12 industries at risk of failing to manage the Earth's natural resources

The oil & gas, mining, transportation and food & beverage industries rank highest in risk exposures in terms of managing the Earth’s natural resources or “natural capital,” according to Allianz Global Corporate & Specialty’s (AGCS) latest report, “Measuring And Managing Environmental Exposure: A Business Sector Analysis of Natural Capital Risk.” AGCS placed these industries in the “danger zone,” meaning their risks are, on average, greater than the mitigation options currently employed.

Additionally, seven industry sectors — construction, utilities, clothing/apparel, chemical, manufacturing, pharmaceutical and automotive — were placed in the “middle zone,” meaning risk and mitigation levels are approximately in balance. The telecommunications sector is the only sector to be classified in the “safe haven” zone, as it does not have a high level of risk exposure.

“Companies around the world are increasingly confronted with the negative implications of natural capital depletion,” Chris Bonnet, manager of AGCS’ environmental, social and governance business services, said in a statement. “Yet while corporate awareness of their natural capital footprint is growing, many still need to gain a better understanding of the specific threats that can impact their industry sector and company in particular, as well as the mitigation options available.”

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The three phases of natural capital risks

According to the report, natural capital risks evolve through three phases before impacting the bottom line of a business.

In the first phase a growing awareness can be observed, generally triggered by changes in either the physical natural environment, public opinion, court rulings or legal changes. Companies need to proactively investigate potential risks stemming from these trends and assess the extent that these risks could affect the company’s operations or business model.

In the second phase, natural capital risks will start affecting individual companies in their supply chain, their own operations or at a site level, either through regulation, growing social pressure or resource scarcity.

In the last phase, once the risk cannot be mitigated, it materializes. Companies can suffer from material or immaterial damage such as liability costs, increased product costs, lost profit or business interruption. In this third phase, efforts to handle the risks should be directed toward minimizing their impact through crisis management.

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How can companies prepare?

Most companies have effective risk management and insurance systems in place that can be used to address natural capital risks. But the challenge will be to balance traditional risk management focused on the present with the management of emerging risks arising in the mid- to long-term.

Companies must account increasingly for natural capital risks and disclose them to governmental agencies, investors and other stakeholders, but AGCS notes that this may be a challenge as generally accepted reporting and disclosure requirements are yet to be developed. Undoubtedly, companies that invest in natural capital risk management will be best-equipped to keep damages and liabilities under control as natural capital reserves continue to be depleted.

AGCS analyzed data on 2,5000 companies from research provider MSCI ESG Research in order to assess the natural capital risk exposure in 12 industries. The full report is available on the AGCS’ website.

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