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Natural Disaster-Related Economic Losses ‘Out of Control’
By Tyler Collins

Despite economic losses from natural disasters making headlines around the world, the United Nations says direct losses from floods, earthquakes, and drought have probably been underestimated by at least 50% in recent years.

The United Nations Office for Disaster Risk Reduction notes in its 2013 Global Assessment Report on Disaster Risk Reduction (GAR) that economic losses from natural disasters have surpassed $100 billion annually for three consecutive years and are likely to continue to increase unless risk management becomes centralized in business investment strategies.

The UN surveyed 1,300 small and medium-sized businesses in six disaster-prone cities throughout the Americas for the GAR report. The survey found that three-quarters have suffered disruptions related to damaged or destroyed power, telecommunications, and water utilities. However, only a small minority of those surveyed—about 14% of companies with fewer than 100 employees—have even a basic approach to crisis management in the form of business continuity planning.

Globalized supply chains also create new risk exposures. For example, Toyota lost $1.2 billion in revenue from the 2011 Japan earthquake and tsunami due to parts shortages. And countries that have experienced intensive disasters may never recover the lost growth—those affected by tropical cyclones have historically experienced lower GDP growth in the 15 years that followed.

Regulators are gradually requiring more disclosure, and large institutional investors that have embraced ESG factor analysis (Environmental, Social, Governance) are seeking more information on exposure and management of disaster risks.

The GAR report argues that the business case for stronger disaster risk management is three-fold: 1) It reduces uncertainty and strengthens confidence; 2) It opens the door to cost savings; and 3) It provides an avenue for value creation.

The report asserts that businesses are finding great opportunities in disaster proofing new and existing infrastructure, buildings, and supply chains, which are critical to risk reduction and global sustainability. Businesses that invest more in risk management may financially outperform their peers over time.

Mention of specific companies or securities should not be considered a recommendation to buy or sell that security. Past performance is no guarantee of future results.

Posted: June 12, 2013