Over the next 20 years, businesses will be exposed to hundreds of environmental and social changes that could bring both risks and opportunities in the search for sustainable growth. In KPMG’s recent report Expect the Unexpected: Building Business Value in a Changing World, more than two dozen forecasts have been analysed in an attempt to identify the changes likely to have the greatest impact on business. RéSource takes a look at the climate change accept in relation to business.

A complex, unpredictable system

New research from KPMG International has identified 10‘megaforces’ that will significantly affect corporate growth globally over the next two decades. 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 new urban centres spawned by population growth. 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. Emphasis was placed on the availability of quality numerical projections, key pressures causing global environmental and social problems, and the most significant consequences of those pressures for natural and human security. The set of 10sustainability megaforces are:

1. climate change

2. energy and fuel

3. material resource scarcity

4. water scarcity

5. population growth

6. urbanisation

7. wealth

8. food security

9. ecosystem decline

10.deforestation.

Each one has important implications for business, which must be understood, assessed and built in to long-term strategic planning. Awareness and comprehension of each is vital, but as the next section of this report demonstrates, it is only the first step. 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 organisations. Michael Andrew, chairman of KPMG International, says: “We are living in a resource-constrained world. The rapid growth of developing markets, climate change and issues of energy and water security are among the forces that will exert tremendous pressure on both business and society. We know that governments alone cannot address these challenges. Business must take a leadership role in the development of solutions that will help to create a more sustainable future. By leveraging its ability to enhance processes, create efficiencies, manage risk and drive innovation, business will contribute to society and long-term economic growth.”

Yvo de Boer, KPMG’s special global adviser on climate change and sustainability, says 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 recognising 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,” says De Boer.

Climate change

1. 1.       Financial risk

Climate change is the one global megaforce that directly impacts all others discussed in the 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.

Predictions of annual output losses from climate change range from 1% per year, if strong and early action is taken, to at least 5% a year if governments fail to act. However, it is developing countries and the businesses that operate in them that are most vulnerable to climate change impacts even as their rapid industrialisation increases their contribution to global CO₂ emissions.

From a local perspective, Neil Morris, the director of climate change and sustainability at KPMG in South Africa, says that in Africa, these sustainability megaforces are even more pronounced. “With growth as the primary agenda item for the continent, the key challenge and the area of greatest opportunity for business is to decouple our growth from environmental impacts and resource depletion.”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% from US$566 billion (about R4.8 trillion) to US$846 billion in the eight years from 2002 to 2010.This represents, on average, a doubling of these costs every 14 years. The report calculates 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.

1. 2.       Physical risk

The physical risks are considerable. The International Energy Agency (IEA) says that we are on course for a long-term global temperature rise of 3.5°C. This could cause ‘irreversible’ impacts, including near-total deglaciation in the long term, contamination of groundwater supplies, water shortages for hundreds of millions of people, lower agricultural yields in many places and more malnutrition, infectious diseases and deaths from heat waves, as well as increasingly severe floods, droughts and storms.

Extreme weather events are set to become more frequent and up to one sixth of the world’s population could face disruption to water supplies and an increased risk of flooding from melting glaciers, mainly in the Indian subcontinent and areas of China and South America – regions that are seen as the new driving force for the global economy. While agricultural yields could increase in higher latitude areas such as Northern Europe, elsewhere, particularly in Africa, falling yields could leave hundreds of millions of people without enough food.

Sea level rises could cause flooding in low-lying coastal areas, displacing “tens to hundreds of millions of people” in places such as Southeast Asia, particularly Bangladesh and Vietnam, and small Caribbean and Pacific islands. Some of the world’s largest and richest cities, such as Tokyo, New York, London and Shanghai could also be affected. Human health could be affected as more people become vulnerable to mosquito-borne diseases, air quality worsens and more extreme weather events occur. Climate change is expected to also affect ecosystem health and biodiversity, in turn reducing land productivity and adding to food security stress and water scarcity.

1. 3.       Moving forward

Urgent action is needed to avoid such a global temperature rise, but because energy-related facilities such as power stations, buildings and factories last for many decades, “80% of the cumulative CO₂ emitted worldwide between 2009 and 2035 is already ‘locked-in’ by capital stock that either exists now or is under construction and will still be operational by 2035,” according to the IEA.

Individual countries have started acting to cut emissions – China, Australia and South Korea plan to create carbon markets by 2015, for example, while many more have carbon reduction targets – but fragmented national responses require business to understand and comply with a complex and unpredictable patchwork of carbon legislation around the world. Meanwhile, international action on climate change has been slow and disjointed. A price on carbon has been established through trading systems such as the EU Emissions Trading System and the UN’s Clean Development Mechanism, but the carbon markets have been dogged by political interference and the economic crisis.

Progress was made at the 2011 UN climate conference in Durban, with all the world’s major emitters agreeing that they must cut emissions, but a new global deal – if it eventuates – will not be agreed until 2015 and will not come into force until 2020.

Nonetheless, 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.

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

Climate change: This may be the sole global megaforce that directly impacts all others. Predictions of annual output losses from climate change range between 1% per year, if strong and early action is taken, to as much as 5% a year if policymakers fail to act.

Energy and 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 industrialise 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(Water Resource Group:2010), the global demand for freshwater will exceed supply by 40%. Businesses may be vulnerable to water shortages, declines in water quality, water price volatility and reputational challenges.

Population growth: The world population is expected to grow to 8.4 billion by 2032(United Nations Department of Economics and Social Affairs, Population Division: 2011). 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 Cooperation and Development (OECD) as individuals with disposable income of between US$10 and US$100 per capita per day) is predicted to grow 172%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 labour’ in developing nations are likely to be eroded by the growth and power of the global middle class.

Urbanisation: 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 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%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 localised food shortages. In relation to this, the number of chronically under-nourished people rose from 842 million during the late 1990s to over 1 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 realising 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. It is 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 US$100 billion per year to the global economy from 2003 to 2007. 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%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 aimed at slowing or reversing deforestation. Companies may also find themselves under increasing pressure from customers to prove through certification standards that their products are sustainable. Business opportunities may arise through the development of market mechanisms and economic incentives to reduce the rate of deforestation.