KPMG study identifies 10 sustainability “megaforces” with accelerating impacts on business; imperative of sustainability changing the automotive business radically
|KPMG developed 3 nexuses linked by climate change to represent the challenges of sustainable growth. Source: KPMG. Click to enlarge.|
In a new study, 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 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.
Environmental costs are often not shown on financial statements because the bearers of such costs can be either particular individuals or society at large, are often both non-monetary and problematic to quantify for comparison with monetary values. The KPMG research finds that the external environmental costs of 11 key industry sectors jumped 50% from US$566 to US$846 billion in 8 years (2002 to 2010), averaging a doubling of these costs every 14 years.
|Total environmental cost 2010 vs growth in environmental cost since 2002 vs environmental intensity improvement. Source: KPMG. Click to enlarge.|
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.
Individual trend projections prepared without consideration of the entire system of sustainability megaforces no longer provide an adequate basis for strategic business decisions or government policies. The world is too uncertain and too complex to rely on linear forecasts; therefore, business leaders and policy makers should prepare for the unexpected. This means learning to look at the world in a new way that takes account of globally interconnected megaforces, the causal relationships between megaforces, feedback loops, effective intervention points and complex scenarios.—“Expect the Unexpected: Building Business Value in a Changing World”
For this report, KMPG analyzed more than two dozen forecasts from international agencies, global think-tanks, national agencies and noted futurists in an attempt to identify those changes likely to have the greatest impacts on business. The KMPG team emphasized 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 report was released on the opening day of KPMG’s global “Business Perspective on Sustainable Growth: Preparing for Rio+20” summit occurring this week in New York. KPMG International is hosting the event, in cooperation with the UN Global Compact (UNGC), the World Business Council for Sustainable Development (WBCSD) and the United Nations Environment Programme (UNEP).
The 10 global sustainability megaforces 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% per year, if strong and early action is taken, to as much as 5% per year if policymakers fail to act.
There are six key types of risk to business from climate change, according to KPMG: physical risk, regulatory risk, reputational risk, competitive risk, social risk and litigation risk.
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.
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, according to the report.
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, KMPW warns. 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.
Material Resource Scarcity: As developing countries industrialize rapidly, global demand for material resources is predicted to increase significantly. In 2030 it is predicted that some 83 billion tons of minerals, metals and biomass will be extracted from the earth—55% more than in 2010. Over the next 20 years, demand for material resources will soar while supplies will become increasingly difficult to obtain, KPMG says.
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: Water scarcity for many businesses can be a major risk to growth and development. It is predicted that by 2030, 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 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 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 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, 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: 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 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 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.
The Nexus approach. KPMG developed three nexuses—an approach used by the World Economic Forum, the German Federal Government and others—to represent the challenges of sustainable growth:
The Footprint Nexus: the forces driving the escalating “footprint” of mankind on the planet.
The Erosion Nexus: the resulting changes in the natural systems on which we depend.
The Innovation Nexus: the opportunity to address sustainability challenges through business innovation.
The three nexuses are linked by climate change.
Sector analysis: Automobiles
The report also provides a quantitative and qualitative review of the business risks and opportunities facing 11 key sectors of the economy: Airlines; Automobiles; Beverages; Chemicals; Electricity; Food Producers; Industrial Metals & Mining; Mining; Marine Transportation; Oil & Gas; and Telecommunications & Internet.
The major climate change-related risk for the automobile industry is the potential to be exposed to carbon reduction legislation such as carbon taxes or emissions trading systems which would result in corresponding increases in operating costs, according to the KPMG report. High oil prices continue to affect consumer behavior, and concerns about climate change and reliance on oil are likely to increasingly shape policy.
With respect to the 10 Global Sustainability Megaforces, the automotive sector is highly exposed to Climate Change; Energy & Fuel; Population Growth; Wealth; Urbanization; Material Resource Scarcity; and Water Scarcity.
Automakers are already highly sensitive to the prospect of rising costs related to greenhouse gas emissions and water in supply chains and operations, and many companies are already taking steps to address these issues. But the future winners in the Automobile sector may well be those companies that are doing more than just adapting an existing model. Automotive executives polled in the KPMG Global Automotive Executive Survey consider that the entire automotive value chain is changing from one shaped by vehicle-dominated solutions, to a new pattern shaped by multiple approaches to achieving personal mobility that is sustainable.
As a result, the near future could see a fierce corporate battle for dominance in the new automotive value chain. The winners could be automotive companies, but they just as well could be utilities capable of offering cost effective charging services. The imperative of sustainability is changing the automotive business radically: the result is that the near future may be very different from the recent past.—“Expect the Unexpected: Building Business Value in a Changing World”