Managing Environmental Risks

Natural catastrophes such as hurricanes, floods, snow, higher temperatures, and earthquakes appear to be increasing in frequency and severity around the world. Over the past few months, we have witnessed a number of natural catastrophes across the globe with devastating consequences on both livelihood and business. For example, on Thursday July 1 2010, hurricane Alex struck Mexico. According to the Risk Management Solutions:

Hurricane Alex made landfall along coast of northeast Mexico approximately 150 miles north of Tampico and 160 miles southwest of Brownsville Texas with maximum sustained winds of 105 mph, classifying the system as a category 2 hurricane by wind. Alex was a fairly large tropical cyclone at landfall with hurricane strength winds extending outwards up to 70 miles from its center and tropical storm force winds extending outwards up to 205 miles, mainly to the northeast of the storm.

The biggest risk associated with Alex now is the heavy rainfall that is spreading inland which has the potential to trigger flash flooding and landslides, particularly in the mountainous region of central Mexico.

Last month, floods and torrential rain in Romania killed 24 people and caused more than 7000 to be evacuated from their homes and damaged farmlands and infrastructure. The damage on crop fields, roads, houses, automobiles, power pylons and the environment at large was enormous to the extent that some Economists are now expecting the forecast GDP figures for the current fiscal year to drop by between 1% and 2%.

In managing environmental risks, managers need to first understand the true definition of environmental risks. They should be able to interpret what the marketplace, the government, regulators, environmental activists and other business stakeholders mean when they use the term “environmental risk”. For example, business managers might use the term to mean risk to the company arising from social concern about the environment, whereas regulators might use the term to mean “risk of damage to the ecosystems or to public health arising from some man-made environmental offense”.

In today’s business environment where sustainibility issues are high on the agendas of governments, regulators, stakeholders and businesses alike, managers need to ensure that the activities of their companies pose little or no threat to environmental damage. With customers now being more attentive and reactive to the effects of an organisation’s activities on the environment, a company may lose customers if deficiences in its environmental performance are publicised.

There is also the risk to cash flows and business asset values and fines and penalties can threaten the company balance sheet. For example, the cost to BP of the oil spills in the Gulf of Mexico has hit $3bn and the total cost of the spill is expected to be much higher. BP also faces the risk of being taken over by other major oil companies such as Exxon and Total and has now been forced to approach sovereign wealth funds with a view to securing a strategic investor to fend off takeover bids. This just shows that superior management of environmental risk can still be a source of long-term competitive advantage because better risk management also means better management of contingent costs.

Thus, in managing both natural and man-made environmental risks, managers should:

# Understand how environmental risk management relates to the overall goals of the company. Environmental risk management or sustainability activities should fit into the company’s overall risk management policies.

# Decide how much risk to transfer, how much to invest in risk reduction and how much risk to carry. One way of reducing environmental risks is purchasing insurance against some environmental risks. For example, purchasing contingent liability arising from waste disposal. The benefits of risk reduction must be weighed against the costs of achieving the reduction.

# Spell out particular procedures that employees must follow when engaged in important but risky activities, in order to reduce environmental risk.

# Some locations on the map are more prone to floods and hurricanes therefore managers should avoid these areas when setting up business facilities or use strong building material that is capable of withstanding these pressures. One way to find out is by visiting the national statistics office.

# Promote a culture of environmental risk management by having in place a management evaluation and promotion system where effective environmental risk management is recognised within the company and is seen as a necessary condition for management advancement.

# Invest in better information about environmental risks. This helps in assessing the probabilities and magnitudes of bad events as well as finding out about new laws and regulations concerning environmental risk management. As information about risks improve, managers will be able to make comparisons of different risks affecting the organisation and the various payoffs to investments in risk management.


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