Given the unprecedented natural resource scarcity, skyrocketing food prices, escalating energy security issues and an expected population growth of up to 10 billion in 2100, the private sector is ever more challenged to overhaul its strategy and make its business models future proof. For example, if companies had to pay for the full environmental costs of their production, they would lose 41 cents for every US$1 in earnings on average.
External environmental costs of 11 key industry sectors (including upstream supply chain) rose by 50 percent between 2002 and 2010. They include things like pollution, external costs that society will likely have to pay for in some way or at some time in the future, but that are not included in transaction prices.
Government policies, investor values and consumer preferences are also altering rapidly, thus impacting businesses’ bottom line and demanding a long-term vision, supported by immediate action. Is this forced by stakeholder demand, or primarily driven by sound entrepreneurship? It is up to each and every company to decide for itself.
Rather than attempting to survive risks resulting from global megaforces, business leaders can do much more. Indeed, with foresight and planning, and by undertaking pioneering actions to prepare for an uncertain future, they can thrive by turning risks into new opportunities. Companies need to develop resilience and flexibility for an unpredictable future and build capacity to anticipate and adapt.
First and foremost, businesses need to fully assess and understand future sustainability risks, for example by integrating them into an Enterprise Risk Management tool, define their responses to deal with them, and analyze opportunities for efficiency, substitution or adaptation.
Integrated strategic planning and strategy development are needed as well, which requires business management to make sustainability central to their corporate strategy and incorporate it at all levels. Put simply, businesses must manage risks and capitalise on opportunities, by turning strategic plans and strategies into ambitious targets and actions.
One can think of energy and resource efficiency improvements, sustainable supply chain management, and investment into innovation on sustainable products and services, as well as gaining access to new markets for greener products, services and technologies. It is also imperative to explore tax incentives tailored to alternative energy, energy efficiency and other areas related to sustainability.
Another much discussed but less implemented tool to success in this area is measuring performance and reporting on sustainability, as well as the related benefits. The growing trend of integrated reporting is an example where companies are building frameworks for sustainability reporting processes, stronger information systems and appropriate governance and control mechanisms on a par with those currently used in financial reporting.
Organisations can’t do this alone. Collaboration with partners on sustainability issues is vital to enhance leverage and improve cost-benefit ratio of action. Business leaders should seek opportunities for genuine dialogue with governments and demonstrate new and innovative approaches to public-private partnerships. Improved dialogue could focus on economic instruments and market barriers that could be reduced to make sustainable business operation easier.
Good management used to be about preparing for the expected, now it is just as much about preparing for the unexpected. Competitive advantage can be carved out of emerging risk. It is clearly no longer the question if we must transcend to a more sustainable economy. The question is the pace in which we are able, and especially willing, to achieve it.
To thrive, or even just to survive, businesses needs to understand the root causes of what affects their operations, not just the symptoms. The bold, the visionary and the innovative recognise that what is good for people and the planet will also be good for the long term bottom line and shareholder value. This is how we can make our common economy future proof.
Yvo de Boer is special global adviser, KPMG Climate Change and Sustainability, and former executive secretary to the U.N. Framework Convention on Climate Change.
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