White Book on megatrendsESG challenges (Environmental, Social & Governance) shaping future economy
ContentMegatrends & business implications 3Trend 1: Changing demographics 5Trend 2: Water scarcity 7Trend 3: Climate change 9Trend 4: Increased attention to corporate governance 11Trend 5: Shortage of human capital 13Appendix – Information sources 14
Megatrends & business implicationsThe world is changing at a rapid pace. These changes bring in their wake challenges involving theway we do business, and the means employed by companies to market their products and interactwith their major stakeholders, including employees, customers and the environment. The samechallenges will also open up new consumer markets and exciting new opportunities.Nordea1 ESG (Environmental, Social and Governance) team has identified five major ESG challengeswhich will shape the economic, social and business environment in the years to come.1. Nordea’s fund companies, Nordea Invest and NordeaInvestment Management (NIM)
The demographic concentration in the next few decades will lie, not in Europeor North America, but in Asia. The share of the European population isexpected to diminish from 20 percent to 5 percent of the global population inthe course of the next century.
Trend 1 - Changing demographicsAsia will be the leader: India and China will have Pacific5, Asia Pacific ex Japan in 1970 had anabout the same population by 2030, causing urbanization rate of 20 percent. By 2000, this hadChindia to make up 35 percent of the world risen to 34 percent. By 2015 and 2030 thepopulation. Population growth in Africa is expec- urbanization rate is expected to climb to 43 andted to be explosive, with double the number of 52 percent respectively.inhabitants compared to 1950. In 12 or so years’time, the Indian and Chinese economies combi- The urbanization rate in Latin America, anotherned will equate to 60 percent of the US economy4. region that is urbanizing at a hectic pace, is also quite telling: in 2000, 75 percent of the popula-In 2030, Africa is expected to make up 18 tion was already living in cities. This figure ispercent of the world’s population. Other fast projected to go up to 81 and 84 percent by 2015growing populations are primarily concentrated in and 2030 respectively. This generally meansother Asian countries: Vietnam, Korea, Indonesia, higher incomes, greater educational opportunitiesPakistan, etc. Apart from growing and developing and more discretionary spending. Also, it willnations, two drivers we have just discussed, there impact dietary patterns, social cohesion, theis a third powerful driver: urbanization. According further emergence of a service economy, and a riseto figures published by the UN and CLSA Asia in energy demand. WHTE BOOK ON MEGATRENDS 5
Despite the fact that about 70 percent of the earth’s surface is covered byoceans, an increasing number of people are confronted with water scarcity.As emphasized by the World Health Organization, water is an essentialresource for life and good health.
Trend 2 - Water scarcityHowever, a lack of water to meet daily needs is a in the use of water-polluting chemicals.reality today for one in three people around the In addition, technological applications, rangingworld. According to Unesco estimates, the world from electricity production to semi-conductorshas some 1,400 million cubic kilometers of water, and pharmaceuticals, are gobbling up ever-incre-97,5 percent of which is salt water and only 2,5 asing amounts of ‘blue gold’. The third reason –percent fresh water suitable for human consump- changing consumption patterns – might surprise.tion. The problem is that more than two-thirds ofthat fresh water is encapsulated in polar ice caps But consider this: every day, Europeans use up toand glaciers. The result? A paltry 0,26 percent of 25 times the amount of water consumed by theirall the fresh water on earth, i.e., 900,000 cubic developing-world counterparts. As peoplekilometers, is available for drinking, manufactur- become wealthier, their dietary habits change, too,ing, agriculture and personal use. The water issue with an increased demand for proteins (meat). Butis thus a phenomenon of global proportions as, as one kilo of beef uses around 13,000 liters of waterrecently as 2002, more than 1,1 billion people to grow the crops needed to feed the cattle agri-lacked access to clean water. culture accounting for 70 percent of global water needs.China, one of the fastest-growing countries in theworld, has only 7 percent of the global fresh water Finally, climate change plays a role as well. Weatherreserves while the country has a population of patterns become increasingly hard to predict, pavingmore than 1,3 billion (22 percent of the global the way to disruptive events such as El Niño or thepopulation). 80 percent of all the rivers in China rising number of monsoons in Asia to the detriment ofare so polluted that all the fish have died. If moderate rainfall.present trends continue, by 2030, nearly half theworld’s inhabitants will, according to the UN3, be From a business viewpoint, the water challengesliving in areas of acute water shortage. In short, as provide enormous business opportunities forthe Financial Times says, ”Water has never been companies active in water purification and waterunder more threat in modern history”. management services (utilities). Builders of water infrastructure (sewages, pumps, valves) will standThe drivers behind water scarcity are growing to benefit, too. On the process side, water-inten-populations, industrialization, consumption sive sectors such as Metals & Mining, Chemicalspatterns and climate change. The world’s popula- and Forest Products will need to adapt theirtion of 6.6 billion is forecast to raise by 2.5 billion business models, as will ultra-pure water consu-by 2050, with most of the growth in developing mers such as the Semiconductors sector. Compa-countries, many in regions where water is already nies that acknowledge water scarcity in theirscarce. Further to that, in emerging markets such processes will have a competitive edge.as India and China, vast amounts of useable waterare being lost to industrialization and an explosion WHTE BOOK ON MEGATRENDS 7
The scientific evidence is now overwhelming: climate change, which presentsvery serious global risks, demands an urgent global response.
Trend 3 - Climate change“CO2 emissions need to be cut by at least 50 percent Climate change obviously has business implica-(80 percent for developed countries) from their 1990 tions. Energy providers need to rethink the relativelevels by 2020 to prevent more than 2°C of warming.” attractiveness of their product mix (coal, oil, gas, The IPCC (Intergovernmental Panel alternative energy). Energy users such as real on Climate Change) estate transport and energy-intensive manufac- turing sectors will need to mitigate their energyThe economic consequences of climate change use and make it less CO2-intensive by introdu-are clear: floods, storms, heat waves, drought and cing a carbon-neutral energy policy. 70 percent ofnatural disasters. Insurance firms have already all CO2 emissions in the industrial sector comeraised premiums for many insurance policies. The from three sectors: steel, cement and chemistry.Stern Review on the Economics of ClimateChange7, a 700-page report discussing the effect Regional accents are also important: Europeanof global warming on the world economy, has and Japanese production techniques are thecalculated that, without any correction, climate cleanest, whereas India and China produce in achange may reduce global GDP by up to 5 percent much more polluting way. Even the best produc-– the equivalent of a global depression! tion processes leave room for a reduction of 10 to 40 percent. Energy efficiency enablers such asThe renowned environmental pundit, Geoffrey measurement tools and insulation products willHeal, has stated that the cost of limiting global become more important and expand their clientwarming to 2°C will amount to about 3 percent of base as consumer awareness, possibly underpin-global GDP. The time to act and decarbonizes the ned by government stimulus, rises. Finally, sectorsglobal economy is here and now. Apart from such as agriculture will also need to adapt to thisscientific evidence, the regulatory framework in new reality.many countries (the American Energy and Secu-rity Act8, for one) is becoming stricter in order to For the record: agriculture and forestry accountmitigate climate change. Other drivers are the for one-third of CO2 emissions through defo-higher long-term fossil fuel prices and the emer- restation, the combustion of woods and fields andgence of competitive alternative energy technolo- other agricultural procedures10. The sector isgies. thus a ‘hidden’ emitter with an equally high responsibility. WHTE BOOK ON MEGATRENDS 9
The financial crisis we currently find ourselves in can, to a large extent, beattributed to failures and weaknesses in corporate governance arrangements.
Trend 4 - Increased attention to corporate governanceIn many cases, in both financial and non-financi- Investors being able to vote at general meetingsal companies, board remuneration, by rewarding and asset managers taking on their responsibilityexcessive risk-taking, was not tied to long-term by engaging in proxy voting on behalf of theirperformance and consequently not aligned with clients are of key importance. Contentious issuesthe interests of long-term investors and other revolved around three broad themes: boardstakeholders. accountability and independence, remuneration, and share capital issues.Other cases of less-than-ideal corporate gover-nance that have been reported include misaligned With regard to the business challenges, all sectorsrisk management and potential weaknesses in are clearly impacted by the justifiable demand ofboard composition and quality. In addition to the long-term investors for better corporate gover-financial crisis, growing public and regulatory nance. It is in their own interest: it enables optimalpressure will result in more stringent and for company strategic decisions and will ease accesscompanies demanding regulation.The goals of to capital on the markets.sound and robust corporate governance spanningboard remuneration and composition, compliancewith accounting standards and thorough riskmanagement are clear: the safeguarding andenhancement of the long-term value of compa-nies, and higher standards of accountability andtransparency. WHTE BOOK ON MEGATRENDS 11
Furthermore, the workforce is ageing at a very rapid pace. By 2050, more thanone-third of the European population will be over 60! In the long run thereremains a lack of skilled workers in many sectors of the economy.
Trend 5 - Shortage of human capitalFor instance, the retirement of many experienced, Furthermore, the workforce is ageing at a verygenerously paid professionals in the oil & gas rapid pace. By 2050, more than one-third of thesector has become a trend. Replacing such European population will be over 60! This will faceexperience in key roles is difficult. The average age companies with many challenges. The struggle forof oil industry workers in OECD countries is competent professionals will grow more intense.climbing steadily (the median age of nearly half the This means that companies will need to look overprofessional in today’s oil industry is 47, among the borders to find these people, pushing up wagesthe oldest of any industry). And there just aren’t and benefits. Attention to intercultural sensibili-enough young professionals to replace them. ties will need to rise concomitantly. Finally, companies and workers will need to deal withAccording to a 2004 survey conducted by the restructurings, relocations and increased offAmerican Petroleum Institute (API), by 2009, shoring.there will be a 38 percent shortage of engineersand geoscientists and a 28 percent shortage of From a business point of view, these topics willinstrumentation and electrical workers.Another clearly impact human resources departments, asdriver is that loyalty to one specific organization is well as client relation management. Moreover, wenot self-evident anymore, e.g., job turnover is see a concrete business opportunity for cross-rising. The globalization of the economy is another border training-related services (language skills,driver, increasing the mobility of workers between intercultural sensitivity and other ‘soft’ skillscountries and even continents. training). WHTE BOOK ON MEGATRENDS 13
Appendix – Information sourcesWorld Health Organization, 10 facts about water scarcity.http://www.who.int/features/factfiles/water/en/index.htmlhttp://www.unesco.org/water/http://www.reuters.com/article/latestCrisis/idUSN12399772Why invest in Asia? A dozen good reasons. CLSA Asia Pacific Markets: 2009. IbidemLaboratories of Innovation: Leveraging Emerging Markets for Commercial Success.http://www.deloitte.com/dtt/cda/doc/content/Innovation%20in%20Emerging%20Markets_ExecutiveSummary_Final_2006(4).pdfhttp://www.hm-treasury.gov.uk/sternreview_index.htmhttp://en.wikipedia.org/wiki/American_Clean_Energy_and_Security_ActEconoshock: hoe zes economische schokken uw leven fundamenteel zullen veranderen.Houtekiet/Geert Noels: 2008.IbidemUNEP FIWBCSD14 WHITE BOOK ON MEGATRENDS
Published by: Nordea Investment Funds Photo: iStockphoto February 2011