Environmental Risk

Define environmental risk

An environmental risk is an unrealised loss or liability arising from the effects on an organisation from the natural environment or the actions of that organisation upon the natural environment. Risk can thus arise from natural phenomena affecting the business such as the effects of climate change, adverse weather, resource depletion, and threats to water or energy supplies. Similarly, liabilities can result from emissions, pollution, waste or product liability.



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Why environmental risks are strategic?

1. Impact on primary stakeholders

• It affects the ways the company is viewed by its primary stakeholders, those without whose support the company will have difficulty continuing. These include the local community because it supplies the key resource of labour. Withdrawal of community support could mean the loss if key staff and problems filling vacancies.

• The other significant stakeholders are investors. Loss of their support may result in them selling their shares and affecting the company’s market price. They may also seek to engineer changes in objectives by, if necessary, forcing changes in company’s board.


2. Industry characteristics
Environmental risks are structural risks that underlie the entire industry in which the company is operation in:

• The method of processing used may result in consequences of the environmental risks materializing much higher than the other industries, leading to serious financial and reputational consequences.

• The useage of resources may have serious environmental implications, hence the company’s strategies may be affected by the need to change the resources it uses, a shortage of resources or significantly greater resource costs.




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