Sustainable Business: 5 Strategies For Capitalism To Save The Planet
Planet earth is getting hotter, and human activity is the principal cause. Although this remains a contested statement for some in US politics, it’s surprisingly well understood by the CEOs and senior executives with whom I work. It may be true that capitalism got us into this situation, but it is also true that there is commitment to getting us out of it.
When I visit the c-suites of companies in US, Europe, and Japan, as I have done over the past two or three years, there is a repeating mantra on the importance of leading with making economic activity sustainable for the planet. The question we are all wrestling with is how to do it and how to make it work within the realities of the market system. It’s a big challenge.
That’s why my colleague Dan Kolodziej is going to be focusing on this topic at the next of his series of roundtables with Imperial College Business School London and its Wicked Lab Accelerator. The roundtable will bring together businesses from a range of industries to discuss practical strategies for innovating for sustainability.
There are really five strategies that corporates can pursue. They are all useful to the goal of saving the planet, but not equally so.
1. Achieve a high ESG Rating to burnish your brand
My use of the word “burnish” has given the game away here. Environment, Social, and Governance Ratings started as one thing, but have become another. ESG ratings emerged about ten years ago as a way to benchmark investments against commitments to realize the UN Sustainable Development Goals. It was a risk management framework for evaluating for ESG might affect a company’s value. It has become a way to appear to be acting on sustainability issues.
The promise of these scores is that it would convert an abstract concept into something that financial markets could understand. The result was a host of investment funds that promised to only invest their customer’s money in companies with good ESG ratings. It was understood that tobacco, oil and gas, and military related firms would be excluded from the funds. Great idea. I have to admit to having been heavily invested in such funds and doing very well because it so happens technology firms align very nicely with this mission!
The problem is that these ESG scores are largely meaningless. A client project brought this home to me several years ago. The firm’s CEO is a passionate environmentalist, and he was astonished to discover that his firm’s ESG scores lagged his nearest competitors. He asked us to investigate and find the reason. We found that the company’s low scores had nothing to do with their practices and everything to do with how they completed the forms from the agencies that publish ESG indices. An easy win for my client, but a hollow victory as it was clear that improving these scores will not save the world.
2. Take action to limit environmental harm in the supply chain
This is a big deal. The EU directive on “scope 3 emissions” is already driving action in many industries as companies will be held responsible for the indirect impact that they have on the environment through their supply chains.
There are already some leaders in this domain. The Swedish construction equipment company, Sandvik, has designed its entire business strategy around the promise of having a “circular economy.” That means that they reuse and recycle the raw materials needed to create their products, leading to a massive reduction in net carbon.
I have recently been involved in projects to eliminate harmful chemicals used in the production of everything from semiconductors and textiles. Again, a vital set of actions that can have a huge environmental impact. However, I am left feeling that this is damage limitation, not really the same as reversing the steady decline of the planet’s natural ecosystems.
3. Make sustainability integral to business design
This is getting closer to the innovation theme. There is a consensus that product developers need to add a fourth criteria to evaluating their pipelines – desirability, feasibility, and viability are still important, but we also need sustainability to be equally important.
My friend and colleague Lorenzo Massa is the co-author of a brilliant book published last year on this topic. Entitled Sustainable Business Model Design, Lorenzo’s book describes 45 patterns for business models that take account of the importance of environmental and social factors.
Lorenzo and his co-authors encourage us to about sustainability as a trade-off between how much value you can create on three dimensions:
- Economic – delivering a commercially attractive business model
- Environmental – managing the environmental impacts
- Social – contributing positively to society
Designing a product with high economic value may have more environmental consequences. For example, manufacturers of vapes make more money on disposable vapes but they are an environmental disaster for the planet. If we accept this premise, we then need to find ways to innovate the model to balance economic impact with the other factors.
The brilliance of Lorenzo’s book is its practicality. The 45 patterns are ones that any business can recognize and see how to apply in design of their own products. Lorenzo will be the guest at Dan’s roundtable mentioned above.
4. Innovate for better sustainability outcomes
Upping the game to another level are firms that are seeking to develop solutions to social and environmental problems and actually give us a chance to save the planet. My favorite is ENEL, the Italian energy generation and distribution company with operations across Europe and South America. In 2010, its CEO took the environmental crisis seriously and over the next decade he moved the company from being a massive user of carbon-based fuels to the world’s largest generator of renewable energy. They did so by harnessing a range of innovations, some technical and some financial. For example, faced with the problem of how to fund their plans for renewable energy, they designed new financial instruments fund investments in wind farms. In return for the investment, ENEL could offer guaranteed returns by purchasing electricity back from the new sources. An elegant answer to a difficult problem.
We cannot stop there. We need to move innovation for sustainability out of the extractive and energy industries so that it becomes a broad based concern dominating innovation agendas in companies across industries.
This is the new frontier for exploratory innovation. We know that there is demand for sustainability solutions for carbon reduction and climate change mitigation. This need will only increase as sea levels rise and human civilization is forced to adapt to the new realities of a warmer world. There is abundant opportunity to ideate, incubate, and scale solutions in these areas.
5. Adopt ecosystem solutions
One recurring theme in sustainability is action is often not in the interests of any one player. It requires action from an ecosystem to make a difference. For example, Colgate has pioneered the introduction of recyclable toothpaste tubes, helping to eliminate the use of single use plastics. Even though Colgate represents almost 50% of the world toothpaste market it is still not able to secure worldwide availability of recycling facilities. It takes the entire industry to move and recyclers and consumers. It’s a complex problem of cooperation, incentives, and consumer behavior.
5 strategies for saving the planet. Let me know any I have missed, or examples of what firms have done to execute them successfully. I look forward to writing a follow-up article on the outcomes of Dan’s roundtable. Find him on LinkedIn if you are interested in attending.
As my friend Felix Dodds, co-author of the book Negotiating the Sustainable Development Goals, has written, “Humanity has taken a huge leap in the last decades and become a planetary-scale force - we need to behave as a global civilization if we are not to face catastrophic consequences.”
We will only succeed if business is in the forefront.
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