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January 23rd, 2008
There has been much talk and hand-wringing about health and environmental risks associated with nanotechnology, but fewer discussions focus on what is termed "strategic risk." One definition of strategic risk, from a recent Ernst & Young report, is "[a] risk that could cause severe financial loss or fundamentally undermine the competitive position of a company" (1). Regulators and NGOs pay attention to health risks, but strategic risks are the bread-and-butter of investors, insurers, Wall Street analysts, and corporate boards. The insurance sector has been very clear that it views nanotechnology as a looming issue. Lloyd's Emerging Risks Team just issued a report on nano that noted that "due to the potential impact to the insurance industry if something were to go wrong, nanotechnology features very highly in Lloyd's top emerging risks" (2). Similarly, Zurich Insurance's Canadian office ranked nano in the top tier of emerging global risks (along with climate change and deteriorating infrastructure) (3).
When we ran numbers through the formula, two sectors came out with a high value for strategic risk: cosmetics/sunscreens and dietary supplements - this can be partially attributed to the high exposure potential for products that are swallowed or applied directly to the skin and the significant number of actual products already on the market, according to our Consumer Products Inventory (5). The food sector is saved (temporarily) by the lack of any real nano-engineered products on the market, but that could change very quickly and radically, given the long history of intense concern over genetic engineering in the food sector. The reason we raised our initial formula by "the power of public scrutiny" is to take into account the high potential impact that the media and consumer or environmental groups can have on the viability of nano-based products, market growth, and the competitive position of firms. Recently, the Soil Association in the UK, which provides certification for organic products, issued a statement banning the use of nanotechnology in the cosmetics, personal care products, and food that it certifies. This includes 2,600 individual products from 80 manufacturers in the health and beauty sector (6).
It is important to point out that this formula does not deal with tipping points or other varieties of radical change, which are better explored using scenarios. The Lloyd's of London report contains a number of speculative disaster scenarios that could occur with nanotechnology and is worth a close look. In dealing with the strategic risk assessment of nanotechnologies, we need to be thinking more about combining narrative and computational approaches (7).
If you'd like to play with the algorithm, you can download the spreadsheet and put in your own assumptions or add/subtract variables (8). Have fun! Our next task is to explore the use of prediction markets to better assess strategic risks across nanotechnology sectors.
(1) Ernst & Young (in collaboration with Oxford Analytica). Strategic Business Risk 2008 - The Top 10 Risks for Business, 2008. This report identified regulatory and compliance risk as its number one risk. Obviously, this has high relevance to any industry using nanotechnology.
(2) Lloyd's Emerging Risks Team. Nanotechnology: Recent Developments, Risks and Opportunities, 2007. Available at http://www.lloyds.com/Lloyds_Market/Tools_and_reference/Exposure_Management/Emerging_risks.htm
(3) Zurich's view was covered in the following article: "Nanotechnology, climate change, infrastructure among top risks," Canadian Underwriter, November 22, 2007. Available at
(4) We applied the principle of Ockham's razor to the formula, adding and subtracting variables to make it as simple as possible while retaining its predictive utility.
(5) The inventory presently includes 103 nano-based cosmetic products/sunscreens and 39 dietary supplements. The inventory of manufacturer-identified, nano-based consumer products is available at: http://www.nanotechproject.org/44
(6) Press Release: "Soil Association first organization in the world to ban nanoparticles -
potentially toxic beauty products that get right under your skin," January 15, 2008. Available at http://www.soilassociation.org/web/sa/saweb.nsf/89d058cc4dbeb16d80256a73005a2866/42308d944a3088a6802573d100351790!OpenDocument
(7) A good example of combining structured scenarios with computational models is covered in the article: Fischhoff, B., et al.. "Analyzing Disaster Risks and Plans: An Avian Flu Example," Journal of Risk Uncertainty, volume 33, pp. 131-149, 2006.
(8) The spreadsheet is available at: http://www.penmedia.org/download/risk_figures.xls