The Leading Edge of Sustainability – New Spheres, New Mindsets, New Models

[This post originally appeared on the SustainAbility website.]

“Sustainability” has become part of the modern business lexicon. But what does it really mean?

In a 2010 survey of global CEOs by Accenture and the UN Global Compact, 93% of the 766 CEOs surveyed said that sustainability issues were “very important” or “important” to the future success of their businesses. In this same survey, 81% agreed or strongly agreed that “these issues are fully embedded into the strategy and operations of my company” (up from 50% in 2007).

We’re glad to see this evidence of the growing importance of sustainability issues on the global corporate agenda, and we celebrate the ambitious goals and substantial progress of many businesses. But we have to disagree that 80% of companies have fully embedded sustainability into their strategy and operations. The participants at our annual members’ workshop in London seemed to feel the same – in response to our informal pre-workshop survey, most said they “strongly disagreed” or “disagreed”.

Such a disconnect between what the CEOs think and what many others think comes from a disagreement over what sustainability means. Sustainability isn’t just about a few percentage point reductions in carbon emissions, or a selection of sustainably sourced product lines, or a supplier policy – as important as all of those are as starting points. But what is it then?
We kicked off our recent Engaging Stakeholders Program member workshops in London and New York by asking each other: “What is sustainability leadership?” Here are some of the themes we discussed.

New Spheres

Manage outside the walls of the company. Leading businesses are expanding their spheres of interest and influence, seeing both responsibility and opportunity in the value chain as well as in the direct footprint. This is reflected in commitments that expand outwards (for example, in 2005 Walmart committed to sending zero waste to landfill; five years later it has committed to increasing the income of one million small & medium farmer suppliers), but also in a new view of what it means to manage a business. One of our workshop participants said that his company had begun to think of suppliers as part of the organization, and that this approach shaped everything they did on supply chain management.

Set Big Hairy Audacious Goals that go beyond the value chain. Examples we’d put into this category include GlaxoSmithKline’s efforts to increase access to medicines; Nike’s goal to develop a closed-loop business model; Google’s goals to make renewable energy cheaper than coal and (less widely known) to maintain the viability of one of its key input industries, journalism; and most recently Unilever’s Sustainable Living Plan, which aims to define a sustainable model for consumer goods value chains.

Look for the best ideas everywhere. The age of “Not Invented Here” is beginning to seem out-dated even in mainstream business. P&G now sources 50% of all new product ideas from outside the company. GSK, Nike and Walmart are all taking open innovation approaches to achieving their sustainability goals through GSK’s Open Lab for R&D into developing country diseases, GreenXchange for patents and Earthster for life-cycle assessment analyses, respectively.

Support individual leadership and innovation – particularly by the young. Many of the examples cited were of leadership from young people or employees, and DSM’s presentation on their young employees’ global bottom-up sustainability network was one of the most popular sessions at the workshop. It is becoming a constant refrain and source of hope that today’s young people are, as a group, much more interested in sustainability than their elders – and are full of ideas and energy.

New Mindsets

Think in terms of economic ecosystems. The least-understood and most overlooked dimension of the triple bottom line, economic impact, is perhaps the most important of all. As SustainAbility chairman Geoff Lye noted in his presentation, we are at a time when the economic power of business today has never been greater. The total annual sales of today’s top 200 corporations is $11 trillion – just under the GDP of the United States, over twice that of China, and five times that of the UK.

Businesses exist to create and distribute value, and the way they do this must be fundamental to any definition of sustainable business. Think of it as corporate economic responsibility, corporate social innovation, business-led economic transformation, or, as one of our members suggested, quite seriously, “Making Business Beautiful!” Whatever you want to call it, sustainable business is a way of doing business that sees each business as part of a larger economic system:

  • Where suppliers and employees are better able to supply and to work if they are treated and paid fairly;
  • Where shared resources and infrastructure are invested in through a good tax base (and businesses pay their fair share of that tax base);
  • Where customers have affordable access to products that will genuinely enrich their lives, including the basics (water, sanitation, nutrition, healthcare, energy, ICT and finance); and,
  • Where competition is healthy and businesses are diverse, making the whole system more resilient.

See values, norms and cultures as crucial enablers. Two participants at our London workshop named the end of the Catholic Church’s absolute ban on condom use and the work of Mechai Viravaidya to popularize the use of condoms in Thailand through humor as favorite examples of sustainability leadership. More generally, almost all agreed that understanding and influencing the expectations and values of everyone from consumers to investors would be crucial to the success of future sustainability initiatives. This is now mainstreaming as a topic of discussion – see, for example, the theme of the upcoming 2011 World Economic Forum, Shared Norms for the New Reality.

New Models

As SustainAbility co-founder John Elkington wrote last year in The Transparent Economy:

Properly understood, sustainability is not the same as corporate social responsibility (CSR)—nor can it be reduced to achieving an acceptable balance across economic, social and environmental bottom lines. Instead, it is about the fundamental, intergenerational task of winding down the dysfunctional economic and business models of the nineteenth and twentieth centuries, and the evolution of new ones fit for a human population headed towards nine billion people, living on a small planet already in ecological overshoot.

Indeed, the search for these new business models is becoming increasingly vocal. At last year’s Clinton Global Initiative meeting, Ceres, Nike, the Skoll Foundation and CalPERS launched a working group on this subject.
Two key goals of these new models:

Collaborate to deliver solutions. Sustainability leadership has moved well beyond compliance (‘because it’s the law’), and even accountability* *(‘because we are pushed, we must’), towards solutions (‘because we can, we will’). Increasingly, leading businesses are looking at their core competencies and asking how these can solve pressing social and environmental challenges, often in collaboration with other industries. As former Harvard Business School professor Shoshana Zuboff has written, “For a century… the manager’s job was to oversee and control what was inside ‘my company.’ Everything else was a distraction. [Now] you need to collaborate… you can’t do it alone because the needs of individuals don’t conform to existing organizational and industry boundaries.” At our London workshop, Vodafone’s Sarah Sanders presented on their work to partner with pharmaceutical companies to make healthcare more accessible through Vodafone’s mobile platform.

Influence consumption – and defy waste. Our workshop participants agreed that addressing consumption was crucial, but admitted that this was also one of the greatest challenges for their business models. Product portfolio changes such as PepsiCo UK’s commitment to increase the percentage of whole foods and low-fat dairy in its global portfolio are important steps, but more is needed. One fascinating trend in this direction is collaborative consumption, web-enabled platforms that allow people to share the use of existing assets. One of our workshop participants named Streetbank, which allows neighbors to borrow household items from each other, as her favorite example of sustainability leadership.

What’s Next?

The leading edge is out there. As author William Gibson famously wrote, “The future is already here, it’s just not evenly distributed.” Here are three leadership themes we’d like to see more of in 2011. We welcome your additions to this list.

  • Sustainability strategy as large-scale collaboration and change management. “Traditional” approaches to sustainability strategy have been heavily focused on the company’s own performance, planning and processes, with partnerships and organizational change as a second step. We now expect to see leaders increasingly placing collaboration and change management at the heart of their strategies. A key part of this will be formal and informal structures to encourage and harness insight and innovation among employees as well as stakeholders. Interestingly, a look at the business section of any bookstore will demonstrate how collaboration and behavior change, once on the sidelines, have now become part of the global business and economic conversation.1
  • Business initiatives to understand and affect values and behaviors. Many businesses have access to deep insight into human behavior through their market research capabilities and relationships with consumers. We want to see more of this directed towards positive change. The power of brands to change our values and aspirations has been a key theme at the Sustainable Brands conferences.
  • Efforts to systematically identify and scale new business models based on creating value from fewer physical resources, such as Daimler’s Car2Go pilot based on the Zipcar car-sharing model.

1 See Macrowikinomics; Collaboration; Drive: The Surprising Truth About What Motivates Us; Nudge: Improving Decisions About Health, Wealth, and Happiness; Switch: How to Change Things When Change Is Hard; Sway: The Irresistible Pull of Irrational Behavior; etc.

The end of cheap [insert global resource here]

Two years to the week after the collapse of Lehman Brothers, the new Basel III global financial regulations are out (what’s that?) and the British Bankers’ Association complains on behalf of consumers everywhere: “This means the end of ‘cheap money’!”

Well. That is a good thing, is it not?

Remember what’s at the heart of our global environmental and social challenges:

  1. Our key resources are too cheap – be they food, oil, money.
  2. Our systems are too good at separating reward from risk – be it here and now, over time, through geographies.

Are there insights to be gleaned for other sectors from  how financial regulators conceptualize and try to manage these issues? The financial system represents our economy at its most abstract and quantified, so it’s fascinating to think about, anyhow.

Basel III raises the Tier 1 capital requirement, which means that banks will need to hold more common equity to buffer against unexpected losses, which essentially comes down to this: more skin in the game. And more protection against financial crises, and, apparently, good things for the economy (at least as measured through GDP – see explanation from finance blogger Felix “Shedding No Tiers” Salmon).

Better Place: The Very Model of a 21st Century Enterprise

betterplace

Photo: With colleague Jennifer Biringer, test-driving the Th!nk EV at Better Place’s Palo Alto headquarters back in June.

Many of us at SustainAbility have a big sustaina-crush on Better Place, the start-up working to build the infrastructure for electric vehicles—charging stations and battery packs—in cities around the world, and its founder Shai Agassi. (Our biggest Better Place fan, Gary Kendall, has contributed to their blog here and here, and the urgent need to transition our systems away from oil is a recurring theme for our team—see most recently Jeff Erikson’s blog on the BP Deepwater Horizon spill.)

But what’s a crush without a little analysis? Here are seven reasons why we think Better Place is one of the best examples of a 21st century enterprise out there.

1. Better Place started with an urgent social need, is moving rapidly to bring a solution to market, and is doing so by prototyping around the world. First, Agassi started with a Big Hairy Audacious Goal for his country: no less than independence from oil.

Says Better Place Australia CEO Evan Thornley in an interview on CNET’s CarTech blog: “[When Shai Agassi was coming up with his initial white paper] he went through the stages of ‘how can we run a country without being dependent on oil?’… We’re a mission-driven organization; we want to get the world off oil. There’s nothing good about it: fighting over it, paying for it, running out of it, or polluting the atmosphere with it.”

And Better Place is not wasting any time, as Cisco strategy EVP Inder Sidhu writes in a nice excerpt from his strategy book Doing Both, which argues that pursuing two seemingly disparate paths at once is often mutually reinforcing:

Agassi hopes to move quickly—before the next wave of first-time car buyers choose gas- or diesel- powered vehicles… Over the next five years, Chinese and Indian consumers are projected to buy as many as 70 million vehicles—more than all of the cars that exist in the UK and Germany today.

Most technology startups set out to build advanced products for sophisticated customers in established countries… Afterwards, they typically water down their innovations for sale to customers in emerging countries. Agassi has dispensed with this model and is instead focused on building simple solutions that can be deployed anywhere around the world simultaneously.

2. Better Place is thinking service, not product. Why are service-based business models often a better bet from a sustainability perspective?

Service-based models incentivize manufacturers to make assets that last and to take end-of-life responsibility (think Xerox copiers). They allow many more people to get use out of the same amount of physical assets (think laundromats, or car sharing services like Zipcar, and see Rachel Botsman and Roo Rogers’s Collaborative Consumption website and book for more examples). And they start with the human need and ask, “How can we best meet this?”

Agassi understands that people fundamentally seek the service of convenient mobility. This insight means that his business model is designed around meeting that need for mobility as effectively as possible, rather than making the current model (liquid-fuelled cars) somewhat better.

For transportation, says Agassi in an interview, what matters is miles:

Oil companies sell miles…at the end of the day [not gasoline]. [Better Place is like] an oil company that has a guaranteed supply of oil at a cost of zero dollars a barrel… I don’t sell the energy—the battery makers do that. I sell the convenience. (Interview by Martin LaMonica, CNET)

And access to a service is often a much better model for the customer than owning the asset itself, say Better Place’s Evan Thornley and Guy Pross in another interview:

Separating the battery from the car is a key to our business. It not only takes that battery [technology] risk from you, but also saves you from purchasing the battery up front, which is a huge part of the cost of hybrid and electric vehicles. (Interview by Derek Fung, CNET)

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Google’s mission to make journalism sustainable

James Fallows has a great piece in The Atlantic on Google’s work to “[reinvent journalism’s] business model to sustain professional news-gathering.”  It’s a fascinating look at business model innovation, journalism, and sustainability for a number of reasons:

First, it’s a fast and clear analysis of an industry business model going through a dramatic transition as we speak (I’d love to read something similar for auto or pharma).

Second, it gives us insights from outsiders on the current state of journalism. Google News head Krishna Bharat believes that there is a deeply fundamental inefficiency in the media today, namely “the predictable and pack-like response of most of the world’s news outlets to most stories.”

“Why is it that a thousand people come up with approximately the same reading of matters? Why couldn’t there be five readings? And meanwhile use that energy to observe something else, equally important, that is currently being neglected.”

Third, it’s a look at how one company, seeing that “huge, historic technological forces” are threatening the viability of a crucial part of its value chain, is throwing its core competencies towards collaborating with that industry to make it sustainable in the truest sense—having the capacity to endure.

“We help people find content,” [Nikesh Arora, president of global sales] told me. “We don’t generate content ourselves… When there’s no great content, it’s very hard for people to be interested in finding it.”

“For the last eight years, we mainly focused on getting the algorithms better,” Krishna Bharat said, referring to the automated systems for finding and ranking items in Google News. “But lately, a lot of my time has gone into thinking about the basis on which the product”—news—”is built. A lot of our thinking now is focused on making the news sustainable.”

It is this same mindset that, say, global processors and retailers of food should be taking: respecting producers—smallholders and Big Farmer alike—as fellow businesspeople operating within an enormously challenging commercial and resource-constrained context and asking “How do we do our our best to help the sector that produces our key input achieve the capacity to endure? And how can we leverage our core competencies, like world-class distribution capabilities and a deep understanding of consumer behavior, to help develop solutions?”

One inspiring lesson seems to be that “an accumulation of small steps can together make a surprisingly large difference.” Google being Google, their efforts here consist of lots of experimentation and prototyping—Fallows describes a few, like Living Stories, an effort to aggregate a news outlet’s reporting on a single key topic over time.

The forces weighing down the news industry are titanic. In contrast, some of the proposed solutions may seem disappointingly small-bore. But many people at Google repeated a maxim from Clay Shirky, of New York University, in an essay last year about the future of the news: “Nothing will work, but everything might.”

Fourth and finally, it’s a look at the three areas (“improving the distribution, engagement, and monetization of information streams”) in which Google is trying to re-design the business model for news, which is interesting from a corporate transparency and reporting perspective. Most of this harnesses Google’s deep expertise in advertising or technologies such as YouTube Direct, which gives newspapers the means to allow readers to send in video clips and do a bit of citizen reporting. For example, Fallows notes that “Al Jazeera used YouTube Direct during the elections in Iraq this spring to show footage from around the country.” One of the things my Open.com piece advocates for is for sustainability reporting to experiment with sourcing data from stakeholders—imagine the possibilities here.

One Planet Value Chain

Everyone at SustainAbility has a particular lens through which they see the world that is our work: mine is value chains. I have other colleagues who see everything in terms of brand, or change management, or markets, or converted particles of energy…

Last spring, when we were writing ‘Unchaining Value‘, I became obsessed with an idea I dubbed ‘One Planet Value Chain’ – appropriately named after WWF’s One Planet branded advocacy program (including a report on One Planet Business co-authored with SustainAbility), one of three inspirations for OPVC – the other two being Yasmin Crowther’s framing of the major sustainability challenge for supply chains as one of managing resource ‘pinch-points’ between competing supply chains (e.g. the food-energy struggle for crops and land, the shared need for water and human resources by every industry), and UNEP’s Cornis Lugt’s deep interest in product service systems.

Here’s the idea: that there is just one set of resources and one set of societal needs (food, energy, transport, shelter, etc. but also things like freedom), linked by global human economic activity (i.e. the creation and allocation of value).

So what we are trying to do is redesign our global economic activity so that value is replicably created and equitably allocated. Seeing business through such a lens could lead to:

  • at the supply end, to new ways of sharing the global resource commons through collaboration and healthy competition
  • in the middle, to scrapping existing industries altogether (goodbye big auto or pharma?) or to collaboration between existing sectors (healthcare & food meeting wellness needs, electricity distributors and auto meeting energy needs through smart grids) or to new ways of organizing businesses (alternatives to the shareholder corporation, different supplier-company-distributor configurations…)
  • at the demand end, to new ways of defining needs (e.g. via human-centered design thinking) and aggregating needs (e.g. via product service systems and use communities).

We are saying that the world is experiencing “spectacular market failure.” Well, why does a market fail? Because a whole bunch of companies are unable, for whatever reason, to make the business case for sustainability. That is because this business case needs to be a systemic business case, not the old-school individual company business case. The “systemic business case” says that the creation of societal value is a necessary condition for the continued creation of business value.

Had an invigorating brainstorm with my colleague Alex Nick on the limits of the business case for sustainability. Here’s what we saw as some of the dimensions of the systemic business case vs the old-school business case:

  • the creator and beneficiary of value (OLD: the company; NEW: the company, the suppliers, the consumers, the industry, society, the environment….)
  • the time horizon (OLD: short-term; NEW: long-term)
  • the quantifiability of value (OLD: tangible, stuff-related; NEW: intangible, need-related)
  • the source of value (OLD: transactions; NEW: relationships and interactions)
  • the goal (OLD: efficiency; NEW: resilience)

The systemic business case for sustainability

The notion of “the business case” for sustainability has been bothering me for some time, and it wasn’t till right before Christmas that I was able to put my own finger on why: Traditional attempts at identifying the business case for sustainability are doomed to fail, because they focus by and large on short-term, (relatively) tangible value created for the company. But sustainability initiatives intrinsically create value beyond the walls of the company, for the long-term, and thus outside the measuring capabilities of traditional financial accounting.

The limits of the 'business case' for sustainability

The limits of the "business case" for sustainability

What’s needed is a broader notion of business case. So, not the usual sort of business case like the opportunities to make money from environmental efficiencies / manage risks / capture new market demand, but the systemic, big-picture business case, which is that business is a part of society and the environment and therefore the sustainability of business depends critically on the sustainability of both. (For example, SustainAbility’s working vision for the food sector is that it deliver safe, nutritious, accessible and affordable food in such a way that the two resources on which the food sector depends – the environment and the farmers – can sustain themselves.)

It may seem obvious, but I do feel that with so much of the wider sustainability advocacy discourse still placing business in opposition to society and to the environment, it is critical to:

  • spell out the argument that environmental and social sustainability are a necessary condition for the long-term sustainability of business, and
  • be really clear about why the old ways of doing business no longer work for businesses.

Luckily, if there ever were a time when business was ready to hear that, that time could be now. Alan Greenspan: I was wrong.

There is certainly opposition and tension, but not between business and society/environment so much as between different mindsets:

  • the short-term at the expense of the longer-term,
  • the pure self-interest at the expense of relationships,
  • the narrow competitiveness and secrecy at the expense of ultimately more value-creating collaboration and transparency, the “more for just me” versus “enough for everyone”,
  • the stubborn fetishization of deregulation versus an approach that understands that individual decision-makers (and hence the market) cannot always know best – an approach that understands that human rationality has its limits.

Thinking of it in this way, it becomes clear that these are all tensions that are not unique to business activities, although that is where they are most powerfully expressed. Rather they are very human and appear in all areas of human activity and are rooted in the way we think and relate to the world and this is why they’re so hard to address… this is why we have had to have some form of the Golden Rule embedded in all religions going as far back as we’ve existed.

And our task becomes sharply and simply a task of shifting mindsets, both at a strategic level through all the various arguments and persuasions we have at our disposal, and at an implementation level through helping businesses to develop new vocabularies and tools to operationalize this way of thinking.

Of course there was a reason why the old way of thinking has thrived, and part of our work needs to be to understand this at a deeper level – it worked well in our old world where (a) natural resources appeared unlimited and (b) people and regions and individual businesses weren’t so connected as they are now.

When natural resources are abundant it’s easier to dismiss the tragedy of the commons because there are always new commons to exploit. But we’re now bumping up against the limit. (I can’t help but think of the last scene in The Truman Show where Truman is in a boat trying to escape and hits the tarp sky enclosing the aquarium that his seaside hometown is set in.)

Similarly, in a world of interconnections so deeply woven that we can’t know the full extent of global interdependency, it becomes clear that offloading risk to another party (as seems to have been the single aim of financial innovation over the last decade) doesn’t make the risk go away, it just hides it… as recent events have made rampantly clear. This interconnectedness has also made it clear that the prevailing “portfolio approach” to managing transactions – an approach that assumes that markets and events are independent – is ultimately flawed.

In an independent world you can reduce investment risk simply by diversifying your portfolio because if one stock goes down another will go up, and you can squeeze your suppliers because there will always be another one waiting for your business. But this is a world where a slowdown in the US retail sector causes Chinese toy factories to lay off workers, and where the collapse of the Icelandic banking system puts the supply of ready meals in the UK at risk, and where foreign gov’ts hold 25% of Fannie and Freddie’s agency debt….