Consumers want sustainable options but few have been willing to pay much to get them. Such has been the conundrum that hinders companies aspiring to pursue more sustainable business strategies. The formula doesn’t balance. It pits financial interests against societal wellbeing, a dilemma that complicates a company’s calculus with investors, partners, suppliers, channels, and regulators.
We can summarize the situation in simple calculation:
(Cost of the Sustainable Option) – (Cost of the non-sustainable option) > (Premium customers are willing to pay)
News headlines are littered with signs. Last summer in Europe, over 60,000 people died from heat-related causes. Globally, June 2023 was the hottest month recorded on Earth. New York City saw some of its worst pollution levels on record from wildfires in Canada. Dead fish are washing up on Texas shores. 35 billion dollars of real estate may be underwater by 2050.
Vulnerable populations especially feel the effects, lacking the resources to move or adapt, or shelter to go inside. Homeless people huddle under bridges for shade. Polar bears starve and face extinction. Migrants die crossing deserts. As climate migration surges, even wealthier nations may struggle to adapt quickly enough to save lives.
Countries like France propose ambitious adaptations like converting Paris’ iconic zinc roofs into gardens to mitigate the urban heat island effect. As externalities like greenhouse gas emissions become inescapable realities, both individuals and institutions are scrambling to adapt. But the scope and speed of infrastructure upgrades needed to withstand climate change will carry staggering price tags, often beyond the budgets of cities and nations. And will it be enough?
Three Variables
The formula above becomes “TRUE” when its three variables reach a critical value. All three are moving in the right direction and it appears they are combining to approach the critical moment at which profit-driven and societal-driven decisions align.
- The costs of non-sustainable options are increasing
- The costs of sustainable options are decreasing
- The margin customers are willing to pay is growing
Shift 1: The costs of non-sustainable options are increasing
For decades, Outthinker research has shown sustainability to be a differentiator. Now it is table stakes. Corporations have a new purpose. They can no longer exist solely to benefit shareholders. They are indebted to the stakeholders, society, and environment in which they operate.
Our world is reaching a tipping point for sustainability. Global citizens are confronted by rising water bills, deadly heat, power outages, and other climate-related impacts. As the examples above show, climate change externalities—the costly effects of a company’s decisions that expand beyond the price (for example, pollution is a negative externality), are becoming internalities—their impact is being felt by companies and investors through the present and costly effects of climate change.
These painful costs are being absorbed by companies and investors. Energy companies are having to invest heavily to upgrade their systems, tourism companies are losing visitors, municipalities are spending billions to upgrade infrastructure, and all companies are struggling with an overall decline in productivity (studies show human productivity declines dramatically when temperatures rise).
Investors are feeling the heat as a result. According to ESG expert, Chris Marquis, “Universal Ownership Theory” states that in the U.S., because institutions hold such a large percentage of capital markets, their portfolios are being hit by externalities. When a climate disaster such as a wildfire or flood occurs, investors are absorbing the financial impact. Even in the past few weeks of summer 2023, the dramatic impact of the climate emergency has become more immediate—in July tourists were forced to flee from the Greek island of Rhodes. Rome recorded an all-time high temperature in July. More than half of US beaches recorded unsafe levels of contamination. As externalities become internalities far and wide, this may be the impetus needed to sway corporations and customers toward sustainable solutions.
Shift 2: The costs of sustainable options are decreasing
Kaihan’s upcoming book, co-authored with Robert C. Wolcott, founder of The World Innovation Network (TWIN), explores a developing global strategic revolution called Proximity. Proximity represents a transformation of business models, infrastructure, productive capacity, and mindset of leaders, investors, regulators, and consumers to bring the production and provision of goods and services closer to the point of actual demand in time and space.
The Proximity revolution is made possible by advancements in digital technologies, which enable us to distribute and coordinate sensing, data collection, analytics, decision making, and production capabilities more precisely and closer to the moment a need arises. These digital technologies have the potential to cut global emissions by 15 percent. The Fourth Industrial Revolution, including a network of sensors connected by AI and artificial intelligence, could make companies radically more efficient and sustainable by pushing production and provision of value closer to the exact moment that customers are willing to pay for it, resulting in far less wasted energy and resources. One can see this clearly in the growth of distributed energy production, farming, healthcare, and manufacturing.
Moreover, markets for sustainable solutions are emerging and growing. Investors are looking to environmentally-friendly companies to solve the world’s biggest challenges. As the market for sustainable solutions grows, companies have a financial incentive to produce sustainable products. Tesla, for example, has expanded the marketplace for electricity (through the growth of EVs) giving sustainable energy a bigger market to compete in which, in turn, expanded the scale and drove down the cost of sustainable energy production.
Shift 3: The margin customers are willing to pay is growing
Customers say they care about sustainability, yet historically data has shown a disconnect between what consumers say and what they actually do. Surveys from IBM and the University of Pennsylvania found between half to two-thirds of consumers said they would pay more for sustainable products. According to a 2020 McKinsey survey, 60 percent of respondents said they would pay more for sustainable packaging.
However, according to one Harvard Business Review article from 2019, while 65 percent of consumers say they want to buy from purpose-driven brands that advocate sustainability, only about 26 percent purchase. When it comes down to it, most consumers won’t just buy a product simply because it’s sustainable. Cost is a factor, and the majority of customers have typically chosen the lower priced option over the sustainable product.
A more recent McKinsey and NielsenIQ study examined sales growth for products that claim to be environmentally and socially responsible. They found that from 2017 to 2022, products making ESG-related claims accounted for 56 percent of all growth. These products averaged 28 percent cumulative growth during the period, compared with 20 percent growth for products that did not claim to be sustainable.
According to McKinsey, the results are a case for introducing and investing more environmentally and socially responsible products to market. Sustainable solutions are no longer just moral differentiators but have evolved into profitable business investments.
Consider Maslow’s hierarchy of needs. At the bottom of the pyramid sit physiological needs: air, water, food, and shelter. The next level is safety needs: security, resources, health, and property. They are followed by higher-order needs: love and belonging, esteem, and finally self-actualization. Choosing sustainability used to sit at the top of the pyramid. Consumers and companies knew it was morally the right thing to do, but they would not feel the immediate impact of making the wrong choice. Now, the impacts are impossible to ignore. The bottom level of the pyramid—air, water, food, shelter, security, resources, health, and property are all at risk. As consumer willingness to pay increases, we could be reaching an era where it is more profitable to be sustainable.
Three ways to enhance your sustainability strategy
There are a few ways you can make sustainability more financially viable and customer-friendly as you lead the way to sustainable innovation:
- Increase the cost of non-sustainable options: With the rapid increase in climate-related crises in the news, it is clear to customers and investors that the cost of choosing non-sustainable options is much greater than a difference in price. To strategically combat non-sustainable competitors, consider pursuing regulation when you know that their practices go against what is best for global community stakeholders. Go after their ecosystem players who are also feeling the impact of externalities becoming internalities (insurance companies are the most prevalent example) to bring the costs back to polluters. If your company sells both sustainable and non-sustainable goods or services, you might consider increasing the price of non-sustainable items. This may be less competitive in the short term, but it will be behavior-modifying in the long term.
- Partner with someone unexpected: Use an ancient stratagem to your advantage. Kaihan interviewed Mark Esposito, author of The Emerging Economies Under the Dome of the Fourth Industrial Revolution, who explained that what we used to think of as separate systems of environment, economy, and politics are becoming more chaotic because they are becoming more interconnected. The interconnectivity between systems and between companies’ activities within those systems is becoming increasingly apparent. Consider: if climate change impacts the tourism industry, a hotel chain’s revenue is indirectly tied to an oil company’s practices. Every decision impacts an amplified number of stakeholders. To design and implement a partnership strategy, ask: Who else benefits if we win? Create collaborations to guide the system to a better outcome. For example, Mattel partnered with Envision Plastics, a plastics recycling company, to make Barbies from ocean-bound waste.
- Create an internal startup: If your core business does not address sustainability, consider launching an internal startup that is responsible for innovative solutions. We spoke to corporate venture expert, Linda Yates, who shared that some non-sustainable companies who are facing existential threats can leverage their existing assets to reinvent themselves by creating new ventures. For example, EDP group, an electric and utilities company in Portugal, started EDP Renewables to operate its renewable energy solutions.
Conclusion
Sustainability is rapidly evolving from a long-term nice-to-have to a pressing strategic necessity. The number of companies with a chief sustainability officer tripled in 2021. At Outthinker Networks, many of our member companies are bringing sustainability into the remit of the chief strategy officer. Digital technologies will act as enablers, but alone they are insufficient without the collective organizational and individual will to invest in societal-level transformation. Climate change is here and now, and so too are its costs in disrupted lives and livelihoods. For the first time in human history financial and social interests are aligning across many sectors. Companies who act in this moment have the potential to both shape the future of their industries and of society as well.
