Plugging the gaps in environmental risk

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As governments around the world respond to climate change with varied regulatory solutions, traditional risk management techniques are leaving multinational companies exposed to unnecessary financial and reputational risks.

Perils such as property and casualty risks are well established in multinational insurance programmes, according to a report released this month by Chubb and Clyde & Co, but environmental risks have been slow to follow — and the threat from these risks is growing.

“It is increasingly important for businesses to understand the multitude of potential threats they now face,” said Suresh Krishnan, head of the global accounts division at Chubb Europe. “The consequences of not being prepared locally can be severe and the impact of an environmental incident resonates on many levels.”

With the exception of the US under Donald Trump, almost all countries are taking climate change more seriously as the impact gets harder to ignore. China, for example, recently introduced a national cap-and-trade programme to target carbon emissions, creating a market more than twice the size of Europe’s.

Of course, enforcement of environmental laws is where the rubber meets the road and this is also ratcheting up. In the UK, the average fine handed out by the Environment Agency has rocketed from £5,000 in 2000 (US$6,600 at today’s exchange rate) to £178,000 in 2017.

“There has been a significant tightening of environmental regulation around the world and this is now the biggest environmental risk faced by organisations,” said Neil Beresford, a partner at Clyde & Co. “Not only that, but organisations operating globally are faced with an extremely wide range of regulations and enforcement regimes that add complexity to their risk management and mitigation processes.”

Indeed, even before Britain’s exit from the EU, what happens in the UK is no guide to enforcement actions elsewhere in the bloc — there is almost no uniformity across member states in how the laws are implemented, according to Chubb, with more than 85% of enforcements under the EU Environmental Liability Directive taking place in Eastern Europe.

Some EU countries have legal requirements for compulsory financial provision for environmental risks, while others have compulsory insurance regimes and some have no such schemes in place.

This type of inconsistency can even happen within countries. Under China’s Environmental Protection Law, introduced in 2015, Chubb notes that enforcement is in the hands of local government, leading to a regionalised regulatory regime where some regions carry out stricter enforcement than others. Some have little or no appetite for taking regulatory action.

This can be a potential minefield for risk managers and is only likely to get worse before it gets better given the lack of international agreement on how to respond to climate change and other environmental issues, such as water pollution.

The cost of getting it wrong can be substantial. Volkswagen’s diesel emissions scandal not only incurred a record fine and damaged the company’s reputation, but arguably harmed the image of the entire German auto sector. BP’s ham-fisted response to its oil spill in the Gulf of Mexico made a bad situation even worse.

The fact that companies like this can make such big mistakes speaks to the challenge of this risk. Leading multinational companies are increasingly putting in place global programmes that assess environmental risk across their worldwide operations but are built from the ground up with local expertise and are combined with crisis response, reputation management and business interruption coverage.

Because when it comes to environmental liabilities, traditional risk management is no longer enough.

The post Plugging the gaps in environmental risk appeared first on InsuranceAsia News.

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