A Slow-Burning Fuse: Climate Change From The Risk Management Trenches

by McCarter & English: Climate Change & Renewable Energy
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This morning was the only professional session on climate change at the 2014 annual conference of RIMS, the Risk and Insurance Management Society, the preeminent risk management trade group in the country. Over 9,000 individuals from insurers, policyholders, brokers and vendors are in attendance.  In a different conference room, my partner made a presentation on "additional insured" coverage with 400+ in attendance.  About 30 showed up for climate change.

The disinterest was not due to the quality of the presenters.  Climate Change: How to Stress Test Your Organization was presented by  Jeffrey Bray, Senior Vice President, Global Risk Management of Prologis, Inc. and John Marren, Director, Global Risk and Insurance Management of CSL Behring and also Business Insurance's Risk Manager of the Year.  Both are engaged in climate change risk management; they were here to give a view from the trenches on practical ways to address climate change issues.

Both companies were new to me. CSL Behring is the American subsidiary of CSL Australia, whose core business is the manufacture of vaccines and plasma protein biotherapies with $5 billion in revenue.  Prologis is a global operator of industrial real estate with 3000 facilities and 569 million sq. ft. under management. 

CSL Australia, in addressing a need for transparency in line with its corporate social responsibility goals, concluded that it needed to include climate change in its risk assessments.  Assessing climate change risk was also required in order to accurately respond to inquiries by the Carbon Disclosure Project, which sought information on the effect of climate change on business.

CSL already had a risk framework in place.  They wanted to treat climate change just like every other risk.  If it was material it needed to be addressed.  If not, it still needed to be on the radar so they could do more than just react if and when it surfaced.  Fortunately, senior management was intimately involved with corporate social responsibility and including climate change in that area was not difficult. 

The methodology of bringing climate change into the risk management framework was relatively simple.  First, the context needed to be established.  Environmental, social and economic impacts would be considered on a 25-year time horizon.  Second, information needed to be gathered as to where CSL's concerns would arise.  Workshops were held with every business unit.  Research was conducted.  Third, the data needed to be analyzed.  Last the findings needed to be reported. 

The result was the identification of six key vulnerabilities:

1.  Would there be enough potable water and where would it come from?
2.  Would their sole source suppliers comply with environmental requirements?
3.  Could time-sensitive biological raw materials be delivered timely?
4.  Would energy supply reliability decrease?
5.  Would resulting new diseases impair the availability of plasma donors?
6.  Would resulting new diseases provide an opportunity for new vaccines?

CSL utilized their corporate risk framework to guide the assessment of risks for the risk management process.  Climate change risks were integrated with all of the corporation's other risks for a relative comparison.  None of the six risks were considered material; nevertheless, they are being evaluated every two years on a Zero Basis risk review for their business unit.

Prologis concedes it is not as far along in the evaluation process as CSL.  It noted that there are significant impediments to making that evaluation.  The accuracy of the data is varied and data is not available for many circumstances.  The modelers provide estimates with significant long-term variation.  Accounting for various exposures (inland flooding, storm surge, temperature change, storm severity) is variable.  For example, flood protection in Amsterdam is much better that it is in New York. 

Despite these data and analyses challenges, Prologis recognized that climate change will affect it.  Ten of its markets (ports) ranked in the OECD top 15 for climate change  vulnerability.  Those potential impacts included  increased physical damage and business interruption, which would lead to more restrictive and costly insurance coverage.  Recognition that property concentrations in vulnerable areas would exacerbate event impacts, has led to risk mitigation in the form of more stringent construction requirements, new site selection criteria, and enhanced disaster management.

A key question was raised during the presentation by the moderator, Andrew Thompson, the Global Lead, Risk and Insurance Practice, for the engineering firm, Arup.  How does one integrate a slow-burning risk like climate change into risk planning, which typically has much shorter time horizons.  Mr. Marren of CSL acknowledged that CSL's typical risk horizon is 12-24 months.

The answer, at least for these two billion dollar companies, was in a nutshell:  strategic long-range thinking.  They concluded the presentation with four key points:
1.  Companies should focus on increasing resilience;
2.  Climate change risk is manageable;
3.  While ongoing analysis is recommended, there need be no direct change in current business activity; and
4.  It is important to be proactive to reduce costly future solutions.

This is not profound.  What is profound, is that at least two substantial business entities are stepping around the rhetoric and addressing climate change as simply another business risk (like interest rates, or workforce training, or raw material sourcing) that must be addressed in the short-term and in the long-term.  That short-term results have not yet been identified, does not say anything about the need for long-term consideration, integration and planning.  Others seeking long-term business success should follow.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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