In a report published earlier this year, KPMG analysts identify “ten sustainability megaforces that will impact each and every business over the next 20 years.” The analysts note that “these forces do not act alone in predictable ways … they are interconnected.” [Expect the Unexpected: Building business value in a changing world, KPMG, 2012] The analysts believe that the interaction between these forces makes it imperative that businesses have a firm understanding of them. In the Foreword to the report, Michael Andrew, Chairman of KPMG International, and Yvo de Boer, Special Global Advisor at KPMG, write:
“Businesses today are operating in an ever more interconnected and globalized world. Supply chains stretch across continents and are vulnerable to disruption. Consumer demands and government policies are changing rapidly and will impact your bottom line if your business does not respond. Against this background of complexity we face a new set of challenges. For 20 years or more we have recognized that the way we do business has serious impacts on the world around us. Now it is increasingly clear that the state of the world around us affects the way we do business.”
It is “the state of the world” and the forces that are affecting it that the report addresses. At the very beginning, the report states, “Today’s global business environment is more complex, uncertain, volatile and fast-moving than ever before.” The ten megaforces identified in the report are: climate change; energy & fuel; material resource scarcity; water scarcity; population growth; urbanization; wealth; food security; ecosystem decline; and deforestation. The report states:
“These megaforces do not function in isolation from each other in predictable ways. They act as a complex and unpredictable system, feeding, amplifying or ameliorating the effects of others. Business leaders seeking to manage the risks and harness the opportunities of the future must understand how these megaforces function and how they might affect their own organizations.”
In this post, I’ll look at the first five of the identified mega-trends and will discuss the remainder of them in a subsequent post. The analysts begin their discussion with the topic of climate change. They write:
“Climate change is the one global megaforce that directly impacts all others discussed in this report. There are six key types of risk to business from climate change: physical risk, regulatory risk, reputational risk, competitive risk, social risk and litigation risk. These risks include new laws and government initiatives to tackle climate change such as energy efficiency requirements and standards, carbon taxes, emissions cap and trade systems and fuel tariffs. Businesses may also be at risk of damaging their brands if they are seen to do the wrong thing, with the added threat of litigation if they fail to comply with legislation, or to disclose their carbon impacts.”
The point is, whether you believe that climate change is man-made or not, your business is going to be impacted by concerns surrounding this topic. The report contains some great charts including one that graphically depicts the Climate Change Vulnerability Index for 2012. According to the report, “Climate change is expected to … affect ecosystem health and biodiversity, in turn reducing land productivity and adding to food security stress and water scarcity.” But every dark cloud has its silver lining and the analysts conclude:
“The need to tackle climate change brings opportunity to innovators. The US$100 billion-a-year Green Climate Fund (GCF) should make it easier to cut emissions and help developing countries to adapt to the effects of climate change. The GCF could lead to the creation of public-private partnerships in developing nations that can build green industries, create jobs, reduce poverty and improve infrastructure as well as tackle climate change.”
If you don’t believe that climate change will have much of an impact on your supply chain, read my post entitled Supply Chain Risk Management and Climate Change. In that post, I discuss why Munich Re, one of the world’s largest reinsurers, is paying an increasing amount of attention to climate change. The second mega-trend discussed involves energy & fuel. The analysts predict, “All companies – regardless of sector, size, or location – will find it difficult to plan for and manage energy costs, especially those related to fossil fuel use.” They do note, however, that “companies that become more energy efficient and/or use more alternative and renewable sources of energy … would be able to lower their exposure to fossil fuel-related risks and improve their financial performance.” They continue:
“Fossil fuel-dependent transportation industries such as aviation, shipping and manufacturers that use petroleum as a process input, such as plastic or chemical producers, will need robust strategies and plans to address fuel price volatility and potential shortages. Vehicle and electrical appliance suppliers, manufacturers and retailers must prepare for significant energy consumption increases in the developing world, and adjust product design and development strategies accordingly.”
I found it interesting that, despite the concerns about nuclear power raised by 2011 disaster in Japan, the KPMG analysts predicted that “nuclear energy is likely to grow by about 70 percent to 2035, led by China, Korea and India.” The third mega-trend discussed in the report involves material resource scarcity. They write:
“As developing countries industrialize rapidly, global demand for material resources looks likely to continue to increase dramatically. Over the next 20 years business is likely to face global competition for a wide range of material resources that become less easily available. The risks presented by resource scarcity also create opportunities to develop substitute materials, and to recycle and recover resources from waste products. Other opportunities include entering new markets, collaborating with other sectors, universities or government and discovering of new techniques or processes. In 2030 it is predicted that some 83 billion tons of minerals, metals and biomass will be extracted from the earth: 55 percent more than in 2010. The message is clear: over the next 20 years, demand for material resources will soar while supplies will become increasingly difficult to obtain.”
The report notes that natural resources are not evenly spread across globe, which means that bulk shipping will remain an important sector in the years ahead. The analysts caution, however, that domestic interests may persuade some governments to restrict exports of some raw materials (as China has done with its rare earth minerals). Although this is a scenario that companies should consider, it is not a universally accepted view. Some experts claim that there are up to 10,000 more years of minerals available. But that is a discussion for another post. The next topic discussed is water scarcity. The report states:
“Water scarcity for many businesses can be a major risk to growth and development. Businesses operating where freshwater is scarce may be vulnerable to water shortages, declines in water quality, water price volatility and reputational issues. They will have to share access to limited or dwindling water resources with municipalities through detailed water management plans and efficiency requirements, and are likely to be subject to regulations that aim to ensure adequate supply for local populations. Potential water shortages pose a threat to business growth and expansion, and conflicts over water supplies may create a security risk to both business operations and markets.”
The Organization for Economic Co-Operation and Development (OECD) believes that urgent reform of water policies is necessary to preserve human and environmental health as well as foster economic growth. The following video provides an excellent overview of why water scarcity is considered a mega-trend worthy of note.
The report concludes, “Companies that use water more efficiently or eliminate water use entirely through closed-loop processes and water recycling can save money and resources and reduce business risks.” In India, Coca-Cola learned what it is like to face public outcry over competing water interests. To learn more about that incident, read my post entitled Let’s Talk Water, Part 1.
The “fifth megatrend discussed in the KPMG report is population growth. The report states:
“The populations of developing countries are expected to grow the most while those of more developed regions, including North America and Europe, are expected to hold roughly steady. In 2032, almost two thirds (58 percent) of people will live in Asia and around one fifth (19 percent) in Africa. Businesses can expect significant supply challenges and price volatility as a result of such a rapid growth in the number of people coupled with an increased use of resources. Population Growth will place intense pressures on ecosystems and the supply of natural resources such as food, water, energy and materials.”
This uneven growth rate and population distribution will create different challenges for different countries. The report explains:
“A lack of employment opportunities for growing young populations in developing nations could result in social unrest and instability. While this is a threat for business, there are also opportunities to create commerce and jobs, and to innovate to address the needs of growing populations for agriculture, sanitation, education, technology, finance and healthcare. Meanwhile, in developed countries with stable populations but a growing proportion of elderly and retired citizens, businesses will face a shrinking workforce and fiercer competition for skilled workers.”
The report concludes, “Businesses are likely to find opportunity in the increasing demand for affordable, accessible pharmaceuticals and healthcare, along with housing and mobility services for older people.” In the second part of this two-part series, I will discuss the remaining five mega-trends identified in the report: wealth; urbanization; food security; ecosystem decline; and deforestation.