The Risk Management Process

Every year, the economists who meet in Davos at the World Economic Forum present an updated estimate of the major risks facing the business world and the global economy. They do this using a grid that shows the two dimensions of risk (Polard and Stephen 2008):

• the likelihood or probability of the risk occurring (expressed as a percentage)

• the severity or consequences if the risk does occur (expressed in monetary units)

The risks that are most closely connected to environmental sustainability and to climate change are marked in red. Many of these risks are interconnected, and a major crisis of one type could trigger a series of related crises, a domino effect. It is unwise, then, to attempt to assess any of these risks in isolation from the others (Polard and Stephen 2008).

ERM can apply into global warming-based business strategies and management subjects. Integrating global warming into risk management requires a systematic approach, commitment leadership, team work, and a systems approach that enables establishment and management strategy and its implementation to best managing of global warming risk. The new Cwg model provides direction and guidance to help managers and decision makers to integrate global warming into their daily decisions and to better understand and manage social, environmental responsibilities and corporate performance. Sustainability-based ERM is required to understanding the sustainable development context truly.

ERM can apply to global warming-based business strategies and management subjects. Integrating global warming into risk management requires a systematic approach, commitment leadership, team work and a systems approach that enables establishment and management strategy and its implementation to best management of global warming risk. This new Cwg model provides direction and guidance to help managers and decision makers integrate global warming into their daily decisions and to better understand and manage social, environmental responsibilities and corporate performance. Sustainability-based enterprise risk management is required for understanding the sustainable development context in the best way.

Fig. 27.5 Sustainability risk management model to global warming: Cgw model.

Fundamentals and aims of sustainability development and ERM are considered for the determination of the steps of Cwg model. Basically, the new model is offered for the best global warming-related risk management practice. The model provides a reasonable assurance for achieving sustainability objectives. The model is basically based on 'C Model' (Kucuk Yilmaz and Yilmaz, 2008). Details of 'enterprise risk management model for corporate sustainability' are given in this book. Cwg model has been developed by authors according to this model which is designed as the six key components and their sub-components (see Fig. 27.5). The detail of components is not given here. Cwg model is shaped according to the sustainability fundamentals, requirements, and related efforts.

The Cgw model process consists of a series of steps that, when undertaken in sequence, enable continual improvement in decision making. Communication and consultation will be reflected in each step of the process. Monitor and review are the essential and integral steps in the risk management process. The basic model steps are as follows:

i. Analysis of global environment ii. Establishment of normative management requirements iii. Establishment of SRM System: GW-based approach iv. Risk identification (threat and opportunities; includes risk scenarios)

v. Establishment of data flow and feedback systems; analysis of ERM implementation performance vi. Providing the continuity of the ERM system for corporate sustainability Also, Cgw model encompasses:

- Enhancing sustainability and global warming risk response decisions via combination of both the proactive and reactive approach

- Reducing impact severity of global warming threats

- Seizing opportunities (renewable energy, new technology, etc.)

The context for Cgw model sets up a framework for identifying, assessment, and prioritization risks. It places the assessment on a clear foundation so that everyone works from a common understanding of the scope of the exercise, how risks are to be rated, and how the analysis is to be approached. Establishing the context consists of five main parts (The Australian Greenhouse office, 2006):

1. Global warming and its impacts scenarios

2. Scope: Defining the scope of the assessment including activities to be covered, geographic boundaries, and the time horizon.

3. Stakeholders: Determining whose views need to be taken into account, who can contribute to the analysis, and who needs to know its outcomes.

4. Evaluation framework: Defining how risks will be evaluated by clarifying the objectives and success criteria for the organization and establishing scales for measuring consequences, likelihoods, and risk priorities.

5. Key elements: Creating a framework that will assist in identifying risks by breaking down the organization's concerns into a number of areas of focus and relating them to the global warming scenarios.

To manage the risks of global warming, it is necessary to define how global warming is projected to change in the future. This is achieved by using global warming scenarios. Global warming scenarios provide a plausible summary of the global warming variables that could apply in your geographical region and timescale of interest. Scenarios can provide a consistent and efficient basis for assessing global warming-related risks across different organizations without affecting the integrity of the analysis.

Growing environmental concerns, coupled with public pressure and stricter regulations, are changing the way people do business across the world. Industry is on a three-stage journey from environmental compliance, through environmental risk management, to long-term sustainable development strategies (BSD Global, 2008).

There are samples given to global warming risks. Global warming-based risks are identified in the threats and opportunity categories by the authors. These threat risks are identified with current research about global warming issue worldwide. Cwg model has been adapted and developed from the book entitled Auto Wars by Kucuk Yilmaz and Yilmaz (2008). There are few samples showing important impacts of global warming:

Threats

Risk considers both threat and the opportunity by Holistic ERM concept. This has shown difference and dominance of risk management managerial approach. There are some threats which are identified as the following:

• Threats to cultures

• Reduction in sea ice

• Increasing yields

• Decreased snowpack

• Severe storms

• Water shortages

• Species losses

• Reduced tourism

• Reduced growing seasons

• Increased diseases

• Receding glaciers

• Unsustainable development

• Populations at risk

• Species extinction

• Changes in precipitation

• Changing range of decease

• Loss of biodiversity

• Changing forests

• Rising sea levels

• Temperature changes

• Changes in the frequency and intensity of extreme weather events

• Economic adverse impacts

Opportunities

There are some opportunities identified according to the global warming issue. These are presented as opportunities to the sustainable world:

• Cooperation among people, nations, and companies for sustainability

• Increasing of health, safety, and environmental awareness

• Development of environmental management system

• Sustainable energy resources with new technologies

• Developing renewable energy resources such as wind, sun, and geothermal developed renewable energy projects

• Production of the environmental friendly products

• Respect for the human being and the environment

• Common goals for success and a peaceful world

• More rational and fair sharing of scarce and limited resources

• Setting of the best international communication

• Investment in human resources, sustainable economy, renewable energy, green technologies, environment protection, technology transfer, etc.

Our civilization can seize opportunities for a universal and peaceable world. Hence, our civilization and culture will rise. Global peace and global sharing are important opportunities, which can and should be provided by global warming to all of us. Otherwise, we may face with new and important threats in the history of human kind. The sharing of scarce resources can be a new reason for war. Increase in the risk is emerging since some countries are going into war to get control of or managing scarce resources. This is not a humanistic and civilized attitude.

Nations, companies, and everyone have environmental responsibility. All of us are responsible toward our world. We should develop our sustainable risk culture for a peaceful world. 'Everyone is risk manager for managing the global warming, protection, and saving our world.'

Natural disaster losses have been increasing at an alarming rate, and it is prudent to consider what practical steps can be taken today. The following are some suggestions (Mills, 1998):

Educate: Risk managers and insurers should educate themselves and their customers alike on the climate change issues and options to help minimize potential exposures. They may choose to participate in the public policy process with other industry groups.

Articulate a policy: Many firms have published policy statements concerning environmental issues. For example, General Accident's Statement of Environmental Principles asserts: 'As a successful commercial business, we consider minimizing resource use, energy use and waste production to be integral for good business practice.'

Lead by example: Many companies have initiated efforts to manage energy in their own buildings. Swiss Re (see sidebar), Storebrand, and other insurers have adopted environmental criteria for purchasing office products and equipment. The voluntary Energy Star and Rebuild America programs offered by the US Environmental Protection Agency and Department of Energy are open to risk managers seeking technical assistance in this realm.

Mobile disaster preparedness technology and planning: Many of the losses sustained during natural disasters stem from inadequate building codes or poor compliance. The IBHS has advanced a major initiative that includes special training for code officials and working with ISO to implement a community-level code rating system. In another example of fostering disaster preparedness, Arkwright has recently provided weather-warning radios to its client. Also, the tendency to locate buildings and populations in high-risk areas must be addressed.

Support climate monitoring and research: While on one hand, climate research is arguably not the domain of insurers and risk managers, Mr. Nutter has noted that 'it is incumbent upon us to assimilate our knowledge of the natural sciences with the actuarial sciences.' To this end, 13 insurers formed the Risk Prediction Initiative in Bermuda in 1993. The members collectively funded a $1.3

million annual research program aimed at understanding the risks posed by hurricanes. Some insurers are also hiring staff climatologists.

Make green investments: It helps to invest in environmentally sound ventures.

Capitalize on energy efficiency and renewable energy: Energy consumption is the largest contributor to human-induced greenhouse gas emissions. Fortunately, there is a class of energy-efficient and renewable energy technologies that also helps mitigate insurance risks. For example, efficient refrigeration equipment minimizes the likelihood of food or pharmaceutical spoilage following power outages and solar energy systems can help keep lights on following natural disasters. Risk managers should encourage their insurance providers to assist them in implementing such technologies.

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