What Wildfires, Hurricanes Can Teach About Risk Reduction

Companies can leverage their involvement in infrastructure development to raise resiliency standards.
Erik R. PetersonOctober 11, 2017

The Northern California wildfires. Harvey. Irma. Maria. We shudder at the thought of the devastation these natural disasters have inflicted. And such high-cost disasters aren’t just happening in the United States. In Mexico, strong earthquakes have left hundreds of people dead. Across South Asia, more than 1,200 people were killed and millions more displaced in severe monsoons in August.

OpinionThe rate of natural disasters worldwide has more than quadrupled since 1970 to around 400 per year, at a pace and price that scientists predict will continue to mount. The World Bank estimates that each year, natural disasters cost about $327 billion in asset losses and an even more dramatic $520 billion in lost consumption.

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A report by the Centre for Research on the Epidemiology of Disasters (CRED) and UN Office for Disaster Risk Reduction (UNISDR) notes the greatest number of natural disasters globally between 1995 and 2015 occurred in the United States, China, and India — the three most populous countries in the world (representing more than 40% of the world’s population) and three of the largest economies globally (representing more than 40% of the global economy).

Further, rising sea levels threaten 60% of the world’s economic assets. In a hyperconnected world, such losses have spillover effects on virtually every large organization. A disaster in one corner of the world can have critical implications for a business in another.

To illustrate the consequences of this ripple effect, consider the fact that Hurricane Harvey brought more than 60% of U.S. ethylene production to a screeching halt. The petrochemical is a cornerstone of the multi-trillion-dollar global chemical industry, accounting for about 40% of global chemical sales. Industrial and commercial manufacturers alike depend on ethylene derivatives for products as diverse as car parts, antifreeze, baby diapers, PVC pipes, and vinyl. The number of companies affected by this disruption is too big to count.

The time is therefore ripe for businesses to consider going all-in to help tackle these disasters. While governments and interest groups continue to duke it out over how much or how little influence climate change will have over future natural disasters, businesses ought to be engaging more substantively in advance planning and preparation initiatives.

They should employ tactics now to help build resilience and operational continuity of in those communities where they operate, actively respond when disasters do occur, and examine ways in which contingency planning might mitigate the destruction caused by future events.

For starters, the private sector can leverage its involvement in infrastructure development through public-private partnerships and major investment projects to raise resiliency standards. Indeed, the private sector is responsible for 75% of investment in infrastructure, according to the United Nations Office for Disaster Risk Reduction. That experience gives private-sector infrastructure developers the knowledge and ability to work with governments to develop building codes for critical infrastructure like roads, bridges, and dams to withstand future natural disasters.

Better infrastructure will not only build community resilience, but also reduce disruptions in future business operations. The amount of time it takes for a city or region to recover from a disaster is a crucial consideration for firms weighing the relative risks and exposure of an investment.

Yet paradoxically, some of the world’s fastest growing economies where global businesses have a keen interest — Indonesia, Thailand, and Bangladesh, for example — are more at risk of disruptions from natural disasters. That’s because the safety regulations and infrastructure of those nations haven’t kept pace with growth rates of population density in disaster-prone urban areas. This situation underscores the important role businesses play in contributing to resilience in high-growth markets that are vulnerable to disasters.

Another powerful way that corporations can help strengthen community resiliency more is to promote relief efforts. The UN’s Sendai Framework for Disaster Risk Reduction 2015-2030 recognizes this important function. Although it acknowledges that national governments have a primary role in disaster risk reduction and response, the private sector has taken this responsibility seriously. A UN-led network of private-sector entities dedicated to upholding the Sendai Framework (ARISE) includes an impressive list of major companies around the world, including some of the world’s largest multinational corporations.

Some corporations demonstrated leadership in their response efforts in the wake of recent disasters. During the hurricanes last month, for example, companies like Bass Pro ShopsWalgreens, and Home Depot offered supplies for immediate relief efforts.

TeleTech provided technology support and staff to help coordinate a massive fundraising effort. PetSmart is providing resources to support local animal rescues. And several Silicon Valley firms mobilized users across their platforms to coordinate response efforts. For instance, Airbnb encouraged hosts to open their homes to evacuees, Uber and Lyft offered free rides to shelters, and Tesla unlocked battery capacity in its vehicles to aid evacuees.

Exercising Foresight

Another way in which the private sector can improve disaster mitigation and response is through effective supply chain management. In this respect, engaging in foresight exercises such as disaster simulations and contingency planning are crucial.

These planning exercises are useful when they’re done at the company level. But they also provide further opportunities for public-private partnership by engaging all relevant stakeholders in simulations and other parts of the contingency planning process.

The difficult and ongoing relief efforts in Puerto Rico certainly highlight the perils of damaged infrastructure in providing necessary goods and services to affected populations. But they also provide a case study of what can go well when businesses use contingency planning to mitigate supply chain disruptions that stem from natural disasters.

Pharmaceutical giants Bristol-Myers Squibb and Baxter have said that proper contingency planning ahead of the storm helped to keep supplies stocked or, when appropriate, moved off the island. Because of their proactivity, product inventory hasn’t led to shortages for their customers in the same way so many others have been affected. These efforts have helped these companies maintain business operations while also improving public health.

Obviously, no business leader can prevent a natural disaster. But every business leader can, and should, make bolder commitments to mitigating risk through a combination of infrastructure investments, providing expertise to support responses, and contingency planning.

The benefits will ripple across the value chain of economic assets, employees, suppliers, distributers, customers, and the rest of the global supply chain, and build agility in responding to disrupted market conditions. As headlines on natural disasters come and go, so too will the sense of urgency to implement risk reduction strategies. But anticipating and planning for the future disasters will be a permanently positive fixture for the continuity of a business’s operations, and its bottom line.

 Erik R. Peterson is a partner at A.T. Kearney, a management consulting firm.