PROJECT EASY GREEN

People judge risk poorly. We worry too much about minor hazards and are nonchalant about more serious ones. We’re especially inept at judging chronic long-term risks like climate change.  

Insurance is a major part of how we deal with risk. Can it lead us to more viable ways to address climate issues? The picture is mixed.

When we manage risk by buying insurance, we endure the slow, small pain of insurance premiums in exchange for the promise of significant compensation should something ugly happen. The insurers profit from our lack of knowledge about risk. Buying insurance goes against the grain, but paying our premiums gives us a little more security against fires, earthquakes, business interruption, and the numerous other events against which we can protect ourselves by buying an insurance product.

Insurers review their policies annually and change their terms if they see a change in the probabilities. When no major losses occur, the industry pats itself on the back for judging their risks correctly for that year. They’re happy and profitable. If the risk landscape changes, they absorb the payouts and adjust the terms accordingly.  

The optimistic point of view is that insurance can play a major role in guiding businesses and individuals toward more climate-friendly decisions. In theory, insurers study the real probabilities of known hazards, figure out a viable premium that gives themselves a profit and the policyholders the agreed-upon level of protection against the risk. When climate change raises the risks of flooding, business interruption, and other insurance hazards, the premiums go up, which can lead their policyholders to change their behavior. Financing for a new factory can be prohibitive or even impossible to get if insurers won’t cover it.  

In practice, though, this theory is faulty for several reasons. Climate change poses special challenges to insurers, not merely because they are on the hook for many weather risks such as hurricanes.  

First, to single out one kind of insurance, many factors combine in extreme weather events. A hurricane has many causes, and global warming might only be two percent part of the overall risk. If that part grows from two percent to five percent, it seems negligible, but in fact it’s quite significant. As one insurance executive said, “Even a minor increase in a risk like that can mean billions of dollars in additional losses to insurers.” If the winds are a few miles per hour stronger, and the storm takes a path through a heavily insured area, insurers can be overwhelmed.

The same is true for other climate impacts. There have always been floods, extreme weather, and times when the water cycle intensifies. But if climate change is turning up the dial, these familiar events may break out of their boundaries and become more frequent, more intense, or change in unexpected ways.  

Second, insurers are people too, and the cognitive blind spots that afflict individuals also affect the risk business. In practice, the insurance industry’s grip on certain probabilities often relies on seat-of-the-pants methods that are subjective, and whose over-optimistic assumptions are sometimes rudely corrected by ugly surprises, especially when risks are constantly changing, as they are with climate change.

Like all of us, insurers want certainty, even when they know that certainty cannot be attained. At a 2007 conference about hurricane science for an insurance audience, the world’s top climatologists discussed various topics in modeling and hurricanes. The head of underwriting at a major North American insurer snorted at the hedged, qualified way the scientists state their conclusions. The underwriter then complained, “Why don’t the scientists give us numbers we can use! These probabilities are too nebulous for us to write business with them!”  His impatience is widely shared, but the answer is no.

Third, insurance functions well when the risks of various hazards are truly independent of each other and truly random. One trouble with climate change is that climate instability tends to make floods, windstorms, and other extreme weather more interrelated.

One force binding all these factors together more tightly is land use, which in the U.S. is often part of a highly entrenched political juggernaut promoting the worst possible policies, such as building heavily in flood plains, or on beaches very prone to hurricane damage.

Consider Florida, where the laws, business practices and general culture are geared to developing every square inch of land near water — oceans, certainly, but also lakes, streams, wetlands. Even in the absence of climate change, this is an obviously dangerous policy. It’s also very popular. John Coomber, former CEO of Swiss Re, once grumbled that every American wants to live on the most vulnerable beaches they can find in Florida.

Governments occasionally try to buck the pro-development tide, but the political pressure against the anti-development forces is swift and merciless. Certainly no politician can withstand it. Rather than resisting, many property and casualty insurers have pulled away from vulnerable coastal property in Florida.

In response, Florida created its own public insurance pool. Result? Development continues, and the state fund is actuarially unsound — a major storm hitting a developed area would bankrupt the fund in short order. A few more storms would bankrupt the state of Florida, which would then call on the federal government — as the stand-in for taxpayers in all other states — to bail them out.

These three factors mean that the insurance industry is weaker than it appears in matters of changing social and economic policies. The only way to change these entrenched policies would be for other social forces to align with the insurance point of view. That will require energetic political leadership and vigorous regulation. The market alone cannot save us.

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Brian Thomas left Swiss Re in 2006 and became a sustainability consultant with a focus on communications. He has developed green-themed projects for clients including Merill Lynch Global Markets and Investment Banking, Cofra Holding, Good Energies, Zurich Financial, Edelman, the City of Chicago, the City of New York, and others. He is currently a member of the New York City Panel on Climate Change, EnviroComm, and the Association of Green Technology Auditors, to name a few. Thomas started his blog, Carbon Based, in 2007, after requests from contributors to the Intergovernmental Panel on Climate Change (IPCC). He is the author of Climate Change Adaptation in 2010 and currently resides in West Cornwall, CT, where he is an activist member of the Conservation Commission. For more information, please visit www.carbon-based-ghg.com, and his blog, http://carbon-based-ghg.blogspot.com.

According to a recent study by the UN Global Compact, 49 percent of CEOs cite the complexity of implementation across functions as the most significant barrier to an integrated, company-wide approach to sustainability. The following six work systems characteristics can help address that problem.

Work Is Managed Strategically

The traditional functions of management — planning, leading, organizing and controlling — generally describe how managers add value and get work done through others. But sustainable management organizations move too fast to rely on traditional work systems. For instance, at Alegent Health, a nurse may be delivering routine patient care one day and then working to design a sustainability strategy the next.

When work is defined in this way, the traditional functions of management are carried out in a strategic manner. Managers link the activities they sanction to the organization’s strategic intent. It is a manager’s job in a sustainable management organization to think about the most important areas for innovation and ensure that processes are in place to address them.

Work Is Based on Activities, Not Jobs

Traditional, job-based approaches to work make sense when control and economic performance are the primary objective. However, sustainable management organizations, including Cisco, HP and Alegent Health, are turning to more flexible ways of working where most individuals do not have fixed jobs or typical reporting relationships. Instead, they ask, “What needs to get done?” Individuals are continually moved from project to project, with a different project lead for each assignment.

As a result, these organizations do not fear change; they embrace it.

Work Is Performed by Multiple Stakeholder Teams and Can Be Virtual

Let’s face it: we have passed the point in time when organizations can be considered freestanding. No single organization is completely in charge of its own destiny. An organization’s performance and effectiveness must be seen in terms of the interactions and relationships among a range of stakeholders—often in tacit coordination.

In our increasingly fast-paced business environment, we have the capability to connect with employees and others via technology. For instance, using their own WebEx and Telepresence technology, Cisco’s councils, boards and work teams are prime examples of this: they are collaborating and innovating in an increasingly virtual system of meetings that supports agility, a smaller carbon footprint, a better work-life balance and lower costs.

Work Is Guided by Shared Goals

When work is designed properly, people can see their work in its context — not just as one part or piece of what is done — and can better understand how their work has an impact on customers, vendors and the larger system. A key method of achieving this kind of work is to set goals collaboratively and at a challenging but achievable level.

Goals that are set by multi-stakeholder groups are more likely to encompass a sustainable performance focus. In the Alegent Health case, for example, involving representatives from the business, the community and the natural environment has led to a comprehensive and integrated set of goals.

Work Is Temporary and Iterative

To be agile, sustainable organizations need temporary and iterative work systems. This holds true for corporations all over the world, but we can draw on an example from an unlikely place — Hollywood and the movie industry. 

The movie industry — in Hollywood, Bollywood and elsewhere — moves around the globe for location filming, hiring a variety of support work—catering, equipment, transportation, technical advice or government assistance—on a project basis. When the movie or project is over, the resources are freed up to reconfigure. The work in a sustainable management organization is similar: issues are identified, the work is designed, the stakeholders are gathered, decisions are made, actions organized and the resources are freed.

And because sustainable management organizations eschew the idea of a sustainable competitive advantage, they drive revenue as best they can under a particular strategic intent until change is necessary, but expected. Thus, any work system is temporary; it will change when it is not contributing to the goals of economic performance, positive social outcomes or ecological health.

Work Is Supported by the Physical Space and Technology

One of the key features of sustainable work systems is the creation of a space that complements the way the work is done. Capital One’s Future of Work project shows how technology and the physical setting can be extended into the workplace.

Beginning with the goals of using space more efficiently, increasing employee satisfaction and work-life balance, and increasing personal productivity, Capital One created a variety of different “neighborhoods.” For example, vice presidents and executives work in what are known as the “executive digs,” while other neighborhoods include “quiet zones” with comfortable furniture (where phones and conversations are not allowed).

The Capital One design saves real estate costs, lowers the company's carbon footprint (because their people are traveling less), improves the quality of work life and increases customer contact (maximum surface area), all of which result in higher sustainable effectiveness.

Implications

Work systems are an important contributor to an organization’s structure that supports the triple bottom line. Approaching work in this way, companies are achieving agility and sustainable effectiveness. So how does your company stack up? If you’re not looking at work — and management — in a new, innovative way, you might be left behind. After all, sustainability is the future of business.

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Edward E. Lawler III, distinguished professor of busi­ness at the University of Southern California Marshall School of Business, and Christopher G. Worley, senior research scientist at the Center for Effective Organi­zations, University of Southern California Marshall School of Business, are co-authors of Management Reset: Organizing for Sustainable Effectiveness (John Wiley & Sons, Inc., March 2011).

Reprinted by permission of the publisher, John Wiley & Sons, Inc., from Management Reset: Organizing for Sustainable Effectiveness by Edward E. Lawler, III, Christopher G. Worley with David Creelman. Copyright (c) 2011 by John Wiley & Sons, Inc.  All rights reserved.