Leading companies today are starting to think of sustainability as a tool for growing profitability, using frameworks such as the UN Sustainable Development Goals as a guide to future market opportunities. In this article, we outline three imperatives for leaders who want to thrive in tomorrow’s markets: think exponential, think open and think circular.
“How much will it cost?”
Even if these are not the first words out of a senior executive’s mouth when approached about a new sustainability initiative, it’s generally the first thought that crosses his/her mind.
It’s an understandable response. Companies have long recognised the intangible benefits of sustainability activities – on brand or talent acquisition and retention, for example. These benefits do, in most instances, enhance profitability, but the relationship is indirect. The notion of sustainability contributing directly to a company’s bottom line remains foreign to most people in business, including – perhaps most especially – sustainability officers.
Not any more. Accenture estimates the value of implementing a circular economy to be $4.5 trillion globally.1 Analysis by the We Mean Business coalition has found that implementing the Paris Agreement will unlock at least $13.5 trillion of economic activity in the energy sector alone by 2030.2 And at Davos this year, the Business & Sustainable Development Commission launched its Better Business, Better World report, which identifies at least $12 trillion a year (by 2030) of market opportunities linked to implementing the UN Sustainable Development Goals. This, by the way, is a conservative estimate. According to the Commission, the real market value could be as much as 2-3 times higher.
None of these numbers should be taken too literally, clearly, but they provide useful broad-brush indications of the scale of economic opportunities linked to sustainability that business leaders interested in long-term value cannot ignore. As a recent white paper by The Generation Foundation put it:
“These opportunities do not come at the expense of profits, but have often been the basis for identifying new business initiatives. This underscores what we have observed more generally to be true with great companies: sustainability is a tool for growing revenue and profitability while strengthening their competitive position.” 3
This powerful trajectory in our economies calls for a radical new function – and mindset – for corporate sustainability teams. It is now clear that it is time to stop thinking simply in terms of the business case for action and to start thinking about new business models, new forms of value creation. The inescapable conclusion: sustainability need not be a cost centre any longer; rather it must find a place at the heart of a company’s approach to generating profits.
[su_pullquote]Sustainability need not be a cost centre any longer; rather it must find a place at the heart of a company’s approach to generating profits.[/su_pullquote]
At the same time as these new value creation opportunities appear on the horizon, a wave of technology-driven disruptions (the so-called “Fourth Industrial Revolution”, as the World Economic Forum has dubbed it) is causing widespread value destruction. Incumbent companies in many sectors are already struggling to keep their heads above water – and those close to the bleeding edge of change conclude that there is much more to come.
By way of example, consider the findings of a recent report on the future of transportation by a new US think-tank called RethinkX:
“We are on the cusp of one of the fastest, deepest, most consequential disruptions of transportation in history. By 2030, within 10 years of regulatory approval of autonomous vehicles (AVs), 95% of US passenger miles traveled will be served by on-demand autonomous electric vehicles owned by fleets, not individuals, in a new business model we call “transport as-a-service.” 4
This disruption, the report states, “will have enormous implications across the transportation and oil industries, decimating entire portions of their value chains, causing oil demand and prices to plummet, and destroying trillions of dollars in investor value”. It estimates that, by 2030, 70% fewer passenger cars and trucks will be manufactured each year. Oil demand, meanwhile, will peak at 100 million barrels per day as soon as 2020, dropping to 70 million barrels per day by 2030. That’s 40 million barrels per day below the Energy Information Administration’s current “business as usual” case.
Again, we should not take RethinkX’s projections too literally, but rather as an indication of the scale of value destruction we are likely to see over the next few decades. Whichever way you look at them, however, they should send a chill down the spine of any automotive or oil and gas industry executive. The value of assets stranded by 2030 as a result of ecological boundaries may yet turn out to be relatively inconsequential compared with assets stranded as a result of technological change. That said, the longer-term risk of asset stranding driven by climate change is likely to be off the scale.
So how should business leaders respond to this changed – and changing – world? What kinds of strategies and mindsets can help companies capitalise on the opportunities whilst minimising their exposure to at least some of the risks outlined above? We now sketch three simple principles that can help any company navigate these choppy waters.
1. Think Exponential
In our Project Breakthrough initiative, co-developed with the United Nations Global Compact, the world’s largest corporate sustainability platform with 9,000+ member companies, we are focussing on three aspects of this latest economic earthquake: exponential technologies, exponential business models and, perhaps most fundamentally of all, exponential mindsets.
To get a better grip on what is going on, we have been accumulating air miles at an almost exponential rate. We have visited such Meccas of the X-world as the XPRIZE Foundation, Singularity University and – perhaps most mysterious of all – Google’s X facility, the self-styled “Moonshot Factory”. For a sense of what we are finding, take a look at the first round of filmed interviews on the Project Breakthrough website (www.projectbreakthrough.io).
Thoughtful business leaders sense that the rules of the game are about to change faster than at any time in their working lives. Simply parroting the latest disruption jargon won’t make the cut. Nor will parroting sustainability jargon. Indeed the entire Sustainability Industry must undergo a radical reinvention, involving defragmentation and re-capitalisation, if it is to tackle its current weaknesses, including intense siloing, internal competition and a Babel-like confusion of terminologies.
In the same way that business leaders once looked to activists and social entrepreneurs for evidence of where markets were headed, they must now engage a very different set of players. These new players are not happy with 1% or even 10% year-on-year improvements, instead pushing towards 10X – or 10-fold – improvements over time.
2. Think Open
“The argument for using the crowd that makes it a no-brainer is that everyone, I think, can agree that the smartest people in the world don’t work for your company.” So says Marcus Shingles, CEO of the XPRIZE Foundation.
XPRIZE launches challenge prizes to incentivise and harness the ingenuity of the crowd to solve “global grand challenges”. It may be an eccentric organisation in some ways – the fact that it has a Science Fiction Advisory Council may cause some eyes to roll – but it’s also a lead indicator of a trend towards more open and decentralised business models that’s already well under way.
In the age of Uber and Airbnb, it’s become a truism that access is better than ownership. Every company wants to be a platform. The three-word title of Andrew McAfee and Erik Brynjolfsson’s latest book – Machine, Platform, Crowd – captures the Zeitgeist perfectly.
But this is much more than a Silicon Valley fad. In an interview for Project Breakthrough, Patrick Thomas of Covestro explained why the company has chosen to license its technology for turning carbon dioxide into plastic.
“If you make a breakthrough in innovation, you cannot keep it to yourself,” Thomas explained. “That’s very, very important. It’s a different way of thinking about how you make money. To keep it to yourself runs the risk that it would die. If you license it to everybody else, you guarantee that they change their view, they change their method of operation, and they adopt your technology. And that’s why we went from nothing to commercial manufacture of a product in less than 10 years… That is way faster than traditional innovation technologies where everything’s kept secret. You’ve got to blow things open.”
3. Think Circular
As more companies experiment with closed-loop business models, they are learning to see value in new places. Externalities that have long been thought of as costs avoided are beginning to look like value wasted instead.
Take the example of IKEA. The company’s zero waste to landfill policy has meant that much of what would previously have gone to landfill has been recycled and incorporated into its products instead. The result: rather than costing money, IKEA actually made a profit out of the policy. Now the company is on a quest to generate more value from its waste: “the next step is not just about recycling, but it’s about using waste in our own operations”.
It’s not just material waste that can be re-imagined as a resource. In the age of Artificial – or Augmented – Intelligence, companies that create reams of data as a by-product of their core business are fast learning that this data is anything but worthless. Earlier this year an Economist editorial described data as “the world’s most valuable resource”, arguing that just as oil was the lifeblood of the global economy in the 20th century, data is its 21st-century equivalent.
The market dominance of data-rich companies like Alphabet, Amazon and Facebook is one indication of this, but it’s not just the tech industry that has been rocked by the data revolution. “Industrial giants such as GE and Siemens,” reports The Economist, “now sell themselves as data firms.”
And consider what’s been happening in the automotive industry, where for three months this year Tesla superseded GM to become the most valuable US car manufacturer (its share price took a tumble in July, which meant it lost the top spot). This was despite the fact that GM sold more than 100 times more cars than Tesla in 2016. So what explains Tesla’s high market valuation relative to sales? Answer: data. For every single mile driven in a Tesla, the company reaps valuable information to feed to its algorithms and improve its self-driving technology.
Perhaps more surprisingly, a similar revolution is under way when it comes to greenhouse gas emissions. Thanks to rapidly improving carbon capture technologies, it is now possible to extract CO2 from the atmosphere and convert it into new materials and products – creating value from climate change-causing emissions.
[su_pullquote]So what explains Tesla’s high market valuation relative to sales? Answer: data. For every single mile driven in a Tesla, the company reaps valuable information to feed to its algorithms and improve its self-driving technology.[/su_pullquote]
One pioneer in this space is Covestro (formerly Bayer MaterialScience), an advanced materials company. The discovery that it could use atmospheric CO2 as an input to its business shifted the company’s perspective on carbon. Rather than seeing it simply as a problem, it now sees carbon as a valuable asset. The CEO, Patrick Thomas, talks in terms of maximising “return on carbon invested” or “carbon productivity”.
The implications of this shift in perspective are three-fold. First, it requires the company to take a much more holistic view of its role in the carbon system – identifying where it can help redirect carbon flows to reduce environmental harm and, at the same time, create economic value. Second, by reframing the problem – from decarbonisation to maximising return on carbon invested – it invites greater creativity and innovation. And thirdly, by reducing the company’s reliance on other sources of carbon, it increases its resilience and reduces its exposure to fluctuations in the oil price or the potential impact of carbon pricing.
This shift in focus is not, and should not be, exclusive to Covestro. Along with a handful of like-minded organisations, we are currently building out a Carbon Productivity initiative, designed to spread this thinking across industry and beyond. (For more, see www.carbonproductivity.com)
The Best is Yet to Come
There are no guarantees for the businesses that embrace these three principles of exponential, open and circular, but they are significantly more likely to survive and thrive in the coming decades than those that don’t. There will be many failures along the way. Indeed, in times of radical experimentation of the sort we now need the corporate failure rate tends to go off the scale. But the scale of the market opportunities now being forecast suggests that, for those who survive and don’t simply limp along, the twenty-first century could prove to be their – and our – best yet.
About the Authors
John Elkington is Chairman & Chief Pollinator at Volans (www.volans.com). Also co-founder of Environmental Data Services (ENDS) back in 1978 and SustainAbility 30 years ago in 1987. He has written 19 books – most recently The Breakthrough Challenge: 10 Ways to Connect Today’s Profits With Tomorrow’s Bottom Line with Jochen Zeitz.
Richard Roberts is Project Breakthrough Lead at Volans. His research and writing covers the role of new technologies, business models and mindsets as enablers of sustainable growth.
1. Waste to Wealth: Creating Advantage in a Circular Economy, Accenture, 2015.
2. The Paris Agreement: What it Means for Business, We Mean Business, 2016.
3. The Transformation of Growth: How Sustainable Capitalism can drive a new Economic Order, Generation Foundation, 2017.
4. Rethinking Transportation, RethinkX, 2017.