The megatrends companies must face to meet sustainability challenges

Systems thinking comes of age as KPMG says environmental, social and economic problems cannot be solved separately

A meeting of the Village Saving and Loan Association<br />
in Katine,

A meeting of the Village Saving and Loan Association in Katine. Photograph: Graeme Robertson

Business is finally recognising what Buddhists have taught for thousands of years and development NGOs have struggled with for decades – that everything is connected and no problem can be effectively dealt with in isolation.

Systems thinking is increasingly filtering into the mainstream and perhaps has finally came of age with consultancy behemoth KPMG shifting its sustainability thinking to a more holistic approach.

In a new report, Expect the unexpected, KPMG says companies need to understand 10 «sustainability megaforces that will impact each and every business over the next 20 years. These forces do not act alone in predictable ways. They are interconnected. They interact.»

The megaforces that KPMG highlights represent all the usual suspects, from climate change, unpredictable energy supplies and water scarcity to urbanisation, deforestation and food security.

The report warns that trend projections prepared without consideration of the entire system of sustainability megaforces no longer provide an adequate basis for strategic business decisions.

«Systems thinking … is an important way to assess and manage new risks and uncover risks that were previously unidentified. For example, a company may understand its direct dependency on water, but may not have thought about how the supply of its material resources could be impacted by increasing water scarcity.»

Katine as an example

I personally learned all about systems thinking over the past few years, working on the Guardian’s integrated development project in the rural community of Katine in Uganda.

It quickly became apparent that we needed to address all the development issues within the village – education, health, water, sanitation and livelihoods – if the 29,000-strong community was to have a chance of lifting itself out of poverty in a sustainable fashion.

For example, unless members of the community were able to go beyond mere subsistence farming and start earning an income, improvements in areas such as health and sanitation were unlikely to be sustained once our NGO partner Amref up pedsticks and moved on to other projects.

But even this was not enough, as we also learned of the importance of developing relationships between the local community and local, district and national political structures.

Amref trained up voluntary village health teams but they could not do their work effectively because the government drugs distribution agency was not supplying much-needed medicines to the local clinics. You get the picture.

Beyond that, the sustainability of the community is inextricably linked to forces outside of the country’s control, such as drought, energy and commodity prices and regional political upheaval. To give an indication, when neighbouring Kenya was caught up by riots, the price of fuel in and around Katine leapt overnight by a fifth.

Trying, as many NGOs still continue to do, to concentrate on just one issue, such as water or health, is destined to be only partially successful at best. So it’s a positive step that a group like KPMG is now recognising that the same is true in the world of business and global sustainability.

External factors

KPMG says it has studied dozens of forecasts but that most are based on linear projections and have not factored in how issues such as water and food security reinforce, compete with or balance the effects of issues such as deforestation and urbanisation.

It gives the example of the increasing wealth and growth of the global middle class, which will accelerate demand for consumer goods and services, thereby putting further pressure on the natural and material resources needed to produce them.

As a result, regional freshwater availability could struggle to keep pace with the agricultural production necessary to feed the growing population. Meanwhile, urbanisation predictions generally do not account for the potential impacts of climate change refugees migrating from areas where water and food is scarcest. Food production projections rarely factor in deteriorating soil quality and the competing demands for agricultural land.

Where the report concentrates most of its attention is on the likelihood that companies will increasingly need to factor in the cost of environmental impacts on their balance sheets as governments respond to the many systemic pressures they come under.

This is likely to include the removal of subsidies on input commodities, such as fossil fuels and water, and the wider introduction of mechanisms to increase the cost of environmentally damaging outputs.

Sector by sector view

The report says that the external environmental costs of the 11 sectors it studied rose by half between 2002 and 2010 to $854bn and are doubling every 14 years, which makes it unsustainable even in the medium term.

Across all these sectors, the report calculates 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, with the costs of food producers exceeding the sector’s entire earnings.

The only sector to demonstrate an absolute reduction in its external environmental costs over the eight-year period was automobiles, which achieved a drop of 14%, while mining recorded the largest increase.

The two sectors at highest risk from sustainability megaforces, but least ready, are food and beverage producers, which have made the least progress in reducing their environmental intensity while their exposure to environmental cost is growing rapidly.

KPMG correctly points out that over the next 20 years businesses will be exposed to hundreds of environmental and social changes that will bring both risks and opportunities.

In the same way that we need systems thinking to understand the hole we are digging for ourselves, we also need a holistic approach to help us climb back out. That means that no single player has all the answers and collaboration is needed from across governments, businesses and civil society.

KPMG insists «a co-ordinated approach holds the key to success,» but all the signs from the upcoming Rio +20 conference are that the door is firmly bolted and the key is nowhere in sight.

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Date / Fecha: 24/04/12

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