The KPMG study, Expect the Unexpected: Building Business Value in a Changing World, explores issues such as climate change, energy and fuel volatility, water availability and cost and resource availability, as well as new urban centres spawned by population growth. The analysis examines how these global forces may impact business and industry, calculates the environmental costs to business, and calls for business and policymakers to work more closely to mitigate future business risk and act on opportunities.
Michael Andrew, Chairman of KPMG International, says: “We are living in a resource-constrained world. The rapid growth of developing markets, climate change and issues of energy and water security are among the forces that will exert tremendous pressure on both business and society.
“We know that governments alone cannot address these challenges. Business must take a leadership role in the development of solutions that will help to create a more sustainable future. By leveraging its ability to enhance processes, create efficiencies, manage risk and drive innovation, business will contribute to society and long-term economic growth.”
Yvo de Boer, KPMG’s Special Global Adviser on Climate Change & Sustainability, says global sustainability megaforces will significantly increase the complexity of the business environment.
“Without action and strategic planning, risks will multiply and opportunities will be lost. Corporations are recognising that there is value and opportunity in responsibility beyond the next quarter’s results, that what is good for people and the planet, can also be good for the long-term bottom line and shareholder value,” according to de Boer.
From a local perspective, Neil Morris, Director, Climate Change & Sustainability at KPMG in South Africa, adds: “In Africa, these sustainability megaforces are even more pronounced. With growth as the primary agenda item for the continent, the key challenge and the area of greatest opportunity for business, is to decouple our growth from environmental impacts and resource depletion.”
The KPMG research finds that the external environmental costs, which today are often not shown on financial statements**, of 11 key industry sectors jumped 50 percent from US$566 billion to US$846 billion in the eight years from 2002 to 2010.This represents on average, a doubling of these costs every 14 years.
The report calculates that 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.
Morris states that KPMG has taken a leadership role in helping organisations understand the opportunity side of the equation, and not just the risk. “KPMG’s clients and others are seeing the link between sustainability and financial results becoming increasingly clear. Companies that recognise the external influences on their organisations and leverage them as opportunities, are realising a competitive advantage. To that end, the exercise of measuring and reporting sustainability activities to stakeholders with clear, accurate data is increasingly relevant and quickly becoming a priority.”
This applies across an organisation’s entire supply chain. Dr Dinesh Kumar, Country Leader on Supply Chain and Procurement at KPMG in South Africa, says, “While the African continent is experiencing tremendous economic growth, its supply chains are still in ‘survival’ mode in terms of stability, maturity, value-add and confidence. In addition, African supply chain managers need to address the challenges posed by the 10 global sustainability megaforces. They need to secure their inbound supplies, meet rapidly changing customer demands, utilise their assets and develop reverse supply chains.”
Dr Kumar stresses that “the approach to address these challenges should include aligning the supply chain strategies, strengthening the stakeholder’s relationships, ensuring availability of right supply chain skills, increasing the use of technology, embedding a compliance culture and adopting an attitude of global competitiveness.”
Notes to Editors:
** These external costs would not be something reflected on a balance sheet, because the bearers of such costs can be either particular individuals or society at large. The costs are often both non-monetary and problematic to quantify for comparison with monetary values.
The 10 global sustainability megaforces that may impact business over the next two decades are:
- Climate Change: This may be the sole global megaforce that directly impacts all others. Predictions of annual output losses from climate change range between one percent per year, if strong and early action is taken, to as much as five percent a year if policymakers fail to act.
- Energy & Fuel: Fossil fuel markets are likely to become more volatile and unpredictable because of higher global energy demand, changes in the geographical pattern of consumption, supply and production uncertainties and increasing regulatory interventions related to climate change.
- Material Resource Scarcity: As developing countries industrialise rapidly, global demand for material resources is predicted to increase dramatically. Business is likely to face increasing trade restrictions and intense global competition for a wide range of material resources that become less easily available. Scarcity also creates opportunities to develop substitute materials or to recover materials from waste.
- Water Scarcity: It is predicted that by 2030*, the global demand for freshwater will exceed supply by 40 percent. Businesses may be vulnerable to water shortages, declines in water quality, water price volatility, and reputational challenges. (* Water Resource Group:2010)
- Population Growth: The world population is expected to grow to 8.4 billion by 2032**. This will place intense pressures on ecosystems and the supply of natural resources such as food, water, energy and materials. While this is a threat for business, there are also opportunities to grow commerce and create jobs, and to innovate to address the needs of growing populations for agriculture, sanitation, education, technology, finance and healthcare. (** United Nations Department of Economics and Social Affairs, Population Division: 2011)
- Wealth: The global middle class (defined by the Organisation for Economic Co-operation and Development (OECD) as individuals with disposable income of between US$10 and US$100 per capita per day) is predicted to grow 172 percent between 2010 and 2030. The challenge for businesses is to serve this new middle-class market at a time when resources are likely to be scarcer and more price-volatile. The advantages many companies experienced in the last two decades from ‘cheap labour’ in developing nations, are likely to be eroded by the growth and power of the global middle class.
- Urbanisation: In 2009, for the first time ever, more people lived in cities than in the countryside. By 2030, all developing regions including Asia and Africa are expected to have the majority of their inhabitants in urban areas. Virtually all population growth over the next 30 years will be in cities. These cities will require extensive improvements in infrastructure including construction, water and sanitation, electricity, waste, transport, health, public safety and internet and cell phone connectivity.
- Food Security: In the next two decades, the global food production system will come under increasing pressure from megaforces including Population Growth, Water Scarcity and Deforestation. Global food prices are predicted to rise 70 to 90 percent by 2030. In water-scarce regions, agricultural producers are likely to have to compete for supplies with other water-intensive industries such as electric utilities and mining, and with consumers. Intervention will be required to reverse growing localised food shortages. In relation to this, the number of chronically under-nourished people rose from 842 million during the late 1990s to over 1 billion in 2009.
- Ecosystem Decline: Historically, the main business risk of declining biodiversity and ecosystem services, has been to corporate reputations. However, as global ecosystems show increasing signs of breakdown and stress, more companies are realising how dependent their operations are on the critical services these ecosystems provide. The decline in ecosystems is making natural resources scarcer, more expensive and less diverse. It is increasing the costs of water and escalating the damage caused by invasive species to sectors including agriculture, fishing, food and beverages, pharmaceuticals and tourism.
- Deforestation: Forests are big business – wood products contributed US$100 billion per year to the global economy from 2003 to 2007. The value of non-wood forest products, mostly food, was estimated at about US$18.5 billion in 2005. Yet the OECD projects that forest areas will decline globally by 13 percent from 2005 to 2030, mostly in South Asia and Africa. The timber industry and downstream industries such as pulp and paper are vulnerable to potential regulation aimed at slowing or reversing deforestation. Companies may also find themselves under increasing pressure from customers to prove through certification standards, that their products are sustainable. Business opportunities may arise through the development of market mechanisms and economic incentives to reduce the rate of deforestation.