PEAK NATURAL RESOURCES

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Resource scarcity: what does it mean for business?

6 May 2009

http://www.lloyds.com/News_Centre/Features_from_Lloyds/News_and_features_2009/360/Resource_scarcity_what_does_it_mean_for_business.htm

Resource scarcity: is it a longer term risk that's overlooked?A new report, launched by Lloyd’s and the International Institute of Strategic Studies last week, advised businesses to assess their vulnerability to the increasing scarcity of resources such as fresh water, food and energy triggered by global warming.

In this, the second of two features marking the launch of the report, we explore what others are saying on resource scarcity—and what it means for business.

Risk managers worried

Although businesses are grappling with the risks posed to their immediate existence by the economic recession they cannot afford to ignore those that are looming on the horizon, particularly those created by climate change.

“Businesses that focus solely on the economic climate rather than the global climate in which we all live and work are in for a big shock,” says Julia Graham, chair of the UK risk management association AIRMIC.

“Businesses should be planning for the future and what’s really worrying me is that people are so preoccupied by the current economic environment that many of these other longer term risks are being overlooked,” adds Graham.

A world in ecological debt

In its Living Planet Report 2008, the World Wildlife Fund (WWF) said: “The possibility of financial recession pales in comparison to the looming ecological credit crunch.”

The global population’s demand for natural resources exceeds by 30% the planet’s capacity to regenerate those resources, the WWF said. Furthermore, this ‘global overshoot’ is growing.

We’re running up a global ecological debt each year of around $4 trillion to $4.5 trillion, according to a recent pamphlet by the Forum for the Future. To put that in perspective, that’s around the entire cost of the financial crisis as estimated by the International Monetary Fund.

Radical greening?

The 2009 Ernst & Young Business Risk Report suggests there is a growing realisation among companies of the environmental threats they face. Not surprisingly, the credit crunch tops its list of the top 10 risks for global business. Regulation and compliance comes second, with the deepening recession in third spot.

But in fourth place is what Ernst & Young calls the risk of ‘radical greening’—the environmental and sustainability challenges facing firms. This risk saw one of the most dramatic movements up the list (it was in ninth place in 2008), despite being unrelated to the financial climate.

Its elevation is partly due to the soaring oil price in 2008, but even though the cost of oil has fallen again few analysts interviewed by Ernst & Young see this risk decreasing in future.

Prepare for peak oil

But it seems that companies outside those industries most directly exposed to volatility in the supply of fossil fuels—oil and gas, construction and energy utilities—still do not see this as being a direct threat to their own businesses. Ernst & Young says that the risk of energy shock is a peril that is still “below the radar” for most enterprises.

However, the Industry Taskforce on Peak Oil & Energy Security—a group of UK-based companies including Arup, Foster and Partners and Virgin Group—has warned of the consequences of not being prepared for oil production reaching its peak.

“Neither the government, nor the public, nor many companies, seem to be aware of the dangers the UK economy faces from imminent peak oil …The risks to UK society from peak oil are far greater than those that tend to occupy the government’s risk-thinking, including terrorism,” the Taskforce’s report said.

These dangers are not confined to the UK, but the Taskforce calls on the British government and companies to consider the risks and to plan strategies in response to this problem.

Resource scarcity: no longer too remote a risk

Planning for remote and faraway risks can be difficult. An article in March’s Harvard Business Review said companies should adopt “sustainable risk management”.

It says: “Instead of focusing on the fact that the probabilities of catastrophic risks are extremely small, risk managers should build scenarios for such risks, and the organisation should design strategies for surviving them.”

Resource scarcity is precisely this kind of risk. The threat of increasingly scarce oil, of limited water supplies or of international tension as a result of climate change may seem remote to many businesses right now.

But forward-looking firms are already assessing their exposure to these effects of global warming, ensuring they are prepared for the changes it brings and able to exploit the opportunities that emerge