The CEO’s ESG dilemma
Making a successful ecosystem play
Even a pragmatist, like a fossil fuels company studying whether environmental concerns will depress demand, can’t go it alone. The shift isn’t just a change in material from oil to non-fossil-based fuels, from coal for power plants to solar and wind. Changes in consumer behavior will also need to be taken into account, requiring collaboration with a host of companies that touch consumers; products and services will need to be redesigned from the start, also requiring a range of new connections and collaborations.
In many cases, the ecosystems needed to deliver on the true north that companies have defined don’t yet exist. Consider a car manufacturer that is expanding into electric vehicles, on the basis of both pragmatic considerations about tapping into a burgeoning market and an array of concerns about the environment; it is also mindful of the social concerns of customers, communities, and employees and of the governance practices it needs to respond ethically to government regulations on pollution. To fulfill its ESG goals, that company can’t just produce an electric car. It needs to think through upstream and downstream concerns, too.
Upstream, there currently are problems with the mining of key materials for batteries, which can occur in ways that damage the environment. These materials are also provided by countries where trade relations may be complex (such as with China) or where conflicts, displacement, and economic stability are an issue (such as the Democratic Republic of Congo). That carmaker may want to find new sources for lithium, cobalt, rare earth metals, etc., and may even want to try to develop new types of batteries that don’t need such materials.
Downstream, the car company hopes to ensure that its vehicles can be recycled—but is aware that the components aren’t currently designed for that. The metal can’t easily be separated from the plastic in the batteries, for example, or the wall of the battery cell. The car company will need to engage with its ecosystem so that a vehicle flows as seamlessly as possible from a lifetime of use into a recycling process that lets its key components be separated and reused. The carmaker will, in some cases, need to find partners that will invent materials, processes, and materials processes that make that recycling easier.
Opportunities for new ecosystems abound as companies pursue ESG goals. For example, a host of companies are working together on an initiative for low-carbon-emitting technologies (LCET) to be established by the end of 2023. Air Liquide, SIBUR, Dow, BASF, Clariant, SABIC, DSM, Mitsubishi Chemical, Solvay, and Covestro have all signed up. Even direct competitors will find reasons to collaborate; for instance, Allbirds and Adidas are working together on how to reduce carbon emissions across the whole shoe process, from manufacturing to packaging and shipping. There is even a new sort of buyers’ cooperative forming—more than 50 companies have joined in the First Movers Coalition to guarantee an early market for technologies that could help get the world to net zero by 2050 but that are too expensive in their early stages to generate much demand on the open market.
Other ecosystems will have to develop or continue to develop. For instance, in transportation, ecosystems are developing relating to micromobility, electrification, infrastructure for charging and refueling with hydrogen, sustainable aviation, and more. Consumer goods will need ecosystems for packaging, delivery, materials, and labor inputs. Agriculture requires ecosystems for fertilizers, farm equipment, alternative meats, and other proteins. And those are just the start.
How do you help these ecosystems develop and get where they need to be to support your strategic ESG stance while playing a significant or even leading role yourself? Several elements are crucial for flexibility and agile steering.
