This article was first published in the July 2012 International edition of Accounting and Business magazine.
Over the past two decades we have recognised that the way we do business has a serious impact on the world around us. It is now apparent that the state of the world affects the way we do business. The central challenge of our age – maintaining human progress while minimising resource use and environmental decline – can simultaneously be one of the biggest sources of future success for business.
Given the unprecedented natural resource scarcity, skyrocketing food prices, escalating energy security issues and an expected population of up to 10 billion in 2100, the private sector is ever more challenged to overhaul its strategy and make its business models futureproof. For example, 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. External environmental costs of 11 key industry sectors (including upstream supply chain) rose by 50% between 2002 and 2010. They include things like pollution – external costs that society will likely have to pay for in the future but are not included in transaction prices.
Today’s leaders are struggling with complexity. Until now, we found global trends on energy, water security and food scarcity complex enough. The convergence of other forces such as population growth, deforestation and a surging middle class is impacting on business and the world around us.
Leaders are overwhelmed by the sheer scale of these problems and are struggling to act. There are ways to solve these problems, and that includes harnessing the capacity of business. Policymakers and the business community should ramp up collaboration and demonstrate renewed leadership in order to achieve sustainable and equitable growth objectives.
Government policies, investor values and consumer preferences are also altering rapidly, thus impacting businesses’ bottom line and demanding a long-term vision, supported by immediate action. Is this forced by stakeholder demand, or primarily driven by sound entrepreneurship? It is up to each and every company to decide for itself.
Rather than attempting to survive risks resulting from global megaforces, business leaders can do much more. Indeed, with foresight and planning, and by undertaking pioneering actions to prepare for an uncertain future, they can thrive by turning risks into new opportunities. Companies need to develop resilience and flexibility for an unpredictable future and build capacity to anticipate and adapt.
Understand the risks
First and foremost, businesses need to fully assess and understand future sustainability risks, for example by integrating them into an enterprise risk management tool, defining their responses to deal with them, and analysing opportunities for efficiency, substitution or adaptation.
Integrated strategic planning and strategy development are needed as well; this requires business management to make sustainability central to their corporate strategy and incorporate it at all levels. Put simply, businesses must manage risks and capitalise on opportunities by turning strategic plans and strategies into ambitious targets and actions. One can think of energy and resource efficiency improvements, sustainable supply chain management, and investment into innovation on sustainable products and services, as well as gaining access to new markets for greener products, services and technologies. It is also imperative to explore tax incentives tailored to alternative energy, energy efficiency and other areas related to sustainability.
Another much discussed but less implemented tool for success in this area is measuring performance and reporting on sustainability, as well as the related benefits. The growing trend of integrated reporting is an example of how companies are building frameworks for sustainability reporting processes, stronger information systems and appropriate governance and control mechanisms on a par with those currently used in financial reporting.
Time to talk
Organisations cannot do this alone. Collaboration with partners on sustainability issues is vital to enhance leverage and improve the cost-benefit ratio of action. Business leaders should seek opportunities for genuine dialogue with governments and demonstrate new and innovative approaches to public-private partnerships. Improved dialogue could focus on economic instruments and market barriers that could be reduced to make sustainable business operation easier. Good management used to be about preparing for the expected; now it is just as much about preparing for the unexpected. Without action and strategic planning, risks will multiply and opportunities will be lost.
KPMG’s clients and business all over the world are seeing the link between sustainability and financial results becoming increasingly clear. Companies that recognise the external influences on their organisations and leverage them as opportunities are realising a competitive advantage. To that end, the exercise of measuring and reporting sustainability activities to stakeholders with clear, accurate data is increasingly relevant and quickly becoming a priority.
Competitive advantage can be carved out of emerging risk. It is clearly no longer in question that we must transcend to a more sustainable economy. The question is the pace in which we are able, and especially willing, to achieve it.
To thrive, or even just to survive, businesses need to understand the root causes of what affects their operations, not just the symptoms. The bold, the visionary and the innovative recognise that what is good for people and the planet will also be good for the long-term bottom line and shareholder value. This is how we can make our common economy futureproof.
Yvo de Boer
(Yvo de Boer is KPMG’s special global adviser on climate change and sustainability, responsible for driving the development of the firm’s Sustainability Service. He is former executive secretary to the UN Framework Convention on Climate Change (UNFCCC), and currently chairs the World Economic Forum’s Global Agenda Council on Climate Change. De Boer helped to prepare the position of the European Union in the lead-up to negotiations on the Kyoto Protocol; assisted in the design of the EU’s internal burden sharing; and has led delegations to UNFCCC negotiations.)