What’s a sustainable (and just) business model?

Of all the quotable lines contained within BlackRock CEO Larry Fink’s annual letter to CEOs, published last week, one stood out:

There is no company whose business model won’t be profoundly affected by the transition to a net-zero economy.

That’s quite a statement, even if a tad hyperbolic. And it got me wondering: What is a sustainable business model?

Answering that question requires understanding a bit about what a business model actually is. Alexander Osterwalder, considered a guru on the topic, who created a tool called the business model canvas, defines it as the “fundamental structures for how companies create, deliver and capture value.”

A good start, but I needed more. How can one think about business models through the lens of net-zero, sustainability and social justice? And what does it take for an organization to transition from one business model to another?

There is no company whose business model won’t be profoundly affected by the transition to a net-zero economy.

I checked in with my longtime friend Rob Shelton, co-author of “Making Innovation Work” and executive fellow at the Miller Center for Social Entrepreneurship, my go-to expert on innovation and its relationship to sustainability.

Business model innovation tends to focus on three aspects of value, he told me.

First, what is the value being delivered? In the past, that value was pretty tangible — a product or service. In the age of sustainability, there can be new sources of value: health, recyclability, biobased, locally produced and so on. Value also can be seen through a social lens. Take Toms Shoes’ buy-one-give-one model, where for each purchase of shoes, Toms sends a pair to a person in need. That’s a business model innovation that provides value to the world, not just the customer.

Technology can create opportunities. Consider food production. Vertical farming, where food is grown indoors year-round with a fraction of the inputs, leverages innovations in lighting, irrigation and other things. Same with circular fashion models such as recommerce, where an apparel brand agrees to take back used garments, which are then refurbished and resold. That wouldn’t be possible without modern-day tracing, tracking, e-commerce and other technologies.

Second, how is the value being delivered? We’ve seen dramatic changes in software, for example. It used to come in a shrink-wrapped box, then was downloadable and now lives in the cloud as a subscription service, a big innovation with significant energy and materials savings. Today’s sharing platforms also fit here, where the same durable product (say, a car, apartment or lawn mower) could be made available to virtually any number of individuals.

Reusable packaging, such as that offered by Loop, is another great example, where consumers return empty containers and receive refills of personal care, household cleaning and other products. (In Loop’s case, the innovation is a 21st-century take on the 20th-century “milkman” model.) Another example involves spare parts created via 3D printing, likely produced closer to the customer, reducing shipping and downtime.

Third, who benefits? This is where the innovation can expand markets and customer access — for example, by making something more cheaply or more attuned to regional needs or trends. Or it can give jobs to previously hard-to-employ individuals, such as former addicts or the incarcerated. But the beneficiaries need not be specific individuals. They can be communities or ecosystems, among others.

“In the old days, the only people that received value were the customers and the shareholders,” Shelton explained. “Nowadays, it can be a broader set of recipients.”

Five easy pieces

Many of these forms of value creation already are well-established in the world of sustainability. Here are five business model innovations poised to accelerate:

  • Circular — clearly, the best understood, although still relatively nascent. Closed-loop, reusable, biobased, zero-waste goods and services all represent business model innovations in which value propositions, delivery mechanisms and market accessibility are up for grabs.
  • Regenerative — an emerging space, where companies find value through innovations that restore, protect or enhance ecosystems. Biomimicry and other nature-inspired design innovations likely fit here.
  • Decarbonized — products and services made and delivered in a way that produce vastly reduced climate pollution. Renewable energy purchases are obvious examples, but that’s just a start: A 2018 YouGov survey of global corporations participating in the Science Based Targets initiative found that 52 percent of executives expected at least half of their products and services to be low-carbon by 2028.
  • Just — business models that increase access to goods and services to lower-income individuals or communities or that expand job and career opportunities. Apple’s $100 million Racial Equity and Justice Initiative, which, among other things, provides venture capital funding for Black and Brown entrepreneurs, is one recent example.
  • Local — turning waste streams into sources of value is one aspect of the growing relocalization of commerce. The aforementioned vertical farms are another example — growing food at or near where it’s consumed — as well as additive manufacturing (as in the parts-printing example), where goods are produced close to where they’re needed.

All of this barely scratches the surface. There is no shortage of ideas of how companies large and small can reinvent themselves for the emerging clean economy. And the examples aren’t mutually exclusive. Growing food indoors, for example, potentially can tap into all five of the above categories.    

As Fink notes, companies will need to explore such opportunities to meet society’s — and investors’ — growing net-zero demands. In some cases, that might mean blowing up the old model; in others, it may mean operating parallel models for a time. Many of these will lead to new partnerships and value networks as companies rethink what, where and how they source and sell goods.

“What Larry Fink is saying is that, as you look at the challenges of a net-zero economy, ask yourself, ‘How can we rethink the value we deliver, how it’s delivered and who’s receiving the value?’” Shelton said. “Reconfiguring one or all of those will significantly change the way that enterprises not only are operated, but also the way they’re governed.

“It puts new responsibilities on the board of directors to make sure that things are working right on the management team to be able to develop and convert to these new business models, and then to keep improving on them because no one will get it perfect the first time. It will take improvements over a period of time.”

This is not some hypothetical thought experiment. “Given how central the energy transition will be to every company’s growth prospects, we are asking companies to disclose a plan for how their business model will be compatible with a net-zero economy,” Fink wrote in his CEO letter. “We are asking you to disclose how this plan is incorporated into your long-term strategy and reviewed by your board of directors.”

That sort of high-power challenge from someone in the financial community has been in short supply. It may well be the reason we have had slow and halting movement to adopt meaningful goals and make crucial changes. Fink and the others that join in this demand for change could be the instigators we’ve long needed.

In any case, the message is both implicit and explicit: Adapting to the new world of climate risk means potentially rethinking everything and having a story to tell that will demonstrate to concerned investors, such as BlackRock, that you are well-positioned for an uncertain future.

I invite you to follow me on Twitter, subscribe to my Monday morning newsletter, GreenBuzz, and listen to GreenBiz 350, my weekly podcast, co-hosted with Heather Clancy.

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