Consumer demands for sustainability are also having a transformative effect on the demand for natural resources. Today, green concerns have an impact on the purchasing decisions of almost all consumers.
Given that the supply, demand and price of natural resources are at the core of business, natural resources and material risks pose a threat for all companies in all sectors.
Environmental concerns contribute to the demand for some materials at the expense of others. A prime example is the changing energy mix, with coal in decline at the expense of renewables and natural gas.
Similarly, the increased pressure to replace the use of toxic materials such as lead in batteries with lithium drives demand for specific niche materials. From 2010 to 2015, lithium production increased by 30% globally.
There is also an increasing emphasis on recycling and pressure for manufacturers and retailers to use less packaging. The introduction of a five pence charge for single-use plastic carrier bags in the UK is one example. In 2012, the government estimates that over seven billion single-use plastic bags were given out by supermarkets alone in the UK. Since the change in legislation, some retailers are claiming decreases of up to 80% in the number of bags used.
The World Economic Forum’s Global Risks 2016 report, identifies natural resources at the top of the agenda. Four of the five risks of highest concern for the next 10 years, identified by 750 members of the World Economic Forum’s global multi-stakeholder community, are related to natural resources and sustainability. Water crises top the list, with 40% of respondents identifying them as amongst the top five risks for the next 10 years.
The Top Five Global Risks of Highest Concern for the Next 10 Years
The supply and demand of natural resources give rise to a range of business risks:
Companies may struggle to secure supplies of key inputs and this could disrupt production. In addition, flow-on effects from natural disasters or climate change can resonate around the world and affect supplies of raw materials. Difficulties around managing high or volatile commodity prices also fall into this category.
The public perception of a brand or a company as a whole can be damaged if the business is exposed as using unsustainable sources of materials or damaging ecosystems or habitats. For instance, a company consuming large amounts of water in a water-stressed locale runs the risk of bad publicity.
Governments may legislate to protect supplies of critical materials or prohibit the use of environmentally damaging resources—for instance, the European Union has specific directives on recycling, such as the Waste Electrical and Electronic Equipment Directive that sets collection, recycling and recovery targets for all types of electrical goods.
Market risks can include changes in consumer trends and demands. Consumers may switch to a competitor’s more efficient or more sustainable products and services as a result of increasing awareness and interest in environmental matters. For instance, consumer demands for sustainable sources of palm oil have forced many food and drink manufacturers to switch to sustainable sources or alternatives to palm oil.
These risks combine to create the new normal for companies, which must act to secure their supplies of key natural resources whilst also accommodating the increased demand for sustainable practices from government and consumers alike.
How can companies manage these risks?
Companies should conduct thorough studies of their reliance on key raw materials, constantly reviewing and updating plans and processes.
The simplest way for businesses to manage the risk is to make the most efficient use of their critical resources. Recycling and substitution offer additional ways for companies to manage their supply of raw materials.
At the more extreme end of the range of options available is a complete or partial change of business models to incorporate ideas such as retaining ownership of products and leasing them to clients and customers or introducing take-back and re-manufacturing schemes and switching to sustainable raw materials.
Euromonitor, Sustainability and the New Normal for Natural Resources, 2016
McKinsey & Company, Sustainability & Resource Productivity, 2014