Today’s business landscape is constantly evolving, producing new risks and opportunities that require a renewed focus on education, planning and developing proactive measures to respond effectively. What threats should risk leaders prepare for? The following six trends have the potential to significantly alter the risk landscape for organizations in the coming decade.
1. Adapting to a Changing Climate
The global climate is changing, and will continue to do so in ways that affect the planning and day-to-day operations of businesses, government agencies and other organizations. Any discussion of climate change should be prefaced by a harsh fact: The frequency and severity of storms, floods, heatwaves and droughts are on the rise, and experts believe this could have catastrophic implications for society.
In the United States, 14 weather and climate disaster events in 2019 caused more than $1 billion in losses, including inland floods, severe storms, tropical cyclones and wildfires. Between 1980 and 2018, the annual average was 6.3 billion-dollar events. The annual average for the most recent five years (2014 to 2018) is an astonishing 12.6 events, according to the National Oceanic and Atmospheric Administration and the National Centers for Environmental Information. Consider Tropical Storm Imelda, which hit Southeast Texas in September 2019. Although it might be too soon to tell how climate change shaped the intensity and speed with which Imelda struck, it will likely be considered the fifth 500-year flood event in the area in as many years.
In peak hurricane season, businesses need plans centered on a resilience strategy that looks at every aspect of the storm, including a system’s ability to maintain a high level of functioning during and after a disaster, the efficient use of remaining resources at a given point, and the ability and speed to recover.
Another key consideration is the downstream impact on business location. With flood probability on a devastating climb, firms will likely choose to open new plants away from coastal areas. These extreme weather events will put certain gulf and coastal states at a disadvantage and change the dynamics of and decisions around where companies invest.
2. Impact of Aging Infrastructure on Supply Chain
Aging infrastructure in the United States is a challenge many have not fully considered. According to the American Society of Civil Engineers, which gave U.S. infrastructure a grade of D+ in 2017, the country will need to spend more than $4.5 trillion by 2025 to fix roads, bridges, dams, airports and other infrastructure. Crumbling bridges and roads, coupled with declining ports that struggle to handle evolving vessel design, materials and mechanics, all result in increased time, effort and process needed to ensure products reach their destinations safely and on time. A lot of overseas trade comes through U.S. ports, and while these ports fare better than most other infrastructure categories, there is still room for improvement, according to civil engineers. As ships increase in size, ports will need to create deeper navigation channels. As congestion increases, the freight network, infrastructure and process that transfers material to its destination must be addressed and refined to ensure goods are transferred efficiently.
For example, the number of vessels looking to enter California’s Port of Long Beach has increased at such a rate that port operators are unable to process them all. Washington’s Port of Seattle can accept part of the load, but some shipping routes are likely to be diverted to East Coast ports like those in Newark, New Jersey or Savannah, Georgia. This would mean huge changes in the dynamics of shipping from Asia, leading to a more complicated supply chain and, in turn, added time to receive goods.
As supply chains continue to become more complex while consumer expectations for greater speed and efficiency simultaneously increase, infrastructure will require additional investment. Road crowding will create the need for alternate modes of transportation like light rail to more efficiently move people and goods. In addition, driver shortage problems within commercial transportation may accelerate the need for rapid deployment of autonomous vehicle fleets to alleviate the pressure.
3. Cannabis Legalization
In recent years, 11 U.S. states and the District of Columbia have legalized recreational cannabis. However, it is still designated as a Schedule I substance under the federal Controlled Substances Act, which criminalizes its possession, manufacture, distribution and sale. This tension between federal and state law has led to confusion and challenges in many industries, including law enforcement, banking and real estate. Across all industries, employers of individuals who use cannabis are also grappling with the contradicting laws. Workplace implications and challenges related to legalized cannabis must be considered and discussed, most notably among manufacturing and distribution, finance and human resources teams.
This conversation is particularly pertinent to human resources, specifically with regard to the effect on hiring and employee safety in the workplace. Studies are being conducted to determine the impact of cannabis on driving, operating machinery and other occupational duties. In states where cannabis has been legalized, 30% of accidents involving commercial drivers saw positive screens for the drug, according to a study conducted by The Risk Institute at The Ohio State University. Further, the study indicated that crash severity for bodily injury claims was, on average, 44% more costly in crashes involving drivers who tested positive for cannabis.
In the financial arena, due to the conflicting federal and state laws, U.S. banks will not fund businesses that are involved in the production and/or distribution of cannabis. If they even suspect that an organization has a cannabis connection, many banks will not be forthcoming with loans.
4. Distracted Driving
With growing public awareness and concern about distracted driving, there is increasing collaboration among dozens of companies, organizations and government entities focused on how to predict and curb distracted driving behaviors. For example, The Risk Institute partnered with Ohio’s Department of Transportation, Department of Public Safety and Governor Mike DeWine on a task force to address the issue.
Two-and-a-half million new teen drivers enter U.S. roadways each year and many of them are underprepared. Every day in the United States, approximately nine people are killed and more than 1,000 injured in crashes involving a distracted driver, according to the National Highway Traffic Safety Administration. A report issued by the Ohio Distracted Driving Task Force revealed that, in Ohio alone, there were more than 14,000 distracted driving crashes in 2017, resulting in 58 deaths and more than 7,000 injuries.
The Risk Institute has developed a multifaceted methodology to combat this epidemic that includes:
- Legislative recommendations including changing state law to reclassify distracted driving as a primary offense
- Behavioral interventions to change perception surrounding the social irresponsibility of distracted driving and promote safe driving behaviors
- Technology initiatives such as advanced driver training in schools or apps that monitor driving performance
- Urban planning and development changes that might include transitions to roundabouts at accident-prone intersections
Firms will need to identify organizational risks and vulnerabilities related to cybersecurity and apply administrative actions and comprehensive solutions to ensure adequate protection.
5. Safe Work Environments
When considering how to introduce safer work practices with a behavior-based emphasis, organizations need to focus on strategies beyond just risk transfer. This requires paying attention to leading indicators rather than lagging ones, and understanding that every dollar of loss mitigated is a dollar to profit and the bottom line.
For this reason, organizations should strive to create a positive environment in which employees do not just survive but thrive. Fostering a culture of health, safety and wellness should be a top priority for human resources personnel, as illnesses and injuries lead to financial burdens for both employer and employee. Risk mitigation includes engineering the workplace environment by applying behavior-based safety strategies, job safety analysis and functional capacity evaluations.
Focusing on a safe work environment requires much more attention in modern industries. The Risk Institute, for example, is exploring behavior-based safety processes. Unlike traditional safety management programs that depended on supervisor-to-associate interaction to drive improvement, these programs assert that safety should be everyone’s responsibility. The introduction of behavior-based approaches focuses on empowering all associates to identify and mitigate unsafe work practices. In addition, augmented reality and artificial intelligence tools are being used in the workplace to train personnel and prevent unsafe work exposures.
6. Cyberrisk Management
Cyberrisk is now at the forefront of any conversation relating to personal and public safety. Practitioners also face an increase in cyber and third-party risk as firms use more external partners to support key functions and tasks.
Addressing cybersecurity means taking the concepts inherent in risk management and applying them to digital assets. Firms will need to identify organizational risks and vulnerabilities related to cybersecurity and apply administrative actions and comprehensive solutions to ensure adequate protection.
For example, the NotPetya ransomware attack in 2017 cost global drug maker Merck $1.3 billion. In all, the attack disabled more than 30,000 laptop and desktop computers at the company’s locations, as well as 7,500 servers. One researcher even claimed she lost 15 years of work.
When we consider the increasing risk of cybercrime on businesses and governments as well as the recent waves of data fraud and theft, risk management must shift from a defensive, reactive focus to a proactive focus that creates value and builds resilience within the organization.
Phil Renaud is executive director of The Risk Institute at The Ohio State University’s Fisher College of Business. With more than 25 years of experience, he has managed risk programs at Risk International, Deutsche Post/DHL (Supply Chain), Kmart Corporation, Limited Brands, Inc. (L Brands) and SCOA Industries Inc. (Shoe Corporations of America).