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the initial sales volumes seem small in comparison to developed markets, the
return on assets and investment can be much more superior in the developing
world, and the demand is much more closely liked with actual ˜needs™;
Cause-related marketing will increase as the successes of those closely linked
to business strategies become apparent; and
Pressure upon and from key suppliers and business partners. An example is
that according to Terra Choice Environmental Marketing (who administers the
Government of Canada™s EcoLogo environmental certification programme) in
their annual EcoMarkets survey there is a surprisingly high desire among cor-
porate procurers to buy green:
Approximately 30% of professional purchasers are subject to green pur-
chasing policies and/or programmes;
Part A “ Overview of Risk Management
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More than 90% of professional purchasers consider environmental factors
at least ˜some of the time™; and
More than 60% of purchasing professionals work for companies with sus-
tainability policies.

Profit margins: many sustainability products currently receive a premium
price and margin as there is first mover and premium product advantages still
to be gained. In addition, an increasingly global economy means that com-
panies must find ways of making their products compliant with stricter envi-
ronmental policies from other regions and this can impact upon costs and
therefore margins.
Taxes and fines: governments and other bodies are utilising market forces
to correct what they see as market imperfections and make organisations more
accountable for their external costs.
Some trends are:

New green taxes, tariffs and regulations like:
Carbon emission taxes;
Usage billing, i.e. congestion charges for vehicles in urban areas;
Waste disposal levies;
Water use and clean-up tariffs; and
Vehicle and petrol costs and taxes.
Increased fine levels for transgression of rules like: environmental incidents
and clean-up costs; contaminated land reclamation; employment laws; and
breaches of health and safety laws; and
Increased court costs of defending against legal actions, court cases and class
actions, including product liability expenses.

Investment: the cost of capital can be influenced by non-market factors like repu-
tation. These issues are discussed in the Stakeholder Assessment part of this
chapter. The value of organisations is being adjusted as methods for measuring
intangible assets, like reputation, increase.
The financial community are adopting more rigorous investment and lend-
ing policies, some trends are:
Banks: are increasingly applying rules to investment lending decisions.
An example is the environmental screening that will be required by all
project financings with capital costs above US$10 million by borrowers of
the banks that are signatories to the ˜Equator Principles™ (www.equator-
principles.com/). This threshold was lowered from US$50 million in July
2006;
Insurers: premiums for sustainability issue cover are increasing as is the
level of research into future claims of these types. Some of the big reinsurers
have estimated that human-induced climate change could cost them up
to ‚¬10 billion a year by 2010. Insurance products designed specifically for
environmental and sustainability risks can help transfer some of the biggest
potential losses; and
Chapter 3 “ Drivers and trends in sustainability risk management 37



Investors: asset managers and stock markets are requiring greater disclosure
on sustainability risks so investors can factor these into their own investment
decision-making processes.
Internal drivers: there are many other internal drivers that have an effect on an
organisation™s value and sustainability; some examples include the following
category headings (with appropriate chapter reference):
Risk management and general management (all chapters and the section below);
Finance systems (Chapter 7);
Licence to operate/reputation (Chapter 9);
Marketing (Chapter 10);
Information systems (Chapter 11); and
Human resources and employee motivation (Chapter 14):
Employment law changes are seen as having a financial impact upon
organisations and motivation a positive influence; and
Health and safety issues are becoming crucial bottom-line concerns
(Chapters 16 and 17).
Risk management: trends and recommendations.
Some trends are:
Key risks identified by a range of CSR surveys of companies highlight prod-
uct impacts and liabilities, supply chain management and ethical business
conduct and governance as major risks;
There is improvement in the integration of these sustainability risks within
risk management processes;
More companies are providing internal training and briefings on specific
responsibility issues; and
There will be an increase in the risks and potential for damage to a company™s
reputation from the use of subcontractors. The contracting company can
come under increasing accusation of outsourcing of risk which could indir-
ectly impact upon reputation.
Recommendations:
The management of these types of risk issues should become incorporated
within the mainstream management of the assets (operations, reputation and
markets);
Organisations should become more transparent about their dealings with
these risk issues. They may be conducting much more in the way of risk miti-
gation work that they are not disclosing to stakeholders. By disseminating
this knowledge, stakeholders should take a more appropriate view of the
organisation™s position in the marketplace and society;
There needs to be some clarification on where the limits of responsibility are,
that is where does the company™s corporate responsibility ends and the gov-
ernment™s or other stakeholders™ begin? An example of this is the level at
which customer data can be used for social benefits before there is an
infringement of the Data Protection Act; and
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38



Identification and reduction of potential liabilities: a more accountable
company (including social and environmental auditing and reporting and
stakeholder dialogue) can identify practices or situations that could pose
liabilities to a company. Early identification can provide companies with the
opportunity to resolve problems before they result in costly legal actions or
negative public exposure.


2. Environmental Scan (tool 2)
What is an environmental scan?
The external operating environment is seen as a significant influence on
the performance of organisations of any size. We use what is described as tool 2.
Key aspects of turbulence include changes in the market, technology, customer
demands and competition.
An effective environmental scan:
Focuses on dominant issues, and involves trying to understand which issues
might take an organisation beyond its current ways of doing things;
Indicates the nature of the world in which the organisation will find itself in
the future, what it wants and what it needs to do to get there;
Gives the organisation a wider and longer-term view of the future, stretching
strategic and innovative thinking beyond normal boundaries in order to:
View risks by scale, whether they are local, national or international, or
global; and
View risks by current situation or conditions; probable trends, events or
developments; and urgent implications.
Attempts to identify events, trends and developments, or drivers, shaping the
future, across the following category areas (similar to the marketing PESTLE
matrix):
2.1 Economic drivers:
Value Drivers (tool 1);
Economic trends; and
Technological and scientific.
2.2 Social drivers:
Society and demographics;
Political and governmental;
Legal; and
Ethical.
2.3 Environment drivers:
Environmental trends.


2.1 Economic drivers
2.1.1 Value Drivers
These were analysed in the previous section of this chapter and tool 1 elements
are included within the economic scan of the ˜environmental scan™.
Chapter 3 “ Drivers and trends in sustainability risk management 39



2.1.2 Economic trends
An overview of the structural nature of the economic environment from the
University of Cambridge Programme for Industry Sustainable Economy Report
(available at www.cpi.cam.ac.uk) finds the followings conclusions:
It is seen that economic systems and pressures are prejudiced towards the
short term at the expense of more sustainable opportunities. There is a grow-
ing realism that this short-term perspective and other economic values may
be incompatible with drives towards sustainability;
There seems to be a lack of consensus on the long-term goals and objectives
of many economies and economic groupings;
Inappropriate market incentives, failures and interventions can distort mar-
kets and create incentives for unjust and unsustainable trade;
There are embedded weaknesses in: governments who should be providing
good governance and policies; the education system in its role to promote sus-
tainability; and the economic distribution systems as there are wide inequal-
ities of opportunity, wealth, health and well-being;
Traits such as selfishness and greed are prevalent and encouraged by the cur-
rent systems of economic behaviour;
Current pricing mechanisms and metrics for measuring progress reinforce
any bias as current measures are misleading, or poor indicators of:
Social factors like the quality of life and well-being;
Health quality issues rather than just duration;
Environmental performance and the full economic value of resources; and
Prices fail to capture social and environmental costs; therefore there can be
an undervaluing of people and nature.
Some relevant trends include the following.
Economic growth:
Growth rates of 5% worldwide will return and be more characteristic of the
next two decades. However, there is to be an expected slowdown in the
developed world as debt correction occurs.
Internationalisation and the globalisation of commerce:
The industrialised countries still account for over two-thirds of manufac-
tured exports although the developing countries™ share of this trade will
increase, especially from Asia.
Globalisation of crime, justice, legislation, trade, commerce and terrorism
(these are covered under the ˜Social drivers™ section below and the ˜International
government™ section of the stakeholder matrix analysis in this section):
Companies and governments are concerned that the US watchdogs are
extending their powers abroad, post-Enron (see also Chapter 22);
Growing fears of US financial rules that are encroaching further into the city
have led UK companies to remove US customers from their books so they do
not come into the remit of the SEC Investment Advisers Act of 1940 which
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40



calls for companies providing advice to more than 14 US citizens to register
with the SEC and make regular reports;
Recent interpretations of the US Alien Tort Claims Act have allowed com-
panies to be sued for their actions in foreign countries; and
The European Union is currently the most regulatory-intensive environ-
ment, and EU companies are rapidly realising the benefits of environmen-
tally sustainable policies. This means that competitor nations must find
ways of making their products compliant with these stricter environmental
policies.
Technology revolution (covered in the next section) and Chapter 11:
The pace of technology development will continue at accelerating rates, and
when business investment picks up, so will the deployment of new and
transformative technologies, especially in biology, life sciences and energy
technology.
Shift to eco-economics:
There will be an increase in the inclusion of environmental assets and liabil-
ities onto the balance sheet and into company processes like product design
and life cycle analysis economics.
Shift to micro-economics:
There is a branch of economics that is addressing the real developing world
issues. An example is Muhammad Yunus who won the Nobel Peace Prize in
2006 for his work in tackling poverty in Bangladesh by granting tiny loans
known as microcredit, via his Grameen bank. Their repayment success has
caught the attention of Citigroup and other commercial banks as the loan
recovery rate is almost 99%, despite interest rates up to 20%.
Competitive marketplace trends in sustainability:
There is growing competition for sustainability leadership within sectors;
There is an increase in measuring and reporting on sustainability issues;
There is more quantification of extra financial risks and enhanced valuing of
items like brands as market differentiators;
There is greater activity with regards to implementing sustainability pro-
grammes. The top three activities that are the focus of current citizenship and
sustainability attention are community and stakeholder involvement, corpor-
ate giving to worthy causes and environmental sustainability/climate change.
Climate change continues to attract increased stakeholder attention (see
Chapter 20). More companies also recognise that climate change will have a
major impact on their future operations and product offering;
Companies are developing a wide range of management systems to measure,
apply, assess and report their efforts to integrate corporate social responsibil-
ity (CSR) into all aspects of their operations;
There has been greater participation in ˜corporate responsibility™ (CR) initia-
tives, the gaining of standards and reporting by companies. There has been
Chapter 3 “ Drivers and trends in sustainability risk management 41



an eightfold increase in ISO 14001 certifications and over 1000 companies
are reporting under the Global Reporting Initiative (GRI);
The proliferation of sustainability indexes continues: FTSE4Good (July
2001); Dow Jones STOXX Sustainability Indexes “ launched by Dow Jones
Indexes, STOXX Limited and SAM Group (October 2001); and
Yet, the majority of companies say they are not active in citizenship and sus-
tainability-related business product developments.
Marketplace trends “ opportunities: the European market for environmental
goods and services is now worth ‚¬227bn, equivalent to 2.2% of the EU™s GDP.
Environment industries represent around 3.4 m jobs in the EU, according to a
study for the European Commission DG Environment entitled ˜Eco-industry, its
size, employment, perspectives and barriers to growth™ by consultants Ernst &
Young, the report estimates that there will be:

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