http://https://youtu.be/0fltpxU5sAE
To future-proof their operations, companies need to start moving away from linear business models and embrace a more circular way of thinking. This video highlights examples of firms already getting to grips with this challenge, and advice to those starting out.
This video was originally featured in BusinessGreen.
To meet the environmental and social challenges the world currently faces, innovation needs to go beyond just products and technologies: we need new business models.
New business models create breakthroughs in the scale and speed at which we can transition to a sustainable economy. By creating, delivering and capturing value in new and better ways, they can rapidly transform whole value chains for the better, changing the behaviour and dynamics of competitors, suppliers, partners and customers.
We are already seeing a lot of progress in remanufacturing and other models that extend the lifetime of products. Caterpillar’s ‘Cat Reman’ brand is an established example of product remanufacturing at end-of-life, thereby preserving and reusing value. Canon are applying remanufacturing and re-conditioning models for printers and copiers; and Philips are refurbishing medical equipment at end-of-life for resale to new customers as part of their SmartPath commitment. Group SEB, a French household appliances company, are the first manufacturer in their segment committing to repairability of their products for a 10 year period.
Remanufacturing can save up to 80% of ‘embedded’ carbon emissions compared to making new products by not requiring significant additional material inputs. Cost structures for remanufacturing and re-conditioning of products can also provide the flexibility to price lower, making products more affordable and expanding markets.
Illustrative remanufacturing cost structure
There are also very exciting new service-based models emerging. These occur where companies re-think who their target customer really is, and what value propositions would most effectively meet their requirements. By shifting from selling products to services, companies are able to incentivise resource efficiency, cut waste, and de-couple value creation from resource use.
As an example, Hilti shifted from selling tools to construction workers to providing a service to construction company managers for access to tools-on-demand, with guaranteed performance and quality. Similarly, Mud Jeans leases clothing for a monthly fee, providing customers with the option to either keep their jeans or switch to a new product at the end of the lease period.
For many industries collaboration is an important element in unlocking new, more sustainable and more competitive business models. Inditex, parent company of retailers including Zara and Massimo Dutti, is partnering with suppliers to create reusable fibres and establishing product take-back channels downstream. BAM Construction is partnering with IBM and construction product suppliers to enable materials within buildings to be tracked and re-used at end of life, as well as developing circular business models for the built environment.
Because creating new value goes beyond the financial, benefitting society and the environment, this can make a significant difference to a company’s license to operate. Demonstrating social benefit can reinforce the foundations for future success. Conversely, if you are a laggard in this respect, it can hamper growth and competitiveness. Importantly, companies need to have a clear perspective on how new business models create value for customers – this is a basic requirement to ensure viability.
The core concept of the circular economy provides useful framework for designing radical resource efficiency into systems. But in order for this to be successful, it requires simultaneous changes to existing business models.
Through work done by the Carbon Trust and partners as part of the EU-funded R2Pi project on circular economy business models, we have identified seven archetype business models and underlying mechanics that enable success. These are illustrated below. Importantly, they do not only work in isolation – combining two or more of these patterns can magnify the scale of value creation and resource efficiency achieved.
Circular Economy Business Model Patterns
Going through the process of business model innovation – whether at an established company or a start-up – is inherently messy and fluid. Nevertheless, structured approaches can be applied in order to plan for success. These borrow and adapt tried-and-tested methods and toolkits, which are already used successfully in many fields, to drive innovation and scale-up new business models.
These approaches help organisations embrace uncertainty, at the same time as enabling new ideas to be effectively generated and tested. Having a clear and focused framework reduces the risk of placing the wrong bet, or investing too much too soon.
Broadly speaking, the business model innovation process is iterative, cycling through the following steps and feeding in new insights into areas such as customer behaviour, market opportunity, revenue models, and cost structures.
Throughout the entire process, it is important for organisations to be able to map out and assess the readiness level of their new business model. This can be used as a useful gauge of progress and a way of setting stage-gate decision points for further investment. This applies both when the process is being done internally by established companies, as well when external investors are involved with start-ups and SMEs.
As things stand, within the next decade the global economy will need transform to the meet the needs of a world striving hard to improve the wellbeing of 9 billion people. In particular radical action on climate change will precipitate leaps forward in clean energy, improved resource and ecosystem management, and systems for sustainable production and consumption.
Overlaid upon this are multiple technological revolutions on the cusp of causing their own major disruptions – such as the Internet of Things, artificial intelligence and blockchain technology – which will each provide further opportunities to create sustainable value.
Having structured processes in place and dedicating resources towards business model innovation will provide organisations with the means for change. Companies that are ambitious and willing to challenge the status quo have a huge opportunity to be the ultimate winners in a sustainable, low carbon economy.
A version of this article was first featured on BusinessGreen.
http://https://www.youtube.com/watch?v=ZAapG6uQNUw
In 2015, the G7 pledged to decarbonize the world economy by 2100. While 2100 many seem a distant goal, the G7 has committed to a medium-term target of the “upper end” of 40 to 70 percent reduction by 2050 – that gives countries around the world only 34 years to significantly redefine their energy sources and infrastructure. This necessitates large-scale changes to investment patterns and a complete halt of building new fossil fuel based infrastructure and industry. Today, fossil fuels account for 80 percent of the global energy share. As we move forward after the UN Climate Negotiations in Paris last December, the panel’s challenge will be to convincingly answer if humanity can decarbonize our shared economy by the end of the 21st Century.
Speakers:
Bhaskar Vira Director, University of Cambridge Conservation Research Institute; Reader in the Political Economy of Environment and Development, and Fellow of Fitzwilliam College
Aleyn Smith-Gillespie Associate Director, The Carbon Trust
Victoria Herrmann PhD Polar Studies (2014) Alumni Officer, Gates Cambridge Scholars’ Council
Ioanna Antypas Renewables Entrepreneur & Independent Energy-Environment Analyst; PhD Materials Science and Metallurgy (2004)
Over the past decade, the business agenda on climate change for UK companies has evolved from an initial focus on regulatory compliance, then to a realisation of the benefits for cost reduction through energy efficiency. More recently, leading organisations have incorporated carbon and climate change into wider cost and risk management considerations, such as supply chain transparency and procurement policies. Companies are now also integrating energy, carbon, and wider resource efficiency into their products and services, thereby tapping into growth opportunities.
One of the drivers of this evolution is that climate change and carbon-related risks and opportunities are coming into the planning horizon of company boards, as well as that of their investors and stakeholders. The COP 21 Paris Agreement is an important milestone: With countries agreeing to hold global warming well below 2°C and pursue efforts to limit the increase to 1.5°C, a clear message has been sent that the world is committed to transitioning towards zero-carbon.
To fulfil this commitment, global emissions need to reach ‘net-zero’ by 2100, and at least peak – if not start decreasing – within the next 15 years. The period between now and 2030 will therefore be critical as it will determine whether the world can successfully shift onto the required trajectory. This means reducing global carbon emissions by about 40% from present levels (or approximately 10% below 1990 levels) by 2030 despite energy demand being forecast to rise by 25% as economies grow and develop.
Figure 1 Global greenhouse gas emission pathways
The low carbon transition creates challenges and opportunities for business
This transition will create challenges and opportunities for business. The strength, nature, and timing of these impacts will differ between geographies and sectors. However all large companies – in particular global corporates – need to address these.
Figure 2 Climate risk and opportunity drivers for business
Physical impacts of climate change. The increasing severity and frequency of weather events (including storms and droughts) as well as shifting climate patterns, will impact companies. Agricultural supply chains will be particularly vulnerable.
Regulations and policies. Changes to regulations and polices can create winners and losers, depending on companies’ abilities to transition towards lower carbon business models. These may either have direct impacts, or work indirectly by shifting the market and customer preferences – for example incentivising adoption higher efficiency products and lower-carbon technologies.
Supply chain. Carbon emissions and related energy consumption within a company’s supply chain often dwarfs that of the same company’s operations, as illustrated in Figure 3. This provides an example of how supply chains can be a magnifier of climate and resource risks: the risk drivers discussed above (regulatory, climate) as well as energy price volatility can be passed through the supply chain and impact companies’ profits.
Figure 3 Supply chain carbon emissions relative to carbon footprint of own operations
Buyers (in particular business-to-business). Customers are demanding increasing transparency of carbon within their supply chains. Almost 10 years ago, the Carbon Trust created the world’s first product carbon footprint standard and label to enable companies to communicate the carbon footprint of products and services. Over the last three years, the Carbon Trust has been developing and aligning similar schemes around the world to a common set of methodologies so as to facilitate inter-operability. An important driver is the desire to certify the carbon footprint of products to meet information and performance requirements of business customers in both export and domestic markets.
Figure 4 International alignment of product carbon footprint certification schemes
Investors. Investors are also increasingly seeking transparency of climate change-related risks within their portfolios, as well as wanting to understand the positive impact of investment. Mark Carney of the Bank of England and Michael Bloomberg have been leading voices in climate-related financial disclosure. They jointly head the Task Force on Climate-related Financial Disclosures (TCFD), which has the purpose of developing voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders.
Corporate action and leadership on Climate Change
Business has the opportunity to be part of the solution for climate change. This means being proactive – anticipating and taking appropriate action. The challenge is that companies often see little benefit, and often risk, in doing so. It is therefore useful to demonstrate key strategies and approaches leading companies are taking to tackle climate change.
Aligning corporate carbon targets with the science
Many organisations have set short or medium-term carbon targets (with 5-10 year timeframes). However these are usually not connected to decarbonisation pathways required to keep global temperature increase below 2°C. In contrast, a carbon target is defined as ‘science-based’ if it is aligned with this ambition and the climate science supporting it.
The Science Basted Targets initiative provides a framework and methodology through which companies can define and commit to decarbonisation pathways appropriate to their organisation. With over 170 signatories, these include global companies in consumer goods (such as Unilever, P&G, Nestlé, Coca-Cola) financial services (HSBC, AXA), utilities, and manufacturing, among others.
Sophisticated carbon target-setting requires a ‘bottom up’ assessment of carbon reduction opportunities, taking into account baseline changes in carbon emissions due to company growth. Figure 5 below shows an example approach, where energy efficiency opportunities as well as renewable energy and ‘green electricity’ purchasing are all considered.
Figure 5 Illustration of a zero-carbon strategy
Another initiative that supports the setting of science-based targets is the ‘100% Renewable Energy’ (or RE100), where participants commit to source 100% of their energy from renewables. Businesses taking part include BT Group, Mars, Unilever, Procter & Gamble, IKEA Group and Nike. This move has been strengthened by changes to corporate reporting under the Greenhouse Gas Protocol, allowing businesses to specifically recognise the purchase of clean energy in their carbon accounting.
‘Net Positive’ strategies
Where science-based targets are set for an organisation’s own boundaries, a commitment to ‘Net Positive’ involves a business giving back more than it takes. In terms of carbon, this can be framed as a company’s products and services ‘enabling’ the reduction of carbon by end-users in a way that is significantly larger than their own carbon footprint, thereby providing a ‘net’ positive impact.
This approach is a lot more ambitious than focusing only on one’s own footprint. Extending the strategy out to positively impact customers and the supply chain enables engagement with a wider stakeholder community and links the carbon agenda to business growth. Figure 6 below demonstrate the net positive (or enabling) impact of mobile communications technologies, quantified by the Carbon Trust in a recent report.
Figure 6 Enabling the abatement of carbon emissions through mobile technology
An example of a company using this approach is BT’s Net Good programme, launched in June 2013. Through this programme, BT aims to help its customers reduce carbon emissions by at least three times the end-to-end carbon impact of its own operations by 2020. At the same time, BT is targeting an 80% reduction in the carbon intensity of its global business per unit turnover by continuing to work on improving the sustainability of its own operations and extending the influence to its supply chain. BT’s focus on being a responsible and sustainable business leader has seen its operating costs reduce by 14% and EBITDA boosted by 6%.
Supply chain collaboration and innovation
To address the full range of risks and opportunities within supply chains, collaboration is needed between companies and their suppliers. This ranges from jointly investing in supply chain efficiency improvements, through to new material innovation for products. Collaboration initiatives are strengthened when they are supported by a company’s procurement function, as this can bring positive commercial incentives (e.g. purchasing commitments in return for supplier investment in innovation and performance improvement).
An example of a company that has invested significantly in supplier collaboration is global pharmaceutical giant GSK. The company spends over £2bn annually on materials, which drives over 40% of its value chain carbon footprint. GSK’s long term goal is to be carbon neutral across its value chain by 2050. In looking at energy and carbon within its supply chain, GSK established that 65% of suppliers did not have an active programme in place to reduce energy costs. In order to drive engagement at scale, GSK set up an online exchange for suppliers to share best practice on energy efficiency and reducing environmental impacts. More than 500 suppliers have joined the network, which is expected to enable value chain emissions to be cut by 25% by 2020. In addition to the exchange, GSK has also run energy reduction workshops at supplier sites, identifying opportunities to save 20-30% of energy costs.
Embedding carbon within business strategy
Few companies assess the foreseeable opportunities and risks from climate change and resource scarcity and their potential impacts. This can leave a business exposed to changes in regulation, shifts in demand, or technology breakthroughs. Nevertheless, company boards face competing priorities and are themselves under pressure to focus on the shorter-term business planning horizon. They also lack an approach, or a set of practical tools, for assessing and quantifying risks and opportunities from the transition to low/zero carbon.
In response, the Carbon Trust has developed methodologies to assess and quantify company value at stake, helping identify which options need to be developed now for potential deployment beyond the horizon of today’s business planning (illustrated in Figure 7 below). This approach includes understanding ‘business-as-usual’ conditions and drivers of risk and opportunity which can impact company revenues and costs. Using scenario analysis, companies can then assess impacts of different drivers on company value. This insight can be used to develop appropriate strategies such as: changes to business model, changes to products and services; investment in technology; etc.
Figure 7 Value at stake framework
Conclusions and perspectives for UK-Japan low carbon cooperation
Businesses need to think seriously about how they will navigate the journey to a sustainable, low carbon economy. Change brings both opportunities and risks, so there are likely going to be losers as well as winners. Companies therefore need to develop roadmaps that provide a sensible way of achieving a low carbon transition. However the right strategy isn’t always obvious, and must be tailored to a company’s circumstances and broader business context.
What is clear is that business-as-usual, where no consideration or action is taken on climate change, is a high risk approach. This is especially true for global companies, among which Japanese corporates are no exception.
Figure 8 Corporate roadmaps for a transition to low carbon
This article is based on a talk I gave at the British Embassy in Tokyo in June 2016. A version in Japanese has been published by the Embassy which can be found here.
http://https://youtu.be/waIc6Jy8qvc?t=2h8m3s
World Bank Dialogue for Climate Action, May 24-25, Hofburg Conference Venue, Vienna Securing and enhancing climate-friendly supply chains Global multinational companies like Marks & Spencer and H&M are looking to source sustainably. This requires a dialogue among not just country level players, but international buyers, NGOs and in-country actors. Global players and local manufacturers will discuss how they’ve successfully helped ensure such climate-friendly supply chains and how regulations and voluntary actions can make the industries more competitive.
Moderator: Aleyn SMITH-GILLESPIE, Associate Director, Business Advice, Carbon
Trust Karol GOBCZYŃSKI, Energy & Climate Manager Poland, IKEA Group
Olaf SCHMIDT, Principal Investment Officer, World Bank Group
MD Zahid ULLAH, Head of Sustainability, Flamingo Fashions Limited, DBL Group
Géraldine VALLEJO, Sustainability Program Director, Kering Group
Matt WILSON, Head of Environmental Sustainability Centre of Excellence, GSK
A shorter version of this article was published by Supply Management in December 2014, and can be found here.
Taking the long view on environmental sustainability can seem somewhat remote from the day job of most people working on the front lines of procurement and supply chain. However, embedding this thinking into business strategy and management has never been more important to improving resilience and competitive advantage.
This article was published by The Economist (Insights) in November 2014, and can be found here.
Many companies have achieved energy and resource efficiency gains within their own operations, and are now eyeing the next prize: improving efficiency outside their organisational boundaries.
Companies such as GSK and Ikea have led the way, with sustainability targets for their whole value chains including upstream supply chains, downstream channels and even customers.
A company’s customer base can be a major source of environmental impact and risk through the way its products are sold, used, and disposed. However, unlike their supply chain, businesses have little or no direct control in managing it.
Consumer-facing products and services must therefore be sustainable by design. Furthermore, any initiative to influence behaviour must contend with the instinctive and emotional nature of buying decisions. Ignoring this will relegate sustainable products to the ‘green’ niche, and will fail to get traction with mass market consumers – a missed opportunity.
This article was published by The Economist (Insights) in November 2013, and can be found here. Some areas covered in this article are explored further in the Economist Intelligence Unit report ‘Supply on demand: Adapting to change in consumption and delivery models’, which Aleyn Smith-Gillespie was interviewed for. The report can be found here.
Volatile and rising resource costs, regulatory pressures and supply chain risks are the new normal – part of the complex global environment in which companies have to operate and plan. Although many have embedded processes to drive efficiencies and mitigate risks, very few companies have recognised the opportunity to profit from these trends.
The reality is that we cannot maintain current resource-intensive business models and consumption patterns. The world’s population is expected to grow by a further billion over the next two decades, reaching 8.3 billion by 2030. This in itself presents challenges for global food supplies and energy resources. Add to this the fact that sixty per cent will adopt middle class consumption habits over that period – roughly double today’s level – the resulting increased demand for resources will only exacerbate current pressures.
Bold innovation will be crucial to decouple business models from resource risks. This will also enable companies to capture opportunities if they apply the same logic to their customer propositions. Approaches include shifting from a ‘linear’ production and consumption model towards a ‘circular’ one based on sharing, re-using, and/or potentially re-manufacturing assets; cutting out waste (or recovering value from it); and utilising more sustainable materials and technologies.
