Australia (GLOBE-Net) - ‘Radical Greening’ has been ranked in the top 10 strategic risks to business in a recent report from consultancy firm Ernst & Young.  Much of the risk comes from shifting consumer demands demonstrating that the requirements for corporate responsibility are also changing rapidly.

To develop the report, Ernst & Young worked with Oxford Analytica to interview more than 70 analysts from around the world and from over 20 disciplines that shape the business environment, including law, finance, the sciences, business strategy, geopolitics, regulation, medicine, economics and demographics. The focus of the interviews was to identify the emerging trends and uncertainties that will drive the fortunes of leading global businesses over the next five years.

‘Radical greening’ refers to the changing landscape of business to be more sustainable resulting from either voluntary corporate social responsibility or regulatory and economic necessity.

Radical greening is a strategic risk to business because of its complexity and dependency on a variety of independently acting and currently unknown variables.  Such variables include consumer attitudes, regulatory responses to climate change, and weather events resulting from climate change.

The strategic challenge centers on how much ‘radical greening’ firms should undertake. Going green is expensive, but could pay dividends if consumer tastes and regulation shift quickly.  On the other hand too much greening or too little greening could severely hurt a company. 

The pace and extent of this new ‘green revolution’ is hard to predict - but what is almost certain is that some firms will get the right fuel mix, real estate portfolio, or carbon footprint, while others will go either too radically green or, more likely, not green enough.

According to the report current climate predictions are based on models and, naturally, the scenarios communicated to the policy world are the scientifically conservative scenarios (i.e., those which most scientists agree are likely).

Yet scientifically conservative scenarios are not necessarily what will happen; it is possible that the hazard is actually more imminent than is commonly understood.  In this case, we may see physical climate surprises as well as an increased policy response that is more abrupt than most firms are currently planning for.

The uncertainty surrounding the future climate policy regime is also a significant risk to business.  In fact regulatory and compliance risk were identified as the greatest overall risk to business in 2008.  Although not specifically limited to the environment, environmental choices of business are directly linked to policy requirements.

Policy is expected regarding cap and trade systems, carbon taxes, renewable energy requirements around the world, but not knowing what those targets will be creates a significant amount of risk for new investments or for business that may not be able to cope with sudden shifts in regulation. (see GLOBE-Net EU something)

Energy security, including access to supplies and pricing, was also identified as another top 10 risk for business.  This risk is directly linked to the future of environmental policy demonstrating that risks associated with the environment transcend risk categories making the environment potentially the most complicated risk facing businesses.

Energy will have the most direct impact on utilities, however a large swing in prices could also trigger economic shocks that could impact sectors such as insurance, consumer products and real estate. Few leading global companies are immune to this risk.

"Governments are increasingly convinced that energy security needs to be pursued actively. The reality may be quite different, but the perception could trigger a crisis [caused by] desperate efforts that countries may make to secure their supplies (paying above market rates, long-term deals, etc.). If markets then panic, this would cause governments to respond with even more uncoordinated, unilateral steps, making the situation infinitely worse," the report says.

Above all the most complex environmental risk facing companies is the failure to anticipate consumer demand shifts.  More and more consumers are seeking greener products and services and greater corporate responsibility from companies.

According to a recent survey conducted by so and so, 68% of consumers are seeking more genuine green products.  The survey also found that 78% of consumers dislike companies which make misleading claims about being ‘green’. (See GLOBE-Net Article)

The Ernst & Young report and the survey underline the point that consumer moods are changing and they require companies to move towards corporate responsibility which is both sincere and transparent.

Companies that manage these challenges well, will, in the long-term, develop a competitive advantage in accessing new opportunities and attracting capital.

"The definition of a company and its involvement in wider society is expanding, as is the expectations of shareholders, employees and consumers," Forbes editor Paul Maidment recently wrote. "Traditional corporate social responsibility is starting to be replaced with a new notion of corporate citizenship, which for larger companies means global corporate citizenship."

The full report Strategic Business Risks 2008 can be found here.

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For More Information: Ernst and Young