Malta: Sustainability Mega Forces – Is Your Business At Risk?

Last Updated: 18 October 2013
Article by Steve Stivala

Over time, two opposing forces have led to today's complex, volatile and uncertain business environment. The forces of globalisation, increasing consumption, digital advances and numerous other global advances have led to multiple ecological declines, resulting in the deterioration of natural resources.

As a result, the earth's ecosystems are not able to provide the same level of services to the economy to any further extent. Resource shortage such as arable land, fresh water, crude oil and global fish stocks are leading to increases in price volatility including large price spikes as well as disruption in supplies. The lack of appropriate sustainability governance over natural resources has led to their further disparate deterioration. Although diverse regions in the world, such as the United States or the European Union, have implemented policies that address domestic issues, global enforcement and monitoring systems are still not appropriately in place. Thus firms operating in diverse regions do not foster a level playing field. In this regard, although significant process has been made in various regions, a global enforcing mechanism is required for a tangible worldwide and coherent change in this respect. Many of the agreements achieved at the 1992 Rio Earth Summit and the 2002 Johannesburg UN Conference have still not been implemented and enforced. The latest United Nations Conference on Sustainable Development entitled the 'Rio+20 Earth Summit', was highly criticised as many argued that it failed to provide global 'concrete' action and enforcement mechanisms. Hence, the responsibility for the promotion of sustainable development is still left at an individual country level.

Business Challenges

Climate change is the first primary obvious risk to business long term sustainability, and is the base cause for all other risks described. All types of businesses may be affected over the long term, particularly as increasing global temperatures could cause irreversible impacts, potentially causing physical risks. Increases in temperatures may have long term effects which could cause contamination of groundwater supplies, intensifying the level of water scarcity that characterises the Maltese islands. As extreme weather events are expected to become more pronounced, rising sea levels could possibly cause flooding. Furthermore, climate change is expected to affect ecosystem health and biodiversity, causing a decrease in land productivity.

In this respect, urgent action is necessary to help mitigate this risk by reducing the level of emissions both on a global and national level. Whilst global consensus on reducing greenhouse gas emissions is required, global individual businesses need to understand and comply with the complexity of this issue by taking actions on an individual basis. This would result in an increase in collective action in mitigating climate change risks.

Natural resource Scarcity

Over time, demand for material resources is expected to increase particularly from developing countries. Ahead of the United Nations Conference on Sustainable Development the Rio+20 Summit in 2012, KPMG International released the report 'Expect the Unexpected: Building Business Value in a Changing World'1. This report envisages that over the next 20 years, businesses will face competition for various material resources, as their supply becomes less available and in addition, as supplies decrease in their availability governments abroad seek to protect domestic resources by imposing export restrictions. In this regard, an article published by EurActiv.com2 in August 2013, ascertained that Europe currently consumes 2.66 times more than Europe's environment capacity to sustain its current consumption levels. Thus, this situation is somewhat of concern for European businesses as this shows that our combined European consumption levels of natural resources are inadequate for long run sustainability.

The global supply and availability of fossil fuels is set to become highly volatile and unpredictable as higher demand pressures continue to materialise. Shifts in fossil fuel consumption as well as the development of new regulatory measures intended for tackling climate change may affect businesses. Businesses, irrespective of their size and nature may encounter difficulties in dealing with energy costs particularly in relation to fossil fuel usage. Becoming energy efficient should therefore become one of your top priorities. Exploring alternative options towards renewable sources of energy may help your organisation reduce its dependency on 'traditional' energy sources. Consequently, reducing your energy bill over the long term.

Water scarcity is also another major issue for numerous businesses, including local firms. Being a Mediterranean island, Malta faces a huge problem of water scarcity as the sole source of freshwater is groundwater resources. Malta is immensely characterised by water scarcity. Local aquifers are the sole source of freshwater supply and consequently, if over-abstraction of groundwater continues to occur, the magnitude of scarcity will increase. Increasing water scarcity may pose a threat to business expansion and growth, as further prices increases are expected to increase the cost burden for all businesses. Furthermore, a decline in global ecosystems will put further stress on businesses' operations which depend on critical services provided by the natural environment such as fish, timber and water. The further resources become scarce, expensive and less diverse, and the higher the extent on the damage case by invasive species to ecosystems, the higher the probability of pressures on industry which critically depend on ecosystem services. Local industries such as the agricultural, fishing, food and beverage, pharmaceutical as well as the tourism industry could be negatively hit as global supplies decrease in their availability. The higher the proportion of corporate expenditure on imported commodities is, the higher will global price volatilities and inflationary pressures impact these industries.

Other contributing Factors

Since global population is increasing we can expect further supply and demand pressures particularly on ecosystems as demand for food consumption increases. Over time, an ageing population will face a higher proportion of retired citizens and thus will result in a lower workforce coupled with skill shortages. Also, as emerging economies such as China, Brazil, India and Mexico enhance their economic growth, it is expected that such countries will experience a higher income per capita growth that will translate into higher demand for resources, leading to a further deterioration of global ecosystems. As a result, we may expect further price volatilities for output produced and imported commodities, leading to an increase in costs for import dependent businesses.

What's next?

Resource availability is a predominant sustainability risk for all businesses. However, other pertinent issues need to be considered further particularly with respect to emerging regulations in particular; at present the United Nations is pushing national Governments to stimulate sustainability reporting. This move will allow companies shift further to the concept of a 'green economy', which was widely accepted at the Rio+20 Earth Summit. Furthermore, Rio+20 encouraged further Government and businesses action to integrate sustainability reporting in their annual financial reporting.

In particular, Rio+20 initiated the process of a post 2015 development agenda with a view of preparing a set of Sustainable Development Goals, which will supersede the current Millennium Development Goals. The concept of Sustainability Reporting through the measurement, monitoring and management of sustainability performance and environmental impacts will be on top of the agenda. In this respect, further future regulatory compliance is expected.

In this regard, Sustainability reporting is already being pushed by various countries including Denmark and France through the implementation of mandatory sustainability reporting laws. On a wider dimension, the EU has made a positive move in this regard. In April of this year, the European Commission issued a proposal for amending the Fourth and Seventh Annual and Consolidated Accounts Directives (78/660/EEC and 83/349/ EEC respectively) with a view of enhancing EU Companies' reporting transparency and performance on environmental and social issues. Specifically, firms will be required to disclose information in relation to policies, results and risks emanating from such issues. Companies would therefore be required to adopt and use international guidelines such as Global Reporting Initiative guidelines, OECD guidelines for Multinational Enterprises, ISO 26000 on Social Responsibility amongst other existing frameworks. If this proposal is eventually adopted in the respective EU Directives, companies' which employee an average of 500 individuals with a Balance Sheet exceeding €20 million or a net turnover of €40 million will be required to report on social and environmental issues.

As the large part of Maltese owned companies are considered as SME's, the impact of this Directive is expected to the relatively minimal within the local context. However, as this is still at Proposal stage, the final scope of the obligation requirement is not determined yet. If this Directive is also applied to SME's, this could potentially increase compliance costs for the major part of Maltese owned businesses. In this regard, prompt business behaviour is favoured to mitigate the risk of litigation as a result of failure to comply with legislation. Failure to comply with new emerging regulations may also cause your organisation to suffer reputational risk in the face of consumers who tend to favour brands which are legally compliant.

Furthermore, businesses face the risk of damaging their reputation and brand image if it is perceived that management is failing to act in an appropriate manner in response to climate change and sustainability challenges. Stakeholders such as investors, consumers, policy makers, employees and the media will surely place greater value to organisations which place importance and consider sustainability challenges into their longterm strategic agenda.

The world is too uncertain and complex to extrapolate the magnitude of future complexities that climate change will bring about. It is true to say that sustainability pressures will impact local businesses in a variety of ways, in differing magnitudes, particularly bearing in mind Malta's peculiarities as a small island state. In particular, Malta's economy is characterised by a high dependency on exports,a small domestic market, scarcity of natural resources and a high exposure to international prices. In this regard, local firms need to incorporate global pressures into their current decision making to mitigate risks arising from non-action and adapt to international resource market developments. If each business unit opts for eco-efficient choices and seeks to minimise its dependency on imported resources, in the long-run this will translate into lower unit costs and significant cost savings, coupled with long run economic and strategic benefits. Additionally, it is expected that increasing pressures will bring in a new whole influx of voluntary and regulatory requirements of various complexities, particularly at an EU level.

New opportunities?

Businesses may turn these challenges into new business opportunities. In essence, businesses need to conserve and possibly find new ways of obtaining substitute resources. A case in point is that it may be particularly sensible for water-intensive businesses to use water in a more efficient manner and possibly invest in water recycling methods, which would generate significant cost savings over the long term. Effective strategic planning will enable firms to find new ways to improve production methods and explore ways which could lead to accessibility to new green markets. In addition, preempting future regulations, particularly with respect to Sustainability reporting, will gear your business with the necessary tools to minimize potential future costs of compliance and decrease liability risks.

How can your business be more eco-efficient?

Here are some useful tips to mitigate sustainability risks:

  • Reduce travelling by car or plane whenever possible. Why not use web cameras to hold meetings instead? Make the best use of today's modernised digital connectivity in ways that can help you save costs and hence, lower your ecological footprint.
  • Inform your employees about you firm's energy saving policies that you would like to implement in your business. It may be a good idea to hold a meeting with your employees explaining ways on how to cut energy costs and propose ideas on how to conserve energy such as using airconditioners at moderate temperatures, switching off printers when not in use, reduce paper waste, and recycling paper. Why not introduce the Reduce, Reuse and Recycle concept amongst your colleagues?
  • Register for environmental initiatives that aim to enhance your firm's reputation such as the Eco-Management and Audit Scheme (EMAS) managed by the Malta Competition and Consumer Affairs Authority. The EMAS is designed to act as a tool that allows your organisation to measure, evaluate, report and ultimately improve upon your overall environmental performance.
  • Invest in green technologies. In the long-run, this will be highly beneficial to your business. Minimising your dependency on 'traditional' technologies will help you heighten energy efficiency which will translate into a sustained future advantage. Possible ideas may include the use a low energy lighting system, install solar panels, switching to low energy appliances. Why not increase your share of total renewable energy by making use of space on your office building to generate further energy through the installation of a photo-voltaic system, and possibly benefit from the feed-in tariff system?
  • In addition, your organisation may register to benefit from possible EU energy support schemes such as the ERDF PV scheme, currently managed by the Malta Resources Authority. If grants are not available, you may opt for a 'green' loan which is offered by three of Malta's leading banks. 'Green' loans are specifically tailored to help businesses, finance the purchase of environmentally friendly equipment such as PV systems, energy saving equipment, and solar water heaters amongst others.
  • Make your energy saving strategies and efforts public. Nowadays consumers are inclined to make green friendly choices. Advertising and marketing your efforts would put you in an advantageous position in the market. For instance, the use of EMAS logo will help put your firm in the spotlight.
  • Incorporate your green efforts into your financial statements to highlight your efforts even further. Your stakeholders would be able to understand how well your organisation is addressing long term environmental issues.

Footnotes

1 Available at: http://www.kpmg.com/global/en/issuesandinsights/articlespublications/sustainable-insight/pages/sustainable-insight-expect-the-unexpected.aspx

2 Source: EurActiv, available at: http://www.euractiv.com/general/human-resource-use-red-2013-news-529861 [viewed on 21st August, 2013].

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Steve Stivala
 
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