Top Risks Facing the Natural Resources Industry

Risk

Top Risks Facing the Natural Resources Industry

20 February 2024

Business Interruption and Regulatory or Legislative Changes

In a world where the population burgeons and the clamour for resources intensifies, the intricate dance between meeting community needs and sustaining economic growth becomes more challenging than ever. Industries dealing in natural resources, from oil and gas to renewables and mining, find themselves navigating a labyrinth of obstacles.

 

The spectre of material scarcity, supply chain intricacies and the relentless ebb and flow of commodity prices hang over these sectors, sending ripples across the global landscape. Geopolitical pressures and societal demands to combat climate change add weight to the industry's decision-making, with environmental, social and governance (ESG) considerations taking centre stage. Amidst this tumult, organisations are fervently embracing technological strides to usher in a carbon-neutral era, while engaging in fierce competition to secure the talent that will drive these transformative breakthroughs with the transition to clean energy expected to generate 10.3 million new jobs globally by 2030.[1]

 

According to Jacques De Villiers, general manager of commercial inland at Aon South Africa, the Natural Resources sector is contending with a myriad of complex and inter-connected risks based on Aon’s latest Global Risk Management Survey.  “Business interruption and regulatory or legislative changes emerged as the top two concerns.

Inflation across the globe, which has pushed up asset values, exacerbates the effect of Business interruption (ranked number one). Notably, the top two risks mirror the same top risks identified in our 2021 survey, underscoring the substantial and inter-connected nature of these risks within the natural resources industry,” says Jacques. 

 

Natural Resources Industry Top Ten Risks:

  1. Business Interruption
  2. Regulatory or Legislative Changes
  3. Commodity Price Risk or Scarcity of Materials
  4. Property Damage
  5. Cyber Attack or Data Breach
  6. Environmental Risk
  7. Political Risk
  8. Weather and Natural Disasters
  9. Climate Change
  10. Environmental Social Governance (ESG) or Corporate Social Responsibility (CSR)

 


Read Article: Robust Risk Management Programs Protect Your Business Assets and Bottom Line

 

Business Interruption:

“Our latest Climate and Catastrophe Insight Report recorded $380bn economic losses in the last year, a staggering 22% above the 21st century average, which highlights the substantial impact that business interruption has. This becomes more evident in the energy market, where major disruptions have far-reaching consequences for the economy and the country as a whole,” says Jacques.

 

The business interruption landscape is growing increasingly complex when considering factors such as:

  • Regulatory changes that necessitate continual compliance measures.
  • Climate-related events that cause extensive damage.
  • Cyber-attacks that can cause any operation to grind to a halt.
  • Supply scarcity, especially on imported goods.
  • Geopolitical events such as conflicts and the fact that South Africa is entering an election year.
  • Workforce shortages due to talent demand and skills gaps

 

“While business interruption remains an ever-present concern, organisations in this sector must navigate the interconnected nature of the top 10 risks to build resilience, as many of these risks feed directly into business interruption,” explains Jacques.

 

Regulatory or Legislative Changes:

The natural resources sector’s pronounced exposure to regulatory or legislative changes can be attributed to the industry’s current environmental impact, the global impetus toward sustainability and evolving stakeholder expectations. Despite being a key concern for the industry, only 13 percent of natural resources respondents stated they had quantified their exposure to regulatory or legislative changes.

 

“Compliance and regulatory costs are not a new or unforeseen burden for business. However, uncertainty about upcoming regulatory changes may affect business confidence and can have an impact on funding or capital, compliance, risk mitigation, brand or reputation and financial standing. This is especially true in an emerging market such as the renewable energy market where regulatory and legislative changes are still in the making and can have far-reaching consequences. It is essential for organisations to constantly monitor and adapt to an evolving array of new policies and regulations and to be prepared for the ramifications thereof,” says Jacques.

 

Underrated Risks

As the industry increasingly embraces technology for cleaner and more sustainable operations, the overlooked risk of workforce shortages poses a significant challenge. “The ability to attract and retain top talent is crucial for organisations, as emerging technologies are driving innovation that will help support the energy transition. Some examples include smart grids that optimise renewable distribution and grid connectivity, innovative solutions for energy storage (hydrogen and pumped hydro) and carbon capture and storage to reduce emissions. Hydrogen fuel cells offer clean power generation and transportation, while advanced materials elevate the efficiency of solar panels and wind turbines, which all need the right technology and engineering talent to drive and build on these developments, alongside massive infrastructural investment, which all bring their flavour of risk to the table,” Jacques explains.

 

Mitigating the risk

Just more than a third (39%) of natural resources respondents reported their organisations had assessed top risks, while 32% indicated they had developed risk management plans. This is a drop from 2021 when 45% of industry respondents reported risk assessment and 39% reported risk management plans in place.

 

“It signals the challenges inherent in addressing the volatility of the economy and the uncertainty surrounding the energy transition and geopolitical risks. Natural resources companies must work to maintain effective, whole-enterprise risk management practices and workforce frameworks that consider expanding ESG expectations and reflect the industry’s rapidly rising insurance needs. These include conducting insurable risk profiling and gap analysis and regularly evaluating both existing and emerging risks while determining a strategy for risk retention or transfer,” Jacques concludes.

 

[1] https://www.weforum.org/agenda/2022/03/the-clean-energy-employment-shift-by-2030/

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