KPMG research: sustainability “megaforces” will increase impact on business

by Brianna Crandall — February 20, 2012—New research from KPMG International has identified 10 “megaforces” that will significantly affect corporate growth globally over the next two decades, with the costs of environmental impacts on business operations doubling every 14 years. KPMG is a global network of professional firms providing audit, tax and advisory services in 152 countries worldwide.

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.

The KPMG research finds that the external environmental costs of 11 key industry sectors—often not shown on financial statements—jumped 50 percent from $566 to $846 billion in eight years (2002 to 2010), averaging a doubling of these costs every 14 years. These external costs would not be something reflected on a balance sheet because they may be borne either by individuals or society at large, notes KPMG. They are often both non-monetary and problematic to quantify for comparison with monetary values, such as the effects of pollution.

The report calculated that if companies had to pay for the full environmental costs of their production, they would lose 41 cents for every $1 in earnings on average. According to KPMG, global sustainability megaforces will significantly increase the complexity of the business environment. The company says it has taken a leadership role in helping organizations to understand the opportunity side of the equation and of measuring and reporting sustainability activities, not just the risk.

The 10 global sustainability “megaforces” identified in KPMG International research that may impact business over the next two decades are:

• 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.
  
• 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 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 labor” in developing nations are likely to be eroded by the growth and power of the global middle class.
  
• 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 2007, and the value of non-wood forest products, mostly food, was estimated at about $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.