Virtual roundtable: Dark clouds on the horizon

In August, Australasia’s top risk managers came together over Zoom to discuss the impact of heightened climate risks in the region, as companies continue to count the cost and wider fallout from Australia’s Black Summer. 

In conjunction with RIMS Australasia, StrategicRISK asked the region’s top risk professionals about their approaches to climate change, and whether they had adapted strategies in the wake of this year’s significant natural catastrophe events.

The conversation was conducted under Chatham House Rules, but some participants have given permission for their opinions to be used in this article.

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How did the events of Black Summer in Australia impact business supply chains? And what lessons have risk managers learned from the catastrophe?

Risk managers adjusted their supply chains following the bushfires in Australia last summer, and also faced the task of managing their employees through the crisis.

One risk executive in the retail sector said her organisation had started a risk assessment into its supply chain following the bushfires.

“They probably thought the supply chain was more vulnerable and this whole experience has stress tested it both from an international and Australian perspective. Incredibly, they have held up really well, and that’s even with IR issues at the same time. They are continuing to work on making it better.”

The head of compliance at a major global drinks company said there had been “physical impacts” to the Australian business.

“There were bushfires 10km out of town, so we essentially had to shut down our distillery to maintain only critical functions there for the safety and operations of the site.”

The drinks executive said there were restrictions on the company’s ability to move manufactured products around Sydney. Health protocols also had to be put in place for staff in affected areas.

“Our Sydney manufacturing facility was impacted by the bushfires west of Sydney. We had to use PPE to enable safe breathing. It enabled us to build a nice stockpile coming into COVID-19. We also had to take physical things like smoke on the site into account, and whether that impacted our fire and safety or smoke warnings.”

Eamonn Cunningham, president of the RIMS Australasia chapter, said the scale of the impact, and speed of the onset, made organisations review their own playbook regarding supply chains.

“This was region-wide, and it was with us for weeks, in some cases months,” Cunningham said. “Suddenly you have to go back to basics, which is always the sensible advice with regard to business continuity management, and build up an alternative response based on fundamentals and whatever mother nature has tossed your way.”

“Some people found themselves dropping their pre-prepared playbook into the bin and starting afresh, and writing it on the circumstances that they found themselves in.”

Nick Deitz, risk and compliance manager at Australian software company Atlassian, said the fires made organisations “look back at where those impacts might be”, and consider “risks around the supply chain”.

“It made us look at the employee, their personal perspective,” Deitz added. “There are California wildfires going on at the moment and we have got a lot of people out there, and it’s the same. It’s ‘where are your people?’ ‘Where are they at risk’? During the bushfires, we looked at the air quality and asked whether people wanted to come in. How do you get access to a mask? It was very much focused on employee welfare, but it very much made the risk team and procurement team consider the risk around supply too.”

An Australia risk manager in the professional services market said the summer’s events made his company look more closely at the welfare of staff and their families across Australia.

“They might be caught up in it, they might need to take leave, there might be mental health issues, all that stuff is relevant in the COVID world.”

The executive said many of their clients were impacted by the fires, with some clients unable to pay bills or get up and running. They were doing what they could to help.

“From a risk perspective we were nearly taking an opposite approach, and looking at what controls can we potentially relax? Therefore, we’re not hammering customers to pay bills, we were having empathy, and in some cases, wiping the debt because it was so small. That’s where risk can play a good role. It’s not just ensuring tightening controls. It can be about loosening controls. That was an eye-opening exercise for the risk team.”

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Has the Black Summer forced you or your organisation to reconsider the whole question of resilience? If so, in what way?

Risk professionals said Black Summer has proven to be a valuable learning experience, and has helped businesses to prepare for the following shock of COVID-19.

The drinks company executive said it was important to focus on retailers, and review how to help smaller partners through the crisis.

“How can we give them free stock where we don’t clip the ticket, or give them deals, and set them up for success? We want a good relationship. How can we ensure that we are an organisation that helps local customers and the beverage industry, and also be seen as doing the right things?”

“We feel like we have coped quite well through COVID because we learnt a lot of lessons through [the bushfires]. We’ve put together lots of additional work to support the hospitality industry, and have learnt lessons about how we can be more resilient,” he added. “If there’s smoke damage in Sydney, for example, and people want to work from home, we know we have tested that with the bushfires, so we were more agile for COVID. It’s a terrible learning opportunity to have, but it has helped us become better-prepared to manage COVID.”

Catherine Parker, head of enterprise risk & governance at the Queensland Investment Corporation, said a key learning from Black Summer was taking the lead from public officials and their actions.

“If you look at the example of our public leaders and the commissioner during the bushfires, you see a great example of a transparent and open approach,” Parker said. “The quality of our response is not articulated in the plan but in the quality of our leadership and our people and the ability to make good, quick decisions. It has been a great opportunity to think beyond the immediate crisis and cement ourselves as an important strategic function.”

A risk and compliance executive in the energy sector said the bushfires had accelerated conversations on climate change risks and building climate resilience.

“There are two main triggers for senior management and board level engagement, one is the bushfires, and the other is the TCFD [Task Force on Climate-Related Financial Disclosures]. A key part of that is assessing a business’ resilience to climate-related risks.

“From my perspective, our risk management function has been heavily involved in articulating what they might look like for the business. With a relatively conservative board, these factors are starting to drive change around climate-related risks, risk management more broadly, and flowing through to our resilience programme.”

Katie Sexton, global leader for risk at Woods Bagot, added: “We weren’t directly impacted from a supply chain perspective, but many of our people routinely work remotely, which put us in a good position to manage the impacts of COVID-19. As a design firm working worldwide and responding to issues of resilience and climate change, we’re taking a greater stake and leading role in the design of buildings and master planning. Climate change is at the forefront of designing for a sustainable future.”

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How should our insurance arrangements adapt to growing climate risks?

The discussion also included some thoughts on how organisations should approach their risk transfer arrangements with regard to climate change.

Robert Walpole, VP head of Property, Asia Pacific at insurer Allied World, said risk managers needed to maintain discussions with their entire insurance panel in order to get the best coverage and pricing.

“A surprising number of risk managers we speak to spend the majority of their time talking with their lead market, even though they have a co-insurance panel supporting their programme. In this changing market, some of the most important conversations in the renewal cycle need to happen with the following markets so they have a greater understanding of the risk in hand and ultimately buy into the renewal approach taken by the lead.”

“Without this dialogue and trusted relationship, following markets can prove problematic towards the end of a placement, driving the terms and conditions which diverge from the lead’s renewal position. Engaging with follow markets should be a priority long before a renewal cycle and ideally before a hardening market,” he added.

Walpole believes the tripartite relationship will become increasingly important amid heightened climate change risks, and says closer collaboration between insurers, brokers, and risk managers is key in ensuring risks are protected.

“It’s essential to spend time with key stakeholders in risk transfer, but timing is everything, so invest that energy early on so those stakeholders buy into your risk management philosophy from the beginning. Then when times are tough, you can rely on your established relationships to ensure your risk is transferred to a market willing to support you in the most optimal approach available.”

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How are you as risk managers positioning yourself to be in the middle of conversations on climate change risks?

Risk managers shared their recent experiences of incorporating climate risks into their organisation’s strategies.

QIC’s Parker said her firm had made some structural changes to its business, with the responsible investment team joining its risk group. She said the change reflected the importance of climate risks to clients.

“In terms of our risk management framework, we’ve incorporated climate risk as part of risk appetite. We’ve got the top level identification of those risks, and now we’re trying to flesh out with the responsible investment team what that looks like, and try to articulate that and establish risk tolerance.”

RIMS’ Cunningham added: “We’ve faced two large dark clouds in the bushfires and COVID-19, and from a risk managers’ perspective, those things have a small silver lining. Risk managers have a chance to show their worth to their organisations, and there are many examples of when risk managers are not in the room when key decisions are made, and they are then told to action those decisions.”

“Given the recent dramatic events, if you’re outside of the room when these conversations are happening, my message is to knock on the door and force yourself into the room,” Cunningham added. “That might sound like a risky strategy but will pay dividends when people start listening to your advice. Climate change, and the transition to a low carbon economy, is an opportunity for you to show what the risk management industry can do.”

The energy sector executive said environmental and social governance was getting more airtime, “particularly at senior management and board level”.

They added the Task Force on Climate Related Disclosures made it a good time to discuss climate risks with board level executives. “It’s a great time to get a seat at the table, because they are looking for expertise in risk management and how to apply that. Because they want to be covered from a climate related risk perspective, and everything else that wraps into that ESG [environmental, social and corporate governance] bucket.”

“One of the big things we’re working through is what does ESG mean to our organisation, who gets to decide and how does that translate?”

The drinks company executive said their organisation was “working through the same issues”. “You’ve got some people that want to define it as purely environmental, as opposed to the broader thing about how we front up, what is our license to operate, do we operate a sustainable safe modern slavery supply chain, do we have a reconcilation action plan. It’s about having that three-legged view of all of those elements.”

Nick Deitz of Atlassian said his firm’s CEO had been “quite vocal” about climate change issues, leading from the front and making sure “the company has to back that up”.

“We do have a head of sustainability and we bring those things together. Human rights are a big issue for us as a company, so is having controls around data and people’s right to privacy.”

“We’re doing more public reporting and commitments. Part of that is building trust with the customer and with society. Mike [the CEO] likes to comment about it, so we need to be held to account and we want to be held to account. We want to do what we say we’re doing, and if we’re not, we should be prepared to have fingers pointed at us. One of the good things for me is that because the message is flowing from the top and the sustainability group, people ask where that fits with enterprise risk management, so they are bringing me in.”

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Have the increasing frequency and severity of natural perils made you reassess your business model in any way, particularly as Australia and New Zealand transition to a low carbon economy?

Participants in the roundtable discussion shared their experiences of practical changes made to business models amid heightened climate risks.

The risk manager in professional services said a key principle was “to try not to have anything that is tied to a building”, that could “prevent an employee from working where they want to”.

He stressed the importance of flexibility among the workforce, and the ability to work from home in the event of natural crises.

“It kind of sounds simple, but in the past, years ago, we’ve had servers sitting in head office, and if the head office was unavailable for whatever reason, and we couldn’t access it, so we’d be in a bit of a pickle. So we ask, where can we push things into the cloud and go faster? Digital transformation is such that if the COVIDs of the world happen, or bushfires or earthquakes, or typhoons in Asia, regardless of what Mother Nature throws our way, let’s make sure our staff can work if they have a stable internet connection.”

Cunningham said the transition to a low carbon economy was a “political” issue and as such, organisations need to take into account political changes, and whatever regulations may be imposed on businesses.

He added organisations needed to be mindful of regulatory developments in their jurisdiction and the potential for future changes.

“The impact, depending on the legislation, can be quite profound,” he said. “It’s another dimension in this very complex area, you have politics right on top of it.”

The energy sector executive said his company had hired staff to understand changes in legislation. “For our business, a heavily-regulated business, that is the number one risk as we transition to a low-carbon economy.”

Walpole at Allied World asked the participants whether they conducted much due diligence on the climate risks among their supplier base.

The energy sector executive said he looked at the issue of climate resilience across the supply chain, and how to assess suppliers against the company’s risk operations.

“What does that operational relationship look like? Do you have resilience or business continuity expectations? How do those commercials flow through to the operational management of that third party? What level of comfort do you require from the third party around the increased impact of extreme weather events on their supply chains? Even if they have a local presence and stock in Australia, where are they getting it from?”

“For me, it’s a broader resilience conversation with suppliers based on a risk assessment against their impact on your operations and ensuring you are having conversations around whether they are going to be able to continue to supply in a changing environment.”

The retail executive said their company had taken steps to improve oversight of supply chain risks in the wake of the Black Summer and COVID-19.

“My company has expanded from product safety to people safety in their supply chain, right into Bangladesh and the factories there. It was able to pivot and upskill their supply chain touchpoints and we are now looking at a value assessment across the supply chain and doing the financial assessment of some of our key players.

“We’d be the first to say COVID has made us embrace our supply chain. Supermarkets used to think, ‘oh well they just supply stuff’, but now, suppliers are at the front and centre of the organisation. That has happened since COVID and it builds a good robustness that will allow me to look in at resilience as a whole. I’m thrilled to see that.”

A risk professional in the Australian construction sector said climate-related risks had begun to put pressure on wider manufacturing industries. He said his company had shifted its focus to low carbon and low-impact products.

“Our innovation focus has ramped up tremendously, and we are preparing for the future. We have low carbon-concrete products, fire-retardant plasterboard features, which have been researched and developed to prepare for that extra demand.

“Political will [on climate change] is underpinned by public sentiment. So having a sense of where the public interest is, and having a sense of how that translates, is important. We will see demand from customers first before we see it in the regulations.”