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Allianz Report: Failure to Manage Natural Capital Brings Increasing Interruption & Liability Risks for Businesses

June 12, 2018 |

This report is a product of Allianz

  • Companies increasingly face new threats from “natural capital” depletion, such as higher costs from resource scarcity, regulatory action, as well as pressure from communities and wider society
  • Allianz industry-specific analysis of 2,500+ companies finds oil and gas, mining, food and beverage and transportation sectors have highest natural capital risk exposure
  • Against a backdrop of growing stakeholder pressure around sustainability, a key challenge for businesses is to measure and manage their natural capital impact and dependency

“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. 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, warns Allianz Global Corporate & Specialty (AGCS) in a new report Measuring And Managing Environmental Exposure: A Business Sector Analysis of Natural Capital Risk. According to 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.”


Three phases of natural capital risk emergence

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 materializes, leading to damages such as liability costs, higher production expenses or business interruption, ultimately affecting the financial performance of the organization.

“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.”

Managing natural capital risk

A significant number of companies have started to address natural capital risk in their ERM. Factoring natural capital costs into business decision-making can also help companies anticipate potential threats. For example, when opening a new factory, factors such as future water availability and the emerging emissions regime should be considered.

However, balancing risk management focused on today with the management of emerging risks is challenging. Future and non-financial risks can easily be overlooked as companies focus on short-term targets. It can be difficult to measure, quantify and monetize these risks. Yet in future it is expected that companies will have to actively disclose their natural capital risk exposure to governmental agencies and investors, as standards evolve.

“With threats to the environment coming from many different areas, there will be no such thing as business as usual in the future,” says Bonnet. “Companies need to understand, quantify and even monetize their dependence on natural capital and the impacts their operations have on it to ensure their organizations are resilient and future proof.”…”

Read on and access the full report at Allianz.

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