Winning the Sustainability Transformation

The air was filled with expectations and the audience excited when Neha Roy-Lal from Ambitry and Jim Li from EOXU Group sat down on the podium of the Global Economic Forum. The title of the panel “What created these two super-majors?” suggested for an insightful panel discussion and lesson in business and politics. Ambitry and EOXU have become the undisputable largest global conglomerates the sustainability transformation has brought forward. You don’t know Ambitry and EOXU? Of course not, this is fiction today, but could be reality in 2030, 2040 or a few years later. At that time, we will be looking back and ask ourselves “When was the inflection point to create these leaders?” And there will be more than just two. The second question we will be asking, “What did they do right to win the leadership spot?”.

Let me start with the timing question and provide a best guess. This inflection point may as well be around the years of the pandemic. I.e., now. What makes me believe this? We worked 20-30 years to get to where we are today. We built significant momentum for sustainability, but we lack traction. From now onwards companies, politicians and nations committed to pivot and to implement massive changes within the same period of 20-30 years.

Taking a glance back, as some may remember the first big sustainability conference was in Rio in 1992. Seven years later I started working for a small Swiss based start-up called SAM Sustainable Asset Management as employee number 11. SAM had the audacious goal to bring sustainability to the global financial industry. Yes, the company was probably a bit ahead of its time, and so was Dow Jones. The two firms teamed up in 1999 to launch the Dow Jones Global Sustainability Index (DJSI). Since then, the DJSI has become one of the most respected ESG indexes globally. It created a profound impact on the behavior of companies, as they seek their desired spot in the world-renowned DJSI. Yet, it took almost two decades and one Greta to get sustainability truly onto a global agenda of politics and into board rooms. Today, the DJSI and thousands of other ESG indexes and ESG funds redirect billions of dollars into Sustainability. But how far did we come since the Rio Conference? The actual global impact is still limited, and carbon emissions have increased over 50%, rather than decreased. So, over these decades a lot of momentum for the sustainability transformation has been built and some sectors started to see significant changes (e.g., the power sector) but true global impact is still lacking.

What’s the plan going forward? The Economist reported recently that countries accounting for over 70% of world GDP and greenhouse gas emission now have targets for net-zero emissions, typically by 2050. So, after 2-3 decades of building momentum but limited global impact the sustainability transformation is changing gears. Within the same duration of 2-3 decades a “sustainable” state shall be reached! Well, let’s start with the good news. It is possible according to the International Panel of Climate Change (IPCC), …but. If one reads the analysis of the IPCC in detail it becomes clear that the actions have to be massive, and they have to start now. To prevent an increase of global warming above 1.5°C the global net anthropogenic CO2 emissions have to decline by about 45% from 2010 levels by 2030, reaching net zero around 2050. To limiting global warming to below 2°C, the maximum agreed temperature increase under the Paris agreement, CO2 emissions need to decline about 25% by 2030 and reach net zero around 2070.

It is also clear that reaching such massive reduction isn’t one industries effort. It requires pretty much every industry and affects every sector. If companies, politicians, and nations make good on their promises to reach these targets we are going through a massive industry transition – a sustainability transition – in the decades to come. And like any transition, it is an opportunity, and it will create new leaders. Leaders who will likely be leading for years to come afterwards.

This gets us to the second question. How do you build the next empire and win one of these leadership positions?

Some industries and large companies have gotten a first taste of this transition. Tesla’s market cap is now larger than the five biggest car OEMs together. BYD has delivered over 65,000 pure-electric buses and coaches globally ahead of any well-established bus manufacturer. In 2020, annual renewable capacity additions increased 45% to almost 280 GW according to IEA with renewables now accounting for 90% of new power capacity expansion globally. Some large utilities in Europe made the painful experience already what energy transition means, while some others started to win new sustainable business. But energy and transport are not the only sectors affected by this transformation. In November 2019, America’s largest milk producer, Dean Foods, filed for Chapter 11. Beginning of 2020 Borden Dairy Co., one of America’s oldest, followed swiftly. Both companies cited the declining consumption of cow milk and the rise of non-dairy vegetarian milk alternatives as the reason for its decline. Of course, the list of disrupted leaders doesn’t stop here while we really haven’t even started making this transition. And let’s be clear, there is no strong reason why tomorrow’s winners cannot be the same as today’s leaders. But if today’s leaders want to defend their space, they have to lend on the entrepreneurial aspects of the ambitious newcomers and start-ups.

The transition requires mastering new disciplines, new technologies, new business models while keeping the legacy business on track. Resources will be limited to manage this and must be allocated carefully and strategically. Companies realize they cannot do everything in-house. In addition, many experts and the most entrepreneurial people may choose to stay outside big firms and push their own ideas. The keyword for today’s leaders is “open innovation”. Lending on outside development where it already exists rather than developing all inhouse. Forming collaborations with outside innovation partners to accelerate market readiness and penetration. If single innovation partners cannot solve the problem, ecosystems must be built.

Since the term was coined by Henry Chesbrough, the concept of open innovation has seen a steady increase in adoption. Most Fortune 500 corporations and countless smaller firms started to build their competence and experience. In parallel, start-ups became one of the most important groups of open innovation providers. Getting access to them is often realized through a corporate venturing activity and collaborations with established VC funds. As Global Corporate Venturing (GCV) reports, there are close to 2000 large firms which established their corporate venturing activities over the last decade, with many of them in the last five years. Yet, as those who do this for several years, if not a decade, know, it is not done by finding the thousands of start-ups that pop-up every year. That’s when the work really starts. It’s about picking the best. Best in terms of their technology, product or service offering but best also in terms of maturity and cultural fit. Solving problems together requires tremendous commitment from both sides, fueled by trust. Open innovation and corporate venturing are not one-way streets. Both, the start-up and the large corporation, and every key person involved, need to see an opportunity to win. Fortunately, the opportunities which come with the sustainability transformation are large and this leaves a piece for all actors. In addition, there is the element that many of the start-ups don’t necessarily want to go all the way to the big price and become the undisputed next industry leader. Many entrepreneurs see themselves as company builders and not patrons. They build to sell. They cash-in and move on to build the next great thing. That’s the business model and it fits well to the need of todays challenged leaders who need to manage a fast transition with innovation. And if collaborating with start-ups isn’t enough, acquisitions can provide a further acceleration.

To wrap it up, the sustainability transition will take its course. The time today is likely marking the inflection point in terms of building momentum. The topic has made it to the top of the pile in board agendas and governments. Now it is all about implementation. Even if we only see part of the net-zero plans being implemented we will still face a massive industry transition. This transition is disruptive and creates big opportunities for new leaders. It will shift profits and wealth to those who are fast in capturing the opportunity. Start-ups have proven to be very agile and able to win substantial spots of this new world. Mastering this transition as a current industry leader means leaning heavily towards open innovation and corporate venturing. Lending from the playbook of start-ups by collaborating with them will be key.