Under the spotlight: the transition of environmental risk management

Environmental risk is rising up the corporate agenda, but companies still rarely consider it formally when undertaking major strategic activities

Stakeholder pressure, the complexity of business relationships and the threat from climate change are encouraging companies to assess more carefully the environmental risks that they face, according to Under the Spotlight: the transition of environmental risk management, a new Economist Intelligence Unit survey and report sponsored by ACE, KPMG, SAP and Towers Perrin. Among the 320 risk managers questioned for the study, the majority say that they are increasing the attention and resources that they dedicate to environmental risk management.

Many companies are still at the early stage of the process, however. To date, this category of risk has tended to be managed either as an ad hoc activity or separate from the overall risk management framework. When companies are planning major strategic activities, the consideration of environmental risk remains the exception rather than the rule. Less than half of respondents say that they undertake a formal assessment of environmental risk when developing new products and services, and fewer than one in five when planning mergers and acquisitions.

A key challenge for many companies appears to be a lack of visibility beyond the walls of their own organisation. The complexity of today's supply chain and the interconnected web of partner organisations that support most businesses give rise to "blind spots" in a company's ability to manage environmental risk effectively across the entire enterprise.

"Environmental risk management is rising up the corporate agenda, but many companies are in the early stages of addressing this issue," says Rob Mitchell, editor of the report. "While there are some companies that take environmental risk very seriously and have developed robust processes to identify, assess and mitigate their exposure, others continue to manage environmental risks in an ad hoc way, and do not consider them when planning major strategic activities such as mergers and acquisitions."

Other key findings of the report include the following:

• A positive impact on reputation is a key benefit of environmental risk management. Companies in the survey clearly recognise that they can enhance their reputation by managing environmental risk effectively. Six out of ten respondents say that an enhanced reputation with customers is the main benefit of effective environmental risk management. Better reputation with investors is seen as the second most important benefit.
• Climate change is an opportunity as well as a risk. Although recognising that climate change could have a devastating impact on economic growth and the business community at large, respondents see new and emerging opportunities associated with society's efforts to address the problem. Asked to rate the significance of opportunities and risks arising from climate change, 44% saw the risks as significant but a slightly higher proportion (49%) saw the opportunities as significant. This was particularly true for financial services firms, which may recognise new opportunities from activities such as carbon trading or insurance products.
• Uncertainty about the scale of liabilities is the main barrier to effective environmental risk management. Asked about the factors that hindered their ability to manage environmental risk, respondents point to the difficulty of knowing the scale of their environmental liabilities as the main obstacle. The high degree of uncertainty associated with climate change, extreme weather events and other major environmental risks creates significant difficulties for companies seeking to identify and quantify their exposure. But the huge potential for loss arising from these liabilities demonstrates the importance of a rigorous process to convert this uncertainty into a risk that can be managed effectively.

Under the spotlight: the transition of environmental risk management
is available free to download at www.eiu.com/globalriskbriefing

Press enquiries:

Economist Intelligence Unit
Joanne McKenna, Press Liaison, +44 (0)20 7576 8188, joannemckenna@eiu.com
Rob Mitchell, Senior Editor, +44 (0)20 7576 8244, robmitchell@eiu.com

About the survey
The research for this report is based on an online survey, conducted in March 2008, of 320 executives around the world. The survey sample was senior: 40% of respondents were C-level executives such as CEOs, CFOs, and CROs, and the balance consisted of risk managers, senior vice presidents, heads of business units and other senior managers. A range of industries was represented, including financial services, manufacturing, information technology and professional services. Most of the firms they work for are large: 58% of surveyed executives work with firms having annual revenue of at least US$500m.

About the Economist Intelligence Unit
The Economist Intelligence Unit is the business information arm of The Economist Group, publisher of The Economist. Through our global network of about 650 analysts, we continuously assess and forecast political, economic and business conditions in 200 countries. As the world's leading provider of country intelligence, we help executives make better business decisions by providing timely, reliable and impartial analysis on worldwide market trends and business strategies.

About the sponsors

The ACE Group of Companies is a global leader in insurance and reinsurance serving a diverse group of clients. Headed by ACE Limited (NYSE: ACE), a component of the Standard & Poor's 500 stock index, the ACE Group conducts its business on a worldwide basis with operating subsidiaries in more than 50 countries. Additional information can be found at: www.acelimited.com

KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. We operate in 144 countries and have more than 104,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss cooperative. KPMG International provides no client services. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative: www.kpmg.com

SAP is the world's leading provider of business software(*), offering applications and services that enable companies of all sizes and in more than 25 industries to become best-run businesses. With more than 47,800 customers (excludes customers from the acquisition of Business Objects) in over 120 countries, the company is listed on several exchanges, including the Frankfurt stock exchange and NYSE, under the symbol "SAP." (For more information, visit www.sap.com)

Towers Perrin is a global professional services firm that helps organizations improve performance through effective people, risk and financial management. The firm provides innovative solutions in the areas of human capital strategy, program design and management, and in the areas of risk and capital management, reinsurance intermediary services and actuarial consulting. Towers Perrin has offices and alliance partners in the United States, Canada, Europe, Asia, Latin America, South Africa, Australia and New Zealand. More information is available at www.towersperrin.com.