For years it has been clear that the way we do business has a serious impact on the world around us. But it is also clear that the state of the world around us increasingly affects the way we do business.
My colleagues and I at KPMG have explored the challenges, risks and opportunities created by the massive environmental and social changes taking place in today’s world. We’ve identified a set of environmental and social “megaforces” that I believe will impact the entire business world over the next two decades. We cannot afford to ignore them.
Climate and energy
Climate change tops the list and will have an economic impact: Forecasts show annual GDP losses ranging from 1% per year, if strong and early action is taken, to over 5% a year if policymakers fail to act.
Just as significant will be the likely increased volatility and unpredictability in fossil fuel markets as a result of higher global energy demand, changes in patterns of consumption, supply and production uncertainties and increasing regulation related to climate change.
Global expansion will accelerate the emergence of material resource scarcity – an ever more pressing issue as developing countries industrialize rapidly, leading to growing trade restrictions and intense global competition.
The same goes for water – another resource that will be in short supply. Businesses will be vulnerable to supply pressures, declining water quality, price volatility, and reputational challenges. Growth may be compromised and conflicts over water supplies may create security risks.
Population, wealth and urbanization
Global expansion will also fuel population growth. We estimate that the world’s population will reach 8.4 billion by 2032, placing intense pressure on ecosystems and natural resource supplies and leading to supply challenges and price volatility.
The rise of the global middle class (defined by the OECD as individuals with disposable income of between $10 and $100 per day) will be significant. This group is forecast to grow by 172% between 2010 and 2030. Serving this exploding middle-class market with scarcer and more price-volatile resources will be the challenge here.
We see a strong worldwide trend towards urbanization as this new global middle class flocks to big cities, which will require extensive improvements in public infrastructure as well as Internet and mobile connectivity.
The issue of food security will also require significant attention. Over the next two decades, global food supplies will come under increasing pressure and food prices are predicted to rise 70-90% by 2030.
Ecosystems will suffer as well, leading to scarcer, more expensive and less diverse natural resources, increasing water costs and escalating damage to agriculture, fishing, and food caused by invasive species.
The timber industry and downstream sectors such as pulp and paper are vulnerable to regulation against deforestation and may also face increasing customer pressure to prove their products are sustainable.
The time to act is now
I believe that over the next 20 years, businesses are likely to come under increasing pressure as governments address the effects of these megaforces. Companies should expect to pay a rising proportion of their external environmental costs, which today are often not shown on financial statements. We encourage our clients to adopt systems centered on sustainability – to consider the megaforces as a whole, rather than individually.
Risk and opportunity we can’t ignore
It is a mistake to label these risks “medium to long term.” Businesses are already feeling the effects. The megaforces pose risks ranging from the physical, such as damage to assets or supply chains from extreme weather events, to the competitive, such as commodity price volatility and rapidly changing market dynamics. Other risks include reputational damage, increasing exposure to legal action, complex and rapidly evolving regulations, as well as the growing threat of civil unrest and even international conflict driven by environmental and social issues.
With potentially far-reaching impacts on the horizon, it is crucial that businesses and policymakers together take strategic decisions now and promote changes in long-term thinking. Can company valuations continue to largely ignore the risks and opportunities associated with environmental and social megaforces? The common-sense answer is “No.”
We can make the transition to a sustainable economy, but we need widespread global support from businesses, governments and civil society, not to mention innovative solutions. But that means we have to move on from old ideas of corporate responsibility focused on protecting and enhancing reputation and accept that our businesses stand to be affected as supplies of freshwater decrease, costs of energy rise, and ecosystems decline. Although managing the effects successfully will require a sophisticated understanding of these factors, real competitive advantage can be carved out of emerging risk.
Consumer and investor values are changing. Corporations are recognizing that there is profit and opportunity in a sense of responsibility broader than next quarter’s earnings. The bold, the visionary, and the innovative recognize that what is good for people and the planet can also be good for the long-term bottom line and shareholder value.
We can never be certain about the future. But it is good business sense to be prepared for the possibilities: to expect the unexpected.