An Interview
with
Anita
Oh

HOW CAN BUSINESSES BEGIN TO ACCELERATE THEIR RESPONSIVENESS TO CHANGING STAKEHOLDER INTERESTS

divytJuly 3, 2022

To operate in an increasingly climate-conscious market, businesses must improve their agility and responsiveness. How can businesses begin to accelerate their responsiveness to changing stakeholder interests, including when their core business model may be under threat?

Stakeholders are calling for action – from asset managers outlining their plans for ESG integration, to regulators requiring new disclosure, corporate coalitions endorsing more inclusive capitalism, and employees and consumers directly calling on companies to take environmental and social challenges more seriously.

For businesses to accelerate their responsiveness and agility, we recommend six actions:

  • Develop real Businesses can use CO2 AI or similar platforms to dramatically increase the accuracy of their emission baselines. By signing up to TCFD, SBTi, CDP, RE100 and other initiatives, they make their performance transparent to the public
  • Drive personal accountability. Linking interim targets and outcomes to executive remuneration to align sustainability outcomes with reward structures.
  • Adapt decision making processes. Businesses can use shadow carbon pricing, and differentiated hurdle rates/cost of capital to accelerate the re-allocation of human and financial capital towards sustainability objectives
  • Control, partner and By working with suppliers and customers on upstream and downstream scope 3, businesses can extend their sustainability impact
  • Publish a Net Zero Plan, backed up by action. Plans need to include no-regret moves in the early years, and indicative pathways for the medium-to-longer term when the technology is more uncertain
  • Pursue continuous executive education. As the rate of change increases, regular knowledge and skills refreshes are critical for business leaders to maintain their organsiation’s agility in the energy transition

 

How are established players leveraging innovative technologies to embrace new energy markets?

In addition to the various technologies that businesses are using to lower carbon emissions (such as direct air capture, sustainable aviation fuel and green hydrogen), innovations continue to emerge on traded energy markets. These innovations will drive more variable renewable energy generation, and in turn transform electricity systems and increase wholesale price volatility. To navigate these changes, companies will need more flexibility in how they consume electricity.

At BCG, we are yet to see that the world is fully appreciating the effect of variable renewable generation on our large energy-consuming industries, and the ability for countries to attract these industries. To date, the largest electricity consumers have been sheltered from volatility, but they are also the most exposed to the challenges of increasing renewables penetration in electricity systems. These large electricity consumers need to improve the flexibility of their operations and their electricity consumption profile to respond to the increase in variable renewables.

Examples include Google, which  has announced it will target 24/7 carbon-free energy by 2030 to increase the amount of renewable energy that it consumes compared to what it procures on aggregate. To achieve this, Google intends to adjust the time and locations in which they process some data, in particular when it is not time critical. In Germany, aluminium group TRIMET has focused on the economic advantages of more flexible operations to offset rising wholesale electricity prices. TRIMET has been testing new heat exchange and magnetic compensation technologies to vary smelter consumption and production by 25% to act as a virtual battery.

These technologies, along with virtual power plants, digital twins that simulate and optimise physical asset operations and investment, and carbon trading platforms, will form the basis of future energy markets.

 

The process of energy transition will force the business models of other sectors such as utilities to undergo reinvention. How should these industries be preparing adaptation models to embrace the fast pace of this change? 

The power and utilities sector faces extensive challenges, such as changing customer behaviour and needs, incumbents constrained by legacy systems, new disruptive players, and black swan events. To manage this change, players can take a few specific steps :

  • Go beyond commodity to grow revenue: Opportunities range from energy adjacencies to products and services beyond the energy sector, such as multi-service bundling, smart homes, data monetisation, energy efficiency, virtual power plants, emobility and demand response
  • Use automation and agile ways of working to reduce costs: Octopus and other start-ups put the customer at the core of their operations and have a fundamentally different way of setting priorities, organising work, making decisions and learning. Octopus has used highly empowered E2E teams to manage the full customer experience, underpinned by an AI-driven customer platform, to grow market share rapidly in a sector in which many companies are struggling.
  • Partner and form alliances/ecosystems: Most utilities and large companies aren’t particularly well placed to innovate, but can partner and invest in other companies to stay in the game until they’re willing and able to make bolder moves.
  • Build new sustainable business models: Sustainability is the next wave of change in which companies have the opportunity to become first movers and gain a 5-15 year competitive advantage. Sustainability leaders already outperform the market by unlocking value to build sustainability as a competitive advantage. BCG‘s Sustainable Business Model Innovation approach gives companies a way to systematically integrate and solve for social and business value in one business model.

 

Many businesses have ambitious and transformative sustainability agendas but fail to bridge the gap between vision and action. How does BCG help businesses quantify the steps required to fully realise such transformative efforts?  

Sustainability is a company’s ability to create positive environmental and societal impact, and is rapidly reshaping competitive advantage. It is remaking whole industries, blurring and in some cases obliterating boundaries between industries, and generating new waves of growth.

From our extensive experience working with companies and investors to drive sustainability transformations, we have identified six actions that put leaders in sustainability transformation ahead of the rest:

  • Develop a sustainability strategy anchored in purpose: Companies need a strategy that starts with the principle that sustainability is a source of durable competitive advantage. The strategy must be clearly connected to the company’s purpose, focus on long-term value creation, and be driven from the top, starting with the CEO and board.
  • Capture business value: Companies need a robust business case that accounts for all sources of value created by their sustainability actions. Once those business cases are articulated, key areas of the business – including marketing, sales, product development, and finance – will need the capabilities to capture the value created, and to track and measure it accurately
  • Build new sustainable businesses: Companies should look for opportunities in new markets where they have unique advantages, and create new offerings and business models to leverage those advantages.
  • Make the core sustainable. Companies that aim to become sustainability leaders need to assess and enhance the sustainability of their existing portfolio and operations. Actions include creating end-to-end supply chain transparency, and re-engineering production designs to make existing products sustainable.
  • Build capabilities: Companies that want to drive a sustainability transformation need the right capabilities and foundation in place to succeed. This includes designing robust governance, updating internal decision-making processes to allocate human and financial capital, developing strong data capabilities and ESG reporting processes, and building new partnerships in the ecosystem.
  • Own the narrative, and engage investors and stakeholders: Companies need a compelling narrative for their sustainability strategy that connects and amplifies their purpose. They also need to own their sustainability narrative in the public markets, and share it in a way that resonates with investors, rather than letting ratings agencies and investors tell their story for them.

A successful sustainability transformation requires a fundamental shift in mindset. Company leaders need to view the push toward sustainability as an opportunity to create new value, not as a compliance exercise or a cost of doing business. Companies that do this well will expand their competitive advantage and develop the capability to rethink and remake their business as stakeholder expectations of sustainability continue to rise in the years ahead