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Dan R. AndersonDan R. AndersonLeslie P. Schultz Professor of Risk Management and InsuranceLeslie P. Schultz Professor of Risk Management and InsuranceUniversity of Wisconsin-Madison School of BusinessUniversity of Wisconsin-Madison School of Business
A. Management of emerging environmental and social responsibility risks.
B. Corporations are being pressured to address environmental and social responsibility performance, in addition to the traditional financial bottom line.
C. Make a business argument for companies becoming more sustainable by using risk management principles.
D. Sustainability risk management needs to be a critical part of enterprise risk management.
• Earth’s Atmosphere is getting warmer and will continue to get warmer• 24 of 25 warmest years since 1980• Warmest 1998, 2005, 2003, 2002, 2004,
2006
• The main driver is human activity increasing greenhouse gas (e.g. CO2, methane) emissions and concentrations by burning fossil fuels (oil/petroleum, coal, natural gas)
Source: IPCC, 2001: Climate Change 2001: The Scientific Basis. Contribution of Working Group I to the Third Assessment Report ofthe Intergovernmental Panel on Climate Change [Houghton, J.T., Y. Ding, D.J. Griggs, M. Noguer, P.J. van der Linden, X. Dai,K. Maskell, and C.A. Johnson (eds.)]. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA.
Source: IPCC, 2001: Climate Change 2001: The Scientific Basis. Contribution of Working Group I to the Third Assessment Report ofthe Intergovernmental Panel on Climate Change [Houghton, J.T., Y. Ding, D.J. Griggs, M. Noguer, P.J. van der Linden, X. Dai,K. Maskell, and C.A. Johnson (eds.)]. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA.
Nike• Outsourcing to sweatshops• United Students Against Sweatshops• Stock price and revenues dropped• Employee morale down• Today – disclosed the names and
• Potential environmental liability risks often build up or accumulate over a long period of time, thus when liability established, firm (or industry) faces a huge inventory of claims
• Even if your current actions are within regulations and have not developed into actual liabilities, events can abruptly change your risk situation
Asbestos• Big Event: Dr. Irving Selikoff’s studies at Mt. Sinai Hospital
in New York City in 1960s of asbestos workers.• $100s of billions• 2nd wave of litigation• Insurers paying 60%
Hazardous Waste Disposal• Big Event: 1980 Superfund (Comprehensive Environmental
Response, Compensation, and Liability Act – CERCLA)• $100s of billions• To date, just clean up costs• Natural resource damages not resolved• Insurers pay 50%
1. Exxon Valdez− Oil spill – 11 million gallons− Prince William Sound – Alaska, 1989− $3 billion cleanup costs− $900 million settlement with U.S. and Alaska
governments− $5 billion punitive damages award – still being
3. Monsanto and Solutia− Residents of Anniston, AL− PCB contamination− $700 million settlement, 2003
4. DuPont− Contaminated water in Ohio and West Virginia− PFOA (Perfluo-rooctanoic Acid)− Chemical used in manufacture of Teflon− $340 million settlement, 2003− $16.5 million fine by EPA – largest ever
• Fishing stocks of large ocean fish down 90% in last 50 years• Possible collapse of all fish species by 2050• Half the world’s population will suffer water shortages by
2025• At current deforestation rates, the Amazon Rainforest will be
gone in 80 years• Great Barrier Reef may bleach out, die and collapse by 2100• 20-30% extinction rates in next 20-30 years; rates 100-1,000
higher than before humans• Millennium Ecosystem Assessment, 2005
− 1,000s of world’s scientists− Ecosystems under major pressure
1. Robert Costanza, et.al., study in Nature, 1997• Annual value of Ecosystem services: $33 trillion
2. Loss of ecosystem services impacts peoples and industries dependent on ecosystems
3. Firms may be held accountable for damages to these systems
4. Liability starts with damages, and then proceeds to find accountable or negligent parties
Image: conservation.org
“Negligence is described as doing the same thing over and over even though you know it is dangerous, stupid or wrong. Now that we know, it’s time for a change. Negligence starts tomorrow.”
– Bill McDonough & Michael Braungart, authors of Cradle to Cradle
• Shareholders resolutions, boycotts and reputation risks “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”
– Warren Buffet, CEO, Berkshire Hathaway
• Loss of market value in investments
• Carbon Disclosure Project report estimated that the market value of some heavy carbon emitters could be slashed by as much as 40 percent
• Innovest Strategic Value Advisors report found similar results with as much as 45 percent of earnings and 35 percent of market capitalization being at risk
Sustainability RisksSustainability RisksDirectors and Officers Directors and Officers LiabilityLiability
• Fiduciary Duties“The “prudent fiduciary” equation is being turned
on its head. Since there is now evidence that superior environmental and social performance improves the risk
profile, profitability, and stock performance of publicly- traded companies, fiduciaries can be seen to be derelict in their duties if they do not consider sustainability.”
- Matthew Kiernan,
CEO, Innovest Strategic Value Advisors• Sarbanes Oxley
− CEO & CFO must certify• Financial statements• Internal controls are in place
− Increased pressure on disclosing environmental liabilities
− Increased pressure to develop environmental risk management control systems
Sustainability RisksSustainability RisksDirectors and Officers Directors and Officers LiabilityLiability
University of WisconsinUniversity of WisconsinSchool of BusinessSchool of Business
• GB 600 – Environmental Strategy and Sustainability• GB 601 – Systems Thinking and Sustainable Businesses • RMI 650 – Sustainability, Environmental and Social Risk Management
Cross-listed with the Nelson Institute for Environmental Studies • BASE – Business Action for Sustainable Enterprise student organization• Net Impact – MBA student organization• Environmental Risk Management Conference
− Fluno Center for Executive Education− Business and Environmental Professors
• Joint Nelson Institute – School of Business faculty committee− Conferences− Research− Joint degree− Proposed Center on Business, Environment and Social Responsibility