There was a time when businesses would not plan for certain types of risks because they were ‘existential.’ Risks—like acts of God, severe weather, pandemics, or civil strife—were viewed as so ‘unknowable’ that they defied strategic planning (other than, perhaps, in terms of business interruption, limited aspects of which might be insured). Those days are over—forever.
McKinsey has said, “[s]hocks that affect global production are growing more frequent and more severe. . . . Disruptions lasting a month or longer now occur every 3.7 years on average” and major multinational “companies can expect to lose [to these disruptions] more than 40 percent of a year’s profit every decade on average.” Looking just at weather-related events, global insured losses for the first six months of 2024 are running over 67% higher than the ten year average, leading Munich Re’s chairman to say that “climate change entails evolving risks that everyone—society, the economy, and the insurance sector alike—will have to adapt to.” All of this leads Zsolt Lengyel of the Institute for European Energy and Climate Policy to observe that we are heading toward an “uninsurable future” driven by risks that used to be viewed as existential, but are attributable to “the beast we have created (economic growth at all costs, little regard for nature and climate).”
To avoid these growing risks, companies must stop treating Nature-related risks (e.g., climate change, biodiversity loss, water pollution and scarcity) as existential and unknowable, and start treating them as knowable opportunities to make business more resilient. This will involve doing three things.
First, companies must break from a system that attributes no intrinsic value to Nature. To the contrary, Nature is an asset, the value of which companies owe a fiduciary duty to shareholders to understand, preserve, and maximize. Thus, corporate strategies must focus on the value of ecosystems like clean air, clean water, and biodiversity sufficient to support crops, plants and other resources needed for business and to respect the local communities upon which business relies.
Second, companies must stop thinking in the short-term, because this makes it impossible to properly manage Nature assets. The diversity and complexity of Nature-related assets requires long-term attention in order to assess and manage impact, mitigate harm, and remediate damage.
Third, companies must stop thinking in silos. They must look beyond themselves to understand how their impact on Nature affects both their particular business and value chain and those of other businesses and their value chains. Business resilience and opportunity lies in understanding how businesses cumulatively affect ecosystems. This will also entail companies learning to work with local and Indigenous communities to gather and understand Nature data, to ensure better management of Nature assets.
Maximizing long-term shareholder value means not using existential risks as an excuse, but as an opportunity to better understand the Nature assets upon which businesses depend.
Comments