The Risks Reward Paradigm

Risk may have positive or negative outcomes, resulting in either an opportunity or a loss for a business. Risk management is the way in which adverse effects from risk are managed and potential opportunities are realized. Therefore, risk management involves (Global Risk Alliance Pty, 2005)

• minimizing those things that may negatively impact upon a business;

• identifying and harnessing those things that will help to achieve the goals and objectives of a business.

Risk is the chance of something happening that will have an impact on objectives (The Australian Greenhouse office, 2006):

1. A risk is often specified in terms of an event or circumstance and the consequences that may flow from it.

2. Risk is measured in terms of a combination of the consequences of an event and their likelihoods.

3. Risk may have a positive or negative impact.

Figure 27.2 illustrates the components of each step of the basic integrated risk management process and illustrates the cyclical nature of the process.

Establish the context

* The external context

• The internal context

* The risk management context

♦ Develop risk evaluation criteria

♦ Define the structure for risk analysis

Identify the risks

* What can happen

Identify the risks

* What can happen

Fig. 27.2 Details of the risk management process.

The current best ERM frameworks and process (such as AS/NZS 4360:2004) can shape and improve according to the climate change and global warming-based factors. ERM can be considered an integral part of sustainable development process as seen in Fig. 27.3.

Fig. 27.3 Sustainable development process (Hutton et al. 2006).

In the context of global warming risk assessment, uncertainty arises because we do not know for certain the magnitude of the global warming and its associated impacts, and in some subjects it is not clear. Also, uncertainty may arise because decision makers do not know the threshold at which global warming impacts have a particular level of consequence for organization.

Risk management, in the environmental, health, and safety functions, is important to any organization, but especially to the sustainability of the world. Sea level rise, heat waves, and increased intensity and frequency of prolonged droughts, floods, storms, and wildfires are already triggering increased financial losses. These physical changes affect a broad range of sectors, including real estate, agriculture, tourism, health care, insurance, fisheries, and forestry, as well as any company with offshore or coastal facilities. Oil producers and other businesses along the US Gulf Coast, for example, suffered billions of dollars of infrastructure damage from Hurricane Ike this past summer. The increasing threat of water scarcity, which will likely be exacerbated by climate change in the many parts of the world, will impact many sectors, including the agriculture, electric power, industrial, beverage, and food sectors. But embedded in the risk of climate change are numerous opportunities for innovation. In anticipation of a carbon-constrained world, DuPont has developed carbon-free refrigerants, more energy-efficient home insulation products, and bio-based fuels. The company expects to realize additional revenues of US$6 billion or more by 2015 from products that reduce greenhouse gas emissions, cut water consumption, or provide other environmental benefits. DuPont has reduced its own greenhouse gas emissions by more than 70% over the past 15 years, saving US$3 billion on its energy bills in the process. General Electric's often mentioned Ecomagination initiative is another example of wise business planning in the face of climate change. Predictably, both companies have key board members who are keenly aware of the risk-reward paradigm represented by global warming (Lubber, 2008).

Global warming risk is managed by holistic risk management and provides sustainability. For this reason, risk management is key factor between global warming and sustainability (see Fig. 27.4).

Fig. 27.4 Link between global warming, sustainability, and risk management.

Risk management is the process that the systematic application of management policies, procedures, and practices to the tasks of communicating, establishing the context, identifying, analyzing, evaluating, treating, monitoring, and reviewing risk (The Australian Greenhouse office, 2006). Sustainability-

based ERM deals with risks emanating from the environmental and social justice areas (Anderson, 2006). It includes both climate change and global warming issue.

The risk management approach allows companies to save money by anticipating and avoiding expenditures arising from global warming. In addition, operating costs can be reduced through waste minimization, pollution prevention, and the elimination of health and safety hazards (BSD Global, 2008).

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