Developing Sustainable Business Models
Sustainability is a no brainer. Ask anybody if they want a sustainable world or a world where resources are progressively depleted, plastic litters the oceans, air is polluted and you can guess the answer. The question then is why are we not pursuing in a determined and unwavering way sustainability? Is technology failing us?
Well, if you just look at technology the forecast is rosy. With today’s technologies we can harvest much more energy from the Sun than what is needed, we can create biodegradable plastic, we can produce fresh water from brackish and salty ones to exceed any demand, we can use transportation means that cut emission to zero or well within the capability of the ambient to adsorb them ….
The problem is the cost of doing all that.
I had a nice talk yesterday with a researcher that is looking at sustainable technology and she was adamant that the overall cost of technology is lower than the long term ambient cost and I do agree with her. However, private companies are looking at cost weight on their next quarter balance sheet. Knowing that a technology will pay back in twenty years or -worse- that the cost sustained by other company/institutions will be lower because of they goodwill is not going to lead to the adoption of a specific technology.
If we want to pursue sustainability we need to look for a sustainable business model. The Great Reset report of the World Economic Forum indicates the areas that should be considered to create such model:
- Plastic and the Environment
The plastic production rose steadily from 1950, reaching 15 million tons in 1964 then 311 million tons in 2014 – a 20 times growth in 50 years- and is now getting close to 400 million tons. Overall it is estimated that some 6.3 billion tons of plastics have been produced, 600 million of it recycled and the rest discarded in landfills and in the oceans. The best way to tackle plastic is to stop producing and using it. The second best is to decrease its production and reuse it as much as possible. This is what the New Plastics Economy Global Commitment is aiming at. An alternative way to address the problem is to use biodegradable plastic. There are different variants of this plastic from the one that dissolves after 12 weeks of exposure to air to the one that requires an industrial process to be transformed into compost usabe in agriculture. All these approaches have one thing in common: they increase the cost of packaging. Regulations shall be enforced, and in many Countries this is already happening, to impose the recycle of plastic and the use of biodegradable plastic. There are, obviously, companies that see this as a new business opportunity but for most companies this is an additional cost to their bottom line. Fiscal incentives and a business ecosystem where the end customer is forced to pay a bit more are necessary. Here I mention plastic as a broad class of materials that are very stable and require hundreds, sometime thousands of years to dissolve. One of these materials is that used for the masks (PPE: Personal Protection Equipment, including gloves …) we have been using for the Covid-19 protection. Just in Italy the estimate is for 1 billion masks per month (you are suppose to discard the mask after a max of 8 hours, on some packages you read: discard after 4 hours). Many masks are made with layers of different materials. This makes recycling difficult. Under the pressure of the moment, Governments are soliciting companies to produce PPEs forgetting to require a design that con facilitate recycling. The so loved Circular Economy had found no place in the pandemic urgency. In addition the possible presence of viruses (not just the Coronavirus) calls for incineration as the best way of dealing with them, and this leads to air pollution.
- Future of Economic Progress
New Economic Models have already been tested. These levers on the sustainability desire of the consumer market and position a brand through advertisement as a “sustainable” brand. This proved successful in some niches, like apparel brands Patagonia and North Face. Notice that these brands target people loving wilderness, therefore more likely to appreciate and be willing to buy sustainable goods. Car manufacturers have been highlighting the reduced emission level of their new cars, but one has also to acknowledge the pressure/constraints generated by Governments measures. The progressive restriction to use older cars when the air pollution rises over certain thresholds is clearly a major force pushing consumers into buying cleaner cars. For sure, raising the awareness of people is an important lever towards creating a market that accept higher prices in exchange of higher sustainability. There should be laws imposing on cars dashboard a counter showing the amount of CO2 generated in a specific trip, and the total in using that car. And there should be indication showing alternatives leading to decreased impact. Similarly, there should be a flashing indication on air conditioning systems telling user how much more energy will be used by decreasing the target temperature by just one degree (I am particularly keen on this as I find myself talking in meetings about the need to decrease energy usage and having to wear a jacket because of the freezing air conditioning. American friends, please take notice!)
- Digital Economy and New Value Creation
The Digital Economy, by using bits, hides the environmental cost. Very few people are aware of the massive use of energy required to support our usage of bits. Data centres worldwide used over 200TWh of electricity in 2018, that is about 1% of all energy use in the world. Notably, data centres processing capacity has increased 550% since 2010 but the power consumption increased only 6% in the same period due to technology improvement. Also important to notice that Clouds are much more power-efficient than individual computers so the shift to the cloud(s) has made the digital economy better, from an energy standpoint.
The Digital Economy has much less friction to overcome and so it is -generally speaking- more sustainable than the classic economy. Having lower entrance barriers it attracts many more players and the die-off is much greater than the one experienced in the classical economy. According to the latest statistics 90% of new start ups will fail and the greatest percentage of these (63%) is in the digital space. Governments all around the world have made easier and easier to set up a start up, lighter bureaucracy, fiscal incentives, capital support… and this has worked. There are 100 million new start up –estimated – created every year worldwide. Governments and Institutions can steer the evolution of start ups in the direction of sustainability providing specific support to those making sustainability a key part of their goal.
- Advanced Manufacturing and Production
In this decade Artificial Intelligence will be used to create new alloys with desired properties and this is likely to reduce waste and make production more efficient. This is just one example of the evolution of manufacturing technologies that can be used to facilitate sustainable business models. Industry 4.0 by looking at the whole process, from raw material to recycling is -at least on paper- a revolution that can forter sustainability.
- Leadership in the Fourth Industrial Revolution
This area, already detailed in previous posts, is a playing field for Governments. They have the possibility of steering investment in specific directions, including the one giving higher importance to sustainability.
- Sustainable Development
Meeting today’s challenges without depleting the resources that will be needed by future generations is the bases of sustainable development. As previously mentioned we have the technology to make this reality, the problem is that the adoption of this technology leads, in the short term. to higher cost -and some inconvenience (like having to wait longer for refilling/recharging your car). Although technology will improve, and therefore the gap might decrease, pursuing sustainable development has to be a top down strategy leading to its enforcement. By the way: enforcing the adoption of sustainable development will increase the market for the supporting technologies and that will lead to their faster evolution.
- Environment and Natural Resources
This ties in with Sustainable Development expanding the range of sustainability beyond the resources used for manufacturing. The preservation os forests, wild ecosystems… and co-existence with other species can be turned into business opportunities (however the driver should not be the business exploitation!).
- Future of Food
Feeding 7 billion people has been a miracle of the last 50 years. The agriculture yield has multiplied thanks to a variety of converging technologies, from biotechnology to automation.
Yet, this has not been enough to feed the growing population and millions of wilderness acres have been destroyed and converted to agriculture. New technologies, more recently, are now been used to convert deserts into arable land.Feeding the 9.8 billion people in 2050 will require a lot of ingenuity and this effort will be even more complex if we want to, as we should, preserve natural environment.
Resource expensive food, like beef, may be substituted by vegetables and artificial meat, this latter is actually receiving a boost from the pandemic.
The shift towards electrical vehicles bring into focus first the performance of batteries (both in terms of energy density and in the speed of recharge) but immediately after that the issue of disposing them once they are depleted. This latter is a major issue although many lay people have not become aware of it -yet.
Consider that 1 million vehicles generate the need to dispose 250,000 tons of batteries by the end of their life cycle. Now, multiply that with the hundreds of millions of cars we have today and you start to get a glimpse on the problem.
It is not just the disposal. Batteries use a number of relatively rare elements that are mined at an high environmental cost. There is an absolute need to focus on this as we are looking forward a sustainable development.
- 3D printing
This technology is an integral part of advanced manufacturing and and important component of Industry 4.0. In theory, 3D printing can help through customisation and just in time to decrease the use of resources. As 3D printing will become mainstream also in the mass market new issues may arise. As you disseminate a technology you are usually losing efficiency. Think of personal printers versus the big printing machines that print those photos you print through a web service. They are not just producing better quality, they use less energy and pollute less.
- Air pollution
Particulate, CO2, NO2, and more are the fall out of industrial processes, of residential heating and of vehicles (there are several others but these are the most significant). These air pollutant can be drastically diminished … at a cost. Particularly, industrial processes are sensitive to manufacturing cost increase (energy cost, material processing, …). Although, in general, Governments have agreed on imposing emission restrictions on vehicles they have been more shy in imposing emission restrictions to industry since an increase in cost leads to loss of market share and eventually loss of jobs. The extent of air pollution generated by industry has become clear to everybody through satellite images taken in locked down areas: the air pollution drastically fell in a matter of days. It is important to reach transnational agreements on air pollution, particularly the one caused by industrial processes so that sustainable business models can be devised.
- Climate Change
Climate is the result of very complex and interconnected processes, most of them independent from human activity: climate has changed many times through the history of our planet, with much hotter and much colder periods than today. The atmosphere composition has also changed significantly in terms of O2 and CO2 concentration. These “facts” are often used by “negationists” to disregard the climate change issue.
Although this is correct, it is also correct that CO2 emission is contributing to warmer climate and it has a compound effects. Of the 29GTons of CO2 produced by human activity only 12GTons are adsorbed by the environment. The remaining 17 pile up increasing the CO2 and the greenhouse effect. It would be preposterous to say that humans can control the climate of the planet with today’s technologies but it is also a fact that human activity is contributing in this phase to an increase in temperature and that by altering our activities, more specifically CO2 emissions, we can remove its contribution to the warm up. It should also be noticed that even if we were able to stop all CO2 emissions it will take several decades for the CO2 added to the atmosphere by our activities to be adsorbed and disappear. This is why is so important to decrease the emission (the 50% reduction target is to bring the emission to the level that can be adsorbed by natural processes) because it is basically impossible, in a short period, to reverse its effect.
It is not just global warming with the rise of the ocean leading to widespread flooding. An increase in temperature leads to an increase of the planet energy that is converted in phenomena like hurricanes, draught, phytoplankton bloom (adversely affecting many marine species).
- Circular Economy
I already addressed the Circular Economy in previous posts. It is a very good reference model, to make it concrete we have to agree on accepting its cost that are higher in the short term, trusting that the overall system will gain in the longer term.
- Corporate Governance – Agile Governance
As noted in many points in this post, creating a sustainable business model requires a global view. Hence a Corporate governance that can steer single business units toward an overall sustainability goal is important. Likewise, it is crucial to have an agile governance that can respond to changing markets and regulations. We have seen a growing awareness in markets steering the choice of buyers towards sustainable products.