Expect the Unexpected:

Transcription

1 Expect the Unexpected: Building buine value in a changing world kpmg.com KPMG INTERNATIONAL PART 1

2 b Expect the Unexpected: Building buine value in a changing world In thi report we offer a tarting point for dicuion. We preent a ytem of ten utainability megaforce that will impact each and every buine over the next 20 year. We want to build awarene that thee force do not act alone in predictable way. They are interconnected. They interact. Diclaimer: Throughout thi document, "KPMG" ["we," "our," and "u"] refer to KPMG International, a Swi entity that erve a a coordinating entity for a network of independent member firm operating under the KPMG name, KPMG' Climate Change and Sutainability practice, and/or to any one or more of uch firm. KPMG International provide no client ervice.

3 Expect the Unexpected: Building buine value in a changing world c Foreword Buinee today are operating in an ever more interconnected and globalized world. Supply chain tretch acro continent and are vulnerable to diruption. Conumer demand and government policie are changing rapidly and will impact your bottom line if your buine doe not repond. Againt thi background of complexity we face a new et of challenge. For 20 year or more we have recognized that the way we do buine ha eriou impact on the world around u. Now it i increaingly clear that the tate of the world around u affect the way we do buine. Thi report how that population growth, exploitation of natural reource, climate change and other factor are putting the world on a development trajectory that i not utainable. In other word, if we fail to alter our pattern of production and conumption, thing will begin to go badly wrong. How wrong and for whom, i alo explored in the report. Intergovernmental treatie are yet to olve the iue and, at a national level, the tranition to utainable growth remain a goal rather than an achievement. The concept of green growth ha gained ground but we till lack a precie undertanding of how we can achieve it along with higher tandard of living within the limit of our planet. Corporation are, of coure, not paive bytander in any of thi. Our report how that global megaforce are likely to bring ignificant threat and opportunitie. The reource on which buinee rely will become more difficult to acce and more cotly. There will be increaing train on infratructure and natural ytem a pattern of economic growth and wealth change. Phyical aet and upply chain will be affected by the unpredictable reult of a warming world. And buinee will be confronted with an ever more complex web of legilation and fical intrument. At KPMG network of firm we have alway been at the forefront of development that hape buine behavior. We are working with organization to help them undertand the force at work that will influence market and impact profitability in the medium to long term. Thi mean moving on from old notion of corporate reponibility focued purely on protecting and enhancing reputation. It mean being aware that your buine tand to be affected a upplie of freh water decreae and cot of energy rie and ecoytem decline. Knowing what thoe effect will be and how your buine can manage them uccefully mean developing a ophiticated undertanding of thee factor and how they work. In thi report we offer a tarting point for dicuion. We preent a ytem of ten utainability megaforce that will impact each and every buine over the next 20 year. We want to build awarene that thee force do not act alone in predictable way. They are interconnected. They interact. At KPMG, we encourage buinee to undertand thi ytem of force; we help them ae the implication for their own organization and to devie trategie for managing the rik and harneing the opportunitie. We can never know the future. But it i good buine ene to be prepared for the poibilitie: to expect the unexpected. Thi report cannot provide all the anwer, and doe not et out to, but it doe ugget approache that we believe will help to build buine value in a changing world. We hope it provide a ueful pringboard for new thinking, debate and above all buine action to deliver a future that i both utainable and profitable. But thi i not the whole tory. Conumer and invetor value are changing. And a they change more corporation are recognizing that there i profit and opportunity in a broader ene of reponibility beyond the next quarter reult. The bold, the viionary and the innovative recognize that what i good for people and the planet will alo be good for the long term bottom line and hareholder value. Competitive advantage can be carved out of emerging rik. Michael Andrew Chairman KPMG International Yvo de Boer Special Global Advior KPMG Climate Change & Sutainability

4 Content PART 1 01 A buine environment more complex and fat-moving than ever 2 Globalization 2 Digital connectivity 3 Accelerated conumption 4 Diparate properity 5 Ecological decline 9 Reource carcity 10 Lack of global governance continue 11 How ha buine adapted to thee global change? Global Sutainability Megaforce 14 Climate Change 14 Energy & Fuel 17 Material Reource Scarcity 21 Water Scarcity 23 Population Growth 25 Wealth 26 Urbanization 28 Food Security 30 Ecoytem Decline 32 Deforetation 34 Summary Acknowledging complexity how utainability megaforce interact 38 The world i becoming more complex and uncertain 38 Buinee around the world are acknowledging complexity 39 Interacting utainability megaforce 39 The ytem approach to utainability 40 The Nexu Approach 41 The Footprint Nexu 42 The Eroion Nexu 43 The Innovation Nexu 44 Staying imple or uing complexity a a timulu 46 Potential diruptor: The climate-water-energy-food nexu Future Scenario 48

5 PART 2 PART 3 01 Global Sutainability Megaforce: A ectoral view 54 Introduction 54 Quantitative review 55 Qualitative review 55 Value at take: Sector could ee profit lot 56 Expoure reduced, but driven motly by rie in earning 57 Environmental intenity: A clearer picture 59 Qualitative review: Rik and readine 60 Summary Call to action for buinee and policy maker 128 Introduction 128 Action by buine 129 Action by government 135 Buine and government working together: Public-private partnerhip a a tool for green growth 139 Imperative for achieving utainable growth 143 Airline 65 Automobile 72 Beverage 81 Chemical 87 Electricity 93 Food Producer 99 Marine Tranportation 106 Mining & Indutrial Metal 112 Oil & Ga 118 Telecommunication & Internet 122 APPENDICES Appendix 1: Methodology 144 Appendix 2: Global utainability megaforce bibliography 148 Appendix 3: Scenario bibliography 150 Appendix 4: Qualitative meta-review bibliography 152 Gloary: Term & abbreviation 156 General elected bibliography 160 Colophon 176 About KPMG Climate Change & Sutainability Service 177

6 PART1 01 A buine environment more complex and fat-moving than ever Globalization, digital connectivity, accelerated conumption and diparate properity have combined with ecological decline, a lack of global utainability governance and reource carcity to tranform the playing field for buinee. A a reult, today global buine environment i more complex, uncertain, volatile and fat-moving than ever before. We begin thi report by exploring major change to the buine environment ince the Rio Earth Summit in That i why the central challenge of our age decoupling human progre from reource ue and environmental decline will alo be one of the bigget ource of future ucce for buine. The corporate world wa involved in creating thee challenge and need to know how to deal with them, not leat becaue we now live in a hyper- connected and more tranparent world where corporate behavior i increaingly held to account in the court of public opinion. A global ytem ha emerged from local economie, accompanied by a hift in the balance of power from the economic powerhoue of the indutrialized world to emerging market giant. The world population ha grown hugely and mot people now live in citie. Hundred of million have moved out of extreme poverty and imilar number have joined the global middle cla, adopting in the proce more reource-intenive diet and lifetyle. There are ignificant opportunitie for buine a a reult of thee change but climate change, reource contraint, water carcity and many other factor alo remind u that we are approaching if we have not already exceeded the planet ability to atify our appetite for growth. Globalization Over the lat 20 year, the amount of money flowing acro border grew at more than three time the rate of global GDP. 1 International trade and foreign invetment more than tripled; 2 trade in 1 United Nation Environment Programme, Keeping Track of Our Changing Environment, From Rio to Rio +20 ( ) (Nairobi: UNEP, 2011). 2 The World Bank, World Development Indicator 2010 (Wahington DC: World Bank, 2010)

7 Expect the Unexpected: Building buine value in a changing world 3 natural reource grew ix-fold; 3 and internationally-traded financial aet uch a bank loan, bond, and portfolio equity oared by a factor of Thee dry figure tranlated into tronger economic growth acro the world and enormou opportunitie for buine through the development of new market and acce to labor. Buinee benefited from exceptionally low interet rate, which allowed them to borrow cheaply and drove a major increae in trade, merger and acquiition. Cheap commoditie and cheap labor led to a urge in economic growth in the indutrialized world without the inflation that uually accompanie uch growth. At the ame time, the emerging market providing thee reource alo grew much more quickly, taking million of people out of poverty and creating new market for companie in both the developed world and emerging market. Living tandard roe rapidly, but they did o unequally and to the detriment of the environment in many area. However, globalization alo made the financial ector more volatile a illutrated by the 2008 US ubprime mortgage market hock, international credit collape and global receion the impact of which continue to be felt. The financial crii accelerated the hift of economic, financial and political power toward the developing world, in particular to dynamic emerging market nation uch a China, India and Brazil. Being preent in thee low-cot and high-growth middle-income economie ha come to be een a increaingly central to corporate ucce. Digital connectivity The digital age began in earnet around Some 15 year later, it i an everyday fact of life for mot of mankind. The combination of thi digital revolution and globalization ha haped the world more profoundly and more rapidly than any other technological development. It ha created new market and tranformed old one, enabling companie to cut cot and become more efficient. However, it ha alo made corporate reputation more fragile than ever. New of corporate falling can reach an audience of million within minute and the damage done can lat for year: witne the Gulf of Mexico oil pill. Digital connectivity ha created new market and tranformed old one, enabled companie to cut cot and become more efficient. 3 World Trade Organization, World Trade Report 2010: Trade in Natural Reource (Geneva: WTO, 2011). 4 The World Bank, Multi-Polarity: The New Global Economy (World Bank, 2011).

8 4 Expect the Unexpected: Building buine value in a changing world roe by 23,000 percent Mobile phone ubcription roe by 23,000 percent from 1992, to 5 billion by 2010 Source: United Nation Environment Programme, Keeping Track of Our Changing Environment: From Rio to Rio +20 ( ) (Nairobi: UNEP, 2011). added 300 million India and China together added 300 million mobile phone ubcriber during the year 2010 alone Source: International Telecommunication Union (ITU), Global Mobile Cellular Subcription Data, grew by 29,000 percent The number of Internet uer grew by 29,000 percent from 1992 to 2 billion people in Facebook, launched in 2004, had more than 800 million active uer by Source: United Nation Environment Programme, Keeping Track of Our Changing Environment: From Rio to Rio +20 ( ) (Nairobi: UNEP, 2011). expanded by 50 percent Global data flow expanded by 50 percent during 2010 alone, and Cico forecat a 26-fold increae in global mobile data traffic by Source: Cico Global Cloud Index: Forecat and Methodology (San Joe, CA: CISCO, 2011); Cico Viual Networking Index: Forecat and Methodology, (San Joe, CA: CISCO, 2011). A new generation of digital native have become far more active and dicriminating conumer companie need to be een to do the right thing and are under growing preure to be more tranparent and accountable about what they do and why. Many corporation are till wary of thi development, but by making information available to other, they are often eeing it themelve for the firt time and are dicovering opportunitie to improve buine model. Accelerated conumption Conumption ha gone into overdrive ince Rio 1992 a Figure 1 illutrate. Reource ue ha grown fater than the population, which itelf urged by 1.5 billion people ince 1992, reaching 7 billion by Over a billion people 5 United Nation Population Fund, The State of World Population 2011 (New York: UNFPA, 2011). 6 United Nation Environment Programme, Keeping Track of Our Changing Environment: From Rio to Rio + 20 ( ) (Nairobi: UNEP, 2011). 7 United Nation Environment Programme, Keeping Track of Our Changing Environment, From Rio to Rio +20 ( ) (Nairobi: UNEP, 2011). moved into citie during thi time and a new middle cla emerged, epecially in Aia, with more reource intenive diet and life-tyle. 6 Even though the world economy became about 20 percent more efficient per unit of output over the pat two decade, thi could not counter the abolute growth of reource ue and CO emiion. 7 2 According to World Wildlife Fund (WWF) and Global Footprint Network, we ued reource and produced CO 2 during thi 20 year period at a rate 50 percent fater than the Earth can utain. 8 If we are already living beyond our mean but at the ame time 3 billion people need to rie out of poverty, then the central challenge of our age mut be to decouple human progre from reource ue and environmental deterioration. 8 World Wide Fund for Nature, Intitute of Zoology and Global Footprint Network, Living Planet Report 2010: Biodiverity, Bio-capacity and Development (Gland, Switzerland: WWF International, 2010).

9 Expect the Unexpected: Building buine value in a changing world 5 Thi challenge create ignificant opportunitie for buine, partly within their own operation. But the real prize come through helping other to decouple. Example include renewable energy, which enable the production of low-carbon energy, drip irrigation technologie that help farmer to produce more crop uing le water, electric vehicle that facilitate low-emiion motoring and oftware that help everything from aircraft to building to work more efficiently. Diparate properity Since 1992 there ha been unprecedented human ocial and economic progre, even among the wort-off. While ome indicator worened, uch a rate of HIV infection and number of lum-dweller, people have motly become healthier, wealthier, better educated, better fed, more empowered and live longer (ee Figure 2). The live of women and girl changed dramatically during thi period, with reearch indicating progre in the area of literacy, health and economic participation. 9 At the ame time, gap in gender equality perit, epecially with regard to child mortality, chool enrollment, acce to economic opportunitie, and voice and agency within ociety. The World Bank ha emphaized that gender equality lie at the heart of mart development given it central role in enhancing productvity, making intitution more repreentative, and improving development outcome for the next generation. 10 Properity ha eluded 1.5 billion people living in countrie affected by conflict. 11 The central challenge of our age mut be to decouple human progre from reource ue and environmental deterioration. 9 United Nation Department of Economic and Social Affair, The World Women 2010: Trend and Statitic (New York: UN, 2010). 10 The World Bank, World Development Report 2012: Gender Equality and Development (Wahington, DC: World Bank, 2011). 11 The World Bank, World Development Report 2011: Conflict, Security and Development (Wahington, DC: World Bank, 2011).

10 6 Expect the Unexpected: Building buine value in a changing world Figure 1: Accelerating human footprint on natural ytem and reource Percent change from 1990 through on a global bai Air freight tranport Gro dometic product 186% 230% Cement production 170% Merchandie export Nitrogen fertilizer ue Platic production International tourit arrival Palm oil land area 142% 135% 130% 124% 120% Air paenger tranport Steel production 100% 100% Contruction mineral ue Soybean land area Electricity production Ore and indutrial mineral ue Coal conumption Natural ga conumption Livetock production Urban population Food production Total energy conumption Total material extraction Global CO 2 emiion Fih and eafood conumption Petroleum conumption Global ecological footprint Per cap natural reource conumption World population Meat conumption 80% 75% 71% 60% 54% 48% 47% 45% 45% 43% 41% 38% 32% 28% 28% 27% 26% 26% Reource intenity CO 2 emiion per unit GDP -21% -23% Source: UNEP, World Bank, Worldwatch Vital Sign, WWF, SERI, UNDP, FAO, IEA, EIA. See General Selected Bibliography (p ) for detailed ource liting.

11 Expect the Unexpected: Building buine value in a changing world 7 Figure 2: Human ocial and economic progre Percent change from 1990 through on a global bai HIV prevalence, % pop aged % Female parliamentarian Mean year of chooling GDP per capita Number of free countrie Slum dweller UNDP human development index Acce to improved anitation Acce to improved water ervice Female youth literacy rate Primary education completion rate Adult literacy rate Girl-boy ratio educ. enrollment Life expectancy at birth Male youth literacy rate Female labor force participation 60% 42% 39% 34% 26% 19% 17% 13% 12% 11% 11% 10% 6% 6% 2% Population living <$US 2.00 per day Dependency ratio on working pop. Undernourihment prevalence Underweight children <5 year old in the developing world Total fertility rate Population living <$US 1.25 per day Population avg. annual growth rate Infant mortality rate Maternal mortality rate Under 5 child mortality rate -7% -17% -18% -23% -24% -24% -32% -34% -35% -36% Source: UNEP, World Bank, UNDP, Freedom Houe, WHO, ILO, UN-Habitat See General Selected Bibliography (p ) for detailed ource liting

12 8 Expect the Unexpected: Building buine value in a changing world Between one quarter and one third of the world population remain in a tate of peritent deprivation, epecially in Sub-Saharan Africa (ee Figure 3). It i not only the leat developed countrie that are uffering; an etimated 72 percent of the world poor now reide in populou middle-income countrie uch a Pakitan, India, China, Nigeria and Indoneia where they confront malnutrition, dieae, illiteracy, and other challenge of extreme poverty. 12 In the advanced economie, there ha been a growing call for a more incluive ytem of global capitalim a evidenced by the Occupy movement that pread around the world in Peritent inequality i not only wrong, it i bad for buine it prevent huge wathe of the population from being worker and cutomer and it increae the rik to buine from the type of intability and unret that were een in the Middle Eat and North Africa in Today buine i being aked to do more to fight global poverty and ha reponded with pioneering micro-credit and bae-of-the pyramid (BOP) corporate initiative. Much of the movement involve ocial entrepreneur Figure 3: Peritent human deprivation Data from year People without acce to adequate anitation People living on le than US$2.00 per day People everely retricted in civil and political freedom 2300 People intermittently lacking food ecurity 2000 People without acce to reliable electricity upplie People living on le than US$1.25 per day People lacking acce to profeional health care ytem People uffering from malnutrition/undernourihment People without literacy People without acce to afe drinking water People living in lum without ecure helter People without gainful employment Number of people (in Million) Source: FAO, World Bank, UNDP, UN-Habitat, ILO, Freedom Houe, WHO, UNESCO See General Selected Bibliography (p ) for detailed ource liting. 12 Andy Sumner, The New Bottom Billion: What if Mot of the World Poor Live in Middle-Income Countrie? (Wahington, DC: Center for Global Development, March 2011).

13 Expect the Unexpected: Building buine value in a changing world 9 experimenting at the local level. 13 Larger multinational companie exploring the growth and innovation opportunitie of more incluive buine model include CEMEX, Danone, DuPont, Proctor & Gamble, SC Johnon, Unilever and Vodafone. 14 Ecological decline Mankind ha caued more extenive and rapid change to ecoytem in the lat 20 year than at any other time in human hitory, thank to ever-growing demand for reource. There i ubtantial evidence that ecoytem are truggling to provide the needed ervice that population have aumed will alway be there. The UN Millennium Ecoytem Aement warned that human activity i putting uch train on the natural function of Earth that the ability of the planet ecoytem to utain future generation can no longer be taken for granted. 15 The damage include lo of biodiverity, acidification of ocean, le productive cropland, deertification, tropical deforetation, and decline in wetland, mangrove foret, ea-ice habitat, alt marhe, coral reef and more. 16 Thi hit the world mot diadvantaged and vulnerable people hardet. Peritent inequality i not only wrong, it i bad for buine. Figure 4: Climate change ince 1992 The 20 year ince Rio 1992 according to UNEP 17 have witneed: a 36 percent increae in global CO 2 emiion a 9 percent increae in average CO 2 concentration in Earth atmophere an increae of degree Celiu in mean urface temperature relative to hitorical mean ( ) 18 of the 20 hottet year on record melting of ice heet and thawing of permafrot in northern latitude teady warming of ocean water by nearly 0.5 degree Celiu global ea level rie of 2.5 mm per year from thermal expanion growing acidity of the world ocean threatening marine life rapid diminihment of mountain glacier in term of annual ma balance, and teady decline in the annual minimum extent of Arctic ea ice. 13 United Nation Development Programme, Creating Value for All: Strategie for Doing Buine With the Poor (New York: UNDP, 2008) and Muhammad Yunu, Building Social Buine: The New Kind of Capitalim That Serve Humanity Mot Preing Need (New York: Public Affair Book, 2010). 14 Ted London and Stuart L. Hart, Next Generation Buine Strategie for the Bae of the Pyramid (London: FT Pre, 2010). 15 Millennium Ecoytem Aement, Living Beyond Our Mean: Natural Aet and Human Well-Being: Statement from the Board (New York: MEA/United Nation, 2005). 16 Secretariat of the Convention on Biological Diverity, Global Biodiverity Outlook 3 (Montreal: CBD, 2010). 17 United Nation Environment Programme, Keeping Track of Our Changing Environment: From Rio to Rio + 20 ( ) (Nairobi: UNEP, 2011).

14 10 Expect the Unexpected: Building buine value in a changing world Companie in all ector need to prepare themelve for a world where raw material may be in hort upply. Scientit are growing more concerned that the Earth i approaching threhold or tipping point that could have abrupt, irreverible and catatrophic conequence. Thee include combined ea level rie, impact of monoon interference on India, Amazon drought and die-back, increaed aridity in Southwet North America, lo of glacial frehwater upplie epecially in Central Aia, and converion of coral reef to algal dominated ytem. 18 Buine i both heavily involved in cauing thi damage and likely to be increaingly affected by the conequence. It i clear that repone to thee challenge mut include reducing greenhoue emiion and becoming more reource-efficient. A a reult, carbon and ecoytem ervice-intenive indutry ector uch a energy, heavy indutry and agriculture are likely to face increaing regulatory and conumer preure to reduce their impact. At the ame time, clean technologie uch a renewable energy are likely to be among the bigget indutrie of the future. Reource carcity Shortage of a number of key reource are becoming apparent, from arable land, freh water and metal to foil fuel. Companie in all ector need to prepare themelve for a world where raw material may be in hort upply and ubject to price volatility, including large price rie and increaed diruption to upplie. For example, by 2008, 80 percent of marine fih tock were conidered over-exploited or fully exploited, prompting a maive urge in aquaculture, epecially in Aia. 19 Soil eroion ha been taking place at everal time the natural replacement rate, the amount of available arable land per peron ha dropped ubtantially and agricultural productivity ha lowed. 20 At the ame time an area the ize of Wetern Europe ha been old or leaed to international invetor in order to produce crop or biofuel for export back to wealthy, food and fuel-inecure nation. 21 Thee factor contribute to intability and volatility in food and biofuel upplie, but alo create opportunitie for companie that can, for example, improve crop yield, reduce land degradation or utain fih tock. In 2009, almot 3 billion people were living in water-treed (defined a le than 1700 cubic meter of water available per capita/year) and watercarce (defined a le than 1000 cubic meter per capita/year) 22 region while water table, oil moiture level and water quality level are declining rapidly in many dry-land area. There are alo concern about upplie of hydrocarbon, fertilizing mineral uch a potaium and phophorou and rare-earth mineral (uch a neodymium, yttrium and cerium) a well a the capacity of the world foret and ocean to aborb carbon. 23 After a century of peritent and teady fall in real commodity price, analyt began to ugget that the world had entered into a prolonged uper-cycle of riing and more volatile commodity price. The knock-on effect included 18 Johan Rocktrom, et. al., A Safe Operating Space for Humanity, Nature, Vol. 461 (September 2009, pp ) and Tim Lenton, et.al., for Allianz and the World Wide Fund for Nature, Major Tipping Point in the Earth Climate Sytem and Conequence for the Inurance Sector (Gland, Switzerland: WWF, 2009). 19 United Nation Food and Agriculture Organization, World Review of Fiherie and Aquaculture (Rome: FAO, 2010) and United Nation Food and Agriculture Organization, The State of World Fiherie and Aquaculture (Rome: FAO, 2011). 20 Pimentel, David. Soil Eroion: A Food and Environmental Threat. Journal of Environment, Development and Sutainability, Vol. 8, No. 1 (February 2006, p ). 21 Bertram Zagema, Land and Power: The Growing Scandal Surrounding the New Wave of Invetment in Land (Oxford, UK: Oxfam International, September 2011). 22 World Economic Forum, The Bubble i Cloe to Burting: A Forecat of the Main Economic and Geopolitical Iue Likely to Arie in the World during the Next Two Decade (WEF, 2009). 23 Richard Heinberg, Peak Everything: Waking Up to the Century of Decline (Gabriola Iland, BC, Canada: New Society Publiher, 2007).

15 Expect the Unexpected: Building buine value in a changing world 11 upply diruption, lower growth, higher inflation, export retriction, new regulation, conflict over reource and currency intabilitie. Thi age of reource contraint 24 i et to be a fact of life for all buinee in year to come. Companie need to prepare for thi and have a trategy to deal with it, through meaure uch a reducing reource ue, increaing recycling of reource, identifying alternative ource of upply or finding ubtitute material. The argument i mot commonly een in the cae for improving energy efficiency but in the future companie will have to improve reource productivity acro a range of input. They will alo need to improve efficiency in the ue and dipoal phae of product and ervice. Lack of global governance continue The number of ignatorie to multilateral environmental agreement ha increaed by 330 percent ince and yet many of the agreement achieved at the Rio Earth Summit 1992 and Johanneburg 2002 UN conference have till not been implemented or enforced. Attempt to etablih global rule have been outpaced by the growth of global challenge uch a climate diruption, declining fiherie, biodiverity lo and health pandemic, along with the increaing interconnectedne of global finance, agriculture and reource extraction. 26 Thi create opportunitie for companie that can improve crop yield, reduce land degradation or utain fih tock. 24 Peter Schwartz, et. al., Winner and Loer in the New Commodity Price Regime (San Francico: Monitor, 2011). 25 United Nation Environment Programme, Keeping Track of Our Changing Environment: From Rio to Rio + 20 ( ) (Nairobi: UNEP, 2011). 26 Brian Walker, et. al., Looming Global-Scale Failure and Miing Intitution, Science, Vol. 325 (September 11, 2009, pp ).

16 12 Expect the Unexpected: Building buine value in a changing world The buine community need clear global rule, powerful regulatory incentive and a level-playing field to upport it in moving to utainable growth. Policymaker have been able to tackle thorny but often dometicrooted problem uch a the tate of the automotive market but not yet ytem-wide problem uch a global imbalance of trade or the eurozone crii. The difficultie in ecuring coordinated global governance on utainability have been clearet in the 20 year of negotiation that have attempted to forge a global approach to tackling climate change. Although progre on low carbon technologie ha been made in individual countrie and region, mot notably in Europe, the level of invetment required for worldwide change have been miing. At the ame time, government ubidie for carbon-intenive indutrie have continued depite a G20 commitment to phae them out by The buine community need clear global rule, for example on carbon emiion, powerful regulatory incentive and a level-playing field to upport it in moving to utainable growth. Thee incentive hould include financing olution that allow the longer term benefit of utainability to compete with other program with a higher hort-term payback; a way to meaure the impact of utainability program; and clearer and more rigorou international regulation that will allow companie to plan with confidence. 27 How ha buine adapted to thee global change? Twenty year after the Rio Earth Summit in 1992, utainability ha become a more important iue for companie and utainability-related invetment have grown ubtantially Bloomberg New Energy Finance recently reported that the trillionth dollar of invetment in clean energy had been made. Furthermore, utainability i increaingly being een a a ource of innovation and growth rather than imply cot reduction and rik management. 28 The Carbon Dicloure Project reported thi year that companie with a trategic focu on climate change provided invetor with approximately double the average total return of the Global 500 from January 2005 to May United Nation Environment Programme, Toward a Green Economy: Pathway to Sutainable Development and Poverty Eradication: A Synthei for Policy Maker (Nairobi: UNEP, 2011). 28 KPMG International in cooperation with the Economit Intelligence Unit, Corporate Sutainability: A Progre Report (April 2011) 29 Carbon Dicloure Project. (2011) Global 500 Report.

17 Expect the Unexpected: Building buine value in a changing world 13 Recent poll of enior executive reveal that many of the world larget 250 corporation are increaingly embracing utainability a a core foundation of ucceful buine and publicly report about their performance. 30 However, there remain a long way to go. In 2008, the world 3,000 larget public companie by market capitalization were etimated to be cauing US$2.15 trillion of environmental damage, equivalent to 7 percent of their combined revenue and 50 percent of their combined earning (meaured a EBITDA: earning before interet, taxation, depreciation and amoritization). Some 60 percent of thee negative impact were concentrated in the electricity, oil and ga, indutrial metal and mining, food production and contruction and material ector. 31 The next ection of thi report preent the ten utainability megaforce that over the next 20 year will exert increaing preure on buinee in all ector and economie around the world. In 2008, the world 3,000 larget public companie were etimated to be cauing US$2.15 trillion of environmental damage. 30 KPMG International in cooperation with The Economit Intelligence Unit, Corporate Sutainability: A Progre Report (April 2011) and KPMG International, KPMG International Survey of Corporate Reponibility Reporting 2011 (2011), at 31 United Nation Environment Programme Finance Initiative and Principle for Reponible Invetment Aociation, Univeral Ownerhip: Why Environmental Externalitie Matter to Intitutional Invetor (New York: UNEP Finance Initiative, October 2010) at

18 14 Expect the Unexpected: Building buine value in a changing world 02 Global Sutainability Megaforce Over the next 20 year, buinee will be expoed to hundred of environmental and ocial change that could bring both rik and opportunitie in the earch for utainable growth. For thi report more than two dozen forecat have been analyzed from international agencie, global think-tank, national agencie and noted futurit in an attempt to identify thoe change likely to have the greatet impact on buine. (See Appendix 2 for a lit of ource). Thee megaforce act a a complex and unpredictable ytem, feeding, amplifying or ameliorating the effect of other. Emphai wa placed on the availability of quality numerical projection, key preure cauing global environmental and ocial problem and the mot ignificant conequence of thoe preure for natural and human ecurity. The reult i a et of ten global utainability megaforce that will impact every buine over the next two decade. They are: 1. Climate Change 2. Energy & Fuel 3. Material Reource Scarcity 4. Water Scarcity 5. Population Growth 6. Urbanization 7. Wealth 8. Food Security 9. Ecoytem Decline 10. Deforetation A ummary of thee global utainability megaforce follow. Each ha important implication for buine which mut be undertood, aeed and built in to long term trategic planning. Awarene and comprehenion of each i vital but, a the next ection of thi report demontrate, it i only the firt tep. Thee megaforce do not function in iolation from each other in predictable way. They act a a complex and unpredictable ytem, feeding, amplifying or ameliorating the effect of other. Buine leader eeking to manage the rik and harne the opportunitie of the future mut undertand how thee megaforce function and how they might affect their own organization. Climate Change Climate change i the one global megaforce that directly impact all other dicued in thi report.

19 There are ix key type of rik to buine from climate change: phyical rik, regulatory rik, reputational rik, competitive rik, ocial rik and litigation rik. Thee rik include new law and government initiative to tackle climate change uch a energy efficiency requirement and tandard, carbon taxe, emiion cap and trade ytem and fuel tariff. Buinee may alo be at rik of damaging their brand if they are een to do the wrong thing, with the added threat of litigation if they fail to comply with legilation, or to dicloe their carbon impact. Prediction of annual output loe from climate change range between one percent per year, if trong and early action i taken, to at leat five percent a year if government fail to act. 1 However, it i developing countrie and the buinee that operate in them that are mot vulnerable to climate change impact even a their rapid indutrialization increae their contribution to global CO 2 emiion (Figure 5, Figure 6). Figure 5: World energy-related carbon dioxide emiion, (billion metric ton) Non-OECD Hitory 2008 Projection OECD Source: U.S. Energy Information Adminitration (EIA). (2011). International Energy Outlook EIA, Wahington D.C. 1 United Kingdom Stern Review on the Economic of Climate Change, Executive Summary (2006).

20 16 Expect the Unexpected: Building buine value in a changing world Figure 6: Climate change vulnerability index 2012 Extreme rik High rik Medium rik Low rik No Data Haiti Bangladeh Cambodia Philippine Sierra Leone D.R. Congo Zimbabwe Malawi Mozambique Madagacar Rank Country Haiti Bangladeh Zimbabwe Sierra Leone Madagacar Cambodia Mozambique DR Congo Malawi Philippine Category extreme extreme extreme extreme extreme extreme extreme extreme extreme extreme Source: Maplecroft. (2012). The Climate Change and Environmental Rik Atla. Available at The phyical rik are coniderable. In World Energy Outlook 2011, the International Energy Agency (IEA) aid that we are on coure for a longterm global temperature rie of 3.5 C. Thi could caue irreverible impact including near-total deglaciation in the long term, contamination of groundwater upplie, water hortage for hundred of million of people, lower agricultural yield in many place and more malnutrition, infectiou dieae and death from heat wave, a well a increaingly evere flood, drought and torm. 2 Extreme weather event are et to become more frequent and up to one ixth of the world population could face diruption to water upplie and an increaed rik of flooding from melting glacier, mainly in the Indian ubcontinent and area of China and South America region that are een a the new driving force for the global economy. While agricultural yield could increae in higher latitude area uch a Northern Europe, elewhere, particularly in Africa, falling yield could leave hundred of million of people without enough food. 3 Sea level rie could caue flooding in low-lying coatal area, diplacing ten to hundred of million of people in place uch a Southeat Aia, particularly Bangladeh and Vietnam, and mall Caribbean and Pacific iland. Some of the world larget and richet citie, uch a Tokyo, New York, London and Shanghai could alo be affected. Human health could be affected a more people become vulnerable to moquito- 2 IPCC, Climate Change 2007: Impact, Adaptation, and Vulnerability. Contribution of Working Group II to the Fourth Aement Report of the Intergovernmental Panel on Climate Change (Cambridge, UK: Cambridge Univerity Pre, 2007). 3 IPCC, Climate Change 2007: Synthei Report. Contribution of Working Group I, II, and III to the Fourth Aement Report of the Intergovernmental Panel on Climate Change (Geneva: IPCC, 2007).

21 Expect the Unexpected: Building buine value in a changing world 17 borne dieae, air quality woren, and more extreme weather event occur. 4 Climate change i expected to alo affect ecoytem health and biodiverity, in turn reducing land productivity and adding to food ecurity tre and water carcity. Urgent action i needed to avoid uch a global temperature rie, but becaue energy-related facilitie uch a power tation, building and factorie lat for many decade, 80 percent of the cumulative CO 2 emitted worldwide between 2009 and 2035 i already locked-in by capital tock that either exit now or i under contruction and will till be operational by 2035, 5 according to the IEA. Individual countrie have tarted acting to cut emiion China, Autralia and South Korea plan to create carbon market by 2015, for example, while many more have carbon reduction target but fragmented national repone require buine to undertand and comply with a complex and unpredictable patchwork of carbon legilation around the world. Meanwhile, international action on climate change ha been low and dijointed. A price on carbon ha been etablihed through trading ytem uch a the EU Emiion Trading Sytem and the UN Clean Development Mechanim, but the carbon market have been dogged by political interference and the economic crii. Progre wa made at the 2011 UN climate conference in Durban, with all the world major emitter agreeing that they mut cut emiion, but a new global deal if it eventuate will not be agreed until 2015 and will not come into force until Nonethele, the need to tackle climate change bring opportunity to innovator. The US$100 billion-a-year Green Climate Fund (GCF) hould make it eaier to cut emiion and help developing countrie to adapt to the effect of climate change. The GCF could lead to the creation of public-private partnerhip in developing nation that can build green indutrie, create job, reduce poverty and improve infratructure a well a tackle climate change. Energy & Fuel Foil fuel market are et to become more volatile and unpredictable becaue of higher global energy demand; change in where foil fuel are conumed; upply and production uncertaintie; and increaing regulatory intervention related to climate change. All companie regardle of ector, ize, or location will find it difficult to plan for and manage energy cot, epecially thoe related to foilfuel ue. A new global deal if it eventuate will not be agreed until 2015 and will not come into force until IPCC, Climate Change 2007: Impact, Adaptation, and Vulnerability. Contribution of Working Group II to the Fourth Aement Report of the Intergovernmental Panel on Climate Change (Cambridge, UK: Cambridge Univerity Pre, 2007). 5 International Energy Agency. 2011, World Energy Outlook 2011 Factheet

22 18 Expect the Unexpected: Building buine value in a changing world Vehicle and electrical appliance upplier, manufacturer, and retailer mut prepare for increaed demand for their product at a time when policy i likely to raie energy price. Companie that become more energy efficient and/or ue more alternative and renewable ource of energy, however, would be able to lower their expoure to foil fuel-related rik and improve their financial performance. The Carbon Dicloure Project lat year highlighted the link between cutting emiion and financial outperformance. While ome buinee are moving lowly toward alternative and renewable ource of energy, mot corporation continue to depend heavily on oil, coal and ga for power, fuel and raw material. Jut three percent of electricity generation came from non-hydro renewable ource in 2010 including hydro, the total i 13 percent while 81 percent of power i foil-fuelled. 6 There are few ign that the urgently needed change in direction in global energy trend i under way, the IEA ay in it World Energy Outlook Energy buinee mut prepare for hift in fuel mix due to policy, upply, and fuel price. Thee buinee, particularly thoe involved in renewable energy, mut alo remain actively involved in policy debate that will impact both total global energy demand and the fuel mix through carbon or renewable energy policie. But other indutrie need to pay attention to the iue a well. Foil fuel-dependent tranportation indutrie uch a aviation, hipping and manufacturer that ue petroleum a a proce input, uch a platic or chemical producer, will need robut trategie and plan to addre fuel price volatility and potential hortage. Vehicle and electrical appliance upplier, manufacturer and retailer mut prepare for ignificant energy conumption increae in the developing world, and adjut product deign and development trategie accordingly. All of thee driver create a market for companie that can help cutomer to become more energy efficient. Equally, companie that can bring low-carbon power to the world pooret people by leapfrogging large-cale utility infratructure are well-placed. The energy mix i likely to lowly change in coming year, but foil fuel will continue to dominate world energy upply to 2035 (Figure 7 ), making up 75 percent of the energy mix and in abolute term, more foil fuel will be conumed than today. World primary demand for energy increae by one-third between 2010 and 2035 and energy-related CO 2 emiion increae by 20 percent, the IEA add. It alo project that over the next 25 year, 90 percent of the projected growth in global energy demand will come from non-oecd economie. 8 Buinee in the OECD therefore face a ituation where the dynamic of the global energy market are increaingly decided elewhere. 6 International Energy Agency. World Energy Outlook 2011 Pre Releae (November 2011). 7 International Energy Agency. 2011, World Energy Outlook 2011 Executive Summary 8 International Energy Agency. 2011, World Energy Outlook 2011 Factheet

23 Expect the Unexpected: Building buine value in a changing world 19 The IMF World Economic Outlook in April 2011 tated: The increae in the trend component of oil price ugget that the global oil market ha entered a period of increaed carcity. The analyi of demand and upply propect for crude oil ugget that the increaed carcity arie from continued tenion between rapid growth in oil demand in emerging market economie and the downhift in oil upply trend growth. 9 Proportionally, oil remain the leading ource of fuel, but demand for natural ga i expected to rie mot trongly. Nuclear energy i likely to grow by about 70 percent to 2035, led by China, Korea and India. 10 The relative hare of renewable energy ource, led by hydropower and wind, hould grow fater than other energy form but in abolute term, total upply of renewable at 18 percent remain well below the level of any ingle foil fuel by Increaed carcity [of crude oil] arie from continued tenion between rapid growth in oil demand in emerging market economie and the downhift in oil upply trend growth. Figure 7: Proportion of variou energy ource in world primary energy demand 50% 40% 30% 20% 10% 0% Oil Ga Nuclear Other renewable Coal Bioma and wate Hydro Source: International Energy Agency (IEA). (2011). World Energy Outlook 2011 OECD/IEA, Figure 2.7, page 79. IEA, London 9 International Monetary Fund (April 2011) World Economic Outlook 10 International Energy Agency. 2011, World Energy Outlook 2011 Factheet 11 International Energy Agency. 2011, World Energy Outlook 2011 Factheet

24 20 Expect the Unexpected: Building buine value in a changing world The IEA predict that the price of crude oil will rie to US$120/barrel by The IEA predict that the demand of ource. 13 The Middle Eat and North tranportation in emerging economie Africa are et to provide mot of the will lift oil conumption by 15 percent growth in oil output during thi period, between 2010 and World oil while other location will turn to more production i predicted to reach 96 cotly and difficult ource (Figure 8). million barrel per day (m b/d) in 2035, The IEA alo predict that the price of 13m b/d up on 2010 level, with a crude oil will rie to US$120/barrel (in growing hare coming from natural year-2010 dollar) by ga liquid and other unconventional Figure 8: Major change in global liquid upply, Iraq (*) Saudi Arabia (*) World biofuel Brazil Canada Kazakhtan Venezuela (*) United Arab Emirate (*) Kuwait (*) United State Angola (*) Mexico Malayia Oman Argentina Ruia Norway United Kingdom China mb/d Crude Oil Unconventional oil Natural Ga Liquid Biofuel Net change (*) OPEC member Source: International Energy Agency (IEA). (2011). World Energy Outlook 2011 OECD/IEA, Figure 3.17, page 124. IEA, London 12 International Energy Agency. 2011, World Energy Outlook 2011 Factheet 13 International Energy Agency. 2011, World Energy Outlook 2011 Factheet 14 International Energy Agency. 2011, World Energy Outlook 2011 Factheet

25 One reaon for the continuing dominance of foil fuel i energy ubidie, which are large and widepread. Without further reform, the IEA report that the cot of foil-fuel conumption ubidie i et to reach US$660 billion in 2020, or 0.7 percent of global GDP. 15 Yet all uer of foil fuel need to be aware of the increaing preure to eliminate foil fuel ubidie, which totaled US$409 billion in 2010 about US$110 billion more than in 2009 a a reult of the increae in oil price. Subidie for renewable energy are predicted to continue growing, reaching almot US$250 billion in Material Reource Scarcity A developing countrie indutrialize rapidly, global demand for material reource look likely to continue to increae dramatically. Over the next 20 year buine i likely to face global competition for a wide range of material reource that become le eaily available. The rik preented by reource carcity alo create opportunitie to develop ubtitute material, and to recycle and recover reource from wate product. Other opportunitie include entering new market, collaborating with other ector, univeritie or government and dicovering of new technique or procee. In 2030 it i predicted that ome 83 billion ton of mineral, metal and bioma will be extracted from the earth: 55 percent more than in 2010 (Figure 9). The meage i clear: over the next 20 year, demand for material reource will oar while upplie will become increaingly difficult to obtain. Demand for material reource will oar while upplie will become increaingly difficult to obtain. 15 International Energy Agency, 2011, World Energy Outlook 2011 Factheet 16 International Energy Agency. 2011, World Energy Outlook 2011 Factheet

26 22 Expect the Unexpected: Building buine value in a changing world Figure 9: Buine-a-uual cenario on worldwide reource extraction, 2005 to 2030 billion metric ton Bioma Mineral Metal Foil Fuel Source: Sutainability Europe Reearch Intitute (SERI), GLOBAL 2000, and Friend of the Earth Europe. (2009). Overconumption? Our ue of the world natural reource. A upplie decreae, government are likely to protect dometic interet by retricting export. The uneven global ditribution of material reource, from oil to land to freh water, make planning for the future even more complex. Countrie without large dometic upplie mut rely on imported material; a a reult invetor could increaingly eek to acquire large cale land right elewhere in the world particularly in Africa and South America to ecure upplie of mineral, bioma, agricultural production and even water. A upplie decreae, government are likely to protect dometic interet by retricting export. Thi i already happening in China, which ha tightened control on export of rare earth element. China upplie 97 percent of current rare earth demand. 17 By retricting global upply and uing more of thee material dometically, it ha increaed uncertainty around the ecurity of future upplie but increaed opportunitie for other countrie with rare earth reource uch a the US. 17 Britih Geological Survey (2011). World Mineral Production (Keyworth, Nottingham: Britih Geological Survey).

27 Expect the Unexpected: Building buine value in a changing world 23 Water Scarcity Water carcity for many buinee can be a major rik to growth and development (Figure 10). Buinee operating where frehwater i carce may be vulnerable to water hortage, decline in water quality, water price volatility and reputational iue. They will have to hare acce to limited or dwindling water reource with municipalitie through detailed water management plan and efficiency requirement, and are likely to be ubject to regulation that aim to enure adequate upply for local population. Potential water hortage poe a threat to buine growth and expanion, and conflict over water upplie may create a ecurity rik to both buine operation and market. Indeed, according to the World Economic Forum, the projection for frehwater availability in 2030 bear potential for crii and conflict, ince water lie at the heart of everything that i important for human life: food, anitation, energy, production of good, tranport and the biophere. The impact of a changing climate on water availability and quality i, in many region, an immediate, tangible and local rik, the WEF ay. Increaing tre on the world water upplie threaten to affect food and energy ytem around the world due to the interlinked nature of the global economy. The 2030 Water Reource Group (2010) etimate that the global demand for frehwater will exceed upply by 40 percent by 2030 auming average economic Potential water hortage poe a threat to buine growth and expanion, and conflict over water upplie may create a ecurity rik. Figure 10: Water rik in 2030: probability of water carcity in 2030 Probability of water carcity in % gwri_aug11 WATRISKOL4 Le than 2% 2 25% 25 50% 50 75% Above 75% Source: Global Water Rik Index, Global Water Intelligence. (2011). Available at

28 24 Expect the Unexpected: Building buine value in a changing world Lack of clean water in rural area could reduce the amount of viable agricultural land, which would add to the preure for people to migrate to citie. growth and no efficiency gain. 18 The increaing demand for water i driven by population growth, increaed indutrialization in emerging economie uch a China, and urbanization. Figure 11 how where water demand i predicted to rie mot, both geographically and in term of type of uage: municipal and dometic, agricultural or indutrial. Agriculture in India, ub-saharan Africa, and Aia (excluding China) i forecat to create the mot additional water demand to In China, indutrial demand for water will dominate to 2030; the country could account for 40 percent of extra indutrial water demand globally. Climate change put further preure on water availability and quality. More frequent extreme weather event caued by climate change, uch a drought and flood, are predicted to accelerate the deterioration of local frehwater upplie. Lack of clean water in rural area could reduce the amount of viable agricultural land, which would add to the preure for people to migrate to citie. Companie that ue water more efficiently or eliminate water ue entirely through cloed-loop procee and water recycling can ave money and reource and reduce buine rik. Figure 11: Increae in annual water demand Billion m 3 Change from 2005 Percent China India Sub-Saharan Africa Ret of Aia North America Europe South America MENA Oceania Municipal and Dometic Indutry Agriculture Source: The 2030 Water Reource Group. (2009). Charting Our Water Future. 18 United Nation Environment Programme. (2011). Toward a Green Economy: Pathway to Sutainable Development and Poverty Eradication

29 Expect the Unexpected: Building buine value in a changing world 25 Water-intenive ector at the greatet rik from water carcity include clothing, automobile, food and beverage, biotech/ pharmaceutical, chemical, foret product, electronic, mining, refining and electric utilitie. 19 Population Growth The number of people on our planet i predicted to increae to 8.4 billion by 2032 in a moderate growth cenario: a rie of ome 20 percent from The population of developing countrie are expected to grow the mot while thoe of more developed region, including North America and Europe, are expected to hold roughly teady. In 2032, almot two third (58 percent) of people will live in Aia and around one fifth (19 percent) in Africa (Figure 12). Buinee can expect ignificant upply challenge and price volatility a a reult of uch a rapid growth in the number of people coupled with an increaed ue of reource. 21 Population Growth will place intene preure on ecoytem and the upply of natural reource uch a food, water, energy and material. Buinee can expect ignificant upply challenge and price volatility a a reult of uch a rapid growth in the number of people. Figure 12: Projected world population growth (billion) 5.5 World population propect, the 2010 reviion Aia Africa Europe Latin America and the Caribbean North America Oceania Source: United Nation, Department of Economic and Social Affair, Population Diviion. (2011): World Population Propect: The 2010 Reviion. UN, New York. Available at 19 Pacific Intitute. (2007). Pacific Intitute Corporate Reporting on Water: A Review of Eleven Global Indutrie. 20 United Nation, Department of Economic and Social Affair, Population Diviion. (2011). World Population Propect: The 2010 Reviion. 21 Behren, A., Giljum, S., Kovanda, J., Niza, S. (2007). The material bai of the global economy. World-wide pattern in natural reource extraction and their implication for utainable reource ue policie. Ecological Economic 64, pp United Nation, Department of Economic and Social Affair, Population Diviion. (2011). World Population Propect: The 2010 Reviion.

30 26 Expect the Unexpected: Building buine value in a changing world Buinee will find opportunity in the increaing demand for affordable, acceible pharmaceutical and healthcare. A lack of employment opportunitie for growing young population in developing nation could reult in ocial unret and intability. While thi i a threat for buine, there are alo opportunitie to create commerce and job, and to innovate to addre the need of growing population for agriculture, anitation, education, technology, finance and healthcare. Meanwhile, in developed countrie with table population but a growing proportion of elderly and retired citizen, buinee will face a hrinking workforce and fiercer competition for killed worker. Financial challenge related to employee retirement benefit and penion funding will become more common a maller workforce truggle to upport the riing cot of ageing population. A people live longer, convention around working life, retirement and peronal finance will be challenged. Buinee are likely to find opportunity in the increaing demand for affordable, acceible pharmaceutical and healthcare, along with houing and mobility ervice for older people. Wealth The OECD define the global middle cla a thoe with purchaing power of between US$10 and US$100 per capita per day. 23 Thi ection of the global population i predicted to grow 172 percent between 2010 and 2030 (Figure 13) 24 reulting in a rie in overall global wealth over the next 20 year. The challenge for buinee i to erve thee new market at a time when reource will become carcer and more price-volatile. The greatet opportunity await thoe buinee that can provide product and ervice for a more reource-contrained world. Figure 13: Growth of the global middle cla 9 7 Billion People Source: KPMG International. (2012). Baed on the data publihed in: OECD Development Centre. (2010). Working Paper No. 285: The Emerging Middle Cla in Developing Countrie OECD, page 27 Year 23 OECD Development Centre (2010). Working Paper No. 285: The Emerging Middle Cla in Developing Countrie. 24 OECD Development Centre (2010). Working Paper No. 285: The Emerging Middle Cla in Developing Countrie.

31 Expect the Unexpected: Building buine value in a changing world 27 A worker in the developing world develop higher expectation and become more cloely connected with the ret of the world, diparitie between working condition and wage in different countrie are likely to become increaingly apparent. There have already been everal indutrial dipute in developing countrie with worker demanding improved condition and pay, and thee are likely to become more common. A a reult, the advantage that many companie have experienced from cheap labor in developing nation are likely to be eroded by the growth and new power of the global middle cla. The emerging economie epecially China, Brazil, India, Mexico and Ruia could become increaingly influential 25 a their middle clae grow and their hare of global output i predicted to grow from 36 percent to 45 percent between 2010 and In China, for example, conumption i expected to rie from 41 percent of the country GDP in 2011 to 55 percent in Thi hift in pending power and lifetyle ambition preent huge opportunitie for buinee, whoe emerging market trategie are moving from a focu on foreign direct invetment and offhoring to erving the demand of thee newly empowered conumer. Such growth projection are impreive, However, a income rie, reource ue per capita alo grow. Billion more middle-cla conumer will emerge over the next 20 year driving demand for water, energy, food and material reource. Reource upplie, infratructure and ecoytem will come under increaing tre. A income rie, reource ue per capita alo grow. Billion more middle-cla conumer will emerge over the next 20 year. Figure 14: World economy (GDP) from USD trn 350 Scale and perpective ize of the world economy today and in 2030 US$ 308trn US$ 62trn US$ 143trn US$ 129trn Real GDP (2009 price and dollar) Real GDP (2009 price and market exchange rate) Nominal GDP Source: Standard Chartered Bank (SCB). (2010). The Super-Cycle Report 25 World Bank (2011). Multipolarity: The New Global Economy (Global Development Horizon 2011). 26 World Bank (2011). Multipolarity: The New Global Economy (Global Development Horizon 2011). 27 World Bank (2011). Multipolarity: The New Global Economy (Global Development Horizon 2011).

32 28 Expect the Unexpected: Building buine value in a changing world Where improvement in urban infratructure lag behind population and economic growth, lum expand and the gap between rich and poor widen. Urbanization In 2009, for the firt time ever, more people lived in citie than in the countryide. 28 By 2030 all developing region including Aia and Africa are expected to have the majority of their citizen living in urban area 29 and virtually all population growth over the next 30 year i predicted to be in citie. 30 The world urban population i predicted to reach almot 4.9 billion people by 2030 (Figure 15). For thee growing citie to be habitable, they will require vat improvement in infratructure including contruction, water and anitation, electricity, wate, tranport, health, public afety and internet and cell phone connectivity. Moving people and good afely and efficiently through larger, denely populated urban area will become more challenging and expenive and a citie grow there will be greater demand on carce reource uch a clean water and open green pace. Figure 15: World urbanization propect, the 2009 reviion (% of total population) 95% 90% 85% 80% 75% 70% 65% 60% 55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% More developed region Le developed region Leat developed countrie Source: United Nation, Department of Economic and Social Affair, Population Diviion. World Urbanization Propect: The 2009 Reviion (New York: UN, 2010). 28 UN Habitat. (2010). State of the World Citie 2010/2011 Citie for All: Bridging the Urban Divide. 29 UN Habitat. (2010). State of the World Citie 2010/2011 Citie for All: Bridging the Urban Divide. 30 UN Habitat. (2010). State of the World Citie 2010/2011 Citie for All: Bridging the Urban Divide.

33 Expect the Unexpected: Building buine value in a changing world 29 Thee requirement create opportunitie for companie that can provide innovative way to boot eco-efficiency, mitigate climate change, improve tranit, alleviate poverty and reduce ecological footprint in area of high reidential and employment denity. Citie alo provide potential for buine in term of the number and diverity of available human reource. Yet the integrated nature of the modern city require companie to collaborate with each other, their upplier, their cutomer, local and national government and maybe even their competitor to provide the optimum olution. IT could allow reource to be ued more efficiently. Smart health ytem that allow patient to conult their doctor over the Internet, for example, not only free up reource in the health ervice, they alo reduce the amount of traffic on the road. City-wide building management ytem and mart grid would be able to reduce power demand at peak time, reducing the need for expenive and polluting peak power plant. Higher population denitie in urban center are likely to change economic and political dynamic, however, creating new challenge for buinee. Where improvement in urban infratructure lag behind population and economic growth, lum expand and the gap between rich and poor widen. While the proportion of urban population living in lum i lowly declining, the abolute number i predicted to rie to an etimated 889 million by 2020, an increae of 7 percent from 2010 level. 31 Slum breed ocial intability and human conflict, yet even here, buine can help by providing acce to improved water, anitation, houing, healthcare, education and employment opportunitie. Higher population denitie in urban center are likely to change economic and political dynamic. 31 UN Habitat. (2010). State of the World Citie 2010/2011 Citie for All: Bridging the Urban Divide.

34 30 Expect the Unexpected: Building buine value in a changing world Global food price are predicted to rie by percent by Food Security In the next two decade the global food ytem i et to come under increaing preure from other megaforce including Population Growth, Water Scarcity and Deforetation. A a reult, global food price could to rie by percent by When the potential effect of Climate Change are factored in, price could rie even higher (Figure 16). 32 In water-carce region, agricultural producer are likely to have to compete for upplie with other water-intenive indutrie uch a electric utilitie and mining and with conumer. Large agricultural producer will likely find a ready market in the growing global middle cla, and the reulting increaed demand for more expenive product uch a meat and dairy. Modernizing agricultural technique in Figure 16: Real food price change predicted over the next 20 year Increae in world market export price relative to 2010 (%) Other proceed food Proceed meat product Proceed rice Livetock Wheat Other crop Paddy rice Maize 2030 baeline 2030 climate change Source: Oxfam International. (2011). Growing a Better Future: Food jutice in a reource-contrained world. 32 The material from Growing a Better Future: Food jutice in a reource-contrained world, 2011, i reproduced with the permiion of Oxfam GB, Oxfam Houe, John Smith Drive, Cowley, Oxford OX4 2JY, UK, org.uk. Oxfam GB doe not necearily endore any text or activitie that accompany the material. Pleae ee alo the reearch note here:

35 Expect the Unexpected: Building buine value in a changing world 31 the developing world, particularly Africa, may provide opportunity for producer of fertilizer and other agricultural input. Demand for food i expected to increae mot in developing countrie with their fat-growing population and thi will pur an increae in dometic production to mitigate the riing cot of food import. Pattern of production are likely to be driven by crop yield, water availability, governance and conumer preference. However, food ecurity depend not only on the amount of food produced, but alo on acce to that food. Acce will be driven by economic development, epecially for the pooret people, who pend roughly half their income on food. 33 If they enjoy trong economic growth, political tability, increaed agricultural production and integration into the world market, developing countrie hould be able to improve food ecurity. Such condition are by no mean certain, however. Another challenge will be to reditribute food urplue in developed countrie to area with greater need. The number of chronically under-nourihed people roe from 825 million in to over one billion in Demand for food will increae mot in developing countrie with their fat-growing population. 33 Oxfam International. (2011). Growing a Better Future: Food jutice in a reource-contrained world. 34 Food and Agriculture Organization of the United Nation, FAO Media Centre (2009) billion people hungry. (acceed 4 May 2012)

36 32 Expect the Unexpected: Building buine value in a changing world More companie are realizing how dependent their operation are on the critical ervice thee ecoytem provide. Ecoytem Decline Hitorically, the main buine rik of declining biodiverity and ecoytem ervice ha been to corporate reputation. In recent year, food producer and retailer in particular have been targeted over the damage to ecoytem of their ourcing of certain product or raw material, uch a fih and timber. 35 However, a global ecoytem how increaing ign of breakdown and tre, more companie are realizing how dependent their operation are on the critical ervice thee ecoytem provide. The decline in biodiverity and ecoytem i making natural reource carcer, more expenive and le divere increaing the cot of water and ecalating the damage caued by invaive pecie to ector including agriculture, fihing, food and beverage, pharmaceutical and tourim. Continued degradation of global biodiverity and ecoytem ervice could increae the preure on thee and other indutry ector. It would add to operational rik and, in certain location, potentially jeopardize the long-term profitability and urvival of ome of the mot-affected ector uch a foret product, agriculture and fiherie. Companie further up the upply chain or that operate uptream may be more uceptible to operational and regulatory challenge, while companie down the upply chain often have a greater degree of public expoure and therefore to potential reputation rik. 36 By paying attention to biodiverity and ecoytem health, companie can recognize the rik and opportunitie, anticipate new market, mitigate their impact, improve takeholder engagement, and demontrate leaderhip. 37 Pharmaceutical i one ector that i increaingly focued on the implication of biodiverity and ecoytem decline. Healthy ecoytem and divere pecie are eential to many valuable and difficult-to-replace ervice ranging from freh water and food to pollution filtration, carbon torage and pollination. 38 The benefit of ecoytem ervice are increaingly recognized the UN initiative entitled The Economic of Ecoytem and Biodiverity (TEEB), etimate that the value of avoided greenhoue ga emiion from conerving foret i US$3.7 trillion, for example, while inect pollinator contribute US$190 billion a year to agricultural output. 39 The Convention on Biodiverity 2010 Nagoya Protocol commit government to value biodiverity and integrate it into their trategic deciion. 40 A a reult, almot 200 countrie have committed to produce plan to top the lo and degradation of natural habitat. Buine will be in the front line of implementing thee plan. 35 KPMG Climate Change and Sutainability Service. (2011). Sutainable Inight: The Nature of Ecoytem Service Rik for Buine. 36 KPMG Climate Change and Sutainability Service (2011). Sutainable Inight: The Nature of Ecoytem Service Rik for Buine. 37 World Reource Intitute. (2008). The Corporate Ecoytem Service Review: Guideline for Identifying Buine Rik and Opportunitie Ariing Among Ecoytem Change, Verion The Economic of Ecoytem and Biodiverity (TEEB),2010, Maintreaming the Economic of Nature: A ynthei of the approach, concluion, and recommendation of TEEB 39 The Economic of Ecoytem and Biodiverity (TEEB), 2010, Executive Summary 40 Convention on Biological Diverity. (2011). The Nagoya Protocol on Acce and benefit-haring.

37 Expect the Unexpected: Building buine value in a changing world 33 Exact biodiverity tipping point are uncertain. However, once thi threhold i breached it i difficult, if not impoible, to return ecoytem to their former condition. One of the mot famou example of thi i the Newfoundland cod fihery, once o plentiful that fihermen joked you could tep into the water and walk on the back of the fih. But having been fihed for centurie, the area aw tock collape in the 1970 and then till further decline in the 1990 after decade of overfihing and they have till not recovered, partly becaue the ecoytem that previouly upported the cod ha changed in their abence (Figure 17). 41 Once thi threhold i breached it i difficult, if not impoible, to return ecoytem to their former condition. Figure 17: Atlantic cod tock Fih landing in ton 900, , , , , , , , , Source: UNEP/GRID-Arendal. (2005). Collape of Atlantic cod tock off the Eat Coat of Newfoundland in UNEP/GRID-Arendal Map andgraphic Library. (Acceed 2012). Available at: 41 Millennium Ecoytem Aement. (2005). Ecoytem and Human Well-Being. Wahington, DC, USA: World Reource Intitute.

38 34 Expect the Unexpected: Building buine value in a changing world Cutting down foret for agriculture, commerce or houing directly reduce the upply of valuable natural reource and ecoytem ervice for buine and the global community. Deforetation Foret cover 31 percent of the world land urface and upply eential reource to local communitie and the global economy, including timber, fruit and medicinal product. 42 They alo provide intangible but equally important ervice uch a oil and water conervation, avalanche control and and dune tabilization, a well a playing a vital role in reducing greenhoue ga emiion. The timber indutry and downtream indutrie uch a pulp and paper are vulnerable to potential future regulation and market-baed mechanim uch a Payment for Ecoytem Service (PES), which incentivize farmer and landowner to manage land for an ecological purpoe. They may alo find themelve under increaing preure from cutomer to prove that their product are utainable through the ue of certification tandard uch a the Foret Stewardhip Council (FSC), the Sutainable Foretry Initiative (SFI) and the Program for the Endorement of Foret Certification (PEFC). Agricultural indutrie eeking to meet higher demand for land-intenive product uch a meat, dairy and even biofuel alo need to be aware of the need to avoid ourcing product farmed on deforeted land and to be able to prove they do o. Many developing countrie are located in tropical foret zone where primary foret are uprooted to upport the cattle, timber and paper, and palm oil indutrie. 43 Foret are crucial to the global carbon cycle in 2010, they tored an etimated 289 gigaton of carbon, more than all the carbon in the atmophere. However, deforetation mean that thi i 2.5Gt le than in Cutting down foret for agriculture, commerce or houing directly reduce the upply of valuable natural reource and ecoytem ervice for buine and the global community. It alo remove a vital carbon ink and reduce the world ability to contain climate change. It hit agricultural productivity, human and animal health and economic activitie uch a ecotourim. It alo increae land degradation and deertification by detabilizing oil, increaing eroion and reducing the cycling of nutrient through oil, according to the Intergovernmental Panel on Climate Change. 45 Deforetation i increaingly being driven by the conumption need of developed economie and rapidly expanding developing economie, according to The Prince Rainforet Project. In Indoneia and Brazil, the two countrie accounting for nearly two-third of tropical rainforet lo between 2000 and 2005, a growing proportion of foret lo can be attributed to export-led commercial agricultural expanion. Palm oil, cattle and oybean production are the key commoditie, but in other area, cocoa, coffee and rubber production play a role, while mining and biofuel can indirectly contribute to foret lo. The global wood product indutry i alo a ignificant driver, both directly and indirectly by opening up the foret to other ue Food and Agriculture Organization of the United Nation (FAO) (2010). Global Foret Reource Aement Union of Concerned Scientit. (2011). The Root of the Problem: What driving tropical deforetation today? 44 Food and Agriculture Organization of the United Nation (FAO) (2010). Global Foret Reource Aement Joint Liaion Group of the Rio Convention. (2007). Foret: Climate Change, Biodiverity, and Land Degradation 46 The Prince Rainforet Project (2009). An Emergency Package for Tropical Foret.

39 Expect the Unexpected: Building buine value in a changing world 35 Foret are big buine wood product contributed US$100 billion per year to the global economy from The value of non-wood foret product, motly food, i etimated at about US$18.5 billion in 2005, although thi i likely to be an underetimate becaue of the difficulty of valuing ubitence ue of the foret. 48 The area covered by primary foret thoe unditurbed by human activity ha fallen by more than 40 million hectare (an area larger than Germany or Japan) ince 2000, mainly becaue of logging and other human intervention. 49 If the detruction of foret continue on it current trajectory, the OECD project that foret area will decline globally by 13 percent from 2005 to 2030, motly in South Aia and Africa. 50 Reforetation with plantation foret i encouraging, but it doe not upport the rich biodiverity of a primary foret. Furthermore, mot reforetation i happening in temperate zone. Primary boreal and tropical foret are mot vulnerable to unutainable foretry practice and land converion. 51 While agriculture could drive an increae in deforetation, indutrie that depend on biodiverity for innovation, uch a pharmaceutical, could uffer from continued primary foret lo and have an incentive to prevent it. Buine opportunitie may arie through the development of market mechanim and other economic incentive through PES and the REDD+ (Reducing Emiion from Deforetation and Degradation) proce. 52 The UN REDD+ initiative ha the potential to create a global foret carbon market and ytem of incentive to keep foret tanding. However, it remain unclear exactly what impact REDD+ will have becaue an international framework ha till not been agreed, even though ome progre wa made at the 2011 COP17 conference in Durban. The area covered by primary foret thoe unditurbed by human activity ha fallen by more than 40 million hectare (an area larger than Germany or Japan) ince Food and Agriculture Organization of the United Nation (FAO) (2010). Global Foret Reource Aement Food and Agriculture Organization of the United Nation (FAO) (2010). Global Foret Reource Aement Food and Agriculture Organization of the United Nation (FAO) (2010). Global Foret Reource Aement OECD. (2008). OECD Environmental Outlook to OECD. (2008). OECD Environmental Outlook to United Nation Environment Programme (2011). Sutaining Foret: Inveting in our common future. Part of the UNEP Policy Serie (Ecoytem Management).

40 36 Expect the Unexpected: Building buine value in a changing world Many prediction extrapolate current rate of change without fully taking account of the impact of other utainability megaforce. Summary The et of ten global utainability megaforce preented in thi report are et to ignificantly affect the way the world doe buine over the next 20 year. However, while exiting trend projection provide ome inight about a poible future, they hould not be relied upon to tell the whole tory. Many prediction extrapolate current rate of change without fully taking account of the impact of other utainability megaforce that will reinforce, compete with, or balance particular factor. For example, increaing wealth and the growth of the global middle cla will accelerate demand for conumer good and ervice, putting further preure on the natural and material reource needed to produce them. Regional frehwater availability will truggle to keep pace with the increaed agricultural production neceary to feed the growing population. Urbanization prediction do not account for the potential impact of climate change refugee migrating from area where water and food carcity hit hardet. Food production projection rarely factor in deteriorating oil quality and the competing demand for agricultural land. Individual trend projection prepared without conideration of the entire ytem of utainability megaforce no longer provide an adequate bai for trategic buine deciion or government policie. The world i too uncertain and too complex to rely on linear forecat; therefore, buine leader and policy maker hould prepare for the unexpected. Thi mean learning to look at the world in a new way that take account of globally interconnected megaforce, the caual relationhip between megaforce, feedback loop, effective intervention point and complex cenario.

41 Expect the Unexpected: Building buine value in a changing world 37 Figure 18: Summary of buine-a-uual global projection (Variouly from 2008/2010 through 2030/2035) Megaforce Indicator % Change Source CLIMATE CHANGE Energy-related CO 2 emiion +20 Mean temperature rie C IEA IPCC & Other Primary energy demand +33 IEA ENERGY & FUEL Net electricity generation +84 EIA MATERIAL RESOURCES Raw material extraction (excluding foil carrier) +55 SERI Demand for water withdrawal Water Reource Group WATER % Population under water tre +39 WEF Total population +20 UN POPULATION % Population 65 and older +50 UN Middle-cla purchaing power +172 OECD WEALTH Real gro dometic product +130 Standard Chartered Urban population +44 UN URBANIZATION Urban land cover km Seto, et. al. (2011) Aggregate food demand +50 FAO FOOD SECURITY Key taple food price +70 to+90 Oxfam Terretrial mean pecie abundance -9 to -17 CBD GLOBIO ECOSYSTEMS Human ecological footprint +33 GFN Net foret cover -13 OECD DEFORESTATION Amazon foret lo +55 WWF See General Selected Bibliography (p ) for detailed ource liting.

42 38 Expect the Unexpected: Building buine value in a changing world 03 Acknowledging complexity how utainability megaforce interact Many will find themelve increaingly in the challenging zone of improbable and unpredictable event. The world i becoming more complex and uncertain A outlined earlier in thi report, factor uch a globalization, digital connectivity and reource carcity are forcing buinee to operate in an ever more complex world. Thi complexity i multiplied by unprecedented uncertainty, imperfect information and rapid rate of change. The diagram below repreent the lo of predictability a complexity and uncertainty increae. Few buinee till operate in the bottom left quadrant: The Zone of Probability defined by order, data, meaurable rik and probabilitie. Many will find themelve increaingly in the challenging top right zone of improbable and unpredictable event. Figure 19: Going North-Eat Complexity Unkown High Plauible Unknowable Known Poible Probable Low Low Known Uncertainty Unkown High Source: Expect the Unexpected: Building buine value in a changing world, KPMG International 2012

43 Expect the Unexpected: Building buine value in a changing world 39 Buinee around the world are acknowledging complexity To gain greater inight into how increaing complexity i impacting buine around the world, KPMG International undertook a comprehenive tudy 1 of 1,400 enior corporate deciion maker from 22 countrie. The reearch clearly how that the iue of complexity ha rien to the top of the buine agenda, with 94 percent of the executive aying that managing complexity i important to the ucce of their organization. The vat majority of executive ay complexity ha increaed in the recent pat, and mot expect it to increae over coming year. Thee executive ee complexity not only a a ource of additional rik and cot, but mot alo believe that it i alo creating new opportunitie. Interacting utainability megaforce While each of the global utainability megaforce preented in the previou ection of thi report i ignificant in it own right, it i important to undertand that they are alo cloely interwoven with each other. To give jut a few example: Population Growth and Wealth increae Energy ue which drive Climate Change Climate Change increae Water Scarcity and Food inecurity which combine to drive Urbanization a more people head for citie to ecape deprivation Climate Change and Material Reource Scarcity drive Deforetation which in turn caue Ecoytem Decline Deforetation circle back to drive Climate Change a there are fewer tree to aborb carbon in the atmophere. The caue and effect of thee complex relationhip between utainability megaforce are rarely proportionate, making it difficult to predict outcome accurately; one caue can lead to many different outcome, leading to urprie and unforeeen chain reaction. The caue and effect of thee complex relationhip between utainability megaforce are rarely proportionate. 1 KPMG International preented the reult of the Confronting Complexity tudy in 2011 at the World Economic Forum in Davo. A part of thi reearch 1,400 enior executive were interviewed. They included CEO, CFO, and finance director in a wide range of indutrie in 22 countrie: Autralia, Brazil, Canada, China, Denmark, France, Germany, India, Ireland, Italy, Japan, Mexico, Netherland, Ruia, Singapore, South Africa, South Korea, Spain, Sweden, Switzerland, the UK and the US. The complexity reearch data can be viewed from different angle via an interactive databae at WhatWeDo/Special-Interet/Confronting-Complexity/complexity-reearch-data/Page/default.apx

44 40 Expect the Unexpected: Building buine value in a changing world To thrive, or even jut to urvive, buinee increaingly need to undertand the root caue of what affect their operation, not jut the ymptom. Companie need to develop reilience and flexibility for thi unpredictable future and build capacity to anticipate and adapt. Good management ued to be about preparing for the expected, now it i jut a much about preparing for the unexpected. To thrive, or even jut to urvive, buinee increaingly need to undertand the root caue of what affect their operation, not jut the ymptom. Sytem thinking around utainability embrace the entire tructure of megaforce rather than it individual contituent. It look at pattern of change and acknowledge the growing importance of low probability but high impact event. Problem experienced with firt generation biofuel provide an example of how action taken without a full undertanding of the interconnected ytem can reult in unintended conequence. Biofuel made from corn or palm oil, which were intended to reduce greenhoue ga emiion, have contributed to higher food price by competing with food crop for land, are expenive and produce only limited GHG reduction benefit, according to a report by the International Energy Forum. 2 They alo accelerate deforetation, compete for carce water reource in ome area and can have a negative impact on biodiverity. Furthermore, they are reliant on the dynamic of the agricultural commoditie ector for the price of their input but on the oil market for the price of their output, which ha led to price volatility. In mot countrie, policie that encourage the rapid growth of biofuel production have outpaced our undertanding of the potential impact of biofuel on the environment, utainable utilization of natural reource and food ecurity, ay the International Energy Forum. 3 Sytem thinking i an important way to ae and manage new rik comprehenively and uncover rik that were previouly unidentified. For example, a company may undertand it direct dependency on water, but may not have thought about how the upply of it material reource could be impacted by increaing water carcity. Companie may already be uing ytem thinking in the buine, for example in trategic planning, revenue management or upply chain planning but in our view it hould be more applied a part of a proactive utainability trategy. Becaue all buinee operate within their own et of variable, the individual ytem approach will be unique to each buine but the implified example given in thi report erve to demontrate the principle. The ytem approach to utainability A coherent picture of how utainability megaforce interact and impact buine can be built through the technique of caual loop diagramming (CLD). In CLD, force are linked by arrow labeled S implying movement in the ame direction and O implying movement in the oppoite direction. If two force are moving in the ame direction, then an increae in one will caue an increae in the other. If they are moving in oppoite direction, then an increae in one will caue a decreae in the other. Dotted line repreent relationhip between force that will take time to develop and therefore have a delayed impact. With link between force mapped out, caual loop can be identified where a chain of force circle back to increae or decreae the power of the original force. For example, more Wealth and Urbanization increae conumption of Water and Food. Thi 2 International Energy Forum (February 2010). Aement of Biofuel Potential and Limitation. 3 International Energy Forum (February 2010). Aement of Biofuel Potential and Limitation.

45 Expect the Unexpected: Building buine value in a changing world 41 reduce Water and Food Security, which then circle back to further increae Urbanization a more people migrate to citie to ecape deprivation in rural area. Several of thee loop can be in train at any one time, further complicating the picture for buine. The nexu approach The nexu approach ha been widely ued by the World Economic Forum, the German Federal Government and other to explore the driving force behind the challenge of water ecurity and it relationhip with climate change, food and energy production. For the purpoe of thi report we have developed three nexue which together repreent the challenge of utainable growth. We believe companie will benefit from exploring thee nexue in their own organizational context: 1) The Footprint Nexu: the force driving the ecalating footprint of mankind on the planet 2) The Eroion Nexu: the reulting change in the natural ytem on which we depend 3) The Innovation Nexu: the opportunity to addre utainability challenge through buine innovation The Footprint and Eroion nexue together create an imperative to increae reource efficiency and reduce dependency on commoditie that are likely to uffer upply retriction and price volatility. The Innovation Nexu provide the olution that may enable buinee to do o. Figure 20 below illutrate how the three nexue are linked by Climate Change. The Footprint and Eroion nexue together create an imperative to increae reource efficiency and reduce dependency on commoditie that are likely to uffer upply retriction and price volatility. Figure 20: The Nexu Approach o /o = Same Direction = Oppoite Direction = Same and Oppoite Direction Footprint Nexu /o Population /o Globalization Wealth Material Ue Urbanization Reource Productivity Climate Change Ecoytem Security Renewable Energy o Water Security Smart Citie Earth Retoration Sutainable Lifetyle o Food Security o Foret Security Energy Security Innovation Nexu Eroion Nexu Source: Expect the Unexpected: Building buine value in a changing world, KPMG International 2012

46 42 Expect the Unexpected: Building buine value in a changing world Figure 21: The Footprint Nexu o = Same Direction = Oppoite Direction = Delayed Effect Climate Change Climate Change Population Wealth o Population o o Wealth o Globalization Urbanization Globalization o Urbanization Material Ue Material Ue o Source: Expect the Unexpected: Building buine value in a changing world, KPMG International 2012 A a reult, the relationhip between megaforce in the ytem will hift over time in often urpriing way that companie need to try to anticipate. The Footprint Nexu The Footprint Nexu (Figure 21) help companie to grap emerging rik and opportunitie, build reilience and flexibility to deal with urprie, and capacity to exploit unpredictable opportunitie. The nexu help u to undertand that phyical expanion for ever i impoible omething ha got to give, and when it doe buine, will inevitably be affected. It i a ytem whoe caual relationhip are mainly non-linear, meaning that the impact of event i neither certain nor predictable. A a reult, the relationhip between megaforce in the ytem will hift over time in often urpriing way that companie need to try to anticipate. Central to thi nexu are the mutually reinforcing relationhip between Globalization and Wealth; and between Wealth and Urbanization. All three of thoe megaforce erve to drive up the ue of Energy and Material Reource which in turn increae Climate Change. Shock that could come from thi nexu include: The failure of global commoditie and reource to keep pace with demand from the growing Aian middle cla, leading to ubtantially higher cot for thee product; Decline in global GDP and trade flow if the advere impact of climate change emerge more everely or much earlier than predicted;

47 Expect the Unexpected: Building buine value in a changing world 43 An increae in the number of climate change refugee leading to an increae in lum dweller and a conequent large cale hift from bioma to foil fuel ue; and More land purchae in Africa and South America by foreign invetor eeking to ecure food and raw material. Without intervention, thi ytem increae Energy and Material Reource ue and Climate Change until in the very long term balancing force would come into play. For example, increaing Wealth lead to maller familie, lowing or even revering Population Growth but create new challenge uch a the increaed cot of healthcare a people live longer and the incidence of health condition uch a obeity and diabete rie. Similarly, advere impact of Climate Change uch a major rie in ea level could alo act to reduce Wealth. Companie can ue the Footprint Nexu to undertand the how the world future utainability challenge may affect them putting them in a tronger poition to manage rik and eek out opportunitie. Alo, becaue radical intervention are required to tabilize the ytem, uing the Footprint Nexu can help buinee to anticipate how government policy may develop and how they can prepare for and influence thoe policie. The Eroion Nexu The Eroion Nexu (Figure 22) help companie to foreee the many way in which climate change and it linked megaforce could affect their buine. It help to identify Climate Change future rik and develop trategic repone, to reduce expoure to higher environmental cot and to dicover potential ynergie. A with the Footprint Nexu, the Eroion Nexu alo help to anticipate future government policy. For example, with le water available, will government legilate to increae price, compel water-intenive indutrie to ue le water or revoke licene? A key element of the Eroion Nexu i the complex ub-nexu linking energy, food, water and climate change. Difficult tradeoff abound here. 4 For example, uing more coal and natural ga, and converting more agricultural land to biofuel production increae energy ecurity but divert water ue toward energy production. It i alo likely to accelerate foret and ecoytem lo, increae carbon emiion and impact global food upplie. Moving, ditributing and purifying water require large amount of energy; large amount of water are needed to generate energy through the extraction, mining and proceing of coal a well a in the cooling of power tation generation ytem. Huge amount of both energy and water are required to prepare, fertilize, irrigate and harvet land in modern reource-intenive farming (accounting for approximately 70 percent of the world frehwater ue). 5 Aeing the Eroion Nexu in a buine context may generate inight uch a: Demand and upply tree are likely to be concentrated in area uch a China and India that already experience maive challenge of water availability and agricultural productivity; Without intervention, thi ytem increae Energy and Material Reource ue and Climate Change until in the very long term balancing force would come into play. 4 Hoff, H., Stockholm Environment Intitute, Undertanding the Nexu: Background Paper for the Bonn 2011 Conference: The Water, Energy and Food Nexu (Stockholm: Stockholm Environment Intitute, 2011). 5 FAO Natural Reource Management and Environment Department, Water NEWS: Climate Change and Water, (acceed 10 May 2012)

48 44 Expect the Unexpected: Building buine value in a changing world Figure 22: The Eroion Nexu o = Same Direction = Oppoite Direction = Delayed Effect Climate Change Climate Change o o o Water Security o o o Food Security Water Security Food Security Human Security o Ecoytem Security o o Human Security o o o o Ecoytem Security Energy Security Foret Security o Energy Security Foret Security Source: Expect the Unexpected: Building buine value in a changing world, KPMG International 2012 By conidering the full ytem of utainability megaforce, companie are more likely to avoid quick fixe that reult in unforeeen problem. Volatility in energy and food price i likely to increae. Economic activity in area vulnerable to high water, food and climate rik may truggle to ecure inurance cover. Global economic activity would gravitate toward area of greater frehwater abundance and arable land, and lower climate diruption. There are opportunitie for innovation that reduce the reource intenity of good and ervice. Companie eeking to manage rik by reducing their environmental footprint can ue the Eroion Nexu to ae the broader and longer term impact their propoed action may have. By conidering the full ytem of utainability megaforce, companie are more likely to avoid quick fixe that reult in unforeeen problem and greater rik in the long term. The Innovation Nexu The previou two nexue have hown how buinee can more fully undertand the rik their organization face from the ytem of utainability megaforce. The Innovation Nexu (Figure 23) how how companie can ue the ame ytem approach to develop buine opportunitie by innovating olution to utainability problem.

49 Expect the Unexpected: Building buine value in a changing world 45 Figure 23: The Innovation Nexu o /o = Same Direction = Oppoite Direction = Same and Oppoite Direction = Delayed Effect Climate Change /o Climate Change o Reource Productivity Sutainable Life Style Reource Productivity o o o Sutainable Life Style Renewable Energy Ecological Retoration Renewable Energy Ecological Retoration Smart Citie Smart Citie Source: Expect the Unexpected: Building buine value in a changing world, KPMG International 2012 Thi nexu ugget that utainable lifetyle, ecological retoration, the ue of ICT to create mart citie, renewable energy and reource productivity are among the key innovation required to avoid dangerou level of climate change. Mot of the link and loop in thi nexu epecially among utainable lifetyle, the digital connectivity needed to create mart citie, renewable energy and reource productivity can work in ynergy to amplify each other. The challenge i to bring about enough poitive innovation to kick-tart the whole-ytem tranformation cycle. Repone to the force of the Innovation Nexu can be een in the buine community. One example i the area of urban infratructure and citie. Citie are looking at way to improve their infratructure to become more environmentally friendly, improve reident quality of life and cut cot at the ame time. An increaingly connected ytem that link citizen to tranport, health, education, local authority ervice and buinee will not only make citie more utainable and efficient, but alo more reilient to cope with the hock and urprie highlighted in the Footprint and Eroion Nexue. The challenge i to bring about enough poitive innovation to kick-tart the wholeytem tranformation cycle.

50 46 Expect the Unexpected: Building buine value in a changing world It i not o much the nature of the complexity a company face that will determine it ucce, but the extent to which a company can effectively analyze it ituation and bring reource to bear. The ame will hold true for companie. Undertanding the rik and opportunitie highlighted by the utainability ytem approach hould not only create new buine opportunitie, it hould enable them to better navigate the challenge of the future. Staying imple or uing complexity a a timulu A it i unrealitic to expect complexity to decline in an increaingly ophiticated world, companie need to decide how to confront complexity. The KPMG International Confronting Complexity tudy ugget that broadly there are two trategie for dealing with complexity. You can either try to avoid it or embrace it. There are organization in every ector that have done well by keeping their buine model imple. They do what they know, provide a valued et of good or ervice in an efficient way, and avoid market they don t undertand. The alternative view i that complexity i a neceary part of a vibrant and rapidly developing market. It drive innovation by preenting a contant tream of new problem to olve. It highlight area of outdated thinking and force buinee to improve contantly. Thi i a common view held by many of the emerging economy buinee. For thee companie, cutting through complexity to focu harply on the opportunitie it preent i a major part of their corporate trategy. Thee may not be comfortable trategie, and they require a peronal commitment from manager determined to keep pace with rapidly changing environment. KPMG Confronting Complexity tudy alo indicated that in the end it i not o much the nature of the complexity a company face that will determine it ucce, but the extent to which a company can effectively analyze it ituation and bring reource to bear. To thi end companie need to eek way to undertand the impact of the ytem of utainability megaforce. One way of doing thi i to apply both quantitative and qualitative foreight technique. Potential diruptor: The climate-water-energyfood nexu One potential diruptive ytemic event i the poibility that Climate Change and Water Scarcity will combine with riing Energy price to create a Food crii. Recent reearch indicate that crop yield decline at an increaing rate once temperature rie above 84 F (for corn) to 86 F (for oybean). 6 In fact, jut one day with temperature 10 F above the optimal level i etimated to be a harmful to crop yield a 10 day that are 1 F above optimal. 7 A both average and extreme temperature continue to increae, crop yield in many part of the world could fall. 6 Wolfram Schlenker and Mark J. Robert Non-linear Temperature Effect Indicate Severe Damage to U.S. Crop Yield under Climate Change, Proceeding of the National Academy of Science, 106(7): Schlenker, Wolfram (2011). Reearch on Climate Change Impact and Aociated Economic Damage. Columbia Univerity and the U.S. National Bureau of Economic Reearch (NBER).

51 Expect the Unexpected: Building buine value in a changing world 47 Furthermore, climate change threaten to exacerbate water carcity in much of the world. The combination of climate change and water carcity could lead to a evere reduction in both food and beverage production. At the ame time, water carcity could raie cot and reduce production in everal other water-intenive ector, including electricity, chemical and indutrial metal. If energy price continue to rie which i likely a rapid economic growth continue in China, India, Brazil and other emerging nation thi would raie the cot of food production further. In turn, declining food ecurity i likely to have a erie of eriou conequence including riing healthcare cot, labor hortage, higher labor cot and more homelene. Such factor are likely to increae global tenion over reource, and water war could develop in water-treed region uch a the Himalaya and Sub-Saharan Africa. Economic growth would be threatened by the increaing cot of labor and energy, and unemployment would grow. Social tability could be at rik. Thi et of change could create difficult challenge for many indutrie, a cot increae on everal front at once. At the ame time, certain ector will find new opportunitie to provide climate adaptation olution, to offer potable water in innovative way, and to better monitor and manage water uage and food production. The exact mix of rik and opportunitie will depend upon how public policy repond to the emerging trend. Climate change mitigation a well a adaptation, potentially driven by global agreement, hould provide an array of opportunitie for indutry, although it will alo impoe additional cot on energy-intenive ector. A lack of global policy action i likely to mean that climate-related innovation opportunitie will be primarily linked to adaptation. In dealing with change ome firm will find it difficult to innovate effectively under challenging circumtance. Other will exploit the emerging opportunitie, and diruptive technologie may overturn the exiting order in the ector. Certain ector will find new opportunitie to provide climate adaptation olution.

52 48 Expect the Unexpected: Building buine value in a changing world 04 Future Scenario Succefully navigating thi turbulent future will require buinee to develop anticipatory awarene, adaptive capacitie and reilient trategie and tructure. The previou ection of thi report ugget that the next few decade will be marked by riing complexity, uncertainty, volatility and an accelerating pace of change. The future i et to become increaingly le predictable and full of urprie. Succefully navigating thi turbulent future will require buinee to develop anticipatory awarene, adaptive capacitie and reilient trategie and tructure. Moving into a world of unknown-unknown demand a hift of thinking away from predictable and ingle future to plauible and multiple alternative future. Quantitative modeling can help to generate and explore varied cenario of the future under condition of moderate complexity and uncertainty. In thi zone, our undertanding of relationhip i high and aumption can be analyzed with the help of reliable data. With data, model can be calibrated and imulation and enitivity analye can be performed uing methodologie uch a ytem dynamic or integrated aement model. Rigorou quantitative model can only be implified repreentation of reality but they do enable buinee to explore the conequence of alternative aumption, pinpoint uncertaintie and define probabilitie. They can alo help in examining trade-off, undertanding core dynamic and generating new quetion and perpective. Figure 24 how a ample of recent quantitative cenario exercie exploring future for biodiverity lo, climate adaptation cot, energy policy and other utainability iue. The uefulne of formal mathematical modeling diminihe a horizon extend further into the future. The future eentially become unknowable but not unthinkable. Under thee condition, futurit generally turn to cenario method baed on qualitative tory-telling or narrative. Thee are carefully crafted, plauible and coherent torie about the future which intertwine powerful driving force, key uncertaintie, hock and tranformational dynamic. Buinee can ue thee torie to deign trategie and take deciion which are robut under a wide range of poibilitie. Hundred of multiple qualitative cenario have been created and are publicly available. Figure 25 provide a brief overview of a dozen recent cenario of value to corporate utainability trategy. Some are general and ueful to all indutry ector; other are of greater ue to particular ector.

53 Expect the Unexpected: Building buine value in a changing world 49 Figure 24: Multiple cenario baed on quantitative modeling (For a full lit of ource document ee Appendix 3). Topic: Author: Report Date: Time Horizon: Key Meage: Secretariat of the Tipping point for large, rapid and Biodiverity convention on irreverible lo of biodiverity; high Biological Diverity variability in long-term projection World Bank Adaptation cot huge, epecially in Eat Aia Climate adaptation and the Pacific; need for robut trategie given climate uncertainty Climate change Mo, et. al The next generation of cenario for climate change reearch and aement by the IPCC International Energy Without bold policy change, great rik of Energy policy Agency locking into an inecure, inefficient and high carbon energy ytem Food ytem Foreight UK Global food ytem mut be tranformed on the cale of the indutrial revolution United Nation 2011/ 2050 Managing water on a global cale ha become Frehwater 2012 extraordinarily uncertain and riky given climate change UNEP Inveting two percent of global GDP into Green economy 10 ector annually could greatly ait the tranition to a low-carbon, reource efficient global economy United Nation With only a mall variation in progre toward Population lower fertility, world population in 2050 could be 10.6 rather than 9.3 billion WWF Intl A provocative cenario by which all of the Renewable energy world energy upply could be met by renewable energy by 2050 in an effective and cot-efficient manner Reource decoupling UNEP Three cenario for future global material ue; radical innovation needed to achieve reource and impact decoupling from economic growth and human welfare

54 50 Expect the Unexpected: Building buine value in a changing world Figure 25: Multiple cenario baed on qualitative narrative (For a full lit of ource document ee Appendix 3). Topic: Climate/development Climate future Global energy Global ecoytem Global environment Global mega-crii Global pathway Map of the decade Urban mobility Author: Forum for the Future Forum for the Future Shell International Millennium Ecoytem Aement Report Date: Time Horizon: Key Meage: Scenario for low-income countrie in a climate-changing world Strategie that will work in a complex and uncertain world dominated by climate change 2008/ World ha entered a huge zone of uncertainty on the gap between energy demand and upply Preure on ecoytem ervice will increae globally with increaed rik of nonlinear change UNEP Rik of croing threhold and need to account for inter-linkage Halal/Marien Claic debate between a global optimit and peimit Tellu Intitute The fundamental force driving world development away from or toward utainability Intitute for the Future Forum for the Future, et.al How the near-term will be haped by dicontinuitie and dilemma The future of mega-citie and olution for urban mobility and acceibility Technology/development Viion 2050 Water and buine Rockefeller/GBN The tranformative role of technology in poitive and negative way in haping reilience and equitable growth WBCSD Viion of a utainable world in 2050 with pathway that will require fundamental change in governance tructure, economic framework, buine and human behavior WBCSD Three torie about the potential role of buine in navigating the rapidly changing world of water

55 Expect the Unexpected: Building buine value in a changing world 51 The qualitative cenario in Figure 25 vary according to purpoe, time horizon and content. Mot of them, however, extend at the extreme from peimim to optimim about the future. Figure 26 claifie the cenario referenced in Figure 25 according to whether they emphaize collape, growth, contraint or tranformation. Thee four categorie have emerged a the central organizing principle in many recent multiple cenario exercie. Adding ome color, the growth cenario could be conidered to be brown; it repreent conventional buine-a-uual dominated by growth ambition, market logic, complacency and natural ytem eroion. The world of contraint could be contrued a green, implying regulation and reform aimed at decoupling growth from natural reource conumption and advere environmental impact; thi i a world of reource ubtitution, efficiency, conervation and protection. Much utainability foreight work focue on the conequence of brown veru green economic future. The mot negative world of collape i bet captured by the color red and aociated image of breakdown, conflict, crie, corruption, uffering, diorder and weak intitution. The mot uplifting world of tranformation i bet contemplated a blue, with aociated poitive viion of revolutionary tranition toward harmony with nature, ocial jutice, community, innovation and reilience. Thee four poibilitie for the future are not mutually excluive. They are likely to mix in a variety of pattern, manifet and hift over time, and differ ubtantially acro region. Each plauible world i full of different rik and opportunitie. Buine leader hould ak three tough quetion about the emergence of alternative brown, green, red and blue global future: 1) How i our organization contributing, in poitive or negative way, to each of thee poible future? 2) Are our current trategie and tructure robut to the conequence of thee divere future? 3) Do we have the neceary learning, innovation and rik management capacitie in place to navigate thee poible future effectively? Uing cenario to build reilience i key to buine urvival in the preence of complexity and uncertainty and help companie dicover trategie for a range of plauible future. Scenario analyi help to identify ytemic rik that may emerge from the interaction of utainability megaforce and provide a context for identifying growth opportunitie before they become maintream. It deepen organizational learning by puhing beyond conventional widom and hift thinking from pecific to generalitie, and from what we know to what we don t know. A bibliography of cenario ource ued to compile thi ection can be found in Appendix 3. Scenario analyi help to identify ytemic rik that may emerge from the interaction of utainability megaforce.

56 52 Expect the Unexpected: Building buine value in a changing world Figure 26: Scenario theme from qualitiative narrative (For a full lit of ource document ee Appendix 3). Brown world: Growth Blue world: Tranformation Market Firt (UNEP, 2007) Market Force (Tellu, 2010) Muddling Down (Halal/Marien, 2011) Lock-Step (Rockefeller/GBN, 2010) One Step Ahead of Diater (IFTF, 2010) Global Orchetration (MEA, 2005) Reveral of Fortune (FFF, 2010) Environmental War Economy (FFF, 2008) Planned-Opopli (FFF, 2010) Hydro-Efficiency (WBCSD, 2006) Turbulent Teen (WBCSD, 2010) Scramble (Shell, 2008/11) Sutainability Firt (UNEP, 2007) Great Tranition (Tellu, 2010) Rie to Maturity (Halal/Marien, 2011) Clever Together ( Rockefeller/GBN, 2010) Super-Structured Sytem (IFTF, 2010) Adapting Moaic (MEA, 2005) The Greater Good (FFF, 2010) Redefining Progre (FFF, 2008) Communi-City (FFF, 2010) Ocean: Interconnectivity (WBCSD, 2006) Tranformation Time (WBCSD, 2010) Red world: Collape Green world: Contraint Security Firt (UNEP, 2007) Fortre World (Tellu, 2010) Decline to Diater (Halal/Marien, 2011) Hack Attack (Rockefeller/GBN, 2010) Local Diater/Regional Conflict (IFTF, 2010) Order From Strength (MEA, 2005) Coping Alone (FFF, 2010) Protectionit World (FFF, 2008) Sprawl-Ville (FFF, 2010) Policy Firt (UNEP, 2007) Policy Reform (Tellu, 2010) Muddling Up (Halal/Marien, 2011) Smart Scramble (Rockefeller/GBN, 2010) Sutainable Path (IFTF, 2010) Techno-Garden (MEA, 2005) Age of Opportunity (FFF, 2010) Efficiency Firt/Service Tranform (FFF,2008) Renew-Abad (FFF, 2010) River: Security (WBCSD, 2006) Blueprint (Shell, 2008/11)

57 Expect the Unexpected: Building buine value in a changing world 53

58 144 Expect the Unexpected: Building buine value in a changing world Appendix 1: Methodology Global Sutainability Megaforce The global utainability megaforce identified a key driver of future change in Part 1 of thi report are: Climate Change; Energy & Fuel; Material Reource Scarcity; Water Scarcity; Population Growth; Urbanization; Wealth; Food Security; Ecoytem Decline; Deforetation. The megaforce were identified through a review of over 30 external future trend projection a lit of which can be found in Appendix 2. Scenario Interpretation The cenario interpretation in Part 1 of thi report i baed on a review of over 20 external future cenario reearch document a lit of which can be found in the bibliography included in Appendix 3. Sector Definition The analyi in Part 2 of thi report cover indutry ector defined according to the Indutry Claification Benchmark (ICB) tructure: a definitive ytem categorizing over 70,000 companie and 75,000 ecuritie worldwide and maintained by FTSE International Limited. The ICB ytem recognize four level of indutry aggregation: indutry, uperector, ector, and ubector. Mot of the analyi wa conducted at the ector level, but in a few cae data wa analyzed at the indutry level to capture an important indutry fully, or at the ubector level in order to capture detail. Thi report cover: Airline (ubector): Companie providing primarily paenger air tranport. Exclude airport. Automobile & Part (ector): Maker of motorcycle and paenger vehicle, including car, port utility vehicle (SUV) and light truck. Manufacturer and ditributor of new and replacement part for motorcycle and automobile, uch a engine, carburettor and batterie. Manufacturer, ditributor and retreader of automobile, truck and motorcycle tire. Exclude maker of heavy truck and maker of recreational vehicle (RV and ATV). Beverage (ector): Manufacturer and hipper of cider or malt product uch a beer, ale and tout. Producer, ditiller, vintner, blender and hipper of wine and pirit uch a whiky, brandy, rum, gin or liqueur. Manufacturer, bottler and ditributor of non-alcoholic beverage, uch a oda, fruit juice, tea, coffee and bottled water.

59 Expect the Unexpected: Building buine value in a changing world 145 Chemical (ector): Producer and ditributor of imple chemical product that are primarily ued to formulate more complex chemical or product, including platic and rubber in their raw form, fibregla and ynthetic fibre. Producer and ditributor of finihed chemical for indutrie or end uer, including dye, cellular polymer, coating, pecial platic and other chemical for pecialized application. Include maker of colouring, flavour and fragrance, fertilizer, peticide, chemical ued to make drug, paint in it pigment form and gla in it unfinihed form. Exclude producer of paint and gla product ued for contruction. Electricity (ector): Companie generating and ditributing electricity through the burning of foil fuel uch a coal, petroleum and natural ga, and through nuclear energy. Companie generating and ditributing electricity from a renewable ource. Include companie that produce olar, water, wind and geothermal electricity. Food Producer (ector): Companie that grow crop or raie livetock, operate fiherie or own nontobacco plantation. Food producer, including meatpacking, nack, fruit, vegetable, dairy product and frozen eafood. Include producer of pet food and manufacturer of dietary upplement, vitamin and related item. Include manufacturer of livetock feed and eed and other agricultural product. Exclude producer of fruit juice, tea, coffee, bottled water and other non-alcoholic beverage, which are claified under Beverage. Exclude manufacturer of fertilizer or peticide, which are claified under Chemical. Indutrial Metal & Mining (ector): Companie that mine or proce bauxite or manufacture and ditribute aluminium bar, rod and other product for ue by other indutrie. Producer and trader of metal and primary metal product other than iron, aluminium and teel. Manufacturer and tockholder of primary iron and teel product uch a pipe, wire, heet and bar, encompaing all procee from melting in blat furnace to rolling mill and foundrie. Include companie that primarily mine iron ore. Exclude manufacturer of finihed aluminium product, uch a iding, which are categorized according to the type of end product. Exclude companie that make finihed product, which are categorized according to the type of end product. Mining (ector): Companie engaged in the exploration for or mining of coal. Companie engaged in the exploration for and production of diamond and other gemtone. Companie engaged in the exploration, extraction or refining of mineral not defined elewhere within the Mining ector. Propector for and extractor or refiner of gold-bearing ore. Companie engaged in the exploration for and production of platinum, ilver and other preciou metal not defined elewhere. Marine Tranportation (ubector): Provider of on-water tranportation for commercial market, uch a container hipping. Exclude port and hipbuilder.

60 146 Expect the Unexpected: Building buine value in a changing world Oil & Ga (indutry): Companie engaged in the exploration for and drilling, production, refining and upply of oil and ga product. Integrated oil and ga companie engaged in the exploration for and drilling, production, refining, ditribution and retail ale of oil and ga product. Supplier of equipment and ervice to oil field and offhore platform, uch a drilling, exploration, eimicinformation ervice and platform contruction. Operator of pipeline carrying oil, ga or other form of fuel. Exclude pipeline operator that derive the majority of their revenue from direct ale to end uer, which are claified under Ga Ditribution. Companie that develop or manufacture renewable energy equipment utilizing ource uch a olar, wind, tidal, geothermal, hydro and wave. Companie that produce alternative fuel uch a ethanol, methanol, hydrogen and bio-fuel that are mainly ued to power vehicle, and companie that are involved in the production of vehicle fuel cell and/or the development of alternative fuelling infratructure. Telecommunication (indutry), Telecommunication Equipment (ector) and Internet (ubector): Provider of fixed-line telephone ervice, including regional and long-ditance. Include companie that primarily provide telephone ervice through the internet. Provider of mobile telephone ervice, including cellular, atellite and paging ervice. Include wirele tower companie that own, operate and leae mobile ite tower to multiple wirele ervice provider. Maker and ditributor of high-technology communication product, including atellite, mobile telephone, fibre optic, witching device, local and wide-area network, teleconferencing equipment and connectivity device for computer, including hub and router. Companie providing Internet-related ervice, uch a Internet acce provider and earch engine and provider of Web ite deign, Web hoting, domain-name regitration and ervice. Further information on the ICB tructure can be found at Quantitative Analyi: Value at take and environmental intenity The quantitative data in Part 2 of thi report i generated by Trucot, an independent environmental reearch agency. The data ue a pricing methodology that calculate the cot to global ociety of environmentally-enitive corporate activitie. Thee include input uch a reource ue and output uch a greenhoue ga and pollutant emiion. The data et i baed on the operation of over 800 companie between 2002 and 2010 (2010 being the mot recent available data) and repreenting the 11 key buine ector. The election of companie i repreentative, a an exact comparion of companie between the two cenu date i not poible due to alteration in the corporate landcape between 2002 and The Trucot data price the damage that i done to ociety and human capital by pollutant and natural reource ue. Thi external cot-baed ytem draw on a library of price for over 700 different natural input and output. The price

61 Expect the Unexpected: Building buine value in a changing world 147 are baed on cot principle derived from a review of environmental economic literature, and the library i overeen by an independent international adviory panel of leading academic. A total of 22 key environmental impact were evaluated for thi report, including: greenhoue gae (carbon dioxide, HFC, nitrou oxide, methane, perfluorocarbon, ulphur hexafluoride), waterabtraction, pollutant including acid rain precuror, ozone depleting ubtance, and wate generation. The phyical total of thee input and output incurred both directly and indirectly 1 were converted into financial value and aggregated to achieve a total environmental cot value. Thee cot which for the mot part do not appear on corporate financial tatement are known a external environmental cot. In the quantitative analyi the external cot of thee 22 environmental impact have been compared with ector EBITDA. EBITDA data come from independent financial data provider, and are checked by Trucot analyt againt company financial tatement. The converion of environmental impact into dollar um of external environment cot i a relatively new practice. For thi reaon, the analye and ummary hould be taken a indicative rather than abolute. Qualitative: Rik and readine The perceived rik and readine interpretation i baed on KPMG meta-review of over 60 external indutry report, which aggregate citation of utainability rik and indicator of rik preparedne for all 11 ector. Report from ource including invetment bank, buine aociation, inurance companie, conultancie, rating agencie and intergovernmental organization were analyed in term of rik type and ector preparedne. The rik categorie ued were phyical rik; competitive rik, regulatory rik, reputational rik, litigation rik, and ocial rik. Expanded definition of thee categorie of rik can be found in the Introduction to Part 2 of thi report. The incidence and level of reference to the ix rik outlined were aggregated to provide an overall core of ectoral rik and readine. In addition, the level of ector readine ha alo been aeed uing the reult of the KPMG International Corporate Reponibility Reporting Survey The qualitative finding of thi review hould be taken a indicative not abolute; rik expoure and readine level are perceived value, providing both a relative indicator acro ector, and a rik reading that i upplementary to the quantitative aement. 1 The external environmental cot data relate to both direct and indirect input and output that i cot incurred by a urveyed company, plu cot incurred in the company uptream upply chain. Trucot ue a global input-output model baed on detailed government cenu and urvey data on reource ue and pollutant releae, indutry data and tatitic, and national economic account. The model can ditinguih input and output at any level of the upply chain from the firt-tier of upplier through to total uptream upply chain requirement. The input-output methodology model the purchae a company make and the reultant environmental impact. Thi provide a mean to differentiate between low impact upplied good, uch a renewable energy, and high impact upplied environmental good, uch a foil fuel energy.

62 148 Expect the Unexpected: Building buine value in a changing world Appendix 2: Global utainability megaforce bibliography The identification of ten global utainability megaforce wa baed on a review of over 30 external future trend projection: 2030 Water Reource Group. (2009). Charting Our Water Future: Economic Framework to Inform Deciion-Making. McKiney & Company. Bailey, Robert. (2011). Growing a Better Future: Food Jutice in a Reource- Contrained World. Oxfam International, Oxford. Boelee, E., ed. (2011). Ecoytem for Water and Food Security. UNEP, Nairobi and International Water Management Intitute, Colombo. Brown, Leter R. (2009). Plan B 4.0: Mobilizing to Save Civilization. W.W. Norton and Company, New York. Food and Agriculture Organization (FAO). (2011) The State of Food Inecurity in the World. FAO, Rome. Gilding, Paul. (2011). The Great Diruption: Why the Climate Crii Will Bring on the End of Shopping and the Birth of a New World. Bloombury Pre, New York. International Energy Agency (IEA). (2011). World Energy Outlook IEA, Pari. International Monetary Fund (IMF). (2011). World Economic Outlook: Slowing Growth, Riing Rik. IMF, Wahington DC. Organization for Economic Cooperation and Development (OECD). (2008). OECD Environmental Outlook to OECD, Pari. Pearce, Fred. (2010). The Coming Population Crah and Our Planet Surpriing Future. Beacon Pre, Boton. Secretariat of the Convention on Biological Diverity. (2010). Global Biodiverity Outlook 3. Secretariat of the Convention on Biological Diverity. Standard Chartered Bank. (2010). The Super-Cycle Report. Standard Chartered Bank, London. Steffen, Alex, ed. (2011). Worldchanging (Revied & Updated): A Uer Guide for the 21t Century. Abram, New York. Sutainable Europe Reearch Intitute (SERI), Global 2000 & Friend of the Earth Europe. (2009). Overconumption? Our Ue of the World Natural Reource. SERI, Vienna. The Worldwatch Intitute. (2011). State of the World 2011: Innovation that Nourih the Planet. The Worldwatch Intitute, Wahington DC. Union of Concerned Scientit (UCSUSA). (2011). The Root of the Problem: What Driving Tropical Deforetation Today. UCSUSA, Cambridge.

63 Expect the Unexpected: Building buine value in a changing world 149 United Kingdom Minitry of Defence. (2010). Global Strategic Trend Out to 2040 (Fourth Edition). HMSO, London. United Nation Department of Economic and Social Affair (UN DESA). (2010). The World Women 2010: Trend and Statitic. UN DESA, New York. United Nation Department of Economic and Social Affair (UN DESA). (2011) World Economic and Social Survey 2011: The Great Green Technological Tranformation. UN DESA, New York. United Nation Development Program (UNDP). (2010). The Real Wealth of Nation: Pathway to Human Development (Human Development Report 2010). UNDP, New York. United Nation Environment Program (UNEP). (2011). Decoupling Natural Reource Ue and Environmental Impact from Economic Growth: A Report of the Working Group on Decoupling to the International Reource Panel. UNEP, Nairobi. United Nation Environment Program (UNEP). (2007). GEO-4: Global Environment Outlook 4: Environment for Development. UNEP, Nairobi. United Nation Environment Program (UNEP). (2011). Toward a Green Economy: Pathway to Sutainable Development and Poverty Eradication. UNEP, Nairobi. United Nation Human Settlement Program. (2011). Citie and Climate Change: Policy Direction (Global Report on Human Settlement 2011). Earthcan, London. United Nation Population Fund (UNFPA). (2011). The State of World Population. UNFPA, New York. US National Intelligence Council (US NIC). (2008). Global Trend 2025: A Tranformed World. US NIC, Wahington DC. Ward, Karen. (2011) The World in 2050: Quantifying the Shift in the Global Economy. HSBC, London. Waughray, Dominic, ed. (2011). Water Security: The Water-Food-Energy-Climate Nexu (The World Economic Forum Water Initiative). Iland Pre, Wahington DC. World Bank. (2011). Global Development Horizon 2011: Multi-polarity: The New Global Economy. World Bank, Wahington DC. World Bank. (2011). Global Economic Propect: Maintaining Progre Amid Turmoil. World Bank, Wahington DC. World Buine Council for Sutainable Development. (WBCSD). (2010). Viion 2050: The New Agenda for Buine. WBCSD, Geneva. World Economic Forum. (WEF). (2011). Global Rik 2011: Sixth Edition. WEF, Geneva.

64 150 Expect the Unexpected: Building buine value in a changing world Appendix 3: Scenario bibliography The cenario interpretation i baed on a review of the following external future cenario reearch document: Convention on Biological Diverity (CBD). (2010). Biodiverity Scenario: Projection of 21 t Century Change in Biodiverity and Aociated Ecoytem Service: A Technical Report for the Global Biodiverity Outlook 3. CBD, Montreal. Forum for the Future (FFF) and Hewlett Packard Lab. (2008). Climate Future: Repone to Climate Change in FFF, London. Forum for the Future (FFF) with the UK Department for International Development. (2010). The Future Climate for Development: Scenario for Low-Income Countrie in a Climate-Changing World. FFF, London. Forum for the Future (FFF), Vodafone, FIA Foundation and EMBARQ. (2010). Megacitie on the Move. FFF, London. Halal, William E. and Michael Marien. (2010). Global Mega-Crii: Four Scenario, Two Perpective. The Futurit, May-June 2011, PP Intitute for the Future. (2010). The Future i a High-Reolution Game: 2010 Map of the Decade. Intitute for the Future, Palo Alto. International Energy Agency (IEA). (2011). World Energy Outlook IEA, Pari. Millennium Ecoytem Aement. (2005). Ecoytem and Human Well-being: Volume 2: Finding of the Scenario Working Group. Iland Pre, Wahington DC. Mo, Richard H., et. al. (2010). The Next Generation of Scenario for Climate Change Reearch and Aement, Nature (Vol.462, pp ). Richard A. Roen, Chrity Electri and Paul D. Rakin. (2010). Global Scenario for the Century Ahead: Searching for Sutainability. Tellu Intitute, Boton. Shell International. (2008). Energy Scenario to Shell International, The Hague. Shell International. (2011). Signal and Signpot: Update to Shell Energy Scenario to 2050: An Era of Volatile Tranition. Shell International, The Hague. The Rockefeller Foundation and Global Buine Network. (2010). Scenario for the Future of Technology and International Development. Rockefeller Foundation, New York.

65 Expect the Unexpected: Building buine value in a changing world 151 UK Government Office for Science. (2011). The Future of Food and Farming: Challenge and Choice for Global Sutainability. HMSO, London. United Nation Department of Economic and Social Affair (UN DESA). (2011). World Population Propect: The 2010 Reviion. UN DESA, New York. United Nation Environment Program (UNEP). (2007). Global Environment Outlook (GEO 4): Environment for Development. UNEP, Nairobi. United Nation Environment Program (UNEP). (2011). Decoupling Natural Reource Ue and Environmental Impact from Economic Growth: A Report of the Working Group on Decoupling to the International Reource Panel. UNEP, Nairobi. United Nation Environment Program (UNEP). (2011). Toward a Green Economy: Pathway to Sutainable Development and Poverty Eradication. UNEP, Nairobi. United Nation World Water Aement Program. (2012). World Water Development Report 4: Managing Water Under Uncertainty and Rik. UNESCO, Pari. World Bank. (2010). Economic of Adaptation to Climate Change: Synthei Report. World Bank, Wahington, DC. World Buine Council for Sutainable Development (WBCSD). (2006). Buine in the World of Water: WBCSD Water Scenario to WBCSD, Geneva. World Buine Council for Sutainable Development (WBCSD). (2010). Viion 2050: The New Agenda for Buine. WBCSD, Geneva. World Wildlife Fund (WWF). and Ecofy. (2010). The Energy Report: 100% Renewable Energy by WWF, Gland.

66 152 Expect the Unexpected: Building buine value in a changing world Appendix 4: Qualitative meta-review bibliography The following ource were reviewed to compile the qualitative analyi of perceived ectoral rik and readine: Airline Airbu. (2011). Delivering the Future. Airbu, Touloue. Boeing Commercial Airplane. (2011). Current Market Outlook Boeing, Seattle. Corridore, J. (2011). Indutry Survey: Airline. Standard & Poor, New York. Datamonitor. (2010). Indutry Profile: Global Airline. Datamonitor, London. International Air Tranport Aociation (IATA). (2011). Aviation and Environment. IATA, Geneva. World Economic Forum (WEF). (2011). Policie and Collaborative Partnerhip for Sutainable Aviation. WEF, Geneva. Automobile Citi Invetment Reearch & Analyi. (2011). US Auto & Auto Part Fuel Economy Focu: Perpective on 2020 Indutry Implication. Citigroup Global Market, New York. Economit Intelligence Unit (EIU). (2011). World Automotive Outlook. EIU, London. IBISworld. (2011). Car & Automobile Manufacturing in the US. IBISworld, London. KPMG. (2010). The Tranformation of the Automotive Indutry: The Environmental Regulation Effect. KPMG International. (2012). KPMG Global Automotive Executive Survey MSCI. (2011). Indutry Report: Automobile. MSCI, New York. Pacific Sutainability Index. (2009). Motor Vehicle and Part Sector Analyi. Robert Environmental Center, Claremont. Beverage Cere. (2011). Murky Water: Company Reporting on Water Rik. Cere, Boton. IMAP. (2010). Food and Beverage Indutry Global Report IMAP, New York. JPMorgan. (2008). Watching Water. JPMorgan Chae, New York. Packaged Fact. (2009). Top Global Food and Beverage Companie: Strategie for Succe. Packaged Fact, Rockville. Reponible Reearch. (2010). Beverage in Aia. Reponible Reearch, Singapore. Wong, J., & Schuchard, R. (2011). Adapting to Climate Change: Guide for the Food, Beverage and Agriculture Indutry. Buine for Social Reponibility, San Francico.

67 Expect the Unexpected: Building buine value in a changing world 153 Chemical European Chemical Indutry Council (Cefic). (2011). Fact and Figure 2011: The European Chemical Indutry in a Worldwide Perpective. Cefic, Bruel. Gerben-Leene et al. (2009). The Water Footprint of Bioenergy. Proceeding of the National Academy of Science of the United State of America, June 23; 106(25): KPMG. (2010). Water Scarcity: What Chemical Companie Need to Know. Levkowitz et al. (2010). China Rare Earth Indutry and it Role in the International Market. US-China Economic and Security Review Commiion, Wahington DC. Riee, J., Weihe, U., & Wekamp, T. (2008). Finding the Buine Opportunitie in Climate Change. McKiney & Company. United Nation Population Fund (UNFPA). (2011). State of World Population UNFPA, New York. Electricity Buine Monitor. (2011). China Power Report. Buine Monitor International, London. Datamonitor. (2011). Global Renewable Energy. Datamonitor, London. Frot & Sullivan. (2011). Global Power and Energy Outlook Frot & Sullivan, Mountain View. McCann, J. C. (2011). Indutry Survey Electric Utilitie. Standard & Poor Financial Service. World Economic Forum (WEF). (2009). Thirty Energy: Water and Energy in the 21 t Century. WEF, Geneva. Food Producer Food and Agriculture Organization (FAO). (2008). Climate Change Adaptation and Mitigation in the Food And Agriculture Sector. FAO, Rome. Frot & Sullivan. (2010) Global Food & Beverage Indutry Outlook. Frot & Sullivan, Mountain View. IMAP. (2010). Food and Beverage Indutry Global Report IMAP, New York. ING. (2010). The Third Indutrial Revolution. ING Bank, Amterdam. Packaged Fact. (2009). Top Global Food and Beverage Companie: Strategie for Succe. Packaged Fact, Rockville. Wong, J., & Schuchard, R. (2011). Adapting to Climate Change: Guide for the Food, Beverage and Agriculture Indutry. Buine for Social Reponibility, San Francico.

68 154 Expect the Unexpected: Building buine value in a changing world Marine Tranportation IBISWorld. (2010). Induty Report: Global Logitic Shipping. IBISWorld, London. InnoVet. (2007). Indutry Overview: Maritime Tranportation. InnoVet Group, Maclean. McCollum, D., Gould, G., & Greene, D. (2009). Greenhoue Ga Emiion from Aviation and Marine Tranportation: Mitigation Potential and Policie. PEW Reearch Center, Wahington DC. MSCI. (2011). Indutry Report: Marine Tranport. MSCI, New York. United Nation Conference on Trade and Development (UNCTAD). (2009). Multi- Year Expert Meeting on Tranport and Trade Facilitation: Maritime Tranport and the Climate Change Challenge. UNCTAD, Geneva. United Nation Conference on Trade and Development (UNCTAD). (2011). Review of Maritime Tranport. UNCTAD, Geneva. Mining & Indutrial Metal Ernt & Young (E&Y). (2011). Top Ten Buine Rik To Mining. E&Y Global. KPMG. (2011). Capitalizing on Sutainable Development in Mining. MSCI. (2010). Indutry Report: Metal and Mining, Non-Preciou. MSCI, New York. Rik Metric Group. (2009). Indutry Overview: Non-Preciou Metal & Mining. Rik Metric Group, MSCI, New York. Swi Re. (2009). Reducing Volatility In The Mining Sector. Swi Re, Zurich. World Economic Forum (WEF). (2010). Mining & Metal Scenario to WEF, Geneva. Oil & Ga Cere. (2010). Global Climate Dicloure Framework for Oil and Ga Companie Cere, Boton. Economit Intelligence Unit (EIU) Oil & Ga Barometer. (2011). Deep Water Ahead? The Outlook for the Oil and Ga Indutry in EIU, London. Ernt & Young (E&Y). (2011). Oil & Ga Alert Sutainability. E&Y Global. IBISworld. (2011). Global Oil & Ga Exploration & Production. IBISworld, London. PriceWaterhoueCooper (PwC). (2010). Reponding to Climate Change: Challenge and Opportunitie on the Road Ahead. PwC Global.

69 Expect the Unexpected: Building buine value in a changing world 155 Telecommunication & Internet Bain & Company. (2010). Enabling Growth: Horizontal opportunitie for the ICT Sector. Bain & Company, Boton. Buine Monitor. (2011). Global Telecommunication View ICT Core View Q411. Buine Monitor International, London. IBISWorld. (2011). Global Internet Service Provider. IBISWorld, London. ITU-GeSI. (2010). Uing ICT to Tackle Climate Change. ITU-GeSI, Bruel. Plunkett, J. W. (2011). Introduction to the Telecommunication Indutry. Plunkett Reearch Online. Rik Metric Group. (2009). Key ESG Iue: Telecommunication. Rik Metric Group, MSCI, New York. The Climate Group. (2008). SMART 2020: Enabling the Low Carbon Economy in the Information Age. Global esutainability Initiative (GeSI), Bruel.

70 156 Expect the Unexpected: Building buine value in a changing world Gloary: Term & abbreviation ADB: Aian Development Bank. APERC: Aia Pacific Energy Reearch Center. ATC: Air Traffic Control. Bael III: A et of banking regulation agreed in repone to the financial crie that occurred at the end of the firt decade of the The regulation greatly increae the amount of capital bank mut hold againt their loe. BAU: Buine a uual. BGS: Britih Geological Society. Bioma: Biological material from living or recently-living organim (uually in the context of a capability of being thermally, chemically or bio-chemically converted to energy). Example include wood, grae and crop. BLS: US Bureau for Labor Statitic BRIC: Brazil, Ruia, India & China. Carbon Trading: A ytem for pricing carbon emiion and trading the right to emit carbon. Example include the EU Emiion Trading Sytem and the UN Clean Development Mechanim. CBD: Convention on Biological Diverity CCS: Carbon Capture and Storage. CDM: Clean Development Mechanim a flexibility mechanim defined in the Kyoto Protocol (2007) that allow indutrialized countrie to invet in emiion reduction in developing economie and thu gain carbon credit. CDP: Carbon Dicloure Project. Cefic: The European Chemical Indutry Council. Cere: A coalition of more than 120 invetor and public interet group working toward global utainability olution. CLD: Caual Loop Diagramming, a method of depicting the interaction of trend. CO 2 : Carbon dioxide. CR: Corporate reponibility. Crack Spread: The cot difference between a barrel of crude oil and a barrel of the petroleum product made from it, eg. jet fuel. Cubic Meter: 1 cubic meter = US gallon. DEFRA: UK Department for Environment, Food, and Rural Affair. EBITDA: Earning before interet, tax, depreciation and amortization.

71 Expect the Unexpected: Building buine value in a changing world 157 EEDI: Energy Efficiency Deign Index a minimum tandard of maritime energy efficiency etablihed by the International Maritime Organization. EIA: US Energy Information Adminitration. EIU: Economit Intelligence Unit. EPA: US Environmental Protection Agency. EPHC: Environment Protection & Heritage Council. ETS: Emiion Trading Sytem. EV: Electric vehicle, including battery powered vehicle, full and plug-in hybrid, and fuel cell vehicle. External Environmental Cot: A calculation of the total non-balance heet value of environmentally-enitive input and output in corporate operation, uing the Trucot input/output price library. FAA: US Federal Aviation Adminitration. FAO: Food and Agriculture Organization. FFF: Forum for the Future. FSC: Foret Stewardhip Council. FWA: Fixed Wirele Acce. G20: A forum for 19 countrie repreenting the world leading economie, plu a repreentative of the European Union, meeting annually. G250: Global Fortune 250 ranking of companie. G8: A forum for eight countrie, Canada, France, Germany, Italy, Japan, UK, US, and Ruia, meeting annually. GAO: US Government Accountability Office. GCF: Green Climate Fund. GDP: Gro Dometic Product. GeSI: Global e-sutainability Initiative, an ICT indutry memberhip organization. GFN: Global Footprint Network, an international utainability think-tank. GHG: Greenhoue ga. GM: Genetically modified. GRI: Global Reporting Initiative. GRI Sutainability Reporting Guideline have gained widepread adoption a the de facto global tandard for CR reporting. GtCO 2 e: Gigatonne of CO 2 equivalent. IATA: The International Air Tranport Aociation.

72 158 Expect the Unexpected: Building buine value in a changing world IBA: Indian Beverage Aociation. ICT: Information & Communication Technology. IEA: International Energy Agency. IFPRI: International Food Policy Reearch Intitute. IFTF: Intitute for the Future. IMF: International Monetary Fund. IMO: International Maritime Organization. IOC: International oil company. IPCC: Intergovernmental Panel on Climate Change. ITU: International Telecommunication Union. JLG: Joint Liaion Group of the Rio Convention. Living Planet Index: An indicator of the tate of global biodiverity, developed by the WWF. LNG: Liquefied natural ga. MARINTEK: Norwegian Marine Technology Reearch Intitute. MDO: Marine dieel oil. Metric Ton: 1 metric ton (or tone) = 1.1 US (hort) ton. Millennium Ecoytem Aement: A United Nation-ponored reearch project undertaken deigned to identify the implication of global ecoytem change. MRV: Monitoring, reporting and verification. MSA: Mean Specie Abundance, a biodiverity indicator. MWh: Megawatt hour. N100: The larget 100 companie by country. NAMA: Nationally Appropriate Mitigation Action. NGN: Next Generation Network. NGO: Non-Governmental Organization. NOC: National oil company. OECD: Organization for Economic Cooperation and Development. PEFC: Program for the Endorement of Foret Certification. PES: Payment for Ecoytem Service, incentive for ecological management of agricultural reource. PPP: Private Public Partnerhip. RED: EU Renewable Energy Directive, a 2009 directive deigned to enure that the EU produce 20% of overall energy and 10% of tranport energy from renewable ource by REDD: Reducing Emiion from Deforetation and Degradation.

73 Expect the Unexpected: Building buine value in a changing world 159 REM: Rare Earth Mineral. SEI: Stockholm Environment Intitute. SERI :Sutainable Europe Reearch Intitute. SFI: Sutainable Foretry Initiative. SIK: Swedih Intitute for Food and Biotechnology. SITM: Symbioi Intitute of Telecom Management. Smart building: A building that embodie a group of embodied ICT ytem that maximize energy efficiency. Smart grid: An electric power grid that integrate ICT application throughout the grid to enable efficiency and optimization olution. SOX: The Sarbane Oxley Act (alo known a the Public Company Accounting Reform and Invetor Protection Act), a 2002 US federal law. TEEB: The Economic of Ecoytem and Biodiverity, a United Nation Environment Program reearch initiative deigned to explore the economic benefit of biological diverity. UCSUSA: US Union of Concerned Scientit. UII: Urban Infratructure Initiative. UN DESA: United Nation, Department of Economic and Social Affair. UNCTAD: United Nation Conference on Trade and Development. UNDP: United Nation Development Programme. UNEP: United Nation Environment Programme. UNFCCC: United Nation Framework Convention on Climate Change. UNFPA: United Nation Population Fund. UN-Habitat: The United Nation agency for human ettlement. USDA: US Department of Agriculture. USGS: US Geological Survey. VOIP: Voice Over Internet Protocol. WBCSD: World Buine Council for Sutainable Development. WEF: World Economic Forum. Wimax: Worldwide Interoperability for Microwave Acce, a wide-area high-peed internet delivery technology. WRG: Water Reource Group. WRI: World Reource Intitute. WWF: The World Wildlife Fund (known outide the US and Canada a the World Wide Fund for Nature).

74 160 Expect the Unexpected: Building buine value in a changing world General elected bibliography: KPMG ource, official ource, independent reearch & periodical KPMG Source KPMG. (2008). Climate Change Your Buine: KPMG Review of the Buine Rik and Economic Impact at Sector Level. KPMG. (2008). The India Electricity Market Outlook. KPMG. (2008). Turning Up the Heat: Inight Into Renewable Energy M&A. KPMG. (2008). REACH: Cot effective and utainable REACH compliance. KPMG. (2009). Global M&A: Outlook for Metal. KPMG. (2009). KPMG 2009 Mining Executive Forum. KPMG. (2009). Outlook: Propect for Recovery in the Global Mining Indutry. KPMG. (2010). The Future of the European Chemical Indutry. KPMG. (2010). The Roll Out of Next-Generation-Network. KPMG. (2010). The Tranformation of the Automotive Indutry: The Environmental Regulation Effect. KPMG. (2010). Water Scarcity: What Chemical Companie Need to Know. KPMG. (2011). Capitalizing on Sutainable Development in Mining. KPMG. (2011). China 12 th Five-Year Plan: Energy. KPMG. (2011). Think BRIC! Key Conideration for Invetor Targeting the Power Sector of the World Larget Emerging Economie Comparative Study. KPMG Climate Change and Sutainability Service. (2011). Sutainable Inight: The Nature of Ecoytem Service Rik for Buine. KPMG Sutainability and the Natural Value Initiative. (2011). Biodiverity and Ecoytem Service: Rik and Opportunity Analyi Within the Pharmaceutical Sector. KPMG. (2011). KPMG International Corporate Reponibility Reporting Survey KPMG. (2011). COP17: One tep cloer to a low-carbon future. KPMG. (2011). Embarking on the low carbon journey: National Mitigation Action a green growth vehicle in developing nation. KPMG. (2012). KPMG Global Automotive Executive Survey External Source: Figure 1, 2, 3, and Figure 18

75 Expect the Unexpected: Building buine value in a changing world 161 External Source: Figure 1, 2, 3, and Figure 18 Figure 1: Accelerating human footprint on natural ytem and reource (Percent change tatitic ranging from 1990 through 2011 on a global bai) 1. Air freight tranport: United Nation Environment Programme (UNEP), Keeping Track of Our Changing Environment, From Rio to Rio +20 ( ). 2. Gro dometic product: World Bank, World Development Indicator 2005 (1990 World GDP); United Nation Environment Programme (UNEP), Keeping Track of Our Changing Environment, From Rio to Rio +20 ( ) (2010 World GDP). 3. Cement production: United Nation Environment Programme (UNEP), Keeping Track of Our Changing Environment, From Rio to Rio +20 ( ). 4. Merchandie export: World Bank, World Development Indicator Nitrogen fertilizer ue: United Nation Environment Programme (UNEP), Keeping Track of Our Changing Environment, From Rio to Rio +20 ( ). 6. Platic production: United Nation Environment Programme (UNEP), Keeping Track of Our Changing Environment, From Rio to Rio +20 ( ). 7. International tourit arrival: United Nation Environment Programme (UNEP), Keeping Track of Our Changing Environment, From Rio to Rio +20 ( ). 8. Palm oil land area: United Nation Environment Programme (UNEP), Keeping Track of Our Changing Environment, From Rio to Rio +20 ( ). 9. Air paenger tranport: United Nation Environment Programme (UNEP), Keeping Track of Our Changing Environment, From Rio to Rio +20 ( ). 10. Steel production: United Nation Environment Programme (UNEP), Keeping Track of Our Changing Environment, From Rio to Rio +20 ( ). 11. Contruction mineral ue: United Nation Environment Programme (UNEP), Keeping Track of Our Changing Environment, From Rio to Rio +20 ( ). 12. Soybean land area: United Nation Environment Programme (UNEP), Keeping Track of Our Changing Environment, From Rio to Rio +20 ( ). 13. Electricity production: World Bank, World Development Indicator Indutrial mineral ue: United Nation Environment Programme (UNEP), Keeping Track of Our Changing Environment, From Rio to Rio +20 ( ). 15. Coal conumption: Energy Information Adminitration (EIA), International Energy Outlook 2011.

76 162 Expect the Unexpected: Building buine value in a changing world 16. Natural ga conumption: Energy Information Adminitration (EIA), International Energy Outlook Livetock production: World Bank, World Development Indicator Urban population: United Nation Environment Programme (UNEP), Keeping Track of Our Changing Environment, From Rio to Rio +20 ( ). 19. Food production: United Nation Environment Programme (UNEP), Keeping Track of Our Changing Environment, From Rio to Rio +20 ( ). 20. Energy conumption: Energy Information Adminitration (EIA), International Energy Outlook Total material extraction: United Nation Environment Programme (UNEP), Keeping Track of Our Changing Environment, From Rio to Rio +20 ( ). 22. Global CO 2 emiion: United Nation Environment Programme (UNEP), Keeping Track of Our Changing Environment, From Rio to Rio +20 ( ) (1990 global CO 2 emiion); International Energy Agency (IEA), World Energy Outlook 2011 (2010 global CO 2 emiion). 23. Fih and eafood conumption: United Nation Environment Programme (UNEP), Keeping Track of Our Changing Environment, From Rio to Rio +20 ( ). 24. Petroleum conumption: Energy Information Adminitration (EIA), International Energy Outlook Global ecological footprint: World Wildlife Fund, Living Planet Report Per capita natural reource conumption: Sutainable Europe Reearch Intitute (SERI), Global Material Flow Databae ( 27. World population: United Nation Environment Programme (UNEP), Keeping Track of Our Changing Environment, From Rio to Rio +20 ( ). 28. Meat conumption: United Nation Environment Programme (UNEP), Keeping Track of Our Changing Environment, From Rio to Rio +20 ( ). 29. Reource intenity: Sutainable Europe Reearch Intitute, Under Preure (Nov. 2011). 30. CO 2 emiion per unit GDP: United Nation Environment Programme (UNEP), Keeping Track of Our Changing Environment, From Rio to Rio +20 ( ). Figure 2: Human ocial and economic progre (Percent change tatitic ranging from 1990 through 2011 on a global bai) 1. HIV prevalence, % pop aged 15-49: World Bank, World Development Indicator Female parliamentarian: United Nation Environment Programme (UNEP), Keeping Track of Our Changing Environment, From Rio to Rio +20 ( ). 3. Mean year of chooling: United Nation Development Programme, Human Development Report (variou year).

77 Expect the Unexpected: Building buine value in a changing world GDP per capita: United Nation Environment Programme (UNEP), Keeping Track of Our Changing Environment, From Rio to Rio +20 ( ). 5. Number of free countrie: Freedom Houe, Freedom in the World 2012: The Arab Upriing and their Global Repercuion. 6. Slum dweller: United Nation Development Programme, Human Development Report (variou year). 7. UNDP human development index: United Nation Environment Programme (UNEP), Keeping Track of Our Changing Environment, From Rio to Rio +20 ( ). 8. Acce to improved anitation: World Bank, World Development Indicator Acce to improved water ervice: World Health Organization (WHO) Fact Sheet 290 (May 2011). 10. Female youth literacy rate: World Bank, World Development Indicator Primary education completion rate: World Bank, World Development Indicator Adult literacy rate: World Bank, World Development Indicator Girl-boy ratio, education enrollment: World Bank, World Development Indicator Life expectancy at birth: World Bank, World Development Indicator Male youth literacy rate: World Bank, World Development Indicator Female labor force participation: World Bank, World Development Indicator Population living <$US 2.00 per day: World Bank, World Development Indicator Dependency ratio on working population: World Bank, World Development Indicator Undernourihment prevalence: World Bank, World Development Indicator Underweight children <5 year old in the developing world: United Nation, Millennium Development Goal Report Total fertility rate: World Bank, World Development Indicator Population living <$US 1.25 per day: World Bank, World Development Indicator Population average annual growth rate: World Bank, World Development Indicator Infant mortality rate: World Bank, World Development Indicator Maternal mortality rate: World Bank, World Development Indicator Under 5 child mortality rate: World Bank, World Development Indicator 2011.

78 164 Expect the Unexpected: Building buine value in a changing world Figure 3: Peritent human deprivation (Percent change tatitic ranging from 1990 through 2011 on a global bai) 1. People without acce to adequate anitation: United Nation Environment Programme (UNEP), Toward a Green Economy: Pathway to Sutainable Development and Poverty Eradication, People living on le than $US 2.00 per day: World Bank PovcalNet (online databae of global poverty tatitic). 3. People everely retricted in civil and political freedom: Freedom Houe, Freedom in the World 2010: Global Eroion of Freedom. 4. People intermittently lacking food ecurity: United Nation Food and Agriculture Organization (FAO). 5. People without acce to reliable electricity upplie: United Nation Environment Programme (UNEP), Keeping Track of Our Changing Environment, From Rio to Rio +20 ( ). 6. People living on le than US $1.25 per day: World Bank PovcalNet (online databae of global poverty tatitic). 7. People lacking acce to profeional health care ytem: World Health Organization (2008), The World Health Report People uffering from malnutrition/undernourihment: United Nation Food and Agriculture Organization (FAO), FAO World Livetock 2011: Livetock in food ecurity. 9. People without literacy: UNESCO Intitute for Literacy Statitic (2011). 10. People without acce to afe drinking water: United Nation, Millennium Development Goal Report People living in lum without ecure helter: United Nation, Millennium Development Goal Report People without gainful employment: International Labor Organization (ILO), Global Employment Trend Figure 18: Summary of buine-a-uual global projection (Variouly from 2008/2010 to 2035) 1. Energy-related CO 2 emiion: International Energy Agency (IEA), World Energy Outlook Mean temperature rie: IPPC/UNEP/GRID-Arendal, Graph: Projected Change in Global Temperature (global average and projection etimate to 2100). 3. Primary energy demand: International Energy Agency (IEA), World Energy Outlook Net electricity generation: Energy Information Adminitration (EIA), International Energy Outlook Raw material extraction (excluding foil carrier): Sutainability Europe Reearch Intitute (SERI), GLOBAL 2000, Friend of the Earth Europe (2009). Overconumption? Our ue of the world natural reource.

79 Expect the Unexpected: Building buine value in a changing world Demand for water withdrawal: The 2030 Water Reource Group, Charting Our Water Future (2009). 7. % Population under water tre: World Economic Forum (WEF), The Bubble I Cloe to Burting: A Forecat of the Main Economic and Geopolitical Water Iue Likely to Arie in the World during the Next Two Decade (2009). 8. Total population: United Nation, Department of Economic and Social Affair, Population Diviion. World Population Propect: The 2010 Reviion Highlight and Advance Table. 9. % Population 65 and older: United Nation, Department of Economic and Social Affair, Population Diviion, World Population Propect: The 2010 Reviion Highlight and Advance Table. 10. Middle-cla purchaing power: OECD Development Centre (2010). Working Paper No. 285: The Emerging Middle Cla in Developing Countrie. 11. Real gro dometic product: Standard Chartered Bank (SCB) (2010). The Super-Cycle Report. 12. Urban population: United Nation, Department of Economic and Social Affair, Population Diviion. World Urbanization Propect: The 2010 Reviion. 13. Urban land cover km 2 : Seto K.C., et. al. (2011). A Meta-Analyi of Global Urban Land Expanion. 14. Aggregate food demand: United Nation Food and Agriculture Organization (FAO). Proceeding from 2008 UN World Food Summit in Rome. 15. Key taple food price: Oxfam International (2011). Growing a Better Future: Food jutice in a reource-contrained world. 16. Terretrial mean pecie abundance: Convention on Biological Diverity (CBD) (2010). Biodiverity Scenario: Projection of 21t century change in biodiverity and ecoytem ervice. 17. Human ecological footprint: Global Footprint Network. Calculation of % change between Earth needed today (1.5) and projected Earth needed in 2030 (2.0). See the following for detailed information: index.php/gfn/page/world_footprint/ 18. Net foret cover: OECD (2008), OECD Environmental Outlook to Amazon foret lo: World Wildlife Fund (WWF) (2010). WWF Living Amazon Initiative, A comprehenive approach to conerving the larget rainforet and river ytem on Earth. External Source: Sutainability 2030 Water Reource Group (WRG). (2009). Charting Our Water Future. WRG, New York. Behren, A., Giljum, S., Kovanda, J., Niza, S. (2007). The Material Bai of the Global Economy. World-Wide Pattern in Natural Reource Extraction and Their Implication for Sutainable Reource Ue Policie. Ecological Economic 64, pp

80 166 Expect the Unexpected: Building buine value in a changing world Britih Geological Society (BGS). (2011). Rik Lit BGS, London. Carbon Dicloure Project (CDP). (2011). CDP Global 500 Report 2011: Accelerating Low Carbon Growth. CDP, London. Clugton, Chri. (2010). Increaing Global Non-Renewable Natural Reource Scarcity An Analyi (Excerpt). Energybulletin.net. Convention on Biological Diverity (CBD). (2010). Biodiverity Scenario: Projection of 21 t Century Change in Biodiverity and Aociated Ecoytem Service: A Technical Report for the Global Biodiverity Outlook 3. CBD, Montreal. Convention on Biological Diverity (CBD). (2010). Global Biodiverity Outlook 3. CBD, Montreal. Convention on Biological Diverity (CBD). (2011). The Nagoya Protocol on Acce and Benefit-Sharing. CBD, Montreal. European Union (EU). (2011). Raw Material: Heading for a Global Reource Crunch? EurActiv.com. Forum for the Future (FFF) and Hewlett Packard Lab. (2008). Climate Future: Repone to Climate Change in FFF, London. Forum for the Future (FFF) with the UK Department for International Development. (2010). The Future Climate for Development: Scenario for Low-Income Countrie in a Climate-Changing World. FFF, London. Forum for the Future (FFF), Vodafone, FIA Foundation and EMBARQ. (2010). Megacitie on the Move. FFF, London. IBM Sutainable Citie Webite. utainable_citie/idea/index.html IBM. (2010). A Viion of Smarter Citie. IBM Intitute for Buine Value, Somer. Intitute for the Future. (2010). The Future i a High-Reolution Game: 2010 Map of the Decade. Intitute for the Future, Palo Alto. Intergovernmental Panel on Climate Change (IPPC) Contribution of Working Group I, II and III to the Fourth Aement Report of the Intergovernmental Panel on Climate Change. (2007). Synthei Report. IPPC, Geneva. Intergovernmental Panel on Climate Change (IPPC), Contribution of Working Group II to the Fourth Aement Report of the Intergovernmental Panel on Climate Change. (2007). Impact, Adaptation, and Vulnerability. Cambridge Univerity Pre, Cambridge. Joint Liaion Group of the Rio Convention. (2007). Foret: Climate Change, Biodiverity, and Land Degradation. UNFCCC, Bonn. Khara, Homi. (2010). OECD Development Centre Working Paper No. 285: The Emerging Middle Cla in Developing Countrie. OECD, Pari. Millennium Ecoytem Aement. (2005). Ecoytem and Human Well-being: Volume 2: Finding of the Scenario Working Group. Iland Pre, Wahington DC. Mo, Richard H., et. al., (2010). The Next Generation of Scenario for Climate Change Reearch and Aement, Nature (Vol.462, pp ).

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83 Expect the Unexpected: Building buine value in a changing world 169 Law, C. K., Law, J. S., & Te, D. S. (n.d.). An Invetigation of Airpace Congetion & Poible Air Traffic Management Integration in the Pearl River Delta Region of Southern China. Aviation Policy and Reearch Center, The Chinee Univerity of Hong Kong, Shatin, New Territorie. US Bureau of Labor Statitic (BLS). (2011). Air Tranportation. BLS, Wahington DC. World Bank. (2010) World Development Indicator. World Bank, New York. World Economic Forum (WEF). (2011). Policie and Collaborative Partnerhip for Sutainable Aviation. WEF, Geneva. External Source: Automobile Citi Invetment Reearch & Analyi. (2011). US Auto & Auto Part Fuel Economy Focu: Perpective on 2020 Indutry Implication. Citigroup Global Market, New York. Economit Intelligence Unit. (2011). World Automotive Outlook. The Economit Group, London. Du, X., & Graedel, T. (2011). Uncovering the Global Life Cycle of the Rare Earth Element. Nature. Hart Energy. (2011). Global Biofuel Outlook Hart Energy Conulting, Houton MSCI. (2011). Indutry Report: Automobile. MSCI, New York. Organization for Economic Cooperation and Development (OECD). (2010). The Emerging Middle Cla in Developing Countrie. OECD, Pari. Organization for Economic Cooperation and Development (OECD). (2011). Tranport Outlook 2011: Meeting the Need of 9 Billion People. OECD, Pari. Pacific Sutainability Index. (2009). Motor Vehicle and Part Sector Analyi. Robert Environmental Center, Claremont. Pike Reearch. (2011). Electric Vehicle Market Forecat: Global forecat for light-duty Hybrid, plug-in Hybrid, and battery electric vehicle: Pike Reearch, Boulder. Rik Metric Group. (2010). Indutry Report: Automobile. Rik Metric Group, MSCI, New York. Siemen. (2011). Daimler Chryler Save Water, Money, Time and the Environment with Zero Liquid Dicharge (ZLD). Siemen, Munich. Summarie of EU Legilation. (2007). Sulphur Content of Certain Liquid Fuel. europa.eu. Wharton School of Management. (2008). The Global Auto Indutry: New Car, Old Problem. Knowledge@Wharton, Wharton. External Source: Beverage Cere. (2011). Murky Water: Company Reporting on Water Rik. Cere, Boton. Datamonitor. (2010). Global Alcoholic Drink. Datamonitor, London. Datamonitor. (2010). Global Carbonated Soft Drink. Datamonitor, London.

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90 176 Expect the Unexpected: Building buine value in a changing world Colophon Thi report wa prepared by KPMG International in conjunction with, and with input from, the following organization and people: Lead author: Yvo de Boer, Special Global Advior, KPMG Climate Change & Sutainability. Barend van Bergen, Head of KPMG Global Center of Excellence for Climate Change & Sutainability. Co-author: Mark McKenzie, Global Thought Leaderhip Director, KPMG Climate Change & Sutainability. Alina Averchenkova, Global Director, KPMG Climate Change & Sutainability. Dr. Thoma N. Gladwin, PhD, MBA, Max McGraw Profeor of Sutainable Enterprie and Aociate-Director of the Erb Intitute for Global Sutainable Enterprie at The Univerity of Michigan. Dr. Thoma Lyon, Dow Profeor of Sutainable Science, Technology & Commerce; Profeor of Buine Economic and Public Policy; and Profeor of Natural Reource & Environment at the Univerity of Michigan and the Erb Intitute for Global Sutainable Enterprie. Rick Bunch, Managing Director of the Erb Intitute at The Univerity of Michigan. KPMG Project Team: Erb Intitute Project Team: Jorrit Duboi; Don Gerriten; Jutta Ko. Jutin Adam; Brent Hire; Kari Walworth. The author would like to thank the following for their aitance in reearching, writing and producing thi report: Lucky Abraham; Jeremy Anderon; Tal Avrahami; Caroline Baldwin; Joanne Beatty; Meghan Beted; Simone Beutel; Katherine Blue; Maureen Boi; Martha Campbell; Chad Carpenter; Martha Collyer; Simon Davie; Rohiteh Dhawan; Marcu Evan; Levina Felix; Mary Fritz; Natalia Gero; Lawrence Han; Paul Harnick; Tim Hartmann; Michele Hendrick; Stephanie Hime; Rick Hi; Sarah Howie; Wayne Janen; Hongda Jiang; Heather Kellett; Berry Kennedy; Sung Woo Kim; Daniel Gonzalez-Kreiberg; Willy Kruh; Nick Lange; Daniel Lawrence; France Leibker; Honore Louie; David McAlliter; Devin McIntire; Kate Meza; Pamela O Leary; Sarah Pendrith; Oli Pereira; Shari Peter; Moritz Pawelke; Elaine Pratt; Lizzie Reiman; Jenn Ritchey; Mia Robin; Margreet Romp; Taylor Samuelen; Mike Scott; Michiel Soeting; Joe Soli; Chritian Spano; Ahley Steel; Sabrina Sullivan; Ana Perez-Uematu; Naeem Walker; Richard Walker; Jim Ward. For more information on thi report, pleae contact: Mark McKenzie Global Thought Leaderhip Director KPMG Global Center of Excellence for Climate Change and Sutainability T: M: E: mmckenzie@kpmg.com

91 Expect the Unexpected: Building buine value in a changing world 177 About KPMG Climate Change & Sutainability Service A utainability and climate change iue move to the top of corporate agenda, KPMG firm advie organization to better undertand the complex and evolving environment, helping them optimize their utainability trategy. KPMG Climate Change and Sutainability Service (CC&S) profeional provide utainability and climate change Aurance, Tax and Adviory ervice to organization to help them apply utainability a a trategic len to their buine operation. We have more than 25 year experience working with leading buinee and public ector organization which ha enabled u to develop extenive relationhip with the world leading companie and to contribute to haping the utainability agenda. The expanding CC&S network, acro more than 50 countrie, enable u to apply a conitent, global approach to ervice delivery and repond to multinational organization complex buine challenge with ervice that pan indutry ector and national boundarie. Our experienced team ait organization in the following area: Sutainability rik and opportunity analyi Corporate reponibility trategy aitance Corporate Social Reponibility/Sutainability/GHG information ytem deign and implementation Regulatory framework aement and optimization, including tax and carbon emiion regime Tax incentive and credit Sutainable upply chain enhancement Corporate reponibility reporting and aurance, including pre-audit aement and Green Houe Ga emiion verification. For more information, pleae viit our webite,