© Dan R. Anderson, UW-Madison (RIMS-NO) Sustainability Risk Management Joint Meeting – SOA, CAS, CIA Quebec City, Quebec June 18, 2008 Dan R. Anderson

© Dan R. Anderson, UW-Madison (RIMS-NO)

Sustainability Risk Sustainability Risk ManagementManagement

Joint Meeting – SOA, CAS, CIAJoint Meeting – SOA, CAS, CIAQuebec City, QuebecQuebec City, QuebecJune 18, 2008June 18, 2008

Dan R. AndersonDan R. AndersonLeslie P. Schultz Professor of Risk Management and InsuranceLeslie P. Schultz Professor of Risk Management and InsuranceUniversity of Wisconsin-Madison School of BusinessUniversity of Wisconsin-Madison School of Business

Image: NASA

© Dan R. Anderson, UW-Madison (SOA,CAS,CIA 2008)



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.


• Concept first articulated by John Elkington, author of Cannibals with Forks, and Chair of SustainAbility, a leading consulting firm (U.K.)

Financial (F) Environmental (E) Social Responsibility (SR)Performance Performance Performance

Maximize F + E + SR = TBL

Financial Performance F- Risk Costs of E- Risk Costs of SR= TBL

Maximize TBL by reducing risk costs of E + SR

Triple Bottom Line (TBL)Triple Bottom Line (TBL)


Global Warming/Climate Change

Boycotts

Environmental Liability

Ecosystems

Social Responsibility

Directors and Officers

Sustainability RisksSustainability Risks


• Earth’s Atmosphere is getting warmer and will continue to get warmer• 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)

Sustainability RisksSustainability RisksGlobal Warming/Climate ChangeGlobal Warming/Climate Change


• Overwhelming scientific evidence• 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

Sustainability RisksSustainability RisksGlobal Warming/Climate ChangeGlobal Warming/Climate Change

Global WarmingGlobal Warming

Source: Climatic Research Unit and the UK Met. Office Hadley CentreBrohan, P., J.J. Kennedy, I. Haris, S.F.B. Tett and P.D. Jones, 2006

The year 2006 was sixth warmest on record, exceeded

by 1998, 2005, 2003, 2002 and 2004

Combined global land and marine surface temperature record from

1850 to 2006

Climate Change


Global Global WarmingWarming

Environmental Risks

Source: IPCC, 2001: Climate Change 2001: The Scientific Basis. Contribution of Working Group I to the Third Assessment Report ofthe 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.

Source: IPCC, 2001: Climate Change 2001: The Scientific Basis. Contribution of Working Group I to the Third Assessment Report ofthe 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.


Source: www.terradaily.com, March 8, 2007


Source: www.earthman.tv, March 13, 2007


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 RisksProperty RisksGlobal Warming/Climate Global Warming/Climate ChangeChange

• Catastrophe Losses – 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)


Property RisksProperty RisksGlobal Warming/Climate Global Warming/Climate ChangeChange

• 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− more intense rainfall− stronger storms− stronger hurricanes− sea level rises− more severe droughts


Liability RisksLiability RisksGlobal Warming/Climate Global Warming/Climate ChangeChange

• 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


Liability RisksLiability RisksGlobal Warming/Climate Global Warming/Climate ChangeChange

• Katrina victims sued oil companies (2006)

• Eight States (CA, CT, IA, NJ, NY, RI, VT, WI) and NYC sued 5 utilities (2004)

• California sued six major auto makers (2006)

• Business Insurance Poll – How serious is global warming liability risk? (2007)− 28.3% - very serious− 30.4% - somewhat serious


• Heat stress- France, 2003- 15,000 deaths

• Malaria spreads north/south from Equator

• Insect borne diseases spread more easily

• Impacts poorer countries (Africa, Bangladesh) more, even though they have contributed little

to global warming

Life and Health RisksLife and Health RisksGlobal Warming/Climate Global Warming/Climate ChangeChange


Nike• 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

Sustainability RisksSustainability RisksBoycottsBoycotts

Images: educatingforjustice.org


NGOs – Internet - send information

• Instantaneously

• Around the world

• Large numbers of people

• Virtually no extra cost



• Revenues – profits and stock prices adversely impacted

• Low Employee Morale

• 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



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

Sustainability RisksSustainability RisksEnvironmental LiabilityEnvironmental Liability


Asbestos• Big Event: Dr. Irving Selikoff’s studies at Mt. Sinai

Hospital in New York City in 1960s of asbestos workers.• $100s of billions• 2nd wave of litigation• Insurers paying 60%

Hazardous Waste Disposal• Big Event: 1980 Superfund (Comprehensive Environmental

Response, Compensation, and Liability Act – CERCLA)• $100s of billions• To date, just clean up costs• Natural resource damages not resolved• Insurers pay 50%



Litigation with Other Harmful Substances

1. Exxon Valdez− 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



2. Pacific Gas and Electric− 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



3. Monsanto and Solutia− Residents of Anniston, AL− PCB contamination− $700 million settlement, 2003

4. DuPont− 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



5. General Electric−Cleanup of Hudson River−PCBs in bottom sediment−$500 million, estimated cost−Agreed to begin cleanup, 2005

6. Litigation in the pipeline−MTBE (methyl tertiary-butyl ether) – an additive in

gasoline−Perchlorate – main ingredient in rocket fuel−Both found in groundwater systems



• Oceans• Water• Deforestation• Biodiversity• Ecosystem Services

• Oceans• Water• Deforestation• Biodiversity• Ecosystem Services

Sustainability RisksSustainability RisksEcosystemsEcosystems


Ecosystem PressuresEcosystem Pressures

• 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

− 1,000s of world’s scientists− Ecosystems under major pressure

WaterWater

Ecosystem Risks Source: United Nations Environmental Programme (UNEP)

Disappearance ofLake Chad in Africa

Images provided by NASA Goddard Space Flight Center

Water

Former shoreline

Vegetation


Georgia's Lake AllatoonaGeorgia's Lake Allatoona

Lake Mead, Nevada & Lake Mead, Nevada & ArizonaArizona


European UnionEuropean UnionEnvironmental Liability DirectiveEnvironmental Liability Directive

• Corporations Responsible for Damages to− Protected species− Natural habitats− Biodiversity− Water systems− Natural resources

• Within 3 years, possible compulsory environmental liability insurance for these damages

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

Image: conservation.org

“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

Sustainability RisksSustainability RisksEcosystem ServicesEcosystem Services


1. Texaco − Race discrimination employees− $176 million

2. Morgan Stanley− Gender discrimination – female employees− $54 million settlement, 2004− $46 million settlement, 2007

Sustainability RisksSustainability RisksSocial ResponsibilitySocial Responsibility


3. Boeing − Gender discrimination – female employees− $72.5 million settlement, 2004

4. 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

Sustainability RisksSustainability RisksSocial ResponsibilitySocial Responsibility


• 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

• Carbon Disclosure Project report estimated that the market value of some heavy carbon emitters could be slashed by as much as 40 percent

• 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

Sustainability RisksSustainability RisksDirectors and Officers Directors and Officers LiabilityLiability


• Transparency• Carbon Disclosure Project – Investors• Carbon Risk Disclosure Initiative – Investors• Global Reporting Initiative – Sustainability Reporting

• World’s 250 largest companies - 67% have made sustainability reporting a part of risk management

• Swiss Re includes in D&O underwriting



• 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

• Sarbanes Oxley− CEO & CFO must certify

• Financial statements• Internal controls are in place

− Increased pressure on disclosing environmental liabilities− Increased pressure to develop environmental risk

management control systems


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)



D. Waste and water reduction, pollution prevention, recycle, reuse

• DuPont waste reduction saves $1.6 billion per year• Intel cut waste 50% while revenues increased 900%

E. GHG Mitigation Strategies Cost Effective• Stern Report/British Government• Cost of mitigation = 1% world GDP (Annual)• Cost from climatic impacts = 5-20% world GDP

(Annual) without mitigation

F. Voluntary Reduction of Greenhouse Gas (GHG) Emissions

• BP saved $1.5 billion• DuPont saved $2.0 billion


Voluntary Reduction of GHG Voluntary Reduction of GHG (Greenhouse Gas) Emissions(Greenhouse Gas) Emissions

• Increased Energy Efficiency

• Increased Transportation Efficiency

• Employ Green Building Standards

• Produce/Buy More Energy Efficient Products

• Use More Renewable Energy Sources



Signed Not Signed Signed but ExemptE.U. U.S. ChinaJapan IndiaCanadaRussiaAustralia

• 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

Kyoto ProtocolKyoto ProtocolGlobal Warming/Climate ChangeGlobal Warming/Climate Change


G. Manage Supply Chain• Avoid sweatshops – NIKE • Avoid dangerous products – Mattel

H. Products - Design for Environment and Life Cycle Assessment• Patagonia uses organic cotton• Timberland and Nike testing water based adhesives in

shoes

I. Partnerships with NGOs• U.S. Climate Action Partnership (27 corporations, 6

environmental groups)• Rainforest Action Network (RAN) – Citigroup, Bank of

America, JP Morgan, Goldman Sachs


U.S. Climate Action Partnership

• 27 Corporations– Alcan – American International Group – Boston

Scientific – ConocoPhillips – Deere & Co. – Dow Chemical Co.

– General Motors Corp. – Johnson & Johnson – Marsh Inc. – PepsiCo – Shell and Siemens Corp. – Alcoa

– BP America – Caterpillar – Duke Energy – DuPont – Florida Power & Light – General Electric

– Lehman Brothers – Pacific Gas & Electric – PNM Resources

– Exelon – Rio Tinto – Chrysler

– NRG Energy – Siemens – Xerox

• Six Environmental Groups– Environmental Defense – Pew Center on Global Climate

Change– National Wildlife Federation – Natural Resources Defense Council– The Nature Conservancy – World Resources Institute

Businesses Calling For Businesses Calling For Mandatory Greenhouse Gas Mandatory Greenhouse Gas Reductions Reductions



J. Anticipate Regulatory Changes like those in the EU

• 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• Safety• Zero sexual harassment• No discrimination


Questions for ActuariesQuestions for Actuaries

• Are Sustainability Risks Creating Potential for Long Tail Liability Claims?− 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

• Even if claims unsuccessful, defense cost coverage could be large

• Best mitigation strategy is to become more sustainable – more environmentally and socially conscious


• Are More Sustainable Companies Better Insurance Risks?

− 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

Questions for Actuaries Questions for Actuaries cont.cont.


• Why?– 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– Dow Jones Sustainability Index– 100 Most Sustainable Companies – World Economic

Forum

Questions for Actuaries Questions for Actuaries cont.cont.


University of WisconsinUniversity of WisconsinSchool of BusinessSchool of Business

• 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 inTheory 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

– Fluno Center for Executive Education– Business and Environmental Professors

• Joint Nelson Institute – School of Business faculty committee– Conferences– Research– Joint/Dual degree/certificate

*Cross-listed with Nelson Institute for Environmental Studies© Dan R. Anderson, UW-Madison (SOA,CAS,CIA

2008)



Sustainability Strategies can lead to:

• Increased sales• Decreased costs• Increased profits and stock

price• Competitive advantages• Enhanced reputation


Business Opportunities Business Opportunities through Sustainability through Sustainability StrategiesStrategies

“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 UniversityHarvard Business Review article, “Beyond Greening: Strategies for a Sustainable World”




All have Strong Sustainability ProgramsIncrease Sales, Profits, Competitive Advantage,

Reputation • Intel• Johnson &

Johnson• SC Johnson• Johnson Controls• Hewlett Packard• Alcoa• Herman Miller• Kimberly-Clark• Veolia• Accenture

• GE• Toyota• Swiss Re• Allianz• Shell• 3M• Baxter• FedEx• P&G• Bombardier

• NIKE• Patagonia• Ben & Jerry’s• IKEA• United

Technologies• Unilever• Xerox• Goldman Sachs


Documents

© Dan R. Anderson, UW-Madison (RIMS-NO) Sustainability Risk Management Joint Meeting – SOA, CAS, CIA Quebec City, Quebec June 18, 2008 Dan R. Anderson