In this blog, Sinem Hostetter, partner, and Greta Carlson, associate partner, McKinsey & Company, reflect on driving a sustainable agenda.
The case for sustainable business practices is strong and growing stronger as the impact of carbon emissions on people and the planet becomes more evident. Companies across industries are investing in decarbonisation efforts, committing significant resources to changing their operations in line with science-based targets and growing consumer demand. Decarbonisation is critical for businesses seeking to grow in a way that minimises impact on the environment.
But often less is said about the financial imperative. The journey to net zero can create a host of new business opportunities for companies across value chains. Change is a constant, and in an evolving marketplace, new practices will bring fresh paths. Not only through direct involvement in disciplines including green technology and sustainable supply chains, but also through more efficient, long-term practices.
However, the pursuit of green growth will not necessarily be straightforward. The development of true sustainability affects everyone from investors, employees, and suppliers at an individual company level to, in the end, customers and society as a whole. It’s a challenge that will require the full attention of the C-suite, as the business pursues cross-value chain alliances, with customers, suppliers, waste collectors, recyclers, NGOs, academia, and others.
Given the scale of the potential work, we’ve laid out six key pillars of green growth, to help leaders identify where they could look to direct their energies.
It’s no easy list, but leading organisations can look to emerge stronger from the net-zero transition.
1. Segment your portfolio
Organisations need to look at their carbon footprint through the eyes of their customers—and their customers’ customers—to understand where they can create value through decarbonisation and other ESG efforts.
What are the most attractive value pools e.g., where can organisations have meaningful sustainability impact and where is there a demonstrated customer willingness to pay? Does your organisation understand what is required by decarbonisation and the perceived benefit it brings to customers? How will demand for the green product develop? How will product supply of competitors ramp up? If premiums and volumes are appropriate from a certain value pool, this is likely an area that should be prioritised for development.
2. Define your go-to-market strategy
After determining the right market segments to focus on based on customer needs and characteristics, another consideration is establishing the right go to market approach.
Green steel, for example, requires significant investment to accelerate supply. Across industries, given the size of investment and scale of commitment, negotiations on contracts happen at a senior level—including involving CEOs on both sides—and deals may differ significantly, it’s important to determine which customers should be approached and with what offering.
In another example, a producer of biodegradable plastic resins adopted a successful commercialisation strategy based on forming co-development partnerships with large, multinational customers. It approached select players in consumer-packaged goods companies that had already demonstrated corporate commitments to sustainability, enlisting them in co-funding R&D initiatives to move away from virgin plastic.
Green go-to-market means thinking beyond the short-term and the current portfolio of products, as providing wider services related to your product and ecosystem can be important to creating the new market and infrastructure necessary to grow the green business.
3. Price accordingly
When set appropriately, premiums can be achieved for ‘green’ offerings across B2B industries, but willingness to pay varies by segment and is constantly changing. Plus, premiums today aren’t necessarily a good indicator of what they may be in 10, 20 or 30 years, or whenever supply-demand for the ‘green’ offering balances.
Returning to the producer of biodegradable plastic resin from above, pricing is pegged to canola oil feedstock—a sustainable input from 100% renewable sources, which is biodegradable and compostable in all mediums.
Success in the long term requires having a detailed understanding of how different supply-demand scenarios may play out, how regulations may impact them, and what drives consumers’ willingness to pay. At the same time, companies can look to define an optimal commercial model (such as co-creation partnerships, contracting strategy, and pricing metrics linked to sustainability) before looking at how to set prices by segment.
4. Elevate your brand
With demand for greater sustainability intensifying, the best companies ensure their efforts are clearly communicated by balancing science (a fact-based understanding of stakeholder needs), art (the articulation of a nuanced and compelling positioning), and craft (seamless communication across all touch points).
A state-of-the art branding strategy can help organisations embrace the topic of sustainability and help activate it. Yet for many B2B companies, branding doesn’t always get appropriate management attention. Done right, branding will not only support and drive a company’s overall valuation and help capture the value created by sustainable offerings but drive additional benefits such as attracting and retaining the right talent.
5. Build new businesses
To achieve the level of decarbonization needed, at the pace required, existing business models will likely not be enough. Although corporations may have the scale to operationalise green initiatives, building entirely new business may be required to execute on disruptive ideas.
Building new businesses (or deploying new business models) likely requires a different mindset and skill sets – from identifying new problems, defining new models to address them, creating practical scaling plans that move fast and mitigate risk, and deploying agile governance, funding, and execution approaches to beat the competition.
6. Develop the right capabilities
Generating value from green products likely requires entirely new commercial skills. It depends on cross-functional expertise far beyond the front line, spanning the entire organisation, including commercial excellence, pricing, strategy, marketing, procurement, operations, sustainability, and supply chain.
Due to this complexity, comprehensive capability-building on ESG topics and supporting assets are likely required, such as carbon accounting and tracking systems, so that the CO2 footprint of products can be shared with customers to highlight their green value.
Potential path forward
Achieving green growth requires more than just commercial-focused decisions. It requires a range of factors such as a thorough understanding of relevant value chains, cross-functional and cross-organisational thinking, rapid execution, and flexibility in a fast-paced environment. The creation of business value from sustainability is a significant consideration for CEOs. It’s a potentially challenging process, but can help organisations successfully navigate the transition to net-zero.