Avoiding the net-zero crunch: Six strategic steps towards net-zero and beyond
In the essential drive towards net-zero, Incrementalism is dead: the future’s all about transformation. In his second article on avoiding the net-zero crunch, Mike Townsend explores six strategic steps towards net-zero success — delivering both radical reductions in emissions, while harnessing commercial advantage.
Last time out, we considered, the serious challenges in achieving our net-zero goals.
Too many companies are currently delivering little more than business-as-usual, supplemented with incremental change. On current trajectories, most net-zero strategies are going to fail, by a long way.
The fundamental problem concerns the outdated assumptions, underpinning virtually all net-zero strategies; that we can deliver net-zero through incremental changes to our business-as-usual models.
Unfortunately, incrementalism can only lead to the net-zero crunch, where we can’t go any further in reducing carbon emissions within the current framing of our business. We need to get much more strategic.
From this moment, incrementalism is dead. The future is all about developing truly transformational strategies for net-zero enterprise — delivering radical reductions in emissions, while harnessing commercial advantage.
This will involve completely redefining and redesigning our businesses, if we are going to deliver the necessary impact, in time, while continuing to be profitable.
Are we ready?
Very few businesses are currently asking the very big, strategic questions, about what it really takes to become an authentic net-zero enterprise. While there’s certainly a growing consensus on the need for transformation, how many businesses are really gearing up for such radical shifts? Are we ready to do what it takes?
Let’s try a short thought experiment: As you’re reading, just call-out-loud, the names of businesses you know that have already undertaken, or are in the process of undergoing, an authentic transformation. And, when we think about transformation, we should be mindful to avoid tales of large-scale incrementalism; no, we need to keep a laser-focus on genuine transformations, delivering radical changes in both mode and performance.
OK, so how did we get on? Well, I get three, maybe four good examples. Ørsted. Patagonia. Interface. Unilever, maybe? We have way too many examples, where companies are talking transformation, while walking incremental change. We need many, many more transformational role models, especially in these times of green-hushing. The question for many organisations is, how do we transform to deliver net-zero and beyond? We need help, and fast.
New recipes, missing ingredients
Thankfully, help is at hand. There is an encouraging array of new reports and guidance – from consultancies, universities and industry initiatives — offering a range of new recipes, towards that elusive feast, the net-zero transformation. These good works all have something to offer – although, in the most part, there are some important ingredients missing:
- Genuinely transformational guidance appears to be very light in content.
- Lacking emphasis on developing ideal future-oriented designs for net-zero enterprise and backcasting.
- Limited visibility of opportunities for radical emissions reduction.
- Methodologies and examples are mainly underpinned by incremental thinking and practice.
- Limited scope: the main emphasis is often on product innovation, rather than fundamental business re-design.
- A lack of radical or breakthrough innovations, examples are often tactical or incremental.
- Emphasis on big-name brands, missing the more radical innovations developed by market-disruptors.
- Innovation tends to be focused on technical issues, missing the need to explore how we make net-zero transformations work commercially, without which we are unlikely to motivate whole-scale business transformation.
The bottom line: current guidance is way too tactical, often missing the real strategic and commercial agendas.
The strategic imperative
In getting things back on track, we need to completely redesign our net-zero frameworks, and get way more strategic and more commercial, too. This will involve addressing the big strategic questions first, before jumping into operational solutions for incremental change, such as eco-efficiency initiatives and optimising renewable energies. This way, we will be able to deliver a much more radical impact, within more rapid timeframes. We will avoid creating path dependences that will be harder to challenge and change, further down the line. And we will avoid the net-zero crunch.
We’ve identified six strategic steps towards genuine net-zero and commercial success, from reframing the game, to delivering the impact for our customers (handprint), harnessing radical carbon reduction and new commercial opportunities along the way.
- Reframe the game: Firstly, we need to change the rules of the game, if we want to experience a radically different outcome. This involves redefining our rules for ‘business success’ to enable bold, new thinking and new choices in support of net-zero transformations. This move is vital, enabling us to open-up the dialogue on key issues, including how we might find new ways of delivering sustainable growth within planetary and societal boundaries.
An automotive company, for example, might express a strong desire to reduce emissions towards net-zero, while still aiming to sell lots of new cars. They will need to explore, quite openly, how they might resolve the tension at the heart of this challenge; how to be profitable, as well as sustainable. Are they open-minded to redefine how they make money? Are they ready to explore new commercial models in all parts of the business? What new guiding principles do they need, and what sacred cows can they leave behind?
This process is all about strategic innovation – opening minds towards developing a radically different future. As Anne Pitcher, Managing Director of Selfridges Group, describes in her deeply thoughtful and insightful essay on the future of retail, “We have to disassemble our businesses and rebuild in an entirely new shape.” She’s absolutely right. We need to be prepared to change everything: our purpose, products, value chains, business models, infrastructure, supply chains and market ecosystems, and our culture. Everything needs to be reconfigured for net-zero and sustainable enterprise.
By allowing ourselves to be open to new ideas and new thinking, we can redefine the parameters for our future success. This will enable us to think more like innovative market disruptors, rather than managerial incumbents. We shift our mindsets from isolated to integrated thinking; from compliance to innovation; from incremental to transformational change; we become open and prepared for what comes next.
- Reimagine the business: Accepting that transformation is needed, we can leave behind our incremental toolkit and deploy backcasting techniques; envisioning the ideal future state model for our net-zero enterprise, we can then work backwards from this point, developing the key stages and steps in our transformational pathway.
Possibly the most complete example of genuine, large-scale business transformation comes from Ørsted – transforming from DONG Energy, a fossil-intensive utility, to become a global leader in renewable energy in just over a decade.
The company delivered an astounding shift from only 15% renewable energy in 2006 to 75% renewables by 2018, and is projected to be 99% focused on renewables by 2025. Ørsted is now supplying renewable energy to 12 million people each year, avoiding around 6.3 million tonnes carbon emissions annually. A phenomenal journey.
The starting point for the level of transformation is in confronting the reality of our business landscape. Ørsted shares a fundamental lesson from its own green business transformation: “Take an honest view of the long-term viability of your current business model in light of the changing context, even if it is unpleasant and challenges what you do or who you are. Be careful not to explain away the risks of maintaining the status quo and a stable worldview.” We need a totally honest appraisal of where we are, and what needs to be done.
Ørsted has also done a great job in establishing science-based targets, and is aiming to achieve net-zero emissions across its entire value chain by 2040. With robust plans, already in place, to reduce its scope 1 and scope 2 emissions, the biggest challenge the renewable energy pioneer now faces is how to deliver radical reductions in its value chain (scope 3) emissions, the sources which are both technically difficult to abate (in energy and resource intensive sectors) and also hard to influence (external to the organisation).
This represents a huge challenge – in common with many businesses: scope 3 emissions can be worth up to 80% of our total footprint. In some cases, even higher; companies like Electrolux and H&M experience 99% of their emissions within the value chain.
- Redesign value chains: Delivering the net-zero value chain requires a more strategic approach. Systems thinking applies in spades: we cannot treat scope 3 emissions in isolation; these emissions are inextricably interconnected with what goes on within the business, as well as within our supply chains and within our customers’ activities.
By focusing on isolated parts of the problem, we miss the opportunity for real, integrated value chain solutions. Each player in the value chain will tend to go their own way; measuring their own footprints and developing their own solutions – in not-so-splendid isolation – oblivious to the interconnections, interdependencies involved, they risks becoming trapped in the net-zero crunch. How can this fragmented approach ever deliver net-zero?
Reductionism is the enemy. The apparent simplicity of our scope 1, 2 and 3 silos might be helpful, towards standardised reporting, but this accounting protocol provides little in the way of breadth of vision, or the granularity needed, towards strategic and radical emissions reduction. Effectively, we need to re-design our value chain in parallel with reimagining our business. They really are part of the same story.
And this story is all about ‘interdependency’. We cannot hope to address the scope 3 challenge, without first revisiting our demand profiles for the goods and services we wish to buy: how we define our needs, our specification of requirements, and how we chose to fulfil them, will either enable or hinder our suppliers (and ourselves) from meeting the net-zero challenge.
Of course, if we keep asking our vendors for the same old supplies, in support of our same old products and services, we are missing the strategic opportunity for radical improvements, and we’ll end up with incremental reductions in emissions. We need a two-way dialogue of radical innovation, both up and down the value chain, to redesign a new, net-zero alignment between demand and supply.
For example, there’s lots of talk of net-zero and circular economy in the automotive sector, although the value chain is fragmented, and genuine circularity and re-use are nowhere near achieving their potential, with only 6.6% (on average) of end-of-life vehicle weight currently harvested for re-use.
At present, we can observe two different worlds, not really coming together. On one side, the shiny world of vehicle manufacturers pumping out new cars, with some recycled content; on the other side, the earnest endeavour of vehicle recyclers, harvesting used parts, as best they can within available technologies and demand, but mainly relying on downcycling to sell base resources into commodity markets, or for further processing by others.
A more strategic approach to net-zero would involve bending the entire value chain – bringing these two different worlds together – engaging all actors, including progressive vehicle recyclers and manufacturers, in co-creating a more circular economy; delivering net-zero emissions, along with massive resource savings.
This will require a massive amount of strategic collaboration, and while entirely possible, will require a great deal of commercial innovation. More of this, another time.
- Explore radical strategic and circular economy opportunities: Many organisations have yet to connect the dots between climate-change mitigation and the circular economy. Going circular can provide up to 45% of the carbon emissions reduction opportunity: by designing out waste, and keeping assets at their highest level of use and re-use, we reduce the pressure to extract new resources and, therefore, enable major savings in embedded carbon emissions.
Mindful of this potential, the circular economy is, arguably, the single most powerful instrument we might include within our net-zero strategies. The opportunity will be greatest for businesses which are highly dependent on non-renewable resources and involving energy intensive processes; they will find they are unlikely to be successful in delivering net-zero emissions without fully engaging with the circular economy.
The retail sector has a massive impact on consumption of resources and, therefore, on embedded emissions – so, it’s not surprising that a number of major retailers are moving towards selling more circular products and services.
Selfridges is accelerating on pledges and plans for circular and low carbon retail, and is now committed to making circular offerings “the backbone of the business”, accounting for 45% of transactions by 2030. This shift will have profound implications for how the retailer will generate profit.
IKEA appears to be aiming even higher, with its ambition to become a fully circular business by 2030. The intention is to design all their products with ‘circular capabilities’ – meaning, they will use only renewable or recycled materials, and provide new solutions for customers to prolong the life of products and materials.
It will be interesting to see how far this goes in practice: will all products really become fully circular, including a greater emphasis on reuse rather than recycling, delivering multiple useful product lives, and enabled by new, viable commercial models (making money, while selling less new stuff)? This move could be hugely significant in closing IKEA’s carbon action gap.
It’s worth dwelling on this point, a moment longer: the emphasis on reuse over recycling is an important issue, because every time a product is downcycled into base resources, there will still be a significant loss in the potential for savings in embodied carbon emissions, along with an attendant loss in asset value and utility.
For example, each time a customer buys a used car door on eBay UK, they will enable double the embodied emissions savings, compared with a recycling option. Downcycling the door also leads to a reduction in asset value by 98.6%, in comparison with the selling price of a reused car door. Of course, this makes sense; smashing-up products into base resources will result in a major loss of utility and value.
Mindful of the carbon downcycling gap, we’re definitely better-off in keeping assets at their highest level of use, for as long as practicable. Without a much greater focus on the re-use of product, retailers are unlikely to achieve either their net-zero targets, or meet the circular economy challenge, in any meaningful way. We have to go fully circular to maximise the carbon opportunity.
But, in taking this route, we inevitably change how companies make money – we need to find new sweet-spot for profitable net-zero business models.
- Rethinking business models: Business models are certainly at the very heart of the circular, net-zero challenge. Ultimately, our pathway towards becoming a sustainable, net-zero enterprise, will still need to work commercially, delivering fair returns, while also delivering radical improvements in carbon emissions and wider sustainability impacts.
How we make money is, quite simply, the problem to the answer: on the one hand a barrier to change, as we resist something that which is a potential threat to our conventional commercial sensibilities; and on the other hand, rethinking the business model can provide the fundamental key to unlock new solutions that work sustainably and commercially.
According to a new study by Capgemini Research Institute, 45% of corporate executives still do not believe there is a clear business case for improving environmental sustainability. If we don’t deliver both sustainability and commercial performance, the business world will lack any real drive for radical change, remaining sceptical, or stuck in the realms of denial or greenwashing.
As many enterprises have discovered, through some trial and much error, it can be hard to balance these apparently competing interests. This experience is even more acute, when we start engaging with the circular economy – business success is no longer defined by our ability to sell lots of new products – we are compelled towards completely reinventing the blueprint for how we make money.
Beleco, an international online furniture retailer, presents a great example of holistic business model innovation, integrating commercial as well as technical innovation. The market disruptor has developed an innovative circular economy business model for both commercial and home furniture markets, and one that has the potential to challenge many incumbents.
Beleco’s business model is all about renting-out high-quality, long-life circular furniture products, designed and manufactured within an entirely new circular market ecosystem and industry infrastructure, incorporating key sustainability considerations and total product lifecycle management.
It’s hard to find anything as ambitious as this, out there. Beleco aims to transform the furniture industry and help create a more sustainable society at the same time as generating long-term value. How is the business able to reconcile these aims?
Starting with the product, Beleco has greatly extended the design-life towards fifty years, which is around four times the duration of many conventional linear economy furniture products. For every single, circular economy sofa it manufactures, Beleco can displace the production required for four linear sofas.
As this model scales up, it can drive a radical savings in the exploitation of virgin resources and energy, as well as generating a 75% reduction in embedded emissions, when compared with the manufacture of four standard linear sofas. By extension, there are also major savings in production waste, as well as the waste associated with discarded end-of-life products.
Beleco then manages to couple this technical product innovation with commercial innovation. While long-life, circular products will attract higher initial production costs, these costs don’t necessarily have to be recovered at the initial point-of-sale; instead, costs can be spread and recouped across multiple rental contracts, throughout the circular asset’s total useful life. Quite simply, a longer asset life provides more touch points for extracting commercial value.
Of course, there are additional repair and refurbishment costs incurred at key points along the journey, but the total asset cost of one multi-life-rental-sofa is much lower than the total cost of producing four short-life linear economy products.
But, the combination of lower total assets costs, and the ability to generate more value-touch-points through multiple product lives, means that more ‘value’ can be captured and shared between customers, Beleco and furniture producing suppliers. This is all about decoupling financial value from resource use.
For the customer, this means a very attractive price point – paying around 25% less than the cost of buying an equivalent linear-sofa, over the full rental term. And, with further benefits experienced from flexible lifestyle options, and no longer having to worry about the responsibility of product disposal.
This level of technical and commercial innovation demonstrates how companies can resolve the commercial tension between apparently competing goals of minimising our footprint, while maximising our business goals of growth and profitability. We can make money from ‘producing nothing’.
- Think handprint, not just footprint: The drive for net-zero and sustainable business is not just about reducing ecological and carbon footprints, and becoming ‘less bad’ at what we do. Leading players are also finding significant opportunities to amplify their efforts by improving customer sustainability impacts – helping each and every customer in this way delivers a much greater, aggregate impact – known as the ‘handprint’.
The Make My Money Matter campaign shares a startling statistic for pension schemes, “investing sustainably can have 27 times as much impact on a personal carbon footprint as eating less meat, using public transport, reducing water use and flying less.” This insight raises a hugely important opportunity, particularly for service companies, like accountants, software providers, asset managers and others, to think about; what we do within our own business will either enable or constrain the strategic pathway towards net-zero transformations for our customers and the entire value chain.
Businesses and suppliers need to respond accordingly – developing new strategies, products and services to help customers improve their own sustainability impacts. The circular economy is for all businesses, whether directly participating in product design remanufacturing and retail, or whether through enabling services, including banks and investors.
Through its Recommerce model, eBay UK enables embedded emissions savings for buyers of used and refurbished vehicle parts, one-hundred-and-twenty times greater than the associated value chain footprint. In other words, for every tonne of value chain emissions expended, eBay enables a saving of 120 tonnes for customers. A significant handprint impact.
Net-zero and beyond
OK, so we’ve come a long way in developing our understanding of the eco-effective enterprise and the steps we can take towards net-zero and commercial success. We’ve put the horse well and truly back in front of the cart. This will enable us to harness a range of strategic opportunities, delivering radical reductions in emissions and wider sustainability impacts, along with commercial benefits, too. We should certainly aim to match, or even exceed, Beleco’s 75% reduction in embedded emissions and 25% lower price point. If we fully integrate commercial and technical innovation, why not?
We should also be mindful of the range of important enabling strategies in support of the above six steps of net-zero and commercial success. Perhaps, the ultimate enabler will be new mindsets and new skills. Until we engage in developing radically different approaches, we can expect more of the same, drifting inexorably towards the net zero-crunch. More than ever, we need system-architects and solutions-integrators, to communicate and coordinate designing the art-of-the-possible, and to join-up-the-dots in sourcing and integrating new ways of working. We need to turn systems thinking into systems action. More of this, another time.
We’re now ready to jump-in and pick up the operational agenda, the point at which where most net-zero strategies start. Armed with our eco-effective enterprise, we can then develop our further tactical emissions reduction initiatives, further optimising the radically low-carbon organisation we have created. Offsetting is, of course, the bottom of the pile – to counteract any residual footprint. SBTi currently allows for only 5-10% of maximum emissions for offsetting. Rightly so, with less than 5% of offsets actually remove carbon emissions from the atmosphere. Definitely, a last resort.
Of course, taking the opportunity to address the big strategic questions and take bold steps forward aligns very closely with what Paul Polman and Andrew Winston are advocating with their Net Positive business agenda. Our six strategic steps, outlined here, could be readily assimilated into Polman and Winston’s five core principles for net the positive enterprise, improving “well-being for everyone it impacts and at all scales—every product, every operation, every region and country, and for every stakeholder, including employees, suppliers, communities, customers, and even future generations and the planet itself.”
At this point, we might question whether net-zero is the right ambition in the first place? As Polman argues, “In a world that has overshot its planetary boundaries, net zero is the wrong target and will quickly become obsolete.” We need to think much more holistically, and much more deeply: “What needs to be embraced is a regenerative model that embraces net positivity.”
And, if we’re going to trouble of fixing net-zero, by addressing the big strategic issues, then we might as well raise our sights, and re-focus on becoming a net positive business, instead? The mechanics of net-zero plans will then take care of themselves.
Ten takeaways for net-zero and beyond – delivering radical reductions in emissions, while harnessing commercial advantage:
- Transform: Incrementalism is dead, it’s time to put transformation at the heart of our net-zero strategies. We can’t expect a radically different outcome without taking a radically different approach.
- Get strategic: Integrate six strategic steps at the front-end of our net-zero frameworks and strategies to harness opportunities for radical carbon reduction and commercial advantage, before jumping into operational and tactical initiatives.
- Reframe: Develop integrated mindsets, redefine success, and change the rules of the game to enable new possibilities for radically different outcomes. Be open and prepared for what comes next.
- Reimagine: Deploy backcasting techniques, envision the ideal future state model for our net-zero enterprise, and develop key stages and steps in our transformational pathway.
- Redesign: Develop comprehensive value chain models, for greater accuracy and visibility of emissions sources and interdependencies – along with enhancing our ability to explore broader opportunities for solutions and benefits, towards complete industry transformations.
- Get radical: Harness strategic and circular economy solutions, emphasising re-use over recycling to maximise embedded emissions savings and avoid the carbon downcycling gap. Integrate these radical strategies within value chain redesign (above).
- Remodel: Redesign business models, finding new ways to make money through non-consumption and reusing existing assets – decoupling financial activity from resource extraction and emissions production. The new sweet spot for net-zero enterprise – resolving tensions between sustainability and profitability.
- Think handprint: Amplify our efforts by leveraging improvements in customer sustainability impacts –known as the ‘handprint’. This can be particularly important for service companies: looking beyond our own footprints, it’s what we can do to help our customers towards net-zero that really makes the difference.
- Eco-efficiency: Armed with our eco-effective enterprise, we’re now ready to develop our further tactical emissions reduction initiatives. We’ve avoided the net-zero crunch.
- Net positive: Integrate our net-zero strategies into a wider vision for Net Positive enterprise – to enable deeper transformations and a greater positive impact.
This article is based on extracts from the forthcoming Earthshine Group white paper, Delivering Net-zero Transformations.
© Faversham House Ltd 2023 edie news articles may be copied or forwarded for individual use only. No other reproduction or distribution is permitted without prior written consent.