The dangerous domino effect

12th April 2012


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Former lead UN climate change negotiator Yvo de Boer explains why firms must prepare now for the big sustainability challenges

The way different major sustainability trends such as potential food shortages, water scarcity, rising energy demand and climate change are converging presents a frightening picture of the future that will require businesses and policymakers to work together to find solutions. That is the assessment of Yvo de Boer, the former executive secretary of the UN Framework Convention on Climate Change (UNFCCC).

Since leaving his UN post in 2010, de Boer has been working as special global adviser on climate change and sustainability for KPMG. It predicts, in its recently published report Expect the unexpected, that the pressure on businesses to pay the full cost of their environmental impacts will increase over the next 20 years as governments address the effects of what KPMG describes as “sustainability megaforces” (see below). These 10 significant environmental and social changes will provide both risks and opportunities.

Coming together

According to KPMG, the megaforces will impact each and every business over the next 20 years, acting in unpredictable and interconnected ways. As a result, the resources that businesses rely on will become more difficult to access and more costly; there will be increasing strain on infrastructure and natural systems as patterns of economic growth and wealth change; and physical assets and supply chains will be affected by the unpredictable outcomes of a warming world.

“I think organisations have been aware of these megaforces and how they’ve been developing, but there’s been a tendency to look at them individually rather than how they are interacting,” says de Boer. “If you start to consider the interaction between the different megaforces, the picture becomes quite frightening.”

De Boer uses population growth – set to rise by 20% by 2032 – to illustrate how the different megaforces are connected. “We’re heading for nine or 10 billion people by the end of the century. That poses the challenge of increasing food production by 70% by 2050. That’s no mean feat by itself,” he explains.

“But if you then look at the issue of water, how do you increase supplies, which we don’t have, to ensure food production on that scale? Then add into that mix the impact of climate change on water. There’s also energy, where biofuels are replacing food crops in the move to more renewable forms of energy. Some countries are focusing more on using hydropower, but you could ask where will the water come from for that? Because in the future there will be more evaporation from lakes that fuel hydropower plants.

“Because we’ve tended to look at these trends individually we don’t think the impact is that great,” warns de Boer. “We’ve pushed them to the back of our minds.”

The failure to look at the bigger picture and how emerging trends connect is exacerbated by the tendency to see some sustainability challenges as of little immediate concern, de Boer says.

“There’s been an inclination, certainly in the West, to see some issues as other people’s problems rather than our own: to think of them as far away and something that can be dealt with at a later date.”

He cites climate change as the classic example, where the major impacts, both now and in the future, are in the poorer parts of the world rather than in industrialised countries.

“That means there is less urgency to deal with the issue,” argues the man who headed the UN climate change negotiations for four years before stepping down in the aftermath of the Copenhagen talks in 2009. He believes the continuing financial and economic crisis has played a significant role, using Europe to highlight how sustainability has dropped down the policymaking agenda.

“The focus is on the euro and financial crisis, and other things – particularly sustainability – are being pushed to the margins. The desire to cope or grapple with these things is being sidelined.”

Corporate response

The KPMG report reveals that some industries are more at risk from the sustainability megaforces and have further to go in their response than others. The food industry, for example, is particularly exposed to energy and fuel volatility risks, and water scarcity is a major issue for food producers.

De Boer is confident that companies can make the necessary adjustments, however. Coca-Cola in Brazil provides a very good example, he says: “It’s planting forests to guarantee rainfall to replenish an aquifer that supplies the water used to make Coca-Cola.”

He also points out that some companies are making millions of pounds by responding to the megaforces in ways that reduce bottom-line costs.

“There are companies that see these trends as an opportunity to put new products and services in the market, and to enhance their brand,” says de Boer. “Unilever, for example, wants to double its profits and reduce its environmental footprint by 50%.”

Another response is collaboration, with businesses working together to stretch the boundaries of what is possible. “The three main drivers of deforestation are cattle rearing, growing palm oil and soya plantations, but a number of consumer-goods firms have now said that, as of 2015, they will no longer use unsustainable sources of beef, soya and palm oil.

“I think you’d have had to spend 200 years negotiating through the UN to even agree a definition of sustainability, let alone agree such objectives,” comments de Boer. “So, that’s an example of companies collaborating to change the rules of the game because of their significance in the marketplace.”

Despite examples of corporations taking positive action to address the emerging sustainability megaforces, de Boer warns that other firms, and countries, are responding by cornering the market in resources.

“Agricultural land, particularly in Africa, is increasingly being bought or leased long term by other countries to secure food supplies in the future, while more and more companies have natural resource contracts going far into the future. So, both countries and companies are trying to secure supplies of food, wood and raw materials.”

He fears such a strategy could lead to possible conflict. “If you sign a deal with a country to grow something there and the deal includes first access to water supplies, what happens when supplies start to diminish to the point where the country has to decide whether to provide water to local communities or the production of your crop?”

To prevent conflict arising, KPMG recommends public–private partnerships, where the two work together to combat specific issues.

“We are seeing examples of mining companies increasingly having to compete for energy. That challenge can be met through private–public partnerships,” he explains. “If a mining company begins to look at the solution to its energy needs, not only in the context of its own operations but also the local communities’, then there is no conflict.”

De Boer acknowledges that public–private partnerships – such as private finance initiatives – often attract a negative press, but says such deals can be a force for good.

“It depends on the nature and quality of the deal,” he argues. “There are things companies can do alone. There are things they can do together. And there are things they can do together in public–private partnerships with government.”

Polluter pays

The KPMG report reveals that companies would lose 41 cents, on average, in every $1 they earned if they had to pay the full environmental costs of production. It also reveals the environmental costs on business are doubling every 14 years.

“Firms are not internalising environmental costs at the moment,” claims de Boer. “By and large, you can pump greenhouse-gas emissions into the atmosphere at almost no cost, even in Europe. In many countries, water is not priced properly. In other words, all of these are simply externalities that are not included in the price of the product.”

But de Boer believes pressure will mount on polluters to internalise more of these costs, as governments look to cut subsidies on input commodities, such as fossil fuels and water, and demand that companies pay for the costs of environmentally damaging outputs.

“So, unless you can get the environmental or sustainability footprint of your product down it’s going to get far more expensive for consumers. And price influences the consumer’s choice as to where, and on what, to spend their money.”

He wants companies to be more transparent about sustainability risks, believing that the current separation of financial and so-called non-financial information is a barrier to greater understanding of the real environmental costs of goods and services. “One of the things that bothers me most is that we keep referring to sustainability information as ‘non-financial’. Walmart went through a big exercise on packaging and transporting diary produce and saved itself millions in the process. I think that is a real piece of financial information,” says de Boer.

“We need to be moving towards more integrated reporting. I don’t think you need a separate financial statement and sustainability report. Why do you need a sustainability report to be listed on the South African stock exchange, but not on the London or Frankfurt stock exchange?”

Political interference

De Boer is very much in favour of government-backed market mechanisms to address the failure by some firms to embrace relatively cheap ways of reducing energy use and cutting greenhouse-gas emissions.

“The international science community has been telling us for something like two decades that we can reduce global emissions by 20%–30% through energy efficiencies that pay for themselves through lower energy bills in two to three years’ time,” he explains. “So we have the potential to significantly reduce emissions without really costing us anything through action that will save us money.

“The question then is how do you ensure you open up those free or cheap opportunities? I think market-based mechanisms, like the EU emissions trading scheme [ETS], are an important way of doing that. It changes the investment equation in a way that all of the so-called low-hanging fruit is actually picked and eaten.”

Although the EU ETS has been criticised for providing energy-intensive industries with a financial windfall, de Boer defends its design, comparing the EU scheme with how Kevin Rudd (Australian prime minister between 2007 and 2010) tried to introduce a similar scheme.

“The Europeans started by including a small number of companies, while Rudd tried to focus on a much larger number,” de Boer says. “The EU began with an over-allocation of permits, while the Australians went for an under-allocation. The Europeans also gave away a lot of permits free of charge; the Australians proposed to charge from day one.

“The outcome was a great deal less resistance in Europe and more time for European companies to get used to the system. Now, over time, Europe is moving from an over- to an under-allocation, introducing greater auctioning of allowances and increasing the number of companies involved. So, I think the EU, in a very intelligent way, eased Europe into an emissions trading system rather than try to shock [it] into it.”

He also points out that the financial crisis means that EU economic activity has gone down, so companies need fewer emissions permits. “You can’t blame the European Commission for that,” argues de Boer. “Should the commission take the ‘windfall’ away from companies already struggling in the economic climate?” he asks. “I think the answer to that is no.”

Level playing field

De Boer would, however, like to see policymakers become more articulate in championing the benefits of action to improve sustainability. “I think if you were to ask most politicians they wouldn’t be able to tell you how you can realise strong economic growth and sustainability at the same time,” he states.

“One of the first conversations I had in my UN role was with an Indian minister, who said ‘the people who have elected me don’t give a damn about climate change, they don’t even know what it is. What they are worried about is where their next meal is going to come from. And unless I can show that their next meal will probably come later and will definitely be more expensive as a result of climate change, I will not get their support for tackling it.’”

He rejects the argument put forward by some industries that unilateral environmental regulation risks carbon leakage because companies relocate to countries with less stringent controls.

“First of all you get a lot of people talking about wanting a level playing field. I don’t think there is such a thing,” he argues. “No two countries have the same labour costs, VAT, energy costs etc, so in that sense there is no level playing field. However, there is a desire to see that there is fair engagement; that your competitors are acting as well.

“You do need to give businesses the confidence that if they ‘stick their neck out’ on something, their competitors are not simply going to run away with consumers through lower-cost but worse [for the environment] products.”

So, with the sustainability megaforces gathering strength, what advice would de Boer offer sustainability professionals as they help to prepare their organisation’s response? He offers the following recommendations:

  1. Understand your risk and vulnerability, so you can understand your exposure.
  2. Prepare a strategy that allows you to reduce your risk and vulnerability.
  3. Make a business case for the strategy. Don’t develop the strategy to save the planet, but to save or enhance the company. Unless you take this third step, you’re not going to be taken seriously. If you can’t make the business case, then you need to stop.
  4. Make sure the strategy can be implemented. Don’t make it too complicated. It’s much better to identify five key performance indicators than 50, or you won’t be able to see the wood for the trees.
  5. Reward the strategy properly. Reward people for their efforts in realising and achieving the strategy and goals.

Future of Climate Agreements

Having been at the forefront of negotiating global treaties for a number of years, Yvo be Boer believes that international agreements such as the Kyoto Protocol provide investors and businesses with a degree of confidence that national policy simply cannot match.

“Look at EU energy policy over the last two to three years,” says the man who was the EU chief negotiator at Kyoto before taking up the UN role. “We’ve seen feed-in tariffs retrospectively scrapped in Spain, Germany suddenly abandon nuclear energy, and most countries looking to scrap favourable tax rates for renewables. In other words, it is very, very difficult to plot an investment course based on what national governments say. International treaties can provide much more certainty about the direction of travel.”

Asked whether multilateral agreements require a legal basis to be successful, de Boer says the compliance process should include every available enforcement tool. “The Kyoto Protocol is only about countries taking on a legally binding target in the context of an international treaty. And that, to me, is a bit like saying: OK, we’re going to introduce a maximum speed limit, but we’re not going to police it; there will be no patrols, radar guns, courts or penalties. Legally binding should mean applying the whole legal toolbox.”

Does he see the voluntary national commitments of the type made at Copenhagen and Cancún as the best way of reinvigorating the international climate change negotiations? “The fact of the matter is that those commitments are nowhere near good enough to stabilise temperature rise at the necessary 2°C,” he says, highlighting several problems with such an approach. “The first is that you have no guarantee that your competitors will act in the same way as you plan to do. You also need a global process that allows you to measure effort against goals so you can see how far you are from the target. There needs to be a mechanism in place to ensure that you regularly revisit performance in order to get to the target.”

He does, however, offer the reminder that Kyoto started in a similar fashion. “Kyoto did not impose targets on countries. Governments came to Kyoto with offers to reduce emissions that they had formulated themselves,” he says. “They then negotiated and compared each others’ efforts and then came a voluntary proposition that was written into the treaty. So the Kyoto process was not top down.”

10 Global Megaforces

  • Climate change – the megaforce that directly impacts all others.
  • Energy and fuel – fossil-fuel markets are likely to become more volatile and unpredictable.
  • Material resource scarcity – global demand for material resources is predicted to increase dramatically.
  • Water scarcity – by 2030, the global demand for freshwater will exceed supply by 40%.
  • Population growth – the world population is expected to grow to 8.4 billion by 2032.
  • Wealth – the global middle class is predicted to grow 172% between 2010 and 2030.
  • Urbanisation – by 2030, all developing regions, including Asia and Africa, are expected to have the majority of their inhabitants living in urban areas.
  • 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.
  • Ecosystem decline – making natural resources scarcer, more expensive and less diverse.
  • Deforestation – forest areas will decline globally by 13% between 2005 and 2030.

Source: KPMG, “Expect the unexpected


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