Similar to the digital revolution before it, the sustainability revolution changes everything.
- During the digital revolution, the objective truth of Moore’s law as well as the increasing portability of smart devices and an explosion of available data combined to create an inescapable need for digital transformations across all industries and sectors.
- For the sustainability revolution, our well-documented environmental and societal constraints as well as increasing pressure from multiple stakeholders and new technologies that enable radically different approaches create the need for equally profound sustainability transformations.
As was the case with digital, the pace and disruptiveness will be different for each industry. Yet the trend is irreversible, and it is reaching an inflection point.
This is happening now for a host of reasons. On a basic level, global consumption has grown massively while many of the world’s resources remain fixed and finite, or only partially renewable. In some areas, consumption is exceeding the capacity to supply sustainably—seafood is a good example. The negative consequences of corporate activity are increasingly measured, visible and scrutinized. Consumers, governments, employees and investors are paying far more attention and taking far more action (see Figure 1). And new sustainable business models in some industries are helping companies outperform competitors.
Companies care because the constituents they care about care
What does this inflection mean for businesses? Sustainability’s scope is expanding to encompass a broader range of environmental threats as well as social, economic and governance challenges—everything from product health impacts to racial equity to gender rights to food equality.
Second, it is accelerating much faster than anyone predicted. The number of electric vehicles has grown nine-fold since 2014.
Finally, it is disrupting industries in ways that could not have been imagined even a few short years ago, poised to do what Amazon did to bookstores, Airbnb did to hotels and Uber did to taxis.
Who could have envisioned that electric cars would disrupt the automotive industry, that renewables would upend the energy industry or that Burger King would sell its iconic Whopper with the plant-based Impossible Burger? Such evidence of sustainability disruption is everywhere (see Figure 2). For example, complying with potential future regulatory measures, ranging from full water pricing to stricter carbon taxes, could cause a typical consumer products company to lose up to 20% to 25% of today's margins, according to Bain & Company estimates.
Many categories are being disrupted by sustainability trends
The trouble is that too few companies factor the potential costs of strict regulations or other big unknowns into their long-range visions. They instinctively tend to model a future that looks more or less like today. The same goes for considering the opportunities. On the upside, the market size for water-friendly alternatives for shampoo, conditioner, shower gel, toothpaste and hand soap is estimated at $30 billion to $60 billion, for example. Yet many companies fail to account adequately for such huge opportunities during their planning.
The sustainability revolution is unstoppable. During the global recession of 2008–2009, many predicted that companies would deprioritize sustainability as a nonessential component of their business. That didn’t turn out to be the case—and it won’t be the case with the Covid-19 crisis either. The pandemic unleashed headwinds that threatened to limit the corporate response to the sustainability imperative, as companies struggled to maintain their footing and preserve cash for costs necessary to ensure their survival. Yet, looking beyond any temporary setbacks, the crisis created longer-term tailwinds. For example, while it exposed weaknesses in existing operations, it opened the door for companies to shorten supply chains and make them more transparent, socially conscious and environmentally friendly. And, as they reevaluated their processes and product portfolios for cost savings, some companies found that using a sustainability lens helped them reduce procurement spending along with their environmental footprint. For example, packaging harmonization saved one consumer goods company a little more than 10% on costs while substantially lowering materials requirements.
The coming shift in profit pools
A long time in the making, sustainability saw a watershed moment last year when more than 180 CEOs signed Business Roundtable’s statement indicating that corporations should commit to serving the interests of all stakeholders—namely, employees, customers, suppliers and the communities where they do business. Stakeholder capitalism became the theme of the 2020 World Economic Forum main event in Davos, and 2021’s theme is slated to be “the Great Reset,” an urgent joint commitment to build the foundations for an economic and social system that will lead to a more fair, sustainable and resilient future.
While most executives now support sustainability objectives and have made some progress with their efforts, many leaders know that they will need to do substantially more. They need to prepare for the day when a $20-per-ton carbon price balloons to $75 per ton in 2030, the level suggested by the International Monetary Fund, or they need to plan for the other unique external forces that will affect their specific industry segment or product category. They need to prepare for the eventuality when satellite technology reveals the collective environmental impact of their far-flung operations as if they were next door. Many feel that they are falling behind in the race to meet changing consumer demands, evolving legislation, developing technology and the needs of a troubled planet.
All transitions are tough, but there is hard evidence that this one will be even tougher. Our global research found that only 12% of all corporate change efforts fully succeed, but the success rate for sustainability initiatives is substantially lower—it is a paltry 4% (see Figure 3).
Despite its urgency, sustainability change proves harder than other types of change
Yet, despite this discouraging track record, there also is evidence of a vast upside potential. Just as with digital, sustainability is shifting profit pools to open up multibillion-dollar industries. Plant-based meat could be a $140 billion business by the end of this decade, and the retail nutrition and wellness market could grow to $50 billion by 2025. The current market value of the alternative beverage category is $13 billion and growing at 12% per year, for example. Yet many companies fail to account adequately for such huge opportunities during their planning. Recycling plastics into products could generate $50 billion. Sustainability-linked consumer products brands now grow nearly six times faster than other brands, and 73% of global consumers say they would definitely or probably change their consumption habits to reduce their impact on the environment, according to a 2018 Nielsen study.
As it expands, accelerates and disrupts, the sustainability revolution requires companies to simultaneously tackle the existential challenges and reach for the opportunities.
Finding a new growth engine
Sustainability challenges industries and opens up opportunities in four basic ways.
Strategic choices. When companies look into the future, many will see that their only option for becoming sustainable is to make a drastic shift in direction—that is, to adopt the “disrupt or be disrupted” mindset that spurred so many companies to embark on digital transformations. A Bain & Company survey found that 90% of companies feel as though they need to change their core business model at least somewhat in order to operate within a truly sustainable economy, and 38% feel that their core business model will need to change radically (see the Bain Brief “Transforming Business for a Sustainable Economy”). That proportion is huge when you consider how infrequently companies reinvent their core—and do so successfully.
Companies will need to make changes that fundamentally affect where to play and how to win. For example, just as the emergence of innovative fintechs quickly forced banks to determine how to shift their strategy in response, meat companies need to get out ahead of their customers’ changing habits. Whether the impetus was protesting against the mistreatment of animals, concerns about health risks or mitigating carbon emissions from meat production, the number of vegans increased by an astounding 600% in the US from 2014 to 2017. In Germany and Poland, 1 in 10 young adults aged 16 to 24 followed a vegan diet in 2017, and the number is even higher in France.
Netherlands-based Vion, a producer of beef and pork, shifted directions to become a player in the fast-growing meat alternatives business, relying on technological advances that make meat and protein substitutes more readily available. The company is now on the path to becoming a “protein” company, with alternative meat as its next growth engine.
Product reinvention. Just as digital changed the product landscape with everything from new formats for music to new ways to deliver news, sustainability has opened the door for new products that support reducing waste, minimizing carbon emissions and enhancing wellness. For example, today’s supermarket beverage shelf, with its varied selection of kombucha, vitamin-enhanced water, plant-based milk alternatives and the like, is virtually unrecognizable from even a few years ago. The same is true of newer snack displays at many urban convenience stores. We are also seeing beverage players diversify into a range of new delivery mechanisms, such as Evian’s in-home water dispenser.
For innovative consumer products companies, the sustainability revolution is an opportunity for development. For instance, Unilever makes toothpaste tablets in reusable containers that eliminate the need for plastic packaging, and Procter & Gamble sells soap swatches that become cleaning products (hand soap, shampoo, laundry detergent) when the consumer adds water—the product’s lack of water means its packaging weighs significantly less than traditional cleaning products thereby substantially reducing the emissions generated in transport.
Operations reinvention. Digital advances such as the Internet of Things, with its connected devices capturing vast quantities of data, are transforming operations in virtually every industry. Now, sustainability is doing the same.
Walmart knew that it would need to overhaul its operations to meet its environmental sustainability commitments.
Having already made good progress in-store and with suppliers, the retail giant turned its attention to the emissions impact of shifting channel mix. It measured its greenhouse gas emissions and costs to fulfill a range of products between physical stores and the fast-growing e-commerce channel. Among its findings: The physical retail model is more carbon efficient vs. e-commerce if the trip is combined with other errands and for any basket size more than three items; ship to home is more efficient for small baskets if you weren't going to go out anyway. These insights allow Walmart to prompt more carbon-efficient behaviors while offering customers a choice.
In addition, Walmart pinpointed how retailers can mitigate e-commerce emissions by reducing split shipments and encouraging a shift to the most carbon-efficient channel when possible. The analysis helped the retailer nudge behavior and e-commerce operations to meet its sustainability goals inclusive of e-commerce growth.
Olam is reinventing its own operations and supply chains. The agriculture company uses its AtSource sustainability tool to enable customers to look at the source of supply for Olam’s products around the world and to measure impacts on the environment, communities and farmer livelihoods. The company initially launched the tool for use with four products, but it is expanding rapidly based on the initial results.
As an entry level, Olam provides country-level social and environmental risk screening. At a second level, Olam works with customers on various key performance indicators, in areas such as gender, education, market access, fair pricing, water and greenhouse gas emissions. Customers can log on to see the total journey of the product from source right through to their factory. At a third level, Olam cocreates programs with its customers to achieve a net positive impact on the environment and communities at scale.
Meanwhile, even digital is being disrupted by sustainability, and the first wave of disrupters faces the challenge of reinventing operations. Data centers consume 2% of global electricity, an amount that is on target to grow to 8% by 2030. It’s a situation that has left cloud service providers grappling with ways to drive down power consumption and the resulting carbon emissions.
Innovative partnerships. The critical need for digital capabilities brought established companies across industries face-to-face with a new reality. To stay in business, they would need to buy, build or find creative ways to collaborate on everything from data analysis to digital marketing—fast. Sustainability comes with the same urgent imperative. More companies will join forces with external partners in an accelerated effort to develop the capabilities now required to address sustainability issues. This may be with nongovernmental organizations, with industry groups, with each other—sometimes forming sustainability ecosystems.
The Consumer Goods Forum, a network of 400 of the biggest consumer goods companies across 70 countries, is working toward standardizing food date labels, a move that could help eliminate confusion about expiration dates and thus reduce food waste. The multibillion-dollar Alliance to End Plastic Waste, founded by major companies such as Chevron Phillips, Dow, and Procter & Gamble, is a coalition of more than 40 players throughout the plastic value chain on a mission to help end plastic waste. The Alliance seeks to develop, deploy and scale solutions that will minimize and manage plastic waste, with a focus on infrastructure projects to collect and manage waste and increase recycling, especially in developing countries. The Alliance works with governments, businesses and communities to support efforts to clean up plastic waste already in the environment.
Partnerships extend well beyond industry associations. For example, delivery company Loop teams with major consumer brands, retailers, manufacturers, municipalities and small businesses in more than 20 countries. Loop home delivers products from the likes of Procter & Gamble, Unilever, PepsiCo and Danone in packaging that can be returned and refilled again and again.
Companies facing digital disruption have learned that the pace and magnitude of change require a mix of measured improvements as well as some radical bets. The same is true for sustainability. The first move any company needs to make is to come to grips with how sustainability-proof its core strategy is. That requires a no-holds-barred assessment of the current state of the business vs. what is required both today and also in the future. Most companies need to do this around a set of scenarios, setting an ambition for each and then plotting the steps to change.
Envision “today forward” and “future back.” Winning companies consider their options from both a “future back” and “today forward” perspective. Future back means you look at the disruptive trends to be able to challenge your thinking, set your sights higher and maybe make some more radical moves. But you’ll still want to start your effort today. Today forward allows you to see what you can do now to keep making progress against current trends. Combining today forward and future back gets you on the right track.
Working in tandem, these two perspectives help a business assess where it wants to position itself to compete in 10 or 20 years, the big moves required to get there and how to make progress on issues today. Today forward and future back convey a sense of long-term direction to employees and other stakeholders, while at the same time articulating the first steps the organization can take to start moving in that direction.
For example, in alcoholic beverage companies, today forward in response to key health trends might mean reformulating products for low- or no-alcohol alternatives. A future-back approach, by contrast, would involve redefining wellness and leisure for the alcoholic beverages industry. Sufferfest’s gluten-removed beer marketed as a recovery beverage is an example, and there are Dogfish beers brewed with superfoods/antioxidant-rich foods.
In waste, a today-forward advance might mean changing existing packaging, often using waste. Consider Saltwater Brewery’s six-pack rings made of wheat and barley waste that is edible for fish and takes only two to three months to disappear completely from the ocean. An example of a future-back approach: circular products that are made from waste, such as ReGrained’s health bars made from spent grain from breweries.
Quantify the disruption for better-informed decisions. Most executives are aware of ongoing trends, but trying to gauge the real impact of those trends (positive or negative) can be difficult. When the impact of trends is quantified and rooted in data, companies can move to fact-based decisions—for example, they can see how their product category’s profit pool will likely change over time. By developing both a today-forward and future-back view of the profit pool, companies typically see a radical difference. They can detect how market share may shift among players along the value chain, how margins may evolve, and the emergence of new segments or players that may not even exist in today’s profit pool.
The leading companies devise and quantify multiple views of the future—for instance, a range of scenarios around the future cost of carbon. They can determine how much money is at stake if they do nothing, how much opportunity lies ahead and set a course of action, either offensive or defensive.
Use “waves” and “stepping-stones.” Setting that course of action becomes a new game. Traditionally, companies develop a pipeline of projects with set timelines and milestones. Some of the most successful companies have replaced that approach, however, by using “waves” and “stepping-stones” to create and communicate a roadmap. Waves are the successive evolutions that lead a business toward the future it envisions. Stepping-stones are meant to convey the idea that you do not see step two until you take step one. The key is moving forward, pivoting as needed, and then moving forward again.
Walmart began its sustainability journey by reducing packaging for, say, toy trucks—an easy triple-win that saved trees, transport emissions and money. Following on that success, the company has deepened its commitment and now embraces projects such as the creation of a sustainability index to reward suppliers that provide sustainable products and services.
Align the capabilities and measures. As with digital transformations, sustainability transformation calls for new capabilities and making the operating model and organizational changes that align your company with its new mission. That usually calls for acquiring new talent. Just as companies pursuing a digital transformation needed data scientists and engineers, sustainability raises the need for people who understand carbon emissions as well as human rights or water experts; it also requires accountants versed in quantifying natural and social capital.
Acquiring, developing and deploying sustainability talent actually starts with understanding the capability gaps that you have and determining how you are going to fill those gaps. Will it be from inside the organization, or outside? Is it something that you would potentially do within a partnership? Identify the new skills and capabilities required, and begin selectively to hire while also educating and upgrading the talent throughout the organization.
Inevitably, the same companies that recently grappled with (or still are grappling with) the integration of advanced digital talent into their organization now face the need to make a similar, sometimes awkward integration of mission-driven talent into enterprises that traditionally have been more commercially focused. It is not always an easy transition. This can be true both ways: Mission-driven talent can chafe at the unrelenting commercial focus, but incumbent colleagues can also find the transition rough as new measures ask them to focus on other impacts, such as natural capital and social capital outcomes, in addition to financial returns.
As sustainability expands, accelerates and disrupts, it is forcing companies across all industries to look at themselves with unwavering honesty in order to prepare rapidly to deliver a future that they never could have imagined. Keeping the digital parallel in mind can help guide them to move quickly and boldly through the coming transformation.
Jenny Davis-Peccoud and Jean-Charles van den Branden are Bain & Company partners based in Amsterdam and Brussels, respectively. They colead the firm’s Sustainability & Corporate Responsibility practice. Chris Brahm is a Bain partner based in San Francisco, and Gerry Mattios is an expert vice president with Bain based in Singapore.