Sustainability “Megaforces” impact on business wi... | KPMG | RU

Sustainability “Megaforces” impact on business will accelerate

Sustainability “Megaforces” impact on business wi...

KPMG has published the results of the survey Expect the Unexpected: Building Business Value in a Changing World.

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The KPMG study, Expect the Unexpected: Building Business Value in a Changing World, explores 10 “megaforces” that will significantly affect corporate growth globally over the next two decades: 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. 

Igor Korotetskiy, Head of Corporate Governance  & Sustainability, KPMG in Russia and CIS, noted: “KPMG clients and other organizations can see that the link between compliance with sustainability principles and financial performance is becoming clearer and clearer. The companies that are able to recognize the specific external factors that have the largest impact on their activities and leverage this knowledge will obtain a competitive advantage. Accordingly assessment of activities in the area of sustainability and the submission of corresponding reporting to stakeholders containing understandable and accurate data is being used more and more actively and is rapidly becoming one of the priority objectives. The conclusions of KPMG’s research are particularly relevant for Russian business, which has significant potential to raise productivity through the implementation of the best technologies and business processes, which ensure that their business activities leave the smallest possible environmental, power and resource footprint.”

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 to US$846 billion in 8 years (2002 to 2010), averaging a doubling of these costs every 14 years.

The report calculated 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, the study found.

Over the next 20 years there is likely to be increasing pressure for the price of resources, products and services to reflect the full cost of their production including the cost of environmental impacts. It is prudent for companies to expect to pay in the future a rising proportion of their external environmental costs.

External environmental costs could account for a considerable proportion of earnings (EBITDA) and thus represent significant business value potentially at stake: across the 11 sectors, the average external environmental costs per dollar of earnings would have been approximately 41 cents in 2010.

The two sectors perceived as being at highest risk from sustainability megaforces, but least ready are Food Producers and Beverages. The cluster of sectors in the center of the risk-readiness matrix indicates that perceived sustainability risk remains high for Oil & Gas, Electricity, Mining & Metals and Airlines. Telecommunications & Internet sectors are perceived as being the least at risk and the most ready.

Yvo de Boer, KPMG’s Special Global Adviser on Climate Change and Sustainability, said 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 recognizing 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,” said Mr de Boer.

The 10 global sustainability megaforces that may impact business over the next two decades are:

  • 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.
  • Wealth: the global middle class (defined by the 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 labor” in developing nations are likely to be eroded by the growth and power of the global middle class.
  • Climate Change: This may be 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 industrialize 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 to reputational challenges.
  • Urbanization: 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 living 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 localized food shortages (the number of chronically under-nourished people rose from 842 million during the late 1990s to over one 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 realizing 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; 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 $100 billion per year to the global economy from 2003 to 2007and 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 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.

Expect the Unexpected: Building business value in a changing world

Expect the Unexpected: Building business value in a changing world

In this report, KPMG’s network of firms analyzes a system of ten sustainability megaforces that will impact each and every business over the next 2...

Expect the Unexpected: Building business value in a changing world

Expect the Unexpected: Building business value in a changing world

For 20 years or more the world has recognized that the way we do business has serious impacts on the world around us.

© 2017 KPMG Audit LLC, the Mongolian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

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