Not Just What Our Corporate Strategies Are, But Also How We Develop Them
The rules of the game have changed. As the world continues to grapple with the challenge of reducing carbon emissions, traditional management thinking, deeply rooted in the practices of the last fifty years, is insufficient to navigate the seismic shifts projected to take place over the next three decades leading up to 2050.
Not much has altered in the approach to corporate strategy development over the past 30 years. However, the impending carbon revolution necessitates a fundamental shift, not just in the outcomes of our strategies, but in the very processes and mindset used to formulate them.
Once, a “sustainability strategy” was something separate from the core corporate strategy, often championed by the marketing department. But recent regulatory actions taken against corporations like Shell, Petronas, and Repsol for misleading advertisements have made this practice both risky and challenging. For investors and shareholders, the potential for market disruption from new, sustainable entrants amplifies these concerns.
Moving to the core of corporate strategy…
In the era of sustainable business, corporate strategy will be influenced on multiple fronts: access to talent and investment, product substitution, policy formulation, pricing and packaging, and branding. In essence, sustainability will permeate the fabric of our strategic considerations, becoming the core around which business decisions revolve.
The cost of doing business is set to transform dramatically due to the advent of carbon offsets and carbon taxes. Understanding and quantifying this issue requires grappling with Scope 1, 2, and 3 emissions and having a profound comprehension of the shifting regulatory and policy landscape.
Scope 1 includes all direct emissions that are generated from sources that are directly owned or controlled by an organisation. Think the fuels you burn at your factory or the direct emissions from any chemical processes. Scope 2 covers the emissions from the electricity you use, either in offices or industrial processes. Scope 3 is the widest view of your carbon footprint, up and down the value chain. For a housebuilder, it’s all the emissions from a house during it’s life time. For an automotive manufacturer, from all the emissions in the components and materials in the car through to its end of life. These are usually the largest contributors to a company’s carbon footprin. Now that Scope 1 & 2 emissions are usually well understood, Scope 3 emissions are becoming more important in strategic thinking.
How are industrials reacting?
To illustrate the complexity of the issue, consider the cement and plastic industries.
Cement production is a tightly regulated, carbon-intensive industrial process with significant sunk investment in production facilities. Its commodity pricing at $50 per tonne has historically made it difficult for innovators to compete with the economies of scale of major producers.
However, with the advent of the phased introduction of the Carbon Border Adjustment Mechanism (CBAM) from 2026, the industry expects prices to increase to $250 per tonne. While this increase won't dramatically impact building costs (cement is typically only 1% of the current cost), it creates a significant opportunity for substitution and innovation, enabling new entrants with low-carbon technologies that can operate in the $50 to $250 per tonne range.
Similar dynamics are at play in the plastic industry. Innovations in alternatives to plastic have struggled due to the significant cost advantage from the economics of scale in the interrelated plastics and petrochemical industries. That has started to flip as the ‘cost externalities’ of using plastic are brought into the pricing equation by regulation.
The latest example of this is a regulation published in the Netherlands in July 2023 that imposes a tax on disposable plastic cups and food packaging used for carryout and delivery consumption and will eventually ban disposable plastic cups and food packaging for dine-in use. Non-plastic alternatives now have a significant commercial advantage.
The implications of these changes are multi-dimensional, affecting organisational culture, values, recruitment, investors, and products. Navigating this new landscape requires innovative thinking, flexibility, and, most importantly, a firm commitment to sustainability as an organisational core, not just a peripheral strategy.
The business potential of green innovation?
Market opportunities are burgeoning for new entrants and innovators, while risks increase for established businesses that fail to decarbonise.
Therefore, assessing the policy and market risks and opportunities from decarbonisation should rank high among executives’ priorities. Consider the disruption from “technology” over the last 30 years; we focus on software development, e-commerce, media, and advertising.
However, the changes coming will affect the fundamental aspects of our lives, including the food we eat, the homes we live in, the way we build our cities, and how we produce the simple building blocks of our society: steel, concrete, glass, chemicals, and agriculture.
Decarbonisation is a holistic issue
It's essential to reimagine every aspect of our businesses through the lens of decarbonisation: access to funding, risk management and insurance, recruitment & retention, cost trends, potential disruptors, and overall industry disruption.
Business schools and management research are unlikely to show us the way, according to Andrew Hoffman, Professor at the Ross School of Business. He wrote in the Financial Times last month that:
“...we need to go beyond existing theory to fully capture the magnitude, scope and complexity of the problem”. Explaining that we need to challenge the “outdated research culture and norms that dominate business school scholarship”.
For this kind of systemic change, Mergers & Acquisitions (M&A) can be a potent lever. A leading example here is Ørsted, a Danish energy company with revenues of $11.7 billion in 2021. The company transitioned from deriving 85% of its revenues from nonrenewable sources in 2009 to generating 90% from renewable sources in 2021, primarily using M&A to shift to wind and solar power generation.
Today, Ørsted is the top-ranked energy company in Corporate Knights' 2022 index of the world’s 100 most sustainable corporations and is considered the global market leader in offshore wind energy.
The impact of sustainability on corporate strategy should be seen as positive. In a 2023 white paper “Winning in Green Markets” from the World Economic Forum, it said demand for green materials would probably outstrip supply. This will benefit those that take an early lead even if there is an initial extra cost, with consumers more willing to pay a green premium. The report observed a median price premium of 35 per cent for sustainably marketed products in consumer goods in the US in 2021. Over five years, the compound annual growth rate of revenues was two and a half times that of conventionally marketed goods.
The implications of the carbon revolution are not just global but also deeply local. Solutions will vary depending on the availability of renewable energy sources, alternative fuels, and processes.
How do companies move forward…
In conclusion, as we anticipate the next thirty years leading up to 2050, businesses must adapt and evolve. This isn't simply about developing a strategy that recognises the importance of carbon emissions and sustainability. Instead, it's about fundamentally changing how we approach strategy development. It's about integrating sustainability into the DNA of our organisations and ensuring it influences every decision we make, from the highest strategic level to the most granular tactical choice.
For companies wanting to move sustainability to the core of their strategic advantage, often the first step involves the comprehensive education and training of stakeholders, spanning from high-ranking executives to newly recruited junior personnel.
You may also need a research team to extract data before investing in a lengthy and costly project or consulting guidance to help shape your sustainability strategy. Take time to understand the opportunities and challenges by talking to end clients and suppliers. However you choose to move forward, preparation is key.
The road ahead may be challenging, but it also presents unprecedented opportunities for innovation, growth, and, ultimately, the creation of businesses that are not just profitable, but also sustainable, resilient, and beneficial for the world at large.