The innovation gap: How to create new opportunities through the sustainable transition
4 MINUTE READ | BY TOM CARR AND NIGEL SALTER | 5 FEBRUARY 2024
While meeting regulation is necessary, so too is looking ahead to prioritise the innovations that will matter in the ‘all change era’.
Many sustainability teams are feeling overwhelmed by regulatory pressure, leading them to narrow their focus to meet disclosure requirements. We previously wrote about how this natural retreat from strategic thinking can result in missing out on opportunities created by the sustainable transition. Here we zoom in on why this is happening, learn from the market transitions we’ve already seen, and outline the steps we think companies would benefit from to navigate this ‘all change’ era.
Why are so many companies at risk of losing out during the sustainable transition?
Traditionally, the sustainability ‘industry’ has been driven by transparency, focusing on risks and shielding businesses from being impacted. Managing the onslaught of sustainability regulations can feel overwhelming, particularly for companies operating across multiple jurisdictions, so it’s understandable that they tend to take a risk-based approach. The problem is, while this approach can help a company to respond to immediate regulatory requirements, it can’t help to identify potential opportunities or navigate the sustainable transition.
The question of how we navigate the transition is a source of ongoing debate. Leading global financial, academic, and in some cases, political bodies, often set out a view of the sustainable transition being unlike any challenge companies have seen before. It will certainly occur rapidly (and already is), but suggesting it is without precedent is unhelpful for companies trying to respond. Reviewing historical examples can be helpful, as today’s sustainable transition has a lot in common with major market transitions that have been successfully navigated in the past.
The sustainable transition is just another market transition.
When we look back to companies that have thrived through previous market transitions, they have been the ones focused on customers, product and innovation - not just risk management.
Today, most companies recognise that the sustainable transition will impact their business. However, their course-setting is often based on linear forecasts typical of incremental market evolution (e.g. blue line in figure 1). This contrasts with the historical evidence of transitional technologies following a non-linear, S-shaped growth trajectory (pink line). Therefore, the current risk-based approach to sustainability adopted by so many companies may actually be guiding them towards increased exposure to an acute innovation gap through the all change era of sustainable transition*.
* This excellent recent article highlights that the delay in product adoption during the ‘early commercialisation’ start of the S-shaped growth trajectory has typically lasted 10-15 years, meaning the swathe of green technologies developed during the early 2010s will likely be hitting the turning point into the ‘all change era’ in the coming couple of years.Innovation is so important because it is the driving force behind the sustainable transition. Without identifying where and how to innovate, the innovation gap will lead companies to fail to protect, create, or capture value.
Figure 1: Companies are struggling to anticipate the non-linear growth of technologies during their ‘early commercialisation’ phase, leading to mis-prioritisation through the ‘all change era’. This leaves them exposed to acute innovation gaps under ‘new technology norms’.
Innovation almost always comes from companies that consider a problem in a new or different way. Let’s take a couple of examples. Few had heard of Tesla in 2010, before it spent a decade transforming the entire car industry. In 2015, oat milk remained the preserve of health food shops before the rise of Oatly led milk alternatives to take over every coffee shop in the country.
During the all change era, innovation and adoption will be achieved at immense rates. The smaller, more deft companies may be the ones to generate that, but the incumbent market leaders also have a crucial role to play. They provide the scale and infrastructure needed to keep up the pace of expansion and adoption as disruptors scale.
Those that invest or partner with the right innovators at the right time will garner strong returns. Akshat Rathi’s book, Climate Capitalism, offers some compelling examples of companies who have timed this right and seen the benefits add up. The expansion of lithium-ion batteries into the mass market offers a prime case of the crucial power and experience that large corporates (in this case, Sony) bring to successfully navigating the all change era; making new innovations breakthrough at scale and delivering strong returns in the process.
Looking beyond regulation to prioritise the right innovation will be crucial to success in the all change era.
Achieving this requires understanding how corporate strategies interface with different sustainability issues. Where is the business exposed? Where are the opportunities to acquire and grow through the key transitions?
Answering these questions in the pursuit of innovation takes us back to the question of prioritisation. We think there are some key actions which sustainability and strategy teams should be taking to position the business to bridge the innovation gap:
1. Set strict priorities for what presents a genuine market opportunity, rather than a management requirement.
The outputs from a double materiality assessment can inform these decisions, but it has to be set up to answer the right questions in the first place (read our previous article to see how).
2. Define your company’s position on sustainable innovation.
Consider how your company typically positions itself when adopting innovations. Under what circumstances do you typically seek to develop innovations, versus adopting or acquiring new technologies and product offerings at the right time.
3. Define the right architecture needed to allow innovation to prosper.
It’s crucial that sustainable innovation doesn’t just become the domain of the sustainability team. Ultimately, the sustainability team’s role should be relatively limited before strategy, product development, sales and production teams get involved. Getting the right corporate architecture to allow for innovation will be crucial to avoid it being stifled.
This great article looking at the inside story of the firing and reinstatement of Sam Altman at OpenAI shows how hard Microsoft fought to keep OpenAI in a separate entity, to maintain its culture and risk appetite needed to maintain innovation. Microsoft knew that bringing OpenAI inhouse should be the last resort as the large corporate environment wouldn’t fit the development and scaling stage the smaller business was at. It’s an instructive example for businesses looking to bridge the innovation gap.
At SB+CO, we help clients prioritise meaningfully, build effective strategic responses, and create compelling sustainability and ESG narratives. Helping companies to identify and structure responses to navigate the all change era is just one way we support clients.
The point is clear: a business can’t do everything well all at once. While meeting regulation is necessary, so too is looking ahead to how companies set strategies that position themselves to prioritise the innovations that will matter.
Keen to find out more? To download a free PDF guide to making materiality matter, please share your contact details in the form below…
Nigel Salter
Founder
Tom Carr
Sustainability Director
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