KPMG’s Joanne Beatty and John R. Hickox reveal new pressures that global trends place upon industry. These involve environmental responsibility. They indicate that 10 “megaforces”—interconnected and unpredictable—will impact business in the next two decades. To paraphrase Aldous Huxley, there’s a new world coming, and businesses need to be brave.
Corporate executives face rising market complexities at every turn – from financing operations and investor expectations, to customer demands, workforce issues and resources, and a sea of regulatory changes. Global trends in the operating environment place additional pressures.
Environmental Cost Rise
Recent research from KMPG International finds that these external environmental trends—which today are often not reflected on financial statements—jumped 50 percent in cost from US$566 billion to US$846 billion in eight years (2002 to 2010) across 11 key industry sectors. That amounts to an average doubling of these costs every 14 years.
KPMG’s report calculated that if companies had to pay for the full environmental costs of their operations, they would lose 41 cents for every US$1 in earnings, on average. Currently, these “external costs” would not be reflected on a balance sheet because either individuals or society at large bear such costs. In addition, they are often both non-monetary and problematic to quantify—for things like pollution, for instance—for comparison with monetary values.
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 population growth spawning new urban centers. 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.
In addition, corporate executives are looking to have a greater voice in how public policy is shaped to face these trends. In February 2012, more than 600 executives attended KPMG’s global summit, “Business Perspective on Sustainable Growth: Preparing for Rio+20.” Here are links to the conference’s plenary sessions:
- Global Sustainability Trends: Preparing for the Future
- Policy Imperatives: Driving Green Growth
- Climate Action: Developing the Business Case
- Driving Sustainable Value Creation: Grasping the Opportunities
Attendees showed near unanimous support for a series of recommendations for business input to Rio+20, the upcoming global policy summit in June. Among recommendations coming out of the KPMG global summit for Rio+20, policy leaders should:
- Provide long-term, stable and transparent policy frameworks and incentives to scale-up investment in sustainable development
- Provide strong price signals on resource scarcity and environmental impacts to drive investment in sustainable growth
- Deliver new platforms for public/private collaboration at the international and national levels.
Further, the Summit recommended that business:
- Reduce focus on short-term performance in favor of longer term sustainable growth
- Adopt stretching sustainability targets (e.g., to reduce water, energy and material use) to drive innovation.
This “corporate voice” rises from the din of complex global issues that go beyond energy, water security and food scarcity. Convergence of additional forces—such as population growth, deforestation and a surging middle class—with these issues will exacerbate them and profoundly impact business and the world.
Megaforces at Work
KPMG’s research identified 10 “megaforces” that may significantly affect corporate growth globally over the next two decades. These include:
- Climate Change: Possibly the one global megaforce that directly impacts all others. Predictions of annual output losses from climate change range between 1 percent per year, if strong and early action is taken, to as much as 5 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 rapidly industrialize, global demand for material resources is predicted to increase dramatically, posing potential trade restrictions and intense global competition for resources that become less easily available. Scarcity could create opportunities to develop substitute materials, or to recover materials from waste.
- Water Scarcity: Predictions indicate the global demand for freshwater will exceed supply by 40 percent by 2030. Businesses may be vulnerable to water shortages, declines in water quality, water price volatility, and reputational challenges.
- Population Growth: The world’s population may reach 8.4 billion by 2032, further pressuring ecosystems and natural resource supplies of food, water, energy and materials. While this represents a business threat, opportunities exist to grow commerce and create jobs, and to innovate to address the growing population needs for agriculture, sanitation, education, technology, finance and healthcare.
- Wealth: The global middle class (defined by the OECD [Organization for Economic Cooperation and Development]) as individuals with disposable income of between US$10 and US$100 per capita per day) could grow 172 percent between 2010 and 2030. While businesses will need to serve a new middle class, resources are likely to be scarcer and more price volatile. “Cheap labor” in developing nations likely will erode by the growth and power of the global middle class.
- Urbanization: In 2009, for the first time, more people lived in urban settings (i.e., cities) than rural environments. By 2030 all developing regions—including Asia and Africa—are expected to have the majority inhabitants living in urban areas, which will require extensive infrastructure improvements in water and sanitation, electricity, waste, transport, health, public safety, and internet and cell phone connectivity.
- Food Security: In the next two decades, global food production will come under increasing pressure from these megaforces. Global food prices could rise 70 to 90 percent by 2030. In water-scarce regions, agricultural producers likely will compete with other water-intensive industries such as electric utilities and mining, and with consumers.
- Ecosystem Decline: As global ecosystems show increasing signs of breakdown and stress, more companies realize how dependent their operations are on these critical services. A decline in ecosystems make natural resources scarcer, more expensive and less diverse, increasing water costs and escalating damage caused by invasive species to sectors including agriculture, fishing, food and beverages, pharmaceuticals and tourism.
- Deforestation: Forests contributed US$100 billion in wood products each year to the global economy from 2003 to 2007. Yet, the OECD projects 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 to slow or reverse deforestation. Companies may also find themselves under increasing pressure from customers to prove that their products are sustainable through the use of certification standards. Business opportunities may arise through the development of market mechanisms and economic incentives to reduce the rate of deforestation.
These 10 megaforces will affect each industry sector differently and to varying degrees. The full environmental costs of production across industry sectors could account for a considerable proportion of earnings. Therefore, significant value may be at stake.
Food and beverage manufacturers, for instance, face a number of sustainability risks, including perhaps the one most critical to this sector: water scarcity. Companies may face limits on their ability to extract and use water, and there may be increasingly complex systems of regulation. Many companies are adopting efficient water management practices throughout their supply chain, while also taking a watershed approach, in which they coordinate with other water intensive users in the supply chain as well as communities and government agencies.
Regulatory risks also pose complex issues for the diversified industrial sector, which, despite progress, remains one of the most energy intensive sectors and vulnerable to emission regulations. Yet, many companies have already grasped emissions reduction as an opportunity for efficiency and cost reduction, especially in the area of energy and greenhouse gases. Diversified industrials have an opportunity in coming years to become a critical part of the solution through innovations that enable sustainable development as well as continued efforts to reduce the negative impacts of certain industrial processes.
Global leaders are overwhelmed by the scale of these problems. They struggle to act in a coherent, cohesive manner. In an increasingly complex world—of population growth, urbanization, scarcity and environmental change—success depends on how well a company can analyze the problems, identify effective ways to address them, and implement appropriate action. Harnessing business’ capacity to innovate and deliver technology solutions can help solve these problems and turn daunting complexity into sustainable growth.
John R. Hickox is KPMG’s Americas leader for Climate Change & Sustainability. He is a partner in KPMG LLP, the US audit, tax and advisory firm, and is based in Atlanta. Joanne Beatty is a Dallas-based director in the US firm’s Climate Change & Sustainability practice and KPMG’s global representative on the World Business Council for Sustainable Development’s Water Leadership Group.
KPMG LLP, the audit, tax and advisory firm (www.kpmg.com/us), is the U.S. member firm of KPMG International Cooperative (“KPMG International.”). KPMG International’s member firms have 145,000 people, including more than 8,000 partners, in 152 countries.
The authors’ views and opinions don’t necessarily represent those of KPMG LLP.