Managing Environmental Risk by Looking through the Rear-view Mirror

A recent survey by The Economist Intelligence Unit identified both the top influencers of – and benefits derived from - corporate environmental risk management (CERM) programs. Two things are curious about these survey results. First, customers and investors rank relatively low in influence (fourth and seventh, respectively) despite the fact that “better corporate reputation” among these groups ranks as the primary benefit for launching CERM in the first place.

Second, “regulators” and “government” exert significant influence – second only to “executive management” – on companies to initiate CERM programs; in terms of benefits, however, “improved relations with regulators” ranks only eighth.

Risk Manager Responses from Recent Survey by The Economist Intelligence Unit

The high level influence of regulators and government suggests that corporations consider regulatory compliance as the primary measure of CERM success.This focus is understandable given the stiff fines imposed for non-compliance.

Moreover, it also suggests that corporations believe that regulatory compliance is the way to improve its reputation with customers and investors. Yet, while compliance is arguably important with customers and investors, it is simply the place to start.

When it comes to customer and investor groups, focusing solely on regulatory compliance is like driving a car by looking through the rear-view mirror. Quite simply, regulations do not necessarily reflect current consumer and investor expectations regarding corporate actions toward the environment; instead, they reflect those held in the past when the regulations were passed.

This is an important distinction because consumer and investor expectations regarding corporate environmental responsibility continuously evolve. As such, it is likely that current expectations have far surpassed current regulations in place today. Take climate change, for example. There is a growing consensus that carbon must be regulated, yet no binding limits yet exist in the US.

There are other cases where customers or investors actively challenge management’s environmental policies. For example, led by members of the Rockefeller family, ExxonMobil shareholders have made it clear that they believe that when it comes to climate change, compliance with existing regulations is not enough for this oil giant.

As such, corporations that primarily focus on regulatory compliance are likely falling short when it comes to improving their reputation with consumers and investors. Instead, management should try to better understand current customer and investor expectations toward the environment, and how these sentiments evolve with time. This will require corporations to take action that go beyond current regulatory mandates. It will also require recognition that customers and investors hold greater “influence” on CERM decisions than what is commonly realized today.