Today, new regulations like CABM, EPR and SFDR are nudging you to weave sustainability into your core strategy. If you don’t, they will hinder your capacity to create and capture value.
Be no fool, international companies like Apple, IKEA, H&M, Google have been exploring sustainable practices for years in ways that now enable them (maybe a decade later ?) to seamlessly integrate them into their core operations. Why lag behind?
We’ll outline the two fundamental shifts that will kick-off your journey towards a more sustainable business.
A SENSE OF URGENCY DRIVEN BY REGULATIONS
Regulations like CABM, EPR or SFDR are examples of external forces you need to act upon to readjust your strategy. These regulations or the concepts behind them are not new. Some of them were enacted in the 1990s, but their stricter enforcement will be felt more acutely during this 2020–2030 decade.
- EPR stands for Extended Producer Responsibility. EPR are often used The 1994 EU Packaging and Packaging Waste Directive obliges all Member States to set EPR schemes for packaging by 2024. [1] Also, several countries in Latin America have introduced some form of EPR policy as part of their circular economy strategy (Chile, Colombia, Peru, Brazil, Venezuela, etc.).
- CABM stands for Carbon Border Adjustment Mechanism. A reporting system is expected to be rolled out in 2023, with financial adjustments falling due in 2026. [2]
- SFDR stands for Sustainable Finance Disclosure Regulation. The EU SFDR came into effect on March 10, 2021, and further regulation like the EU Taxonomy is expected for 2022. It will have a concrete impact on the investment choices of these stakeholders, which in turn will indirectly impact you and your business’s ability to attract their investments. [3]
- Right to Repair laws. In March 2021, a right to repair law came into effect in the European Union to fight planned obsolescence: manufacturers must ensure that electric and electronic goods can be repaired for up to 10 years.
These regulations are just examples of what may nudge you into integrating sustainability into your core business.
BUSINESS MODEL SHIFT
The first shift towards sustainability is to move your business model from linearity to circularity.
In a circular model, the scope of your activities is Take-Make-Recirculate. You must take care of the end of life of your product to reduce waste, avoid harmful waste, and if possible regenerate resources. To infuse circularity into your business operations, you need to unlock three challenges (1) Upstreaming Circular Design, (2) Developing partnerships through the 6R framework and (3) Doing the Math to refine your Income/Cost structure.
You can get started by doing a circularity assessment of your business with the Circulytics tool developed by the Ellen MacArthur Foundation. Over a thousand companies are already using it (including H&M, Volvo, Group Accor, Coca Cola…). The tool will tell you your level of circularity, grading the enablers (strategic planning, investment, innovation, people, operations, external engagements) and the outcomes (GHG emissions, water consumption, etc.). It will help you prioritize your strategic decisions in terms of investments and resource allocations to achieve a greater circularity in your business model.[4]
According to the Circularity Gap report, less than 9% of our economy is circular. There is definitely room for progress. Yet, Circularity is not enough to deliver on sustainability. Sustainability is about reaching an equilibrium between economy, people and environment. That’s is the triple bottom line that embraces Environmental, Social and Governance criteria. Hence, we also need a value shift to complete the loop. No pun intended.
VALUE SHIFT
When you reassess your business model and your ability to capture value, you should shift your focus from value to Impact Weighted Value. When I say value, I mean the value measured as “net profits” from companies’ financial statements.
Why ? Because until we reflect in monetary terms the impact of our business activities on people and the environment, very little will change. To fully reflect the change of business scope from TAKE-MAKE to TAKE-MAKE-RECIRCLATE, we need to compute the positive or negative impact of our business activities into our financials. We need to consider seriously the Stakeholder capitalism approach, explore the Shared Value approach and Valorize natural capital.
And yes, I am aware that the stock market is not there yet, they’re still focusing on the plain bottom line, but they may pay attention when they realize that sustainability strategies lead to more resilient companies.
To focus on the Impact Weighted Value, you need to follow the following 3 steps: (1) assess your true impact with Impact Measurement and Management (IMM), (2) explore how to leverage the Shared Value concept and (3) adopt Impact Weighted Accounting.
READY PLAYER ONE?
Rome wasn’t built in a day. The transition to sustainability is a journey. There are still many controversies. Eventually, it’s about showing that it can make business sense, beyond “only” making sense for the planet. There are so many initiatives, so many approaches, it can be overwhelming. External and Internal Forces are in play: you need to align your internal forces (your CFO, your design team, your operations) to keep a competitive advantage while navigating new regulations, and changing customer behaviors. Nobody has cracked the code just yet? Game on.