What risk lessons can we learn from wildfires?
Over the past several years, we have seen an increasing focus on climate change and other related environmental considerations from businesses worldwide. Most recently, the unprecedented increase in wildfire frequency and severity has highlighted a new and complex challenge for some businesses.
Wildfires and other natural disaster events, such as floods and earthquakes, that were once considered purely environmental disasters are starting to pose new risks for corporate operations and sustainability. Over the past decade there has been an increase in the number of S&P organizations citing the risk of wildfire in annual reports. Also from a regulatory perspective, the Securities and Exchange Commission (SEC) has proposed new rules for company disclosures regarding environmental, social, and governance (ESG) policies.
According to Dr. Loren E. Wold, associate dean for research operations and compliance at The Ohio State University College of Medicine, the current Canadian wildfires are the earliest to appear in recent history and have set us up for a long summer of wildfires burning throughout the country. Wold's research focuses on external triggers of cardiac disease, with emphasis on air pollution exposure and electronic cigarette exposure.
On July 9, there were 3,412 wildfires actively burning throughout Canada, consuming approximately 8,782,952 hectares of land. As of July 26, there are still 716 active Canadian wildfires with 4,797 recorded since the beginning of 2023 and scorching 12,145,200 hectares of land. This level of burning throughout the country, along with global warming and climate change, has caused the worst air quality within the U.S. in the past several decades. It does appear that these fires are happening more frequently, with worsening impact, potentially due to greater herbicide/pesticide use on crop areas and greater lightning strikes, which could be due to changes in the climate.
The smoke from these fires contains all types of particulate matter, but most importantly PM2.5 (particulate matter < 2.5micrometers in diameter). This PM2.5 is known to cause the majority of health effects from exposure, as these particles are able to cross the endothelial lining of the blood vessels and gain entry into the circulation, thereby affecting all organ systems. These health effects include acute effects on the respiratory and circulatory systems, as well as long-term effects on all organ systems and include lung diseases such as chronic obstructive pulmonary disease (COPD), emphysema, cardiac hypertrophy, arrhythmias and cognitive decline, to name a few.
It appears that these wildfires have continued to intensify, and depending on winds, areas of the U.S. (including Columbus, Ohio), have been impacted throughout the summer. It is important for everyone with preexisting conditions (hypertension, obesity, emphysema, the very young and old) to limit their exposure to outdoor activities when an air quality alert is issued, and if they must be outside to wear a mask and avoid strenuous activities. When the air quality index (AQI) enters the Unhealthy category, health effects can be seen in everyone (healthy and unhealthy), so limiting outdoor exposure is important for all.
From an organization perspective, the impact of wildfires occurs in multiple direct and indirect ways. Direct risks include the destruction of physical assets, supply chain disruptions, operational delays, increased insurance premiums, and potential loss of human capital. However, indirect risks are equally, if not more, threatening. These include reputational damage due to an inability to manage crisis situations, a decrease in stock value, increased regulatory scrutiny and future investment risks. In a world where climate change has moved to the forefront of global discourse, stakeholder expectations of how companies manage environmental risk are rising.
We have already seen multiple industries directly impacted by the Canadian wildfires. Airline flights were delayed or cancelled. Professional sports were forced to postpone games that were scheduled, which included Major League Baseball, the National Women's Soccer League, and the Women's National Basketball Association. Many public schools also announced closures or switched to virtual learning. Even several Broadway performances were canceled due to the poor air quality. Additionally, within the past several months we have seen three major national insurance providers, Farmers Insurance, State Farm and Allstate, announce that they will be limiting or no longer providing new applications to California residents due to the increased wildfire risk.
Enterprise risk considerations
In the broader context of enterprise risk management (ERM), wildfires can represent a systemic risk that intersects with other risks. So, while wildfires may not appear at the surface to be of direct relevance to an organization, they can be indicative or even serve as an example of an intersectional challenge with a topic such as ESG considerations. The recent wildfires spotlight the necessity for comprehensive and adaptive risk assessments and underscore the overall importance of risk management.
In addition, just as we saw the impact on employee health, well-being and performance with the COVID-19 pandemic, the current air quality issues due to the wildfires can also pose similar risks for employees. Wold states that, "organizations whose employees must be outside should consider instituting policies on limiting the time allowed, as well as potentially including masking as a requirement. Mitigation strategies must be in place in order to limit the potential for health effects from PM2.5 exposure. We have learned during the COVID-19 pandemic that many jobs can be satisfactorily performed from home, so one mitigation strategy could be to require workers to remain home when the AQI reaches dangerous levels. We must all remain smart about PM2.5 exposure as the long-term health effects are only beginning to be discovered and will likely continue to evolve as their source intensifies."
Amidst these challenges, opportunities emerge for organizations to reimagine their risk management processes and models. Technological advancements in artificial intelligence and machine learning offer new ways to predict, manage and mitigate the risks associated with wildfires and other natural disasters. Satellite imagery, drone technology and advanced sensors can provide real-time data, enabling proactive rather than reactive strategies.
In his recent review paper, "Role of Autonomous Unmanned Aerial Systems in Prescribed Burn Projects," Mrinal Kumar, associate professor in the Department of Mechanical and Aerospace Engineering at Ohio State, and his coauthors, Roger Williams and Amit Sanyal, provide some insights regarding the use of autonomous technology in wildfires and the related challenges and opportunities. With funding from the National Robotics Initiative program of the National Science Foundation (NSF), this group of researchers is exploring the use of autonomous robotic platforms for creating situational awareness in a wildfire environment. Kumar's work has also led to the development of a new podcast series, Worlds Apart: An Alliance of Outcasts to Tame Wildfires, that further explores the intersection of wildfires and autonomous technology.
Moreover, organizations can potentially leverage this crisis as an upside risk impetus to enhance their ESG and other commitments. Those that invest in sustainable and resilient infrastructure, promote environmental responsibility and contribute to the communities they operate in are likely to see not only improved risk management but also increased brand value and stakeholder trust. The way forward involves not only recognizing and preparing for unexpected risks such as wildfires but also using these challenges as catalysts for overall corporate resilience and sustainability. Enterprises have the opportunity to lead in a time of crisis, paving the way for a sustainable future for all stakeholders.