Incubating Environmental “Black Swans” In the Nest

Our last entry discussed the concept of “Black Swan” events, a term created by noted author Nassim Nicholas Taleb to describe an event that is (a) so low in probablility that it is unforeseeable and (b) so catastrophic in impact that it changes history.

Certainly, risk assessments are predictive in nature and no one can predict the future with complete certainty.  But in our view, one of the best tools available for risk assessments is an open mind.    This can be a challenge in the EHSS world as we generally have engineering and other technical backgrounds.  We have been trained to seek absolutes and eliminate uncertainties.  At Elm, we believe that involving external support helps to identify and explore events (and their related exposures) that are relevant but get “technically rationalized” by internal staff.

With the BP oil spill and the December 2008 Kingston, Tennessee coal ash pond failure, we began thinking about some of the Black Swan events discussed with clients in the past.  Below are a handful of EHSS Black Swan risk events that we have discussed with clients over the past years – and some that are currently on our mind.

• Radical change in EPA’s regulation of coal ash management (discussed several years before the Kingston event, and vehemently opposed by the client)
• Catastrophic failure of GHG emissions trading market
• Dramatic failures/errors in GHG footprint calculation methodology
• Nationalization of privately-owned CO2 emissions assets
• Regulation and class-action level public concerns over chemical content of consumer goods
• Waste disposal liability for and public pressures about exporting electronic wastes
• Dramatic increase in OSHA/EPA enforcement – frequency, severity and targeted industries/sites
• Major expansion of pollution exclusions/limitations in insurance policies
• Increased success of US-based NGOs in successfully obtaining US venue for lawsuits concerning EHSS allegations for non-US sites/projects/activities
• Unprecedented shareholder and SEC pressure on public companies related to EHSS matters
• Increased importance of EHSS in supply chains and procurement decisions

Perhaps these seem far-fetched to you or your company.  But if that is the case, the egg of that – or another – Black Swan is quietly incubating somewhere in your organization.

BP’s Oil Spill and The Black Swan

This past week saw two unfortunately intertwined events unfold: the BP Deepwater Horizon well blowout/oil spill and the 2010 Annual Conference of the Risk and Insurance Management Society (RIMS).  For those unfamiliar with RIMS, it is a global association with a membership of approximately 10,000 of risk management professionals.

Among the myriad of presentations, Nassim Nicholas Taleb was the luncheon keynote speaker one day of the week-long conference.  Taleb is the author of the book The Black Swan: The Impact of the Highly Improbable.    In Taleb’s context, a Black Swan is an event that is (a) so low in probablility that it is unforeseeable and (b) so catastrophic in impact that it changes history.  In covering RIMS 2010, Risk Management Monitor blogged on Taleb and his presentation.

Which brings us to the Deepwater Horizon well blowout.  An article in USA Today stated that in assessing the environmental risk of the well, BP assumed:

an accident leading to a giant crude oil spill and serious damage to beaches, fish and mammals was unlikely, or virtually impossible.

The sort of occurrence that we’ve seen on the Deepwater Horizon is clearly unprecedented,” BP spokesman David Nicholas told the Associated Press on Friday. “It’s something that we have not experienced before … a blowout at this depth.”

The [plan] conceded a spill would impact beaches, wildlife refuges and wilderness areas, but argued that “due to the distance to shore (48 miles) and the response capabilities that would be implemented, no significant adverse impacts are expected.”

Robert Wiygul, an Ocean Springs, Mississippi-based environmental lawyer and board member for the Gulf Restoration Network, said he doesn’t see anything in the document suggesting BP addressed the kind of technology needed to control a spill at that depth of water.

Even if a massive spill had been assessed, the question remains whether the risk assessment/spill response plan would assume that weather conditions would possibly hinder spill response effectiveness, and how quickly/effectively the underwater well would be sealed.

It appears that BP has found their Black Swan.  And Black Pelicans, Black Seagulls, etc.