Climate Change the Number 1 Threat for CEOs

KPMG Robert Stöllinger speakingat the CEO survey press briefing.

Ten years after the crisis, the CEOs of some of the world’s largest organizations are optimistic. They have some reason to be so, particularly in the Unites States, as this has been the longest period of growth for America since World War II. Their peers in China or in the United Kingdom may be less content but they don’t fear a recession either.  

In fact, of the company leaders KPMG asked in its 2019 global CEO outlook survey, almost two-thirds (63%, up from 54% in 2018) believe that their organization is going to actively disrupt its sector.  

That seems pretty confident, but then again that is what a global firm’s CEO is supposed to be, says Robert Stöllinger, CEO and head of advisory at KPMG in Hungary who presented the findings of the report to the press.

Being optimistic doesn’t mean you ignore threats. The five biggest risks CEOs identified have remained the same, although their ranking has changed. For the first time, climate change has taken the lead.

This may come as a bit of surprise to some, as climate is not really a number one priority for capitalism, the system most of these companies operate in, Stöllinger says.  

Yet pressure from regulators and consumer demand for products that are less harmful for the environment is concentrating minds. So does the firm’s reputation, which can easily be damaged unless care is taken, Stöllinger adds.  

Today, not Tomorrow

Incorporating climate policies into business strategies is not about preparing for the future; companies are already feeling a lot of the effects of climate change on their skin today, says Csaba Kovács, a partner at KPMG.

Preparation for climate change has been going on for a while. In energy-intensive sectors in particular, some serious developments have taken place to improve energy efficiency. Many companies have invested a lot in helping renewable energy expand.  

To support a transition to a greener economy, many investments have to be made. Capital and financing have the tendency to gravitate towards greater returns, which means only those projects promising a good return are likely to be funded.  

This is where governments have great responsibility: they need to create conditions and incentives such as feed-in-tariffs for renewable energy production or tax breaks for electric car purchase, or energy efficiency projects, says Kovács, partner at KPMG.  

The countries where the transition is very efficient are usually those that keep social benefits ahead. Instead of focusing on one segment, they create an entire back- economy that supports society as a whole, he adds.

If states are lax in creating proper conditions to induce change, consumer demand is now strong enough to put pressure on companies. So much so that it is no longer all about the product; how sustainable it is also matters for consumers. And whether consumers seek sustainable services and products out of conviction or faddism, companies still have to address that.  

Communication Channels

Depending on the sector, and the company’s goals, communication varies. For a manufacturing or a retail company, sustainability is a more tangible term, so they can better communicate it, Kovács notes.

For an electricity-generating company, for example, placing more emphasis on what sources it uses for energy generation or on its emission rates makes more sense.  

These days, retail companies are trying hard to reduce and recycle the amount of packaging they use and reintroduce it in the circular economy, Kovács says.  

Water usage is a similarly hot topic: how to reduce water use or use grey water more efficiently or use machines that use less energy in general. It is not unusual now for the biggest firms to a sustainability department with a small team of experts who coordinate the sustainability requirements of the various business units and create sustainability reports.  

“Firms that care will run a really thorough due diligence to check their suppliers. That is, they won’t rely on written statements but will actually check a site or measure the emission rates written in reports provided by suppliers when entering into the contract,” Kovács explains.  

Should suppliers fail to keep these standards, responsible firms will quickly replace them. One such failure would damage their reputation so much if it surfaced, that it is worth devoting attention and money to being truly sustainable.  

“For those to whom this is of less importance, they will use it [sustainability] as a marketing tool. But companies that have more at stake in business, will put a lot of effort in it”

Although Hungary did not officially take part of the global survey, KPMG Hungary did quiz some local CEOs informally. Many were concerned about competition being threatened by global mammoths, especially the giant tech firms. They also brought up the question of intuition vs. data during decision-making, claiming intuition will continue to play a strong role despite the availability of data. The age of individual CEOs may account for that statement, KPMG experts noted, as most are older and may be less used or willing to rely on data than the younger generation.

Threats to Growth

A lot has changed in a year of business, which is reflected by what the leaders of global firms are more concerned about. According to KPMG CEO outlook report, the main five threats to growth in 2019, with their 2018 ranking in brackets, are:

Yet it is not just the order of risks that have changed; how companies respond in general has also altered. Acquisitions are now being made with a new aim. Unlike before, when companies bought up smaller firms to boost growth, today the key purpose is often to bring a new mindset or corporate culture into the company. 

Also, the CEOs surveyed are not concerned about technology replacing people; instead, they focus on how to create a balance between machine and men.