Tag Archives: environmental risk calculator

The World Economic Forum in Davos Releases Global Risk Report 2010

The Global Risk Network (GRN), an initiative under the World Economic Forum (WEF), released its Global Risk Report 2010 today.  The report is produced annually in conjunction with the WEF Conference in Davos and 2010 is the fifth year of the report.

This year, the report emphasizes the “interconnectivity” of global matters and the long-term view needed to identify and reduce major risks.  The report sets the stage by noting that

the increase in interconnections among risks means a higher level of systemic risk than ever before. Thus, there is a greater need for an integrated and more systemic approach to risk management and response by the public and private sectors alike.

In a contrast to previous years, today’s report underscored that a long-term view is critical to predicting major exposures.  Previous Global Risk Reports have not been as careful to clarify the timeline of the discussed exposures.  The report comments that:

the biggest risks facing the world today may be from slow failures or creeping risks. Because these failures and risks emerge over a long period of time, their potentially enormous impact and long-term implications can be vastly underestimated.

Further, the 2010 document seeks to provide more pragmatic guidance for companies to try to address the risks reviewed in the report.  A few points brought forward by GRN/WEC include:

Typically, risk is considered in terms of “impact and likelihood” based on internal consensus, often involving very little external or expert input [emphasis added].  Corporate risk assessments rarely consider a time frame beyond two to three years, or explicitly examine the long-term volatility introduced by risks to strategies with a five to 10 year execution horizon. Decision-making is further skewed by necessary focus on the reporting of short-term results and known or recent risks affecting the current period.

Further, research shows that relatively few companies effectively apply tools, such as scenario analysis, or effectively integrate risk data into long-term strategic planning.

…. institutions and governments collaborate to:

  • Take a long-term approach to global risk identification, analysis, tracking and mitigation
  • Use frameworks that reflect risk interconnections rather than silo approaches
  • Address the need for more robust data on key risks and trends to be collected and shared in a coordinated manner
  • Conduct cost-benefit analysis on risk solutions to improve fund allocation and better understand the long-term benefits of investment choices
  • Track emerging risks and educate leaders and the public about real, rather than perceived threats
  • Communicate clearly and consistently about the nature of threats and about strategies to manage and mitigate them
  • Understand the influence of behavioural aspects of risk perception

Our experience with various client HSE risk frameworks mirrors a number of GRN’s points.  Among our common observations:

  • HSE risk assessments frequently rely solely on internal senior management views.  Unfortunately, these views are not always consistent with operational reality in the field or trends outside the company.  To generate truly valuable information,  a risk assessment process should include senior management perspectives that are benchmarked against middle management directions, operations in the field and external emerging pressures.
  • Traditional financial and cost/benefit analyses do not adequately evaluate risk reduction benefits.  We find there are two primary reasons for this.  First, the complete array of relevant costs and benefits are not typically captured.   Second, the traditional view of short-term financial benefits tends to conspire with the internal “behavioural aspects of risk perception” to drive investment away from HSE risk assessment/management needs.  These findings lead to Elm’s development of our HSE risk reduction financial metric Return on Investment of Loss Avoidance (ROIa©).  Read more here.

The Global Risks report is produced by WEF’s Global Risk Network – a partnership of Citigroup, Marsh & McLennan Companies (MMC), Swiss Re, the Wharton School Risk Center and Zurich Financial Services.

Analysis Demonstrates Gap Between Risk Management and Environmental Exposures

According to Insurance JournalAon’s Global Risk Management Survey 2009 found that “environmental risk ranked lower as a concern in Europe than any other region – despite the introduction of the EU Environmental Liability Directive (ELD).”

Dr. Simon Johnson, Aon’s environmental director for UK and EMEA, pointed out:

The fact that environmental risk ranked 32nd as a concern in the survey is worrying because risk managers are seemingly lulled into a false sense of security, believing they have no exposure or their pollution strategies are under control.

He added:

Risk managers need to review the ELD and their operations in relation to their insurance programs as there will be gaps. US companies with European subsidiaries are becoming increasingly aware of their potential exposures and in turn we’ve seen a higher take up for environmental liability insurance.

Johnson stated that environmental insurance should be viewed as”preparing for the low frequency, high severity event [to] cover all the risks, damages and losses that could occur.”

On-going operational risk that are not “low frequency, high severity” may not be covered by insurance yet can still represent a significant financial exposure.   The company retains such financial risks.  Risk Managers may not be familiar with either the limitations of insurance coverage or the technical aspects of operations/environmental matters.

Environmental risk assessment processes, such as those used by Elm, are valuable in communicating to Risk Management leaders/departments in their terms, rather than technical EHS jargon.  This can lead to effective integration of risk management and EHS functions and risk reduction.  More information on environmental risk assessments can be found here, here and here.

Word Resources Institute Report: Financial Institutions Should Improve Environmental Risk Identification and Mitigation Efforts

Word Resources Institute (WRI) recently published a new issue brief titled Accounting for Risk.

This publication focused on the myriad issues confronting financial institutions (FIs) when determining and evaluating greenhouse gas (GHG) emission inventories and related risks.  The study concludes that there are a number of benefits to FIs for implementing well-thought out processes for assessing GHGs beyond their direct emissions.

Key risks discussed include:

  • GHG risk impact on new investment opportunities.  This risk may be most prevalent in the power generation sector.  WRI noted

Investments in carbon-intensive projects are no longer a safe bet. Companies, under pressure from shareholders, have been pulling support and cancelling plans to construct new coal plants.

  • Appropriate scope for emissions measurement. WRI contrasts two different scoping approaches – the Operational Control approach and the Equity Share approach.  To illustrate the potential differing results between the two, WRI provided an example.

In 2007, Citi reported its total environmental footprint (scope 1 and 2) at about 1.4 million metric tons of CO2, but estimated its share of CO2 emissions from financing just two thermal power plants to be almost 200 million metric tons of CO2 (~3.3 million metric tons on an annual basis based on a 60 year life). That’s a big difference, and, like Citigroup, most other financial institutions’ traditionally reported scope 1 and 2 emissions will be tiny when compared to their share of emissions from investments.

  • Comparability and reliability of emissions calculation methodologies.  Elm has commented several times on the issues of emissions calculation risks here, here and here.  In its report, WRI echoed our earlier comments and quoted Eliza Eubank, Assistant Vice President of Environmental and Social Risk at Citi:

“If everyone is finding their own way and designing their own methodology, then you really don’t know how to compare different numbers that different people are putting out there.” Without guidelines, deciding what and how to report, “can be a very dicey issue.”

In its summation, WRI stated:

To satisfy internal users (i.e., financial institutions) and external users (e.g., investors, clients, NGOs, regulators), more definitive and standardized [GHG inventory] guidance is needed.

New Report by The Conference Board: Gaps Exist Between Risk Management and Financial Measures

A report released today by The Conference Board concluded that few companies link Enterprise Risk Management (ERM) data into corporate performance management/metrics.

Enterprise risk management and performance management are two complimentary processes essential for the management of an organization. Both disciplines are designed to support organizations’ efforts in making decisions and meeting their goals–ERM through the identification and management of those risks that could affect business objectives, and performance management through the identification and measurement of the drivers needed to achieve results.

Risk-adjusted performance metrics offer managers tools that strike the appropriate balance between meeting performance goals and achieving appropriate returns for the risks being taken. The application of risk-based performance management may also lead to incentives that are more aligned with an organization’s long-term success.

These points raise interesting implications for those companies implementing sustainability and other EHS management programs.

–       How are EHS elements reflected in the ERM program?

–       Are existing EHS/sustainability performance metrics aligned with internal risk management standards and benchmarks?

–       Do financial measures of EHS/sustainability performance incorporate risk-adjusted factors that are obtained from the ERM framework?

Elm’s Return on Investment of Loss Avoidance (ROIa)© is an innovative valuation methodology that links EHS/sustainability risk data and financial performance.  ROIa© demonstrates financial return of EHS risk reduction investments in terms of both reasonable anticipated loss and the cost of generating new profits needed to recover associated profits.  ROIa© utilizes existing financial data along with frequency and severity data obtained through EHS risk assessment processes, then benchmarks that exposure information against varying sets of cost data that are most relevant to client organizations.  This produces ROI information for EHS management costs in the context of internally-credible values, risk management and revenue/profit generation benchmarks.  Click for a graphic showing general guidance on interpreting ROIa©

About The Conference Board:   For over 90 years, The Conference Board has created and disseminated knowledge about management and the marketplace to help businesses strengthen their performance and better serve society. The Conference Board operates as a global independent membership organization working in the public interest. It publishes information and analysis, makes economics-based forecasts and assesses trends, and facilitates learning by creating dynamic communities of interest that bring together senior executives from around the world.

The Economist Intelligence Unit: Significant Improvements Needed in Environmental Risk Management

Last year, The Economist Intelligence Unit (EIU), the business research arm of the company that publishes The Economist magazine, published a survey about the concerns and trends for environmental risk management.  The survey, sponsored by ACE, KMPG, SAP and Towers Perrin, was sent to 320 executives globally, half of which represented companies with greater than US$500million in annual revenue.  All respondents had material involvement in risk management for their organizations.

The results of the survey provided a number of insights into perceptions of environmental matters within the context of overall corporate risk management.  A shortened list of the findings is reviewed below.

Three key findings were:

–       Only one-third of those surveyed include environmental within their overall risk management strategy.  The remaining two-thirds address environmental in an ad hoc fashion, outside of corporate risk management, or not at all.  EIU commented:

This piecemeal approach may enable companies to identify isolated problems, but without oversight it will be difficult for them to obtain an overall picture of the risks they face.

–       Three of the top four identified obstacles to effective environmental risk management illustrate this lack of an integrated approach and overall picture:

  • Lack of certainty about impact of environmental liabilities,
  • Cost of managing environmental risk, and
  • Difficulty establishing benchmarks of key performance indicators.

–       Forty percent of the respondents stated that the scale of their environmental liabilities had increased over the past three years, and a full 58% felt that the next three years would see more increases.  Similarly, 59% indicated the amount of time and money dedicated to environmental risk increased in the past three years and 75% anticipate increasing that over the next three years.

Taking these three points in context of each other, what is surprising is that companies anticipate investing more in environmental risk management even in the absence of

–       an internal integrated structure to manage the risk, and arguably the projected increase in attention/resources;

–       an understanding of how environmental risk impacts the company;

–       metrics for measuring effective risk reduction and the associated financial return on the current – and future – expenses.

Another interesting point may be seen as a sore spot for environmental and EHS professionals: the reputed growth in ISO 14001 and other environmental management systems (EMS), ostensibly integrating environmental management into business operations, appears not to have seen the holistic success envisioned.

Companies who see the need to increase environmental risk management efforts would be well served to first invest time in improving the connection between risk management and environmental management.  Those who rely on an adopted EMS may also benefit from reviewing the framework in the context of risk, metrics and ROI.

Read the survey.

New European Perspectives on Understanding “Risk”

Two recent articles in European publications discuss results of studies related to

  • how “risk” is defined/perceived, and
  • implementing risk assessment processes

Both articles and perspectives have their foundations in different contexts (one crowd behavior control, one IT), but the conclusions are the same: smaller, more frequent risks are generally ignored, while “headline grabbers” get attention.  Further, the risks that are ignored are likely to aggregate and have material impacts.

In an article from Science Daily, UK Researcher in Organisational Psychology Rose Challenger authored a study for the Cabinet Office UK Resilience.

“There can be a tendency when planning events to prepare for the big dramatic ‘what ifs’ but ignore the smaller, less visible although more likely ones which collectively can cause serious problems,” says Challenger. “It’s important to ensure your risk assessment isn’t blinkered. For example, at Hillsborough there was an over emphasis on hooliganism as that was the big issue of the day, but other more generic safety issues were overlooked. Today, we may tend to focus on the risk of a terrorist attack and ignore more banal risks such as power or transport failures or a gas leak.”

Read the study here.

Similarly, Siri Segalstad, in his article published on ScientificComputing.com, summarized it this way:

People’s perceptions of risk are influenced more by what “sounds scary” than by how likely it is to happen.

Although these studies are from backgrounds unrelated to HSE or environmental management, the results are consistent with Elm’s client experiences in integrating and implementing risk concepts into EHS and environmental functions.  Our risk assessment process is designed to indentify potentially ignored or overlooked issues, map them in a frequency/severity matrix, then identify potential solutions for all the identified risks.  Contact us to find out more.

Elm Announces ROI Metric for Environmental/HSE/EHS Risk Reduction

Elm has developed an innovative valuation methodology that leverages EHS and risk management concepts with economic analyses.  Our Return on Investment of Loss Avoidance (ROIa)© demonstrates financial return of EHS risk reduction investments in terms of both reasonable anticipated loss and the cost of generating new profits needed to recover associated profits.  ROIa utilizes existing financial data along with frequency and severity data obtained through EHS risk assessment processes, then benchmarks that exposure information against varying sets of cost data that are most relevant to client organizations.  This produces ROI information for EHS management costs in the context of internally-credible values, risk management and revenue/profit generation benchmarks.

See our April 2009 presentation on ROIa at http://www.slideshare.net/lmheim/roia-presentation

Do you measure the economic value of EHS risk reduction or auditing programs?

Elm recently sponsored a poll on LinkedIn.com on the status of measuring improvements in EHS risk (or “HSE”, “environmental”, “environmental, health and safety” – whichever term is preferred).

This survey demonstrates the variety of views on the importance of and methods for risk quantification or risk measurements for environmental, health and safety matters.  The results indicate that only 20% of the respondents are using detailed financial analytics to measure and track the value created from EHS risk management.

–       202 responses were logged in less than 24 hours (the poll was set up for  a maximum of 200 responses).

  • 37% from very large companies;
  • 14% from large companies;
  • 10% from medium companies; and
  • 39% from small companies.
  • 27% of the respondents represented the Management/Senior Management/Owner functions in their organizations

–       29% currently measure EHS risk reductions through some form of financial metric, but 10% indicated no rigorous metrics are used.

–       12% felt that no measurement is needed because the value of improving EHS exposures is inherent.

–       13% are looking for ways to develop financial metrics.

–       The remaining 43% stated that such measures are not a priority at this time.

LinkedIn members can view the poll at  http://polls.linkedin.com/poll-results/44274/mulee