very significant and 5=Not at all significant.(% respondents) 1 Very significant 2 3 4 5 Not at all significantOpportunity 17 32 26 15 9Risk 17 27 34 14 7 © The Economist Intelligence Unit 2008 17
  • 20. AppendixUnder the spotlightThe transition of environmental risk management About the respondents In which region are you personally based? What is your primary industry? (% respondents) (% respondents) Asia-Pacific Financial services 31 41 North America Professional services 30 9 Western Europe Energy and natural resources 22 9 Eastern Europe Government/Public sector 7 7 Middle East and Africa IT and technology 6 7 Latin America Manufacturing 4 5 Construction and real estate 3 Healthcare, pharmaceuticals and biotechnology 3 Telecommunications 3 Education 3 Transportation, travel and tourism 2 Which of the following best describes your title? (% respondents) Agriculture and agribusiness 2 Risk manager Entertainment, media and publishing 17 2 SVP/VP/Director Consumer goods 15 2 CEO/President/Managing director Chemicals 14 1 CFO/Treasurer/Comptroller 10 Other manager 9 Other C-level executive 8 Head of department 7 Head of business unit 6 Board member 4 CRO 4 CIO/Technology director 2 Other 318 © The Economist Intelligence Unit 2008
  • 21. Appendix Under the spotlight The transition of environmental risk managementWhat are your main functional roles? Do you have responsibility for, or influence over, strategicPlease choose no more than three functions. decisions on risk management in your company?(% respondents) (% respondents)Risk Yes 56 100Finance 36Strategy and business development 27General management 27Operations and production 9IT 8Marketing and sales 7Customer service 6Information and research 6R&D 6Procurement 4Legal 3Supply-chain management 2Human resources 2Other 5What is your organisations global annual revenue in US dollars?(% respondents)$500m or less 42$500m to $1bn 12$1bn to $5bn 13$5bn to $10bn 9$10bn or more 24 © The Economist Intelligence Unit 2008 19
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