From Broad to BMW: is disruptive innovation the new frontier of climate leadership?Jim Walker
Corporate climate action is dominated by a ‘target and reduce’ mantra on carbon emissions. Now that the Paris COP21 Agreement has set the world on a journey towards net-zero carbon, companies and investors need to think radically differently about the DNA of corporate leadership.
“Doing less bad is not the same as doing more good. Don’t think about minimizing the footprint of a person or society. Think about a beneficial footprint. Committing to continuous improvement is the beginning of a great journey.”
– William McDonough
The ‘be less bad’ world of climate leadership
Many of the current leadership platforms for companies center on the theme of footprint measurement, target setting and incremental reduction in impact over time. Through We Mean Business we have supported some of the leading commitments, to 100% renewable energy, science-based targets and zero deforestation in particular. This is for a number of (we believe) very good reasons:
- Target-setting begins the journey within companies on impact and management. As a statement of intent it is a critical first step a major companies to begin to plan for a low carbon economy.
- Progress can be measured quickly. Within a year or two, progress can create positive feedback and a communications win for key stakeholders, particularly investors.
- Business targets underpin government targets. The target-and-reduce story meshes well with target-heavy national and international policy debates. Last year, hundreds of bold corporate targets played a key role in building government confidence in a global deal.
We now have a highly developed industry around this important process of incremental change, embodied in for example the Global Reporting Initiative and CDP. This in turn has been driven by disclosure to an investment community seeking to quantify its portfolio exposure to climate risk.
The disruptive alternative – ‘be more good’
Meanwhile, something else is also happening. A host of strategic low carbon plays are emerging within the private sector, looking a lot more like disruption than incrementalism.
Half of Philips’ global revenue in 2013 came from green products and services like LED lighting. BMW created a mobility-centric ‘i’ brand unit to drive electric vehicle innovation as well as explore investment plays in car sharing.
E.On and Enel are positioning to divest of fossil fuel business units in the next few years. GM this month made a US$0.5Bn investment in the ride-sharing platform Lyft. Consumer brands like Nike, Ikea, Nest and Tesla are connecting innovation and sustainability in product offerings that are better, and just happen to also be significantly ‘greener’. [Disclosure – Ikea Foundation and Nike are supporters of The Climate Mobilization Fund].
“The green thing has become the thing that is just better”
– Steve Howard, CSO IKEA
These strategies speak to transformational change but fall outside the scope of the ‘target-and-reduce’ model. They are plays, in the words of architect and author Bill McDonough, to be ‘more good’ instead of just ‘less bad’.
But how significant are they and where could they lead us?
From Mining to Materials – Umicore & Royal DSM
We can draw some lessons on the potential from two companies that have shown that, with foresight, it is possible to shift sectors entirely away from high and towards low carbon whilst retaining value. Umicore and Royal DSM were founded as mining companies in 1805 and 1902 respectively. They have demonstrated the feasibility of a complete transformation away from resource-intensive sectors to lower impact businesses. Their journeys happened through processes of diversification, acquisition, investment and divestment, with much of the transition happening in the past 20-30 years. Umicore today is a metals and recycling company, and DSM (originally ‘Dutch State Mines) now majors in health, nutrition and materials.
“Sustainability is not a ‘nice-to-have’ but a ‘need-to-have’ if you want to survive in the long term as a company”
– Feike Sijbesma, CEO Royal DSM
Radical transformation is of course not constrained to the sustainability field. Swathes of the economy face disruption from the internet, mobile tech and big data, and many companies are transforming in response. Publisher Pearson recently sold its flagship Financial Times and Economist brands to focus on online education, a sector that its CEO John Fallon sees as “one of the great global growth stories of the next decade.” IBM has famously transformed from mainframe to PC company, and from PC to cloud. Its own heretical strategy for weathering two revolutions was to create new quasi-independent business units tasked with growing to overtake the parent company and become the ‘new IBM’ over time.
“To deliver results consistently, you have to change constantly.”
Disruptors, great & small
Innovative, disruptive change is characterized by a sustained period of effort, followed by breakthroughs and ‘tipping points’ as new concepts move from the lab to market and down the cost curve (e.g. LEDs and solar PV in recent years), or as companies re-structure around a new business model. Perhaps the most familiar ‘carbon disruption’ is happening today through the work of start-ups like Nest, Tesla and Solar City. But major companies are showing that they can live with, and indeed generate, disruptive change.
The lessons learned by these two cohorts of companies – start-ups and ‘established disruptors’ – could bring important new levers to bear on efforts to move companies and policymakers forward on climate.
For incumbents, whilst the overall direction of travel may be the same, the behaviors, strategies, metrics and systems required to foster disruptive innovation can differ widely from those required for continuous improvement. On climate and sustainability, these attributes have yet to be systematized sufficiently to infiltrate into corporate disclosure, investor advocacy, or the current policy narrative dominated by carbon targets.
Pascal Finette’s model of linear and non-linear change highlights not only the pitfalls of linear thinking, but also the challenge of how to categorize success during the ‘disappointment’ phase when investment outweighs returns. [Subscribe to Finette’s feed on disruptive innovation here.]
Engaging the investor community
This is a field in which the investor community needs to become more articulate. A pension fund should be as focused on a utility’s plans to shift to decentralized renewables and demand management models (before such models render the utility obsolete), as in its incremental progress on the carbon intensity of its power generation.
We are promisingly seeing this shift in investor initiatives like ‘Aiming for A’ asking fossil fuel majors to put forward credible 2 degree plans, and Morgan Stanley’s increased valuation of Nike by US$9 billion in view of its sustainability innovations.
But at the same time David Crane’s experience at energy utility NRG, and feedback from other companies, highlight a fundamental disconnect between investor and corporate thinking on transformation. Crane’s reflections to Greenbiz on his firing are a must read.
“Transformation. I think the problem was transformation … From a societal perspective, the lack of investor appetite for internal transformation is a dangerous inhibitor to corporate change”
– David Crane
Can big oil transform?
Some sectors are of course highly challenged by the transition to a low carbon economy, in particular global oil and gas majors unable to move away from long term investment in upstream exploration, and a broader swathe of extractives and heavy industry that could perhaps learn lessons from the Umicore/DSM model.
In the absence of a credible, transformational route forward, the natural response is to resist change. The climate agendas for chambers of commerce are being co-opted [pdf] by players from challenged sectors as a result. And resistance is also fueled by blind spots from linear thinking, like the potential for electric vehicles to destroy demand for gasoline much faster than models project [pdf].
As an aside, industrial companies in emerging economies may be better suited to transition. Both BYD and Broad in China have demonstrated the ability rapidly to shift focus, and in India diversified companies like Tata and Mahindra may be better structured for the sectoral shifts required.
Bridging the gap
The core question is whether major companies can move beyond linear ‘target and reduce’ thinking to deeper transformation strategies informed by science-based targets.
For now, the Aiming for A model carries promise. After the Paris climate deal, for every major company the goal should be a ‘two-degree business plan’ that lays out the strategic plays required to reach zero carbon, minimize the risk of disruption, and retain value in the process.
Through this approach investors can introduce disruptive thinking into the carbon disclosure lexicon, and back those companies with the mindset and culture to transform before they are disrupted.