Businesses must focus on long-term sustainability | KPMG | IE

Businesses must focus on long-term sustainability

Businesses must focus on long-term sustainability

Caroline Pope, Director of Sustainability, says that businesses must have leadership and vision to create a story that is long-term in focus

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Businesses must focus on long-term sustainability

The European Directive on non –financial reporting was passed in December 2014 and is due for implementation in Ireland next month, having been delayed since December 2016. Although vague in detail, the directive is clear on one point in particular – non-financial reporting and disclosure of long-term business value is becoming a fundamental element of corporate governance.

This, along with increasing investor scrutiny on the topic, indicates an immediate need for businesses to integrate non-financial information into everyday business planning and disclosures.

For too long, sustainability has operated in isolation, detached from business strategy and too often considered a business cost rather than a business opportunity. Now, sustainability is increasingly being considered part of business strategy and relates directly to non-financial indicators driving business returns. For example: how can a business increase revenue without an engaged and talented workforce, satisfied customers, efficient use of natural resources and a continuous spend on innovation?

How can a business decrease its cost of capital without evidence of valuable patents, strong ethical integrity, environmental compliance, a social licence to operate, customer loyalty or retention of skilled staff? 

How to measure performance

Capital markets rely on relevant information presented clearly and accurately, so the clarity and usefulness of reporting and communications have an important role in ensuring that the markets function efficiently and help to support a healthy economy.

Financial reporting plays a central role in this communication, but it cannot present a complete picture of business performance and prospects on its own. Capital providers need to be able to assess the underlying health of the business, its potential for growth, and the long-term sustainability of its earnings.

This current imbalance of information can lead to short-termism. Current-year earnings may be valued more highly than longer-term business prospects, simply because the value created is more visible. As a result, businesses that are investing in their long-term prospects may find it difficult to compete for capital with those that are instead prioritising short-term earnings.

Addressing this will require something greater than merely tweaking financial reporting standards. Instead, the answer lies in the presentation of a broader range of business-focused information that addresses the operational performance of the company, allowing investors to form their own assessments of business prospects. 

Why is this important?

Today, we stand at a crossroads. After a turbulent year characterised by major political shifts and economic instability it is clearer than ever that our current global system is not working.

In the period to 2030, the food system is faced with a number of challenges related to innovation, demand, supply and regulation.  A step change in innovation is needed to meet future demand, given that growth rates in agricultural yields have been declining and are currently below world population growth, and crop yields are already approaching theoretical maximums in developed countries.

In terms of demand, over 800 million people are hungry, and over two billion suffer from micro-nutrient deficiencies.

From a supply perspective, to meet 2030 food, feed and duel demand would require between 175m and 220m hectares of additional cropland. Over half of remaining land in the world is subject to both infrastructure and political risks.

From a business perspective, financial returns in agricultural sector are already low (5%) – if negative externalities are taken account of, they become negative (-10%).

From a regulatory perspective, there is increasing pressure to deal with the obesity effect (which has a social cost of US$2 trillion currently and is rising rapidly) and pricing of natural resource inputs (e.g. water and energy). 

This article was originally published in the Irish Farmers Journal Agribusiness Report and is reproduced here with their kind permission. 

© 2017 KPMG, an Ireland partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

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