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Why sustainability is the new digital

EVEN IN A YEAR dominated by a global pandemic, the sustainability revolution has accelerated faster than expected, while also expanding to include a wider range of environmental and social issues.

With consumers and investors demanding significant change, profit pools shifting away from incumbents to insurgents, and even the most carbon-heavy companies making net-zero pledges, executives ignore this revolution at their peril. And make no mistake: this is a real revolution. With every industry — nearly every product and most of our habits under scrutiny — it would be downplaying it to call it anything else.

Like the digital revolution before it, the sustainability revolution promises to change everything. Yet, just as with digital, many companies are moving too slowly, taking an incremental approach to a challenge that demands a radical rethink.

Remember in the early 2000s, when companies realized they needed to go digital, they would hire a web developer? They soon learned that was a woefully inadequate response to the enormous task at hand: the need to reshape their organizations, their products, their entire industries to meet the demands and opportunities of a digital economy.

Something similar is happening today when the executive suite hires a sustainability expert to shepherd this transformation. It’s a start, but it barely begins the work needed to navigate the impending revolution.

The task is daunting and there’s no time to lose. We need to transform a global economy founded on the principles of unlimited access to resources and the primacy of shareholders to one that recognizes the limits and consequences of everything we extract, manufacture, consume and waste, and the impacts on the people involved in doing so.

RAPID DISRUPTION
Some companies are grasping this change faster than others, and consumers and investors are rewarding them. For example, Unilever’s Sustainable Living Brands portfolio is growing nearly twice as fast as other brands in its portfolio. In energy, even before the coronavirus disease 2019 (COVID-19) economic slowdown, shares of lower carbon energy companies were outperforming those of the oil and gas majors.

These disruptions are spreading more quickly than most expected. Who could have envisioned that electric cars would disrupt the automotive industry so quickly, or that Burger King would sell its iconic Whopper alongside the plant-based Impossible Burger? Such evidence of sustainability disruption is everywhere (see the figure above).

Seeing this movement, most executives now support sustainability objectives, but they remain wary of the costs. For example, in many industry sectors they’re searching for ways to minimize plastic waste, but they find the cost of setting up collection and recycling systems or replacing current volumes with bio-based materials prohibitive. They know they must prepare for the day when the price of carbon balloons to $75 per ton or more, but they are also cautious about the cost of renewables and other low-carbon technologies.

However, if they want to lead, they need to think not just about the short-term costs associated with sustainability, but also the long-term benefits. Just as with digital, sustainability is shifting profit pools to open up multibillion-dollar industries. Plant-based meat could be a $140 billion business by the end of this decade, and the retail nutrition and wellness market could grow to $50 billion by 2025. The current market value of the plant-based beverage category (things like almond milk and coconut water) is $13 billion and growing at 12% per year.

Yet many companies fail to account adequately for such huge opportunities during their planning. Sustainability-linked consumer products now grow nearly six times faster than other brands, and 73% of global consumers say they would definitely or probably change their consumption habits to reduce their impact on the environment, according to a 2018 Nielsen study Sustainability-friendly projects and companies are attracting a lower cost of capital.

DECISIVE ACTION
Companies will need to reinvent themselves to capture these opportunities. All transitions are tough; this one’s even tougher. Bain’s global research found that only 12% of all corporate change efforts fully succeed, but the success rate for sustainability initiatives is substantially lower — a paltry 4%. So, what can companies do to improve their chances of success?

1. Make bold strategic choices

The scope of change is extensive, so leaders should adopt a “disrupt or be disrupted” mindset. Just as the emergence of innovative fintechs forced banks to shift their strategies, food companies need to get out ahead of their customers’ changing habits. Whether their concerns centered around health, carbon emissions, or animal welfare, the number of vegans increased by 600% in the US from 2014 to 2017. In Germany and Poland, one in 10 young adults followed a vegan diet in 2017, and the number is even higher in France.

2. Reinvent products

Sustainable innovation is creating new products that can be produced with fewer carbon emissions, less waste, and an emphasis on enhancing wellness. For instance, Unilever makes toothpaste tablets in reusable containers, and Procter & Gamble sells soap swatches that become cleaning products (hand soap, shampoo, laundry detergent) when you add water. These dry products are lighter, and so when transported emits less carbon. Even building materials companies are working hard on low-carbon steel and cement.

3. Rethink operations

Digital technologies transformed operations across industries; now sustainability requires the same. In an effort to understand which channels are more efficient, Walmart measured the greenhouse gas emissions and costs to fulfill a range of products ordered online vs. sold in stores. Shipping to homes was more efficient if customers were buying just a few things, but in-store purchases were more efficient if they had a longer shopping list or combined the trip with other errands. These insights helped Walmart identify ways to mitigate emissions by reducing split shipments and encouraging a shift to the most carbon-efficient channel when possible.

4. Form innovative partnerships

Sustainability issues are broad and complex — beyond the capacity of any single company to manage — so teaming up is essential. For example, about 40 companies across the plastic value chain (including energy, chemicals, and consumer goods companies) formed the Alliance to End Plastic Waste, which supports innovative solutions to minimize plastic waste and encourage recycling, especially in developing countries.

As the sustainability revolution expands, accelerates and disrupts, it is forcing companies to reassess themselves with an unwavering honesty in order to deliver a future that few imagined. Keeping the digital parallel in mind can help guide them to move quickly and boldly through the coming transformation.

This article first appeared on The Davos Agenda.

 

Orit Gadiesh is the Chairman of Bain & Company. Jenny Davis-Peccoud is a Partner and Head of Bain’s Global Sustainability & Corporate Responsibility. Gerry Mattios is an Expert Partner and Co-Director of Bain Global Sustainability Innovation Center in Singapore.

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