Climate Innovation: Diversification and Green Business Models
To succeed in the decarbonization economy, companies need to look outside their core business to unlock new value
By Ashley Silver, Daniel Jarosch, and Kanika Chandaria, BCG Digital Ventures
In the context of the clear need to address climate change, the decarbonization economy has risen to the top of C-level agendas; Chief Sustainability Officer has become a serious and integral role in the boardroom, taking prominence at Ikea and Unilever, to take just two examples. The success of decarbonization is not only necessary to keep warming under 1.5c, but also to provide consistent growth and revenue opportunities over the next decades. Consumers are looking to companies to provide them with low- or zero-carbon products and solutions, and there is clear investor demand to back this up. Companies are making radical commitments as the starting point to bold action, with market leaders like Microsoft pledging to become not just carbon neutral but carbon negative by 2030.
Climate disruption can be viewed on a similar scale as digital-driven disruptions in the past; climate innovation is not just about doing the right thing for the planet, it’s also a commercial imperative. This is clear when we look at how previous waves of disruption have affected businesses. A BCG study showed that during an industry-wide shock, only 33% of companies successfully steered their way through. Others failed, stumbled, or were bought out. By playing to win in a changing environment rather than playing not to lose and defending the status quo, businesses can find new ways to create value. Innovating into resilience is the key for future growth.
While we have seen plenty of ambitious pledges and companies start to back these up with serious action, we’ll need much more velocity and depth to adequately respond to the severity of the threat posed by climate change. It’s not enough for companies to continue with sustainability-as-usual; we need to see far-reaching and impactful action grounded in scientifically verified targets and backed by accountability to support the transformation of today’s carbon-intensive economy. The companies that are successful in this action will be those who not only take their own emissions seriously, but also unlock new climate solutions outside their core business, reaping rewards in terms of revenue and actively addressing climate disruption rather than losing out to external challengers.
The decarbonization economy
Blackrock has estimated that the disruption around climate change could create $10 trillion of investment opportunities in the next three years. Meanwhile, Amazon has announced a $2 billion fund to invest in sustainable innovation, and Microsoft has a similar plan, with $1 billion to play with.
By responding to the shifting decarbonization economy, forward-looking companies are demonstrating that climate solution innovation is all about creating long-term value. Oil and gas companies have begun diversifying into renewables and integrating them into the grid. Meanwhile, mobility services like Lyft are moving into low-carbon alternatives, and banks are helping consumers make greener investments in their homes.
“As demand for clean products and energy sources continues to rise and nascent technologies become ready to scale, the market will grow and mature, and the possibilities for clean solutions in every sector will present new opportunities for companies to secure value in the decarbonization economy.”
These new, low-carbon products and services are set to disrupt the traditional ‘dirty’ incumbents that have been core to many companies’ business until now. As demand for clean products and energy sources continues to rise and nascent technologies become ready to scale, the market will grow and mature, and the possibilities for clean solutions in every sector will present new opportunities for companies to secure value in the decarbonization economy.
New offerings are likely to drive customers towards better climate practices. Think consumer carbon-tracking solutions like Wren, driving preferences to more climate-friendly products and services; integrated carbon removal options such as with Stripe; or driving customers towards more renewable energy consumption, like startup Amber Electric. They also open up new revenue streams, replacing carbon-heavy or non-sustainable activities — or just increasing and expanding companies’ value sources.
Taking this into account, it becomes clear that many corporates will be well-placed to succeed in the growing marketplace for products and services which drive sustainability. It’s by combining expertise and assets with cutting-edge technologies that new business models and revenue streams can be unlocked.
To take one example of climate-led diversification, at BCGDV, we created Atfarm with agriculture business Yara. Sustainability has been a priority for Yara, central to its mission to ‘responsibly feed the world and protect the planet.’ By combining Yara’s technical resources, extensive industry knowledge, and decades of R&D experience with satellite data and a user-friendly user interface, Atfarm helps farmers determine the optimum fertilizer distribution for their crops intra field, reducing waste and increasing yield. Atfarm enables farmers to produce the same yield of crops with ~3–7% less fertilizer as input. In this case, innovation meant taking Yara’s existing algorithm and network assets and using them to create a smart, more sustainable solution, while diversifying the company’s core business.
Leveraging privileged assets to advantage early stage innovation
As new startups quickly shape the innovation landscape, we also see selected corporates innovate in the decarbonization space. While startups often have the speed and greenfield advantages, established players have the privileged assets like reach, brand, customer base, or resources that allow them to compete effectively in the new value pools.
As the world struggles to adopt a synchronized and effective push for climate action and policy, the choices of corporates, who have capital, scale, expertise, and experience, will be critical in helping us achieve the goals of the Paris Agreement. Corporates have a strong right to win in the decarbonization economy because of these privileged assets. By investing in green business models and diversification, they can actively future-proof themselves, building resilience and investing in long-term success, rather than passively witness their own disruption at the hands of challengers.
Companies should ask themselves what privileged assets they have access to that they can leverage in building new solutions. These might include anything from brand and reputation, capital, market position and scale to specific expertise and capabilities, such as specialized sector knowledge or operational capacity, to the ability to manage massive, complex projects.
Companies will often have more than one of these types of assets, and can use them to drive initial thinking around climate plays. Then the hard work starts: Identifying the privileged assets is a relatively easy first step — it’s unlocking and leveraging them to pursue new venturing opportunities that’s the hard work.
Creative thinking is crucial here, and different types of assets will enable different innovation opportunities, for example:
- Natural physical assets such as land or sea access could enable regenerative land use, like regenerative farming, and afforestation.
- Building assets could drive more dual use, such as smart grid participation, or expertise in green building retrofit services.
- Material assets could become circular, or have a second use such as generating biofuels from waste or new products from recycling or reuse.
- Financial assets have the promising capacity to drive systemic change, such as green mortgages rewarding investment in more efficient homes, or social investment funds.
- A logistics footprint can be used to optimize energy use, set up EV charging networks, and more efficient transport options, such as micromobility.
- Human capital — mindshare of customers, employees and suppliers — is a valuable asset and can be used to drive climate impact and new business models. For example, businesses are currently innovating by enabling carbon footprint tracking, or rewarding climate-friendly choices (which are often more economical).
Innovating across Scope 1, 2, and 3 emissions
The sources of a company’s carbon footprint can also be the starting point for driving climate innovation. Companies with high emissions should see themselves as part of the solution — they present the motivation and inspiration for new innovative climate businesses that can drive new revenue streams and scale impact.
As companies look to control their Scope 1 emissions (direct emissions from company-owned and controlled resources), investment in new low-carbon technologies and operating models are paving the way for new offerings and business opportunities. For instance, as airlines look to decarbonize, United Airlines Eco-Skies Alliance is driving investment in and demand for sustainable aviation fuel, SAF, by offering its corporate customers the ability to pay for the price of SAF for its flights. This is one of the many initiatives that United is undertaking to drive innovation, investment, and economies of scale into SAF.
Another opportunity can be seen in the transition of commercial fleets to electric vehicles, and the potential this presents to drive the economies of scale required for the EV sector. Amazon’s fleet electrification with the purchase of 100k delivery vans is driving innovation in electric vehicle design, EV charging hardware, software, and networks. Amazon’s partnerships with Rivian, for its vans, and ABB, for a new industry-level EV fleet management platform, show how innovation and new business opportunities can emerge when addressing Scope 1 emissions.
The impetus to tackle Scope 2 emissions (indirect emissions from purchased or acquired electricity, steam, heat, and cooling) is leading companies to switch to commodified renewables as well as to research and develop new innovations for renewable energy. For instance, Unilever is working to develop new low-carbon sources of thermal energy with approaches using heat pumps, concentrated solar power, biomass, biogas, and hydrogen in their product manufacturing. Unilever’s scale and investment could help lead these technologies to be commercially viable and available in the future, serving as new capabilities for Unilever to leverage and potentially monetize.
Scope 3 emissions (all indirect emissions that occur in the value chain of the reporting company, including both upstream and downstream emissions) are where there are likely the most diverse opportunities for climate innovation and new business possibilities — they also often account for the majority of an organization’s overall emissions, in some cases 90%.
Many of these business opportunities include building industry platforms for sharing measurement, tracking, and reporting tools; enabling multi-sided marketplaces to promote transparency and low-carbon suppliers; spearheading industry certification and standards; driving new product and service categories; and using IoT and distributed ledger technology to trace and certify materials and products as they move across the supply chain. When looking to innovate across Scope 3 emissions, leaders should consider nine initiatives that enable companies to tackle their supply chain emissions successfully:
- Sustainable product redesign
Making sure each product is designed with sustainability in mind, perhaps by using greener materials or making products recyclable.
- Value chain design and sourcing strategies
Reconsidering value chain design choices, for example by limiting the need for long-range logistics.
- Procurement and tracking
Setting clear standards for suppliers, for example by mandating renewable energy use.
- Supplier support
Working directly with suppliers to address their emissions, sharing knowledge and offering technical support.
- Scale up buying groups
Using demand as a driver for change by driving economies of scale to upstream low-carbon technologies and practices.
- Baselining and data exchanges
Defining a baseline for suppliers, products, and components using emission factor databases.
- Target setting and reporting
Increasing accountability by setting clear climate targets and reporting performance.
- Best-practice sharing, certifications and standards
Engaging in sector initiatives through industry bodies to establish best-practice operations, certifications, and standards bodies.
- Low-carbon governance and internal incentives
Creating the mechanisms within the business to incentivize change, such as internal carbon pricing, targets, and funding.
Companies with complex global supply chains are spearheading various new circular business opportunities to tackle Scope 3 emissions. Companies like P&G are working in consortiums to reduce the impact of their packaging through new innovations in plastic watermarking for easy recycling, to initiatives such as LOOP to drive circular packaging use. These are impacting supply chains, while driving new product and service lines. BCG worked with the global shipping industry to build Container Xchange to reduce the inefficiencies in empty container repositioning (ECR), showing the opportunity for industry collaboration to tackle waste.
Ikea has pledged to make all its products circular by 2030. 45% of Ikea’s value chain emissions come from materials used in its products; to reduce these upstream emissions, Ikea has a multitude of new products and services such as recycled plastics in its materials, furniture-as-a-service, and furniture buy-backs to reduce end-of-life landfill waste and drive material reuse.
While companies are driving these initiatives for themselves, many of these capabilities can be developed into new product and service offerings for the wider industry, enabling new revenue sources, diversification, and further reaching climate impact.
Diversification to drive transformation and break-out growth
Instead of solely reducing the climate impact of existing business operations, diversification is about focusing on break-out growth: New business models that create low-emission solutions or take innovative approaches using technology.
Break-out growth is not about pivoting all resources into a new revenue stream. It requires a portfolio approach, keeping close to the core of your business and taking calculated and appropriate risks in new frontiers. Across markets, businesses seeking to diversify do best by retaining a solid foothold in their original market — keeping 70% investment focused on the core business, with the remaining 30% going to innovation projects. Therefore, it makes sense to carefully manage the breadth of the products and services, while placing big initiatives in one or two areas.
There are two key elements to break-out growth: Reimagining and inventing as strategies for innovation. For some businesses, there will be diversification opportunities around reimagining: Think new, low-carbon solutions that respond to the fundamental customer need in a reimagined way. For example, equipment management platform MachineMax, built by Shell and BCGDV, uses an AI telematics solution to vastly reduce the unnecessary idling time of off-road machinery, cutting emissions as well as maintenance costs.
For some, the best way to diversify will be to invent. This is about integrating new breakthrough solutions to disrupt existing markets or create new ones — as renewables or hydrogen have begun to replace oil and gas, and sustainable proteins have begun to replace animal-grown. At BCGDV, we helped to found Utopus Insights, for example, a platform that collects and analyzes information on renewable energy, allowing companies at the intersection of weather, energy, and data to increase efficiency. Utopus Insights leverages years of experience in energy software solutions development and delivery for renewable generation and utilities — a clear advantage over other solutions.
Likewise, OpenSC, launched by the World Wildlife Fund and BCGDV in January 2019, leverages the WWF’s reputation and expertise in conservation and combines it with technology to create a supply chain transparency platform that empowers consumers to know whether their goods have been sourced sustainably. What these ventures have in common is that they leverage privileged assets, hold strategic value, and executed on a well-defined value proposition.
Businesses that are committed to thriving in the decarbonization economy have a commercial interest in diversifying their activities through strategic innovation. They should be taking a portfolio approach to new growth opportunities, taking stock of the assets that give them competitive advantage, and the potential climate plays and innovative business models they can bring to market. This strategy will be good not only for their business, but also for the planet and humanity.