In this fifth post devoted to the PESTEL methodology in the field of risk monitoring, we will examine the second dimension “E” of this model for “Environmental” risk.

“Risk is like fire: if controlled it will help you, if not controlled it will grow and destroy you”  Theodore Roosevelt.

The above words, though spoken over a century ago by President Theodore Roosevelt, still hold true today. However, controlling risk is not equivalent to eliminating it, because risk management means dynamic and controlled adaptation to changing circumstances. For a resilient risk management process – within your supply chain but also within the business as a whole – it is essential that your organization implements continuous and targeted monitoring in order to be able to quickly identify warning signs.

What factors should be taken into account to monitor environmental risks?

In a broad sense, environmental risk can apply to all external factors that can potentially have an impact on the company. In the context of PESTEL risk monitoring, environmental risk is more focused on the physical environment. Here are some examples of environmental factors that can affect the business:

Climate, weather and natural disasters:  Globalization – applied particularly within supply chains – associates companies with a much wider range of climates and weather events. Thus, a natural disaster can seriously disrupt the activities of a supply chain. Earthquakes in Japan in April 2016 forced Toyota to suspend production at its factories across the country due to parts shortages.

Climate Change:  Although climate change has the ability to significantly increase environmental risk within a supply chain, it is often overlooked because it appears to be slow moving. However, climate change is directly linked to the low or non-availability of raw materials, such as water or energy shortages. It is also associated with the amplification of the power of weather phenomena such as hurricanes, snowstorms or fires – which can disrupt operations and the transport of goods in a significant way – thus plunging supply chains into the chaos.

Pollution:  Many organizations outsource some of their production activities to developing countries, where pollution regulations are much more relaxed. And when consumers and the media take notice, the companies involved face serious reputational issues. We remember the bad media buzz affecting big fashion brands like H&M and Marks & Spencer earlier this year, because they sourced their textiles from highly polluting factories in Bangladesh and China. During a Riverkeeper environmental award speech, American clothing designer Eileen Fisher admitted that “the clothing industry is the second biggest polluter in fashion…just behind oil”.

Availability of non-renewable materials:  When there is a shortage or surplus of non-renewable materials, organizations face a number of risks. Oil companies – for example – face serious strategic risks when excess product drives prices down. But on the other hand, a large number of companies face a much greater financial risk in the event of an oil shortage and therefore a price increase, not to mention the potential disruption of transport or production activities in the event of a low energy availability.

Regulatory:  With accelerating climate change and the need to tackle pollution in emerging economies, the regulatory environment continues to evolve. Organizations therefore need visibility into legislative activities and laws that may increase their exposure to risk.

Gain visibility by applying the PESTEL methodology to your risk monitoring process

Climate is generally a known factor and it is sometimes possible to anticipate environmental risks without a continuous monitoring process. For example organizations looking to expand into the United Arab Emirates are certainly well informed and prepared for the challenges of operating in a hot and arid climate. Weather-related events can also be predictable. Organizations with operations or suppliers in coastal areas understand that they face seasonal risk and have an action plan in place to deal with a potential hurricane. However, as climate change progresses, known factors become less predictable. This is where continuous environmental risk monitoring can help.

The interconnectedness of geopolitics, technology, economics, society, climate and more means that one risk is increasingly likely to influence others. As risk media Brink explains, “When a known risk – hurricanes – collides with an emerging risk – rising tides – the outcome is not easy to predict. Thus, by anticipating emerging risks, we gain in ability to predict potential results when the risks overlap”.

How to gain visibility into the factors that can pose a risk to your business 

LexisNexis Entity Insight is a tool that helps companies keep an eye on the PESTEL factors most likely to present a risk to their activities, whether political, economic, socio-cultural, technological, environmental or legal. This personalized approach to risk management helps eliminate information overload, allowing organizations to more quickly detect red flags and react proactively to reputational, regulatory, financial and strategic risks. Learn more . 

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