The effective management of environmental risks is being hampered by a lack of certainty about the impact of environmental liabilities and slow progress on international regulatory harmonisation, according to the latest research amongst senior risk managers by the Economist Intelligence Unit (EIU), co-sponsored by insurer ACE.
The survey of 320 senior global executives revealed that environmental risk management has been neglected by many, with 43% of respondents saying that they either managed it in an ad hoc manner or not at all. According to ACE, this suggests that despite media, investor and regulatory scrutiny of businesses’ performance in this area, environmental risk has not yet become part and parcel of the main risk management agenda.
When asked about the main areas hindering their ability to manage this category of risk, 35% cited the lack of certainty regarding the impact of environmental liabilities and 34% said the lack of international regulatory harmonisation was the main issue.
Nearly half of respondents felt the ability to comply with legislation and identify environmental liabilities were major strengths in managing environmental risks. However, only 41% felt they accurately assessed the scale and scope of these liabilities and only a third felt they successfully made decisions on whether to absorb the risks or transfer them. Both findings highlight the challenges businesses face in quantifying the true extent of environmental risks.
Commenting on the survey results Wayne Harrington, ACE’s Environmental Risk Manager – UK & Ireland, said: “The findings are a wakeup call to organisations to act now to include environmental risks as part of their overall risk framework. Insurance can play an important role in protecting them but, to ensure it is applied to optimum effectiveness, risk managers must first ensure that their risk assessment procedures and reporting lines are clear and robust.”
Confusion also exists within organisations as to who carries ultimate responsibility for environmental risk management. A quarter of respondents said that the chief executive officer is responsible and one in five attributed responsibility to the chief risk officer. Within the other organisations surveyed, however, ownership of this discipline was widely dispersed and often at sub-board level. In 14 per cent of organisations questioned, no-one had overall responsibility.
The survey also explored the importance attached to environmental risk in a range of strategic business activities. The results showed a surprisingly low level of consideration given the potential scale of the liabilities. Just 41% said that they conducted an environmental assessment when developing new products or services; 32% when selecting partners or suppliers; 26% when planning geographical expansion and only 19% when planning mergers and acquisitions.
Harrington commented: “The responses to these specific questions reveal that the management of environmental risks remains fragmented. Companies will find it difficult to obtain an overall picture of the risks they face while it is managed in a decentralised way."
While the survey highlights the challenges many organisations face in getting to grips with environmental risk, there is evidence that many see clear opportunities from improved performance in this area. Almost six out of ten cited an enhanced reputation with customers as the key benefit, ahead of a better reputation with investors which was cited by 30%.
Harrington concluded: “Environmental risk management is set to rise up the corporate agenda as concerns about climate change, compliance with developing legislation and the overall impact of business on the wider environment increase. While these offer huge challenges to organisations across Europe, they also deliver opportunities both in terms of enhanced reputation and customer satisfaction for those that address the issue. The insurance sector is well placed to play a strategic role in terms of the development of products and services to help deal with these risks effectively.”
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The complete report: “Under the spotlight: The transition of environmental risk management” and others in the series, can be downloaded here.
Notes to editors:
The EIU research
The Economist Intelligence Unit surveyed 320 executives around the world in March 2008 about their attitudes to environmental risk management. The survey was sponsored by ACE, KPMG, SAP and Towers Perrin.
Respondents represent a wide range of industries and regions, with roughly one-third each from Asia and Australasia, North America and Western Europe. Approximately 50% of respondents represent businesses with annual revenue of more than US$500m. All respondents have influence over, or responsibility for, strategic decisions on risk management at their companies.