From the February 2009 issue of Treasury & Risk magazine

Green Moves Up

As risk surveys and reports keep piling up, Ernst & Young's 2009 Business Risk Report stands out even though more than 100 global sector analysts polled predictably rank the credit crisis, regulation and compliance, and the deepening recession as the top three concerns. Fourth place is a surprise. "Radical greening" moves up from ninth place last year, as "environmental and sustainability issues continue to escalate, especially in carbon-intensive sectors such as automotive, real estate, oil and gas and utilities," the report notes. The change in administration in the U.S. also raises the possibility of concerted government regulation, although "it's too early to tell how that will go," says Todd Tueller, partner and risk transformation leader at Ernst &Young's LLP's advisory services.

The spike in oil prices this summer was a wake-up call and although prices have fallen "few analysts expect the pressure for radical greening to disappear," the report says. Climate change and energy conservation are the main drivers.

Expect the oil and gas industry to change fundamentally over the next decades, with oil eventually relegated to petrochemicals. Cap and trade programs, like the European Union Emissions Trading Scheme, where the government sets emissions limits and lets businesses that land under their cap sell their excess carbon credits for profit, will spread globally and likely come to the United States under the new administration.

Meanwhile, "virtually all major office buildings will be green in the next construction cycle," the report quotes one analyst as saying. Improved green design may reduce energy use up to 70%, says a University of British Columbia business ethics professor.

Besides regulatory risk and impact on revenue and market share, the radical greening movement is also a matter of reputational risk, Tueller points out. Companies need to be regarded as socially responsible, global corporate citizens. "Failure to be seen to be responding to climate change could have huge reputational risks for companies in high-carbon sectors and elsewhere," the report notes.

Recognizing this emerging risk beyond the hypothetical, AIG Risk Management, a unit of AIG Commercial Insurance, recently introduced AIGRMGreen Reputation Coverage to provide for crisis management in the event a green building experiences adverse publicity and AIGRMGreen Indoor Environment Coverage to protect against claims of bodily injury caused by any substance or odor produced by a green building's specialized equipment to clean the air and water. With these products, AIGRM says it has entered "new territory."


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