Should Firms Be Focusing On Sustainable Business Model Innovations?

On a macro scale, significant work has been undertaken on indicator development for sustainability and alternative ecological economic paradigm development, notably Raworth (2017). However, if sustainability trajectories are to be altered it must incorporate change at a microeconomic scale. The private sector has control over significant resources and capabilities and is, therefore, a crucial component in addressing sustainability challenges. This acknowledgement of the private sector is not to the exclusion of the work that has been done on the importance of the role of the state such as the work of Mazzucato et al. (2015) on the green entrepreneurial state and the importance of the role of government in driving innovation in sustainability transitions. However, an understanding of how we change the way we measure growth and resilience at the private sector level is what requires further research and answers. 

What Needs to Change within Firms to create a space for sustainable business model innovations?

Raworth (2017) identifies five traits within organisations that will assist them in driving change, namely purpose; governance; networks; ownership and finance. Within this framework invariably company’s shareholders are still primarily profit-driven, resulting in a conflict between an organisations’ purpose, governance and networks and its finance and ownership structures. The short-term framework in which companies choose to measure performance and shareholder returns hinders the adoption of sustainable projects. This short-termism (Raworth, 2017) indicates that there needs to be a change in the way business models are conceptualised and implemented and in the way business resilience is measured. Innovation on the business model level is required to align incentives and revenue mechanisms to allow for the implementation of sustainable solutions. 

Is Environmental Social and Governance (ESG) Reporting Enough?

Progress has been made in sustainability reporting on a company level through the ESG (Environmental, Social and Governance) frameworks. The rise of ESG reporting has largely arisen because of the growth of responsible investment practices. This has increased pressure on listed companies to include ESG reporting into their traditional investment analyses to highlight their performances on corporate governance. ESG or integrated reporting does address the issues of creating value beyond financial profit in companies, however, the conceptualisation and implementation of these concepts need further development in the business context (Adams, 2017). A study done by Whiteman et al. (2013) indicated that ecological conditions are worsening despite an increase in sustainability and greening efforts and that there is an unknown element regarding the extent to which corporate greening contributes to ecological sustainability. They note that many corporate reports describe sustainability as a journey that results in sustainability within corporates having no quantifiable boundaries and often results in a deferral in needed changes within organisations. Corporate social reporting or integrated reporting is also often not linked to a broader ecosystem or systems thinking and is carried out separately to the core functioning of businesses.

What is at the heart of sustainable business models?

Business models are ultimately concerned with understanding value capture, value creation and value proposition of firms (Geissdoerfer et al. 2018)  or simply put, the company’s logic of earning money. If this is at the heart of current business models, then any business model that focuses on optimizing business-as-usual practices will be perpetuating the current climate crisis status-quo. The innovation that is required within organisations is to develop sustainable business models through the alignment of incentives and revenue mechanisms. The move towards sustainable business models is one that seeks to alter the business model concept by incorporating sustainability aspects into the value processes of a firm, rather than just focusing on product or process innovations (Geissdoerfer et al., 2018). If we are to identify the strategic benefits of sustainability it will require whole systems thinking and the integration of sustainability in the core of a firm’s business model.

How should firms be refocusing their efforts towards creating a sustainable business model?

Figure 1 below is adapted from work done by the Institute for Manufacturing at Cambridge University and graphically represents what is involved in adopting sustainability at the core of your business model. The main elements that require rethinking by adopting this business model approach are:

• Business Purpose
• Meaning and measurement of value within your business
• Redefining stakeholders in your business (including the shift of the environment being a stakeholder, rather than a resource)
• Implementing a long term systems view of your business.

Figure 1- Sustainability as the Core of the Business Model
Source: IFM Cambridge University

The shift towards placing sustainability at the heart of business models forces a change in which value is defined, created, and captured. To some, it may appear as semantics, but it does require a fundamental change in mindset. The current climate crisis requires all of us to rethink our view on sustainability, especially at a firm level. We need to change our mindsets from viewing sustainability as implementing measures to compensate for the negative impacts of the firm to one of fundamentally changing the way the firm does business. Equally so, sustainability should no longer be viewed as that which requires financial sacrifices but rather as an instrument to capture new business opportunities and as a key driver of innovation.