Sustainability Risk Management
Joint Meeting – SOA, CAS, CIA
Quebec City, Quebec
June 18, 2008
Dan R. Anderson
Leslie P. Schultz Professor of Risk Management and Insurance
University of Wisconsin-Madison
School
© Dan R. Anderson,
UW-Madisonof Business
(RIMS-NO)
Image: NASA
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Sustainability Risk Management
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.
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Triple Bottom Line (TBL)
• Concept first articulated by John Elkington, author of
Cannibals with Forks, and Chair of SustainAbility, a leading
consulting firm (U.K.)
Financial (F)
Performance
Maximize
F
Environmental (E)
Performance
Social Responsibility (SR)
Performance
+
=
E
+
SR
TBL
Financial Performance F
- Risk Costs of E
- Risk Costs of SR
=
TBL
Maximize TBL by reducing risk costs of E + SR
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Sustainability Risks
Global Warming/Climate Change
Boycotts
Environmental Liability
Ecosystems
Social Responsibility
Directors and Officers
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Sustainability Risks
Global Warming/Climate Change
• Earth’s Atmosphere is getting warmer and will
continue to get warmer
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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)
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Sustainability Risks
Global Warming/Climate Change
• Overwhelming scientific evidence
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Intergovernmental Panel on Climate Change (IPCC)
4th assessment (2007)
100s to 1000s of the world’s leading scientists
representing over 120 countries
90% plus certainty, “unequivocal,” that human
activity the main driver in global warming
Major scientific organizations (e.g., National
Academies, American Geophysical Union, American
Meteorological Society) also support
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Global Warming
Combined global land and marine surface
temperature record from 1850 to 2006
The year 2006 was sixth warmest on
record, exceeded by 1998, 2005, 2003,
2002 and 2004
Climate Change
Source: Climatic Research Unit and the UK Met. Office Hadley Centre
Brohan, P., J.J. Kennedy, I. Haris, S.F.B. Tett and P.D. Jones, 2006
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Global Warming
Source: IPCC, 2001: Climate Change 2001: The Scientific Basis. Contribution of Working Group I to the Third Assessment Report of
the 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.
Environmental Risks
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Source: www.terradaily.com, March 8, 2007
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Source: www.earthman.tv, March 13, 2007
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
The images show the ice cap as it was in 1979 and the ice cap in 2003.
Source: awitness.org
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Property Risks
Global Warming/Climate Change
• Catastrophe Losses
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Hurricane Andrew, 1992
Poland (floods, 1997)
China (floods, 1998)
Central Europe (floods, 2002)
Korea (Typhoon Maemi, 2003)
Florida (4 hurricanes in 2004)
Gulf Coast (Hurricane Katrina, Rita,
Wilma, 2005)
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Property Risks
Global Warming/Climate Change
• Munich Re, since 1960s
− Frequency of weather disasters has tripled
− Natural disaster damage = $200 billion(2005);
$90 billion(2004)
− Insured losses = $75 billion(2005); $35 billion(2004)
• Research predicts
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more intense rainfall
stronger storms
stronger hurricanes
sea level rises
more severe droughts
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Liability Risks
Global Warming/Climate Change
• Sue countries and industries
• U.S. and fossil fuel industries (coal, oil)
• Coalition of environmental groups
− Greenpeace; WWF; NRDC; FOE; Climate Justice
• Island States
− Maldives, Tavalu, Kiribati
• Inuits sued U.S. (2006)
− Human rights violations – threatens their existence
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Liability Risks
Global Warming/Climate Change
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Katrina victims sued oil companies (2006)
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Eight States (CA, CT, IA, NJ, NY, RI, VT, WI) and NYC
sued 5 utilities (2004)
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California sued six major auto makers (2006)
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Business Insurance Poll – How serious is global
warming liability risk? (2007)
− 28.3% - very serious
− 30.4% - somewhat serious
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Life and Health Risks
Global Warming/Climate Change
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Heat stress
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Malaria spreads north/south from Equator
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Insect borne diseases spread more easily
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Impacts poorer countries (Africa, Bangladesh)
more, even though they have contributed little
to global warming
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France, 2003
15,000 deaths
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Sustainability Risks
Boycotts
Nike
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Outsourcing to sweatshops
United Students Against Sweatshops
Stock price and revenues dropped
Employee morale down
Today – disclosed the names and locations
of their 700 outsourcing factories
Greatly improved sustainability efforts
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Images: educatingforjustice.org
Sustainability Risks
Boycotts
NGOs – Internet - send information
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Instantaneously
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Around the world
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Large numbers of people
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Virtually no extra cost
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Sustainability Risks
Boycotts
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Revenues – profits and stock prices
adversely impacted
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Low Employee Morale
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Reputation damage and brand tarnished
“Targeting brands was like discovering
gunpowder for environmentalists”
- James Allen and James Root, “The New Brand Tax,”
Wall Street Journal, September 7, 2004
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Sustainability Risks
Environmental Liability
Litigation Risks
•
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
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Sustainability Risks
Environmental Liability
Asbestos
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Big Event: Dr. Irving Selikoff’s studies at Mt. Sinai Hospital in New
York City in 1960s of asbestos workers.
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$100s of billions
2nd wave of litigation
Insurers paying 60%
Hazardous Waste Disposal
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Big Event: 1980 Superfund (Comprehensive Environmental Response,
Compensation, and Liability Act – CERCLA)
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$100s of billions
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To date, just clean up costs
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Natural resource damages not resolved
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Insurers pay 50%
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Sustainability Risks
Environmental Liability
Litigation with Other Harmful Substances
1. Exxon Valdez
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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 appealed
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Sustainability Risks
Environmental Liability
2. Pacific Gas and Electric
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Erin Brockovich
Poisoned water with Chromium 6
around Hinkley, CA
$333 million settlement
Negative publicity – movie – Julia
Roberts won Oscar
11/03/05 – Another similar lawsuit –
Contra Costa Times
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Sustainability Risks
Environmental Liability
3. Monsanto and Solutia
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Residents of Anniston, AL
PCB contamination
$700 million settlement, 2003
4. DuPont
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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
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Sustainability Risks
Environmental Liability
5. General Electric
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Cleanup of Hudson River
PCBs in bottom sediment
$500 million, estimated cost
Agreed to begin cleanup, 2005
6. Litigation in the pipeline
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MTBE (methyl tertiary-butyl ether) – an additive in gasoline
Perchlorate – main ingredient in rocket fuel
Both found in groundwater systems
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Sustainability Risks
Ecosystems
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Oceans
Water
Deforestation
Biodiversity
Ecosystem
Services
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Ecosystem Pressures
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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
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1,000s of world’s scientists
Ecosystems under major pressure
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Water
Water
Former shoreline
Vegetation
Disappearance of
Lake Chad in Africa
Images provided by NASA Goddard Space Flight Center
Ecosystem Risks
Source: United Nations Environmental Programme (UNEP)
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Georgia's Lake Allatoona
Lake Mead, Nevada & Arizona
European Union
Environmental Liability Directive
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Corporations Responsible for Damages to
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Protected species
Natural habitats
Biodiversity
Water systems
Natural resources
Within 3 years, possible compulsory environmental liability
insurance for these damages
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Sustainability Risks
Ecosystem Services
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
“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
Image: conservation.org
Sustainability Risks
Social Responsibility
1. Texaco
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Race discrimination employees
$176 million
2. Morgan Stanley
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Gender discrimination – female employees
$54 million settlement, 2004
$46 million settlement, 2007
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Sustainability Risks
Social Responsibility
3. Boeing
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4.
Gender discrimination – female employees
$72.5 million settlement, 2004
Wal-Mart
− Gender discrimination
− 1.6 million female workers
− Largest class action gender discrimination suit ever
filed
− If each employee gets $10,000 - $16 billion
settlement
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Sustainability Risks
Directors and Officers Liability
• 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
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Carbon Disclosure Project report estimated that the market value of
some heavy carbon emitters could be slashed by as much as 40 percent
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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
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Sustainability Risks
Directors and Officers Liability
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Transparency
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Carbon Disclosure Project – Investors
Carbon Risk Disclosure Initiative – Investors
Global Reporting Initiative – Sustainability Reporting
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World’s 250 largest companies - 67% have made
sustainability reporting a part of risk management
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Swiss Re includes in D&O underwriting
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Sustainability Risks
Directors and Officers Liability
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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
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Sarbanes Oxley
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CEO & CFO must certify
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Financial statements
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Internal controls are in place
Increased pressure on disclosing environmental liabilities
Increased pressure to develop environmental risk management
control systems
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Sustainability Risk Management
A. Must be a priority and CEO top
management driven
B. Sustainability Risk Management is just
high quality environmental and social
responsibility management
C. Consider Producing a Sustainability,
Environmental, and/or Social Report
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Sustainability Risk Management
D.
Waste and water reduction, pollution prevention, recycle,
reuse
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E.
DuPont waste reduction saves $1.6 billion per year
Intel cut waste 50% while revenues increased 900%
GHG Mitigation Strategies Cost Effective
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F.
Stern Report/British Government
Cost of mitigation = 1% world GDP (Annual)
Cost from climatic impacts = 5-20% world GDP (Annual)
without mitigation
Voluntary Reduction of Greenhouse Gas (GHG) Emissions
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BP saved $1.5 billion
DuPont saved $2.0 billion
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Voluntary Reduction of GHG
(Greenhouse Gas) Emissions
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Increased Energy Efficiency
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Increased Transportation Efficiency
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Employ Green Building Standards
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Produce/Buy More Energy Efficient Products
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Use More Renewable Energy Sources
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Kyoto Protocol
Global Warming/Climate Change
Signed
E.U.
Japan
Canada
Russia
Australia
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Not Signed
U.S.
Signed but Exempt
China
India
Reduce greenhouse gasses (GHG) 5.2% below 1990 levels by 2010
U.S. based companies – uncertainty
U.S. global companies – operate under two standards
Ill will towards U.S. as largest contributor to greenhouse gases-5%
population, 22% GHG emissions
EU cut to 20% below 1990 level by 2020, vs. US increasing 20%
above 2000 level by 2020
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Sustainability Risk Management
G. Manage Supply Chain
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Avoid sweatshops – NIKE
Avoid dangerous products – Mattel
H. Products - Design for Environment and Life Cycle Assessment
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I.
Patagonia uses organic cotton
Timberland and Nike testing water based adhesives in shoes
Partnerships with NGOs
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U.S. Climate Action Partnership (27 corporations, 6
environmental groups)
Rainforest Action Network (RAN) – Citigroup, Bank of America,
JP Morgan, Goldman Sachs
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Businesses Calling For Mandatory
Greenhouse Gas Reductions
U.S. Climate Action Partnership
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27 Corporations
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Alcan
ConocoPhillips
General Motors Corp.
PepsiCo
BP America
DuPont
Lehman Brothers
Exelon
NRG Energy
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American International Group
Deere & Co.
Johnson & Johnson
Shell and Siemens Corp.
Caterpillar
Florida Power & Light
Pacific Gas & Electric
Rio Tinto
Siemens
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Boston Scientific
Dow Chemical Co.
Marsh Inc.
Alcoa
Duke Energy
General Electric
PNM Resources
Chrysler
Xerox
Six Environmental Groups
– Environmental Defense
– National Wildlife Federation
– The Nature Conservancy
– Pew Center on Global Climate Change
– Natural Resources Defense Council
– World Resources Institute
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Sustainability Risk Management
J.
Anticipate Regulatory Changes like those in the EU
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Kyoto – greenhouse gas reductions
WEEE – Waste Electrical and Electronic Equipment
RoHS – Restriction of Hazardous Substances
REACH – Registration, Evaluation and Authorization of
Chemicals
K. Certifications (e.g., ISO 14000), Organizations (e.g., CERES),
Programs (e.g., UN Global Compact)
L. Worker Based Programs
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Safety
Zero sexual harassment
No discrimination
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Questions for Actuaries
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Are Sustainability Risks Creating Potential for Long Tail Liability
Claims?
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IBNR loss reserves may need to be established to price risks
accordingly
Claims-made policies should help to mitigate D&O, chemical,
pollution and discrimination claims
Global warming/climate change and ecosystem damage claims
may fall under occurrence policies, which could trigger many
policy years
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Even if claims unsuccessful, defense cost coverage could be
large
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Best mitigation strategy is to become more sustainable – more
environmentally and socially conscious
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Questions for Actuaries cont.
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Are More Sustainable Companies Better Insurance Risks?
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Travelers offered first premium discount of 10% for hybrid
automobile drivers
Fireman’s Fund offering green upgrade (more coverage) for
homeowners policies at no extra cost
AIG offers property premium discounts for LEED Certified
commercial buildings
Swiss includes GHG strategies in D&O underwriting
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Questions for Actuaries cont.
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Why?
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Sustainability a proxy for quality management – including risk
management
LEED Certified buildings better quality
More concerned about reputation
Worker safety a critical priority
Hybrid drivers control speed
Sustainable Companies Can Be Identified
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Dow Jones Sustainability Index
100 Most Sustainable Companies – World Economic Forum
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
University of Wisconsin
School of Business
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GB 600 – Environmental Strategy and Sustainability*
GB 601 – Systems Thinking and Sustainable Businesses*
RMI 650 – Sustainability, Environmental and Social Risk Management
GB 365/765 – People, Planet, Profit: Exploring The Triple Bottom Line in
Theory and Practice
GB 365/765 – Business and the Social Side of Sustainability
RE 365 – Sustainable Green Development
BASE – Business Action for Sustainable Enterprise student organization
Net Impact – MBA student organization
Environmental Risk Management Conference
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Fluno Center for Executive Education
Business and Environmental Professors
Joint Nelson Institute – School of Business faculty committee
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Conferences
Research
Joint/Dual degree/certificate
*Cross-listed with Nelson Institute for Environmental Studies
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Business Opportunities through
Sustainability Strategies
Sustainability Strategies can lead to:
• Increased sales
• Decreased costs
• Increased profits and stock price
• Competitive advantages
• Enhanced reputation
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Business Opportunities through
Sustainability Strategies
“sustainable development will constitute
one of the biggest opportunities in the
history of commerce.”
Stuart Hart, the S.C. Johnson Professor of
Sustainable Global Enterprise at Cornell University
Harvard Business Review article, “Beyond
Greening: Strategies for a Sustainable World”
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
Business Opportunities through
Sustainability Strategies
All have Strong Sustainability Programs
Increase Sales, Profits, Competitive Advantage, Reputation
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GE
Toyota
Swiss Re
Allianz
Shell
3M
Baxter
FedEx
P&G
Bombardier
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Intel
Johnson & Johnson
SC Johnson
Johnson Controls
Hewlett Packard
Alcoa
Herman Miller
Kimberly-Clark
Veolia
Accenture
© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)
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NIKE
Patagonia
Ben & Jerry’s
IKEA
United Technologies
Unilever
Xerox
Goldman Sachs