How prioritizing sustainability affects and evolves business strategies and operating models

By | 8 minute read | August 2, 2022

Road jutting out over a mountain

International businesses are operating in a world suffering a powerful sense of malaise with the status quo. Environmental and societal issues have shot to the top of national and international agendas, and the pressure for action is intense and pressing. Businesses must respond to change; they should anticipate high state intervention, explicit societal demands from citizens and higher levels of scrutiny from investors and regulators. The number of issues, institutions and interests pressing for change indicates a compelling need for international businesses to overhaul their core strategies.

Are international businesses open to sustainability?

First movers in the international business community, like Unilever, IKEA and Patagonia, have embedded sustainability throughout their business models. Others, like Ørsted, a Danish multinational power company, are rapidly reinventing their business model to provide renewable energy. To accomplish this, Ørsted is swapping fossil fuels for offshore wind power. Unfortunately, most international businesses are considerably behind these global leaders, with many not accepting that averting climate change or global poverty is part of each business’s social contract.

How would prioritizing sustainability change business strategies and models?

Consumers who “reduce, reuse, recycle” will expect different experiences and services from the businesses and organizations they entrust with their money, data and wellbeing. Sustainable markets will be profitable, innovative, collaborative and open, and the design principles that reorient them to sustainability will direct them to long-term and inclusive growth.

New sustainability-driven innovations and capabilities create significant change for a business

Putting sustainability at the heart of your business strategy puts your business on a new path of innovation and expanded capabilities. Practical sustainability-related innovations depend on product, process and business model innovation. This includes innovative models like a move to renewables, a circular economy that doesn’t rely on the consumption of finite resources, as-a-service models, maximized product utilization to rethink the concept of waste, and product innovation.

What follows are some examples of operating model impacts of sustainability-driven innovations.

New technology innovation: impact of renewable innovation

Adopting renewable energy technologies will have diverse impacts on industries. Some industries, like technology consulting, can adjust to renewables relatively smoothly by switching energy providers and installing solar panels on offices and data centers. Other industries are more power-intensive.

Mining is an especially interesting use case for heavy industry’s move to renewable energy. The mining industry must make more significant changes to their operating models to incorporate renewable energy technologies, including overhauling remote fleets of mining and construction vehicles or investing in private power stations as well as new technologies capable of creating steel without burning fossil fuels.

New organization innovations: the impact of leveraging external ideas

The very activity of attempting to address sustainability can drive business model innovation. Tackling a wicked problem like the complexity of global sustainability requires ideas, a lot of them, ideally through open innovation. Open innovation requires a fundamental transformation in a business’s understanding of who can create value. This should no longer be limited to the R&D departments. Instead, organizations need to develop employee confidence and skill across all business units to envision new ways of working. This requires enterprise design thinking programs to build ideation skills, updated governance models to empower teams to change their ways of working, the recruitment of new talent, and corporate partnerships bringing diverse expertise to established teams.

New organization innovations: right to repair

The UK and EU are updating legislation to discourage “premature obsolescence,” alongside existing legislation to encourage recycling. Companies with business strategies that include planned obsolescence will have to rethink their ideas about value. If a product like a washing machine can no longer be designed to last just 5 years before replacement, then entire enterprise business processes must be reconsidered: design, manufacturing, pricing, sales and servicing, and arguably the company’s entire value set. Sustainable consumption will directly challenge the whole business model of low-cost operators and their extensive global supply chains.

New organization innovations: transparency in labor arbitrage

Pressure to reduce prices and increase agility and volume has led to extensive globalization of the supply chain for many international businesses. However, the employment practices in many developing countries and firms far down the value chain can be exploitative, allowing for lower wages, longer working hours and less unionized workforces. Therefore, sustainable retail practices must address workforce and supply chain strategies that knowingly or unknowingly source products made by forced labor or prison labor. Legislation such as the UK’s Modern Slavery Act and France’s Corporate Duty of Vigilance is pushing organizations to bring transparency to their sourcing strategies, making them accountable for employment along their whole supply chain. This step requires a rethink of the scope of “supplier relations” and a broadening of the skills and responsibilities of a company’s strategic buyers to develop long-term sustainable value.

New market innovations: Ecosystem collaboration

As the renewables market is still in formation, there are enormous opportunities for value pool creation, from first-mover innovation with new sustainable product designs and “complementary assets” needed to power the renewables market. For example, to support electric vehicles’ demands on the grid, three industry group leaders from energy, technology and automotive came together to create Equigy, a new electricity management and power-grid usage business. Equigy uses a blockchain-based platform to crowd-balance energy. It’s one example of a complementary asset for renewables addressing a new market need.

New market innovations: Circular economy

One powerful proposal fast gaining ground is the “circular economy,” which challenges the current “linear value chain” business model and addresses the waste and loss of potential value at the end of the value chain. The circular economy aims to replace the concept of waste by looping products back into its business, which means companies need new processes, technology and teams enabled to recycle, refurbish, harvest for spare parts or resell to new customers. This requires a significant change to an organization’s operating model; to service and repair products requires available parts (which aren’t welded together), service vans with the right size and geographical spread, and cross-skilled engineers.

New market innovations: product utilization creating new markets

When businesses move from a product to as-a-service, it can significantly change what is valued, foregrounding factors like durability of the product, ease of repair and ongoing customer service. A typical car is an unutilized asset, for many barely leave the driveway or go beyond picking the kids up from school. The latent value of the car is an example of how increasing a product’s utilization can create new markets and partnerships, requiring new teams, products, services and talent. As an example, we have seen an expansion of new ride-sharing businesses like Uber, Lyft and Didi and new business ventures for BMW and Daimler.

How does a business demonstrate the impact of its sustainability actions?

Being a sustainable organization requires concerted effort. There are evolving international frameworks, metrics and standards to help businesses and organizations guide, focus and report on their progress.

GHG: The GHG Protocol is a common standard framework that measures greenhouse gas emissions across the public and private sectors. This protocol recognizes all three scopes of an enterprise’s emissions: direct emissions from owned or controlled sources, emissions from the generation of purchased energy, and indirect emissions that occur upstream and downstream throughout the value chain.

ESG: Environment, social and governance reporting expands the definition of success to include more than financial considerations. Environmental factors include energy efficiency and reduced water pollution. Social factors include community development and diversity and inclusion. Health and safety and governance factors include corporate risk and integrity oversight or mechanisms of executive board governance.

Global investor and consumer pressure, along with pointed legislation, are succeeding in getting businesses to adopt ESG frameworks. ESG reporting is being reinforced by legislation, and the EU is leading the development of such legislation through the Climate Benchmarks Regulation (2020), Sustainable Finance Disclosure Regulation (SFDR) (2021), and EU EcoLabel (pending). However, adoption has been inconsistent, which often leads to claims of “greenwashing” by businesses the public perceives to be misrepresenting their sustainability progress.

While ESG frameworks serve to help businesses shape their sustainability decisions and transparently report progress against the different ESG criteria, they can also cause confusion. The different frameworks each bring their own “flavor” of ESG metrics and indicators, as they target the needs of different stakeholder groups: investors, governments or businesses.

The fear of greenwashing, and the doubt in the efficacy of much ESG reporting, is rooted in several thorny characteristics: ESGs are based on self-reporting, with few independently recognized reviewers or assessors. An absence of globally recognized metrics and benchmarks makes it hard to assess what good progress really looks like. Different companies, investors and geographical regions each must weigh the importance of the various environmental, social and governance metrics differently. Unless investors really understand a company’s business model and industry, it will remain difficult to fully scope out effective sustainability efforts.

Notwithstanding these setbacks, businesses need to embrace ESG and GHG reporting. They need to follow emerging best practices and be transparent with their data and metrics. Investors and the public expect companies to be organizationally agile as ESG reporting frameworks mature, and to take on more ambitious operating model changes to deliver improved ESG metrics. This degree of change and agility requires leaders to work across their ecosystem to drive industry-wide concrete change, and to share their data outside their business to forge a new, broader definition of success in their industry. ESG tracking and reporting should reflect a business’s long-term and evolving commitment to a successful sustainability journey.

Sustainability will bring significant change and opportunity to the company’s operating models

Sustainability is not integral to most industry and international business models, as seen by the decades-long failure of businesses to own the cost of environmental destruction and social exploitation that many have caused.

The challenge of designing, commercializing and adopting successful innovations will require significant investment and endurance from the business and ecosystem leadership.