KPMG released a publication in 2012 entitled Expect the Unexpected: Building business value in a changing world, which identifies ten sustainability “megaforces” that are projected to impact business across all industry sectors in the coming decades.  In today’s global economy, such megaforces as water scarcity, population growth, and urbanization will all shape the way business is conducted.  The report posits that the process of “decoupling human progress from resource use and environmental decline [will be] the central challenge of our age,” and businesses that emerge successfully through this transition will be more resilient and therefore protected against risks.  The concept of decoupling is an accepted way to reconcile the disparity between our planet’s apparent finite resources and thus far infinite (and virtually exponential) economic growth: economic growth can be possible without relying – at least as much – on natural resources or raw materials.  Waste elimination, recycling, and other methods of increasing operational efficiency will all provide ways for businesses to expand their output and economic growth while shrinking their ecological footprints.

The KPMG report goes on to discuss different industries by sector and explore which may be the most vulnerable to these sustainability megaforces.   As per the Industry Classification Benchmark (ICB) system, KMPG identifies the following 11 industry sectors:

• Airlines
• Automobiles
• Beverages
• Chemicals
• Electricity
• Food Producers
• Industrial Metals and Mining
• Mining
• Marine Transportation
• Oil and Gas
• Telecommunications and Internet

In order to effectively analyze and evaluate these sectors, KPMG used a data set created by the independent environmental research agency Trucost that translates environmental impacts into monetary values and is therefore a measure of an industry’s environmental sensitivity.  One important measure of environmental sensitivity is environmental intensity, which conveys the environmental cost of potential profits. Trucost’s data set indicates that environmental costs are rising very quickly, but since it puts a price tag on environmental externalities, those “off balance sheet” costs have not yet necessarily translated into financial impact.  KPMG points out that calculating these externalities is becoming more commonplace, as “businesses will be most motivated to act on sustainability when the costs of environmental and social impacts can be shown on financial statements.” (Expect the Unexpected)

This analysis reveals good news and bad news for different industries.  The Industrial Metals, Marine Transportation, and Mining sectors all showed a reduction in earnings exposure to environmental cost, or an improvement in environmental intensity, though this is largely the result of profits in those sectors growing more rapidly than their environmental impact, rather than a real reduction in these industries’ environmental impacts: in other words, this juxtaposition between economic growth and environmental cost likely cannot be contributed to decoupling.  Conversely, the Automobile, Chemicals, and Electricity sectors show signs of decoupling.  Their environmental costs are growing at a lower rate, or even shrinking altogether, while they are simultaneously improving their environmental intensity.

The Food Producer and Beverage industries, conversely, appear to be facing particularly devastating changes resulting from the sustainability megaforces.  Not only is their environmental intensity actually increasing, but the “environmental costs of the Food Producers sector could outweigh their entire earnings.” (Expect the Unexpected)  Beverages have significant exposure to these megaforces, with high exposure to water scarcity, food security, climate change, population growth, ecosystem decline, and with partial exposure to energy and fuel, deforestation, and urbanization.  Similarly, Food Producers will be highly exposed to climate change, water scarcity, ecosystem decline, population growth, wealth, energy and fuel; and potentially exposed to urbanization.

While decoupling is clearly a necessary process for all industry sectors to explore, it is worth further exploring just what this may mean.  Author Jackson of “Prosperity without Growth” stresses that there are actually two types of decoupling, relative and absolute.  Relative decoupling relies on increased efficiency to accomplish its goal: lowering the ecological intensity of industry activity relative to the GDP (Jackson).  With continuously growing GDP, however, ecological intensity may still ultimately rise even when employing relative decoupling.  Absolute decoupling means that the absolute ecological impact declines, regardless of what is happening with the economy.  Jackson proposes some potentially radical methods by which we may achieve absolute decoupling, including curbing economic growth.  While those ideas aren’t tenable in today’s economy, it is certain that now is the time to be making ecological investments in carbon reduction, infrastructure changes, and ecosystem protection among others (Jackson).  Furthermore, the KPMG report shows a stark future ahead for industry sectors that fail to reduce their environmental intensity in some form or fashion.  Creativity and innovation has always been vital for businesses, but will be increasingly so as they pivot to meet the coming sustainability challenges.

Sources

Jackson, Tim. Prosperity without Growth: Economics for a Finite Planet. London: Earthscan, 2009. Print.

KPMG. “Expect the Unexpected: Building Business Value in a Changing World.”Building Business Value in a Changing World. N.p., n.d. Web.

The GRI, which is widely considered to be the closest thing to a standardized reporting framework in the sustainability world, has conducted a study of existing integrated reports: reports that have been issued by organizations and self-identified as integrated.  These findings are shared in its recently published “The sustainability content of integrated reports – a survey of pioneers” report.  The report categorizes existing integrated reports into three categories:

1. Sustainability structure – The report focuses on sustainability while neglecting financial metrics, and is thus integrated in name only.
2. Cover structure – Sustainability and financial performance are discussed separately and published in the same document.
3. Embedded structure – The report contains “clear evidence of inter-linkage between reporting on financial and sustainability performance.”

In its report, the GRI is careful to describe these three reporting styles in neutral terms, but it is clear that an embedded structure is a more genuine integration of sustainability and financial reporting, and that this kind of structure is the direction in which they assume <IR> will evolve.  Feedback from companies currently practicing integrated reporting (of the embedded structure variety) confirms that they view the practice as “the natural logical expression of their intrinsic business model” and that to report in any other fashion would actually be “counter-intuitive.”

The companies that report such sentiments are most likely in the minority, and in fact, most companies probably have some work to do before integration becomes so comfortable, but the International Integrated Reporting Council is seeking to facilitate the transition to <IR> by developing a reporting framework that companies can use.  As a starting point, the IIRC released a Consultation Draft  of the International <IR> Framework earlier this spring, and they are currently soliciting feedback with an open comment period that started on April 16 and runs until July 15.

The main themes of the Framework are value creation over different time frames (short, medium, and long term); and accounting for the different kinds of capital, both internal and external, that an organization utilizes and creates.  Organizations are invited to decide upon and justify their individual short, medium, and long term time frames.  In its Framework, the IIRC categorizes capital as financial, natural, manufactured, intellectual, social and relationship, and human, and posits that each kind, whether owned or not, plays a role in creating or diminishing company value.  The IIRC also suggests that determining materiality – the factors that significantly affect value creation over time –  will be fundamental to an organization’s business model, its growth strategy, and its ability to participate successfully in the <IR> process.

During this open comment period, the IIRC encourages stakeholders to read and evaluate the draft Framework, and in addition to providing general commentary, to answer a specific set of Consultation Questions regarding the Framework’s content.  These questions generally pertain to definitions and the scope of the report, as well as how such a report might be verified.  The responses to these questions will be taken into account when updating the Framework, and the IIRC intends to publish the first – of probably many, in this iterative process – official version of the Framework in December 2013.  We look forward to the continued evolution of sustainability reporting, and of <IR> in particular.