Hurricane Sandy has already led to a couple of interesting discussions. It reminded everyone about the importance of addressing climate change, made everyone talk nonstop about resilience and provoked discussions about the lessons cities should learn from the storm. Yet, one thing this storm didn’t seem to bring up, at least not yet, is a sense of urgency among companies about the changing risk landscape they’re facing.
There are some exceptions. The New York Times reported that many of the New York’s 24,000 restaurant owners “are re-examining their buildings’ infrastructure and architecture,” adding that “for the first time, many are realizing a need to set up backup power, communication systems and transportation networks.”
In fairness, many companies are probably still occupied with efforts to restore regular operations, but with up to $50 billion estimated damage from the storm, they better start taking this warning sign seriously. A good place to start is by reading a new report published by PwC just before the hurricane, titled Risk ready: New approaches to environmental and social change.
The report provides a clear message for companies, presenting the various ways climate change can reshape their business environment, why companies need to reevaluate their risk approach as soon as possible and how, exactly, they should build business resilience. To learn more about the report, I got in touch with PwC’s Nick Shufro, Director of Sustainable Business Solutions and Lillian M. Borsa, Principal, Risk Assurance/Sustainable Business Solutions.
TriplePundit: It seems like the timing of this report couldn’t be better. Do you think companies will be more willing to consider the risk approach you present following hurricane Sandy?
Nick Shufro/Lillian Borsa: Yes, Hurricane Sandy was a wake up call. In our view, this storm will compel management, audit committees and boards to pay increased attention to environmental risk. Vulnerabilities will continue to be exposed and can have an adverse impact if not identified and mitigated. Just as the flooding in Thailand in 2011 identified supply chain vulnerabilities, organizations must consider both identified risks and those that may not be immediately visible.
Companies need to evolve and recognize that environmental and social risks have strategic, operational and compliance implications, all of which should be part of a robust risk management program.
3p: Even without Sandy, you provide a long list of extreme weather events that should raise a red flag to every company. Yet, according to the latest CDP report, (co-authored by PwC), the percentage of companies that view physical risks as “current” has jumped from 10 percent in 2010 to 37 percent in 2011, which means that still 63 percent of the companies that report to the CDP don’t see these risks as current. Why is that?
NS/LB: We believe awareness will continue to grow as more companies start to challenge their traditional view of physical risks, which have typically included intuitive risks such as rising sea levels. For example, labor shortages affecting the financial services sector due to Hurricane Sandy were significant; employees critical to the functioning of trading floors on Wall Street could not get to work. Without broadening the perspective on physical risks, these types of issues would have a low likelihood of being identified.
Additionally, we have found that many companies still manage environmental and social risks in silos and that the risks are not being properly identified. Consequently, they’re not being considered as part of enterprise risk assessments. We believe that as organizational and governance models mature, physical risks will be identified in a holistic way.
Finally, as the probabilities and impacts of these risks increase, it may be hard to justify that these are not “current.” Next year’s CDP results will be interesting; we would surmise that they may even be markedly different given the significant impact of recent extreme weather events.
3p: How do you see the relationship between resilience and sustainability? Do you believe, like some, that resilience should take over sustainability’s place as the overall framework or should it be just another dimension of sustainability?
NS/LB: There is broad recognition that we are entering a period of heightened risk that has led to a stronger focus on building business resilience. That means recognizing how much risk is outside and beyond a company’s organizational control and how important it is to build external relationships and co-create responses that build shared value. You can’t be a sustainable organization unless you are protecting the organization against resilience; consequently, it is about integrating resilience as part of the overall sustainability program of the organization.
3p: What should be the first step for a company that reads this report and is convinced that it’s time to take environmental and social risks more seriously?
NS/LB: That “convincing” needs to happen at the C-suite level to be taken seriously, and for the solutions to be sustainable. The next key step would be to ensure enterprise risk management (ERM) processes include the consideration of both short- and long-term environmental and social risks. The input for identifying those risks would come from a wide variety of internal stakeholders such as Human Resources, Supply Chain, Research & Development, Facilities, Environment, Health & Safety, etc. While these functional groups have been part of ERM dialogues in the past, the dialogue needs to be expanded to include these landscape level risks.
3p: What should companies do first, develop in-house solutions or work on creating partnerships that will jointly address these challenges?
NS/LB: We believe holistic solutions must start at the company-level, and then leverage industry best practices. Further consideration should also be given to community and public/private partnership solutions that will work to marshal resources accordingly.
Raz Godelnik is the co-founder of Eco-Libris and an adjunct faculty at the University of Delaware’s Business School, CUNY SPS and the New School, teaching courses in green business, sustainable design and new product development. You can follow Raz on Twitter.