An analytical tool for managing environmental risks strategically

In this article, Dr. Robert Repetto and Duncan Austin of the World Resources Institute present an approach for analyzing and communicating the financial implications of a company's environmental exposures through an empirical application to companies in the U.S. pulp and paper industry. The methodology is based on a sequence of steps: A) identifying salient impending environmental issues; B) developing multiple scenarios for each issues; C) assessing the company (or facility's) exposure under each scenario; D) estimating scenario-specific financial impacts; E) constructing overall risk measures; and F) analyzing options to minimize risks or maximize advantages.Within the pulp and paper industry there are varying levels of exposure and associated risk from environmental issues. For some companies, environmental issues will have little or no impact on financial performance, while for others, they could be a source of increased value. For others, environmental issues may entail costs that approach fifteen percent of a company's current valuation. In environmentally sensitive industries, the approach presented can help companies to benchmark themselves against rivals, identify major sources of environmental risk and opportunity, assign financial values to risk-mitigating options, and communicate their environmental strategies to the investment community and other stakeholders.