Are firms prepared for emerging risks?

Fortune 1000 companies may not be taking a long term view of risk management and preparing accordingly for emerging risks, such as a lack of access to clean water or pandemics, according to new research.

Roughly 4 in 10 executives believe that if a water crisis occurred it would have a severe or even catastrophic impact. Yet, less than one in five say they have prepared for the crisis.

The number one reason companies gave for not being prepared was that the risk was perceived as not relevant to their company.

Only 6% of the respondents believe it is likely that in the next 5 to 10 years access to water for manufacturing or drinking will be significantly reduced because of quality degradation or scarcity. And only 12% saw climate change as a potential crisis.

The findings are based on work conducted by Marsh including a poll of senior officials from a cross section of more than 100 Fortune 1000 companies, to gauge their biggest risks.

Marsh has formed the centre for risk insights as a working group on emerging risks and the founding advisors discussed the research findings.

“Perhaps people are lured into the view that these are long term impacts that they might not be able to control, when there is increasing evidence that they are hear and today, real and now.

Gary Guzy, Marsh national practice leader, emerging environmental risk and climate risk initiative

Gary Guzy, Marsh national practice leader, emerging environmental risk and climate risk initiative, said: “Perhaps people are lured into the view that these are long term impacts that they might not be able to control, when there is increasing evidence that they are hear and today, real and now.”

Dr. Howard Kunreuther, co-director of the risk management and decision processes centre, Wharton School, University of Pennsylvania, added: “If managers are thinking in the short run, i.e. the problem is not in my term of office (NIMTOF) we then find that the benefits get shortchanged in some sense because they are only thinking about what will happen over the next one, two or three years. This issue of the short term horizons really raises some challenges.”

Commenting on the problems of globalisation, long and complex supply chains and the correlation between different risk issues, Guzy said: “Water is absolutely critical for a wide range of manufacturing processes that’s in high demand all over the world. In addition we are seeing how water scarcity is contributing to the increased potential for there to be border conflict and a general rising of tension where water becomes an exacerbator of other threats which may exist.”

Dr. Kunreuther, added: “The more you have this issue of interdependency, the less rationale and reason you’ll have for firms investing in a problem if others are not doing it…So you have that feeling of why should I do it unless we have others doing a similar thing.”

Out of eight possible loss scenarios, two thirds of those polled felt that natural disasters were the most likely to occur, followed by international terrorist attacks and a rise in oil prices.