This should not come as a surprise: Climate change is one of the biggest challenges that humankind faces today with a wide range of negative impacts such as droughts, floods, rising sea levels, ocean acidification, and loss of biodiversity. Due to its complexity, there is no easy, quick-fix solution to address it. Experts agree that climate change is clearly linked to Green-House-Gas (GHG) emissions.
Therefore, decarbonization is seen as one of the important levers to addressing climate change and the topic of decarbonization gains more and more attention in living rooms and boardrooms alike. According to the Intergovernmental Panel for Climate Change (IPCC), achieving carbon neutrality until the mid-21st century is required to limit global warming to 1.5 degrees Celsius compared to pre-industrial levels. This target has also been set in the Paris Agreement, which has been signed by 195 countries. But what does this mean for businesses and how does business model innovation fit into the picture?
In this blog post, we want to share our perspective on how business model innovation can support efforts to decarbonize our society and economy and thereby contribute to the fight against climate change. To bring everyone on the same page, we will start with some core concepts and definitions.
Definitions - What do decarbonization and carbon neutrality mean?
Simply put, carbon neutrality is the goal and decarbonization is the way to get there.
Carbon neutrality refers to the balance between emitting carbon and absorbing carbon from the atmosphere in carbon sinks. Removing carbon oxide from the atmosphere and then storing it is known as carbon sequestration.
Decarbonization from an energy perspective means the reduction or elimination of carbon dioxide from energy sources by switching from fossil-fuel-reliant energy sources to clean energy sources. Decarbonization has three pillars that intertwine and support each other:
Electrification
Decarbonization of electricity
Energy efficiency
How does decarbonization work?
As mentioned above, climate change is a complex problem, so the partial solution of decarbonization is not simple either. It spans from new technologies over new business models all the way to consumer readiness and societal acceptance.
Decarbonization includes:
improving energy efficiency across both conventional and renewable (energy) value chains
electrifying the economy as much as possible
decarbonizing the electricity generation and transmission
decarbonizing the production of products and services e.g., through circular approaches
What role do new technologies play?
Technology is expected to play a key role in tackling climate change, both new technologies – such as Carbon Capture & Storage (CCS), green hydrogen, new energy storage solutions – as well as digitalization – for example, artificial intelligence (AI), blockchain and internet of things (IoT). However, the impact of digital technology is heavily debated as it remains unclear if the promised efficiency gains will really lead to a reduction of global carbon emissions.
As outlined by the European Commission: “Technology is not the only component of successful decarbonization. Deployment of new technologies and solutions also requires attention to non-technical aspects, e.g., consumer readiness or societal acceptance. This shows that decarbonization requires a holistic approach — the emergence of not only new technologies but also new business models, rules and regulations, in which the digital dimension is paramount.”
Why does decarbonization matter?
Climate change affects individuals, organizations, and nations around the globe – so decarbonization should be on everyone’s agenda. Recent years have seen mobilization across the civic society, among policymakers on the national and international level and in the private sector, as the following figures show.
Civil society
In a 2018 study, 93% of EU citizens viewed climate change as a serious problem.
Climate movements, such as ‘Fridays for Future’ and ‘Extinction Rebellion’ are on the rise.
Especially young talent is choosing sustainable-conscious employers while urging them to act upon climate-change-related issues.
Policymakers
The Paris Agreement in 2015
The non-financial reporting directive in 2019
The European Green Deal in 2020
And most recently the European Climate Law in April 2021 (still to be approved)
Business
In a 2020 Deloitte study, 89% of executives from the energy & resource industry reported having already a plan in place or were developing a strategy to reduce reliance on fossil fuels.
The finance industry is increasingly focusing on climate-related opportunities – for example, 300+ investors with €37 trillion in assets joined the institutional investors group on climate change.
Many companies, especially from the Information and Communications Technology (ICT) sector have committed to reducing emissions – such as Amazon, Apple, Microsoft, and Sky.
Other sectors are catching up as well – BMW announced to cut emissions by 1/3 until 2030 while tying bonuses of the board of directors to this goal.
In the spotlight: Microsoft’s carbon pledge
Let us look at the plan of Microsoft in more detail: Microsoft – including its supply chain – aims to become carbon negative by 2030. In the graph below you can see that most carbon emissions come from the supply chain (grey area). By 2030, these will be neutralized by their carbon removal efforts. Microsoft even goes one step further aiming at compensating all historically accumulated CO2 emissions until 2050.
How can companies measure carbon emissions?
We just looked at Microsoft’s carbon footprint. When talking about corporate emissions, companies often talk about ‘carbon footprints’ – often overlooking the so-called ‘carbon handprint’. What is a handprint you ask? Let us get these concepts straight.
The Carbon Footprint refers to the amount of carbon dioxide released into the atmosphere as a consequence of the activities of a particular individual, organization, or community.
The Carbon Handprint refers to the beneficial environmental impacts that organizations can achieve by providing products or services that help reduce the footprint of their customers. A carbon handprint thus is the reduction of the carbon footprint of an organization’s customer.
If the organization you belong to focuses on reducing its footprint, this is already a great start. To maximize your contribution, it is recommended to also think about how your organization can support your customers on their decarbonization journey.
Apart from reporting, why should business care?
Decarbonization creates many business opportunities across various sectors and geographics. In fossil-fuel intensive industries, such as energy, transportation, agriculture, industry, construction, these opportunities include:
Improved resource efficiency
Emission-free energy sources
New products & services to reduce the foot- and handprint
New, emerging markets
Improved access to capital
Yet, the transition to carbon neutrality also creates less obvious opportunities for companies across all industries, including among others:
Risk management: substituting existing products and services with lower emission options.
New partnerships: a chance to leverage partnerships e.g., pursuing joint investments and alliances across the supply chain.
Positive publicity: opportunity of positive positioning in the public eye but also for talent and shareholders.
So how does Business Model Innovation fit in?
Decarbonization is a key change driver for society and businesses with a significant impact on current business practices and models – therefore, innovative business models are required to exploit these new business opportunities.
From a business model perspective, this means combining the traditional elements of a business model – who, what, how and value – with the concept of the triple-bottom-line – people, planet & profit
Contributing to decarbonization will mean something different for every business – initiatives might for example include:
expanding the participation in the circular economy,
shifting towards more service-oriented business models,
helping customers drive their efficiency,
integrating downwards in the value-chain to create value for end-customers.
In general, efforts to work towards carbon neutrality can be grouped into two categories – approaches for decarbonizing an organization’s foot- and handprint.
How to decarbonize an organization’s footprint
To reduce your organization’s carbon footprint, developing a circular business model is key. To learn more about our approach to circularity, please check out our whitepaper that has been published together with the University of St. Gallen and that also featured in the Harvard Business Review.
How to strenghten an organization’s handprint
Our approach for decarbonizing your handprint is structured along the four steps of our Business Model Navigator methodology:
1. Initiation: Identify opportunity areas based on your current business model and capabilities, such as
analyzing your own portfolio, your capabilities, and your current customers in relation to decarbonization,
analyzing trends and drivers of focus industries (starting at the ones you already have deep insights in and moving from there),
asking yourself the question of how decarbonization is affecting your customers especially in relation to the products and services you are offering,
identifying the most affected customer segments and their needs and problems including new and existing customers.
2.Ideation: Ideate how to innovate your business model based on the identified customer needs and problems while keeping the impact on people, planet, and profit in mind for example, by:
developing new decarbonization products and services,
adapting existing technologies for new customer segments,
rethinking your value-chain and leveraging new partnerships,
redefining the value capturing logic of your business model.
3. Integration: Think about how to integrate the new business model into your existing business.
4. Implementation: Iteratively build, validate and scale the business model for these ideas
Climate change - and decarbonization as part of the solution - is a challenge that affects us all – so let’s start innovating together.
Author
Richard Stechow
Managing Innovation Consultant and Circular Economy Lead
You want to learn more about our approach on decarbonization or need support on your foot- and handprint decarbonization journey?
