Natural resource management important, claims new Allianz report
Natural resources such as clean air and fresh water are vital for businesses – and at the same time massively at risk across many industry sectors today, according to Allianz Global Corporate & Specialty (AGCS).
In a new report, entitled ‘Measuring And Managing Environmental Exposure: A Business Sector Analysis of Natural Capital Risk’, AGCS points out that failure to manage the earth’s natural resources or “natural capital” has consequences that extend beyond direct effects on the environment. For businesses, it can also bring new interruption and liability scenarios which can wipe out profits and impact business models, as resource scarcity, regulatory action and pressure from communities and wider society grows.
According to an analysis from the insurer, the oil and gas, mining, food and beverage and transportation sectors rank highest in terms of natural capital risk exposure.
“Companies around the world are increasingly confronted with the negative implications of natural capital depletion,” says Chris Bonnet, manager, Environmental, Social and Governance (ESG) Business Services, AGCS. “Sustainable use of natural resources is critical for the future success of most businesses. Yet while corporates’ awareness of their natural capital footprint is growing, many still need to gain a better understanding of the specific threats that can impact their industry sector and company in particular, as well as the mitigation options available.”
In the report, AGCS analyses data from research provider MSCI ESG Research, covering more than 2,500 companies, in order to assess the natural capital risk exposure in 12 industries. The oil and gas, mining, food and beverage and transportation sectors rank highest in terms of risk exposure, based on five factors – biodiversity, greenhouse gas (GHG) and non-GHG emissions, water and waste. All are classified as being in the "danger zone", meaning the natural capital risks businesses face are, on average, greater than the mitigation options currently employed.
Seven industry sectors – construction, utilities, clothing, chemical, manufacturing, pharmaceutical and automotive rank in the “middle zone”, meaning risk and mitigation levels are approximately in balance.
However, according to AGCS the telecommunications sector is the only sector to be classified in the “safe haven” zone, which means it does not have a high level of risk exposure. Furthermore, there are tremendous opportunities for telecom companies to hedge natural capital risk in other sectors. Digital communication and management solutions can enable more efficient resource use.
“Sectors with an inherent natural capital footprint often provide the necessary resources for manufacturing or other industries, so it’s obviously harder for companies who operate in them to mitigate their natural capital risks. However, innovative risk solutions to reduce the stress to the environment could be more strenuously applied,” says Bonnet.
The aim of the sector analysis in the report is to give a strong indication of each featured industry’s overall exposure to natural capital risk, rather than that of individual companies. This is because there are significant differences in how companies in each sector address and mitigate natural capital risk. For example, in the utilities sector, the levels of risk exposure and management regarding GHG and non-GHG emissions can range from low-emitting companies who manage the impact well to heavy emitters with little emission management. It is important to acknowledge that there are natural capital risk-conscious companies operating in sectors ranked in the “danger zone” in the report.
According to AGCS, natural capital risks rarely appear without warning. The report reveals they evolve through three phases before impacting the bottom line of a business. In the first phase, awareness of the risk grows. In the second phase, the natural capital risk will potentially start affecting individual companies in their supply chains or own operations through regulatory change or social pressure. In the last phase, once the risk cannot be mitigated, it materialises, leading to damages such as liability costs, higher production expenses or business interruption, ultimately affecting the financial performance of the organisation.
“The key question is how risks can be mitigated as early as possible – both on a technical operational level and in regard to overall enterprise risk management (ERM),” explains Bonnet. “Local water scarcity, for example, can be addressed by rainwater harvesting in day-to-day management or, on a more strategic level, by deciding not to expand an existing plant due to risk of water shortages.”
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