The Paris Agreement may be the biggest thing to happen to business models since the advent of the term in the dot-com bubble, essentially requiring all companies to assess the viability of their models in a “well below” 2°C world, achieved via net-zero greenhouse gas (GHG) emissions by mid-century. For companies with GHG emissions baked into their value cycles (supply chain, operations, and customer product use), this will clearly require significant business model transformation – as well as requiring entrepreneurs to embed such considerations into their assumptions when generating models for new companies.
This emerging reality prompted the Reporting 3.0 Platform to round out its series of four Blueprint Projects with the New Business Models Blueprint, which was launched at the 4th International Reporting 3.0 Conference in late May (see here for the report summarizing conference proceedings). Following in the footsteps of the Reporting Blueprint and Data Blueprint (which released Final Reports at the Conference) and Accounting Blueprint (which released its Exposure Draft 1.0 at the Conference), the New Business Models Blueprint will follow a structured, 12-month process (more on this below) leading to the publication of a Final Report at the 5th International Reporting 3.0 Conference in 2018.
In her keynote opening the New Business Models Blueprint plenary session at the R3 Conference, Preventable Surprises Chair Carolyn Hayman cited a key driver of business model transformation: investor demand. She pointed to shareholder resolutions asking energy companies to assess their business operations and strategies in light of <2°C scenarios – such as the International Energy Agency’s 450 Scenario and 2°C Scenario (2DS).
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Several such resolutions achieved majority support (67.3 percent at Occidental Petroleum; 62.1 percent at ExxonMobil; 56.8 percent at PPL) from voting shareholders in 2017, a rarity signaling rising investor expectations. And importantly, one resolution (at Southern Company) transcended the ask for a scenario analysis to instead seek a transition plan to a new business model – the approach that Preventable Surprises advocates in its Transition Plan Guidance Note for utilities.
Preventable Surprises (an anchor partner in the New Business Models Blueprint Working Group) favors business model transition plans over scenario analyses because the latter can be conducted by narrow subject-matter experts (including external consultants), whereas transition plans require engagement at the C-suite and board level. As well, scenarios are easily “gamed,” whereas business model transition plans are much harder to feign because they involve much more in-depth considerations and interconnected variables.
As with all R3 Blueprints, the primary output of the New Business Models Blueprint will be a set of Recommendations geared toward key constituencies in the field – in this instance, they will address the following key considerations for new business models:
- Context: Attends to micro (company-level) / macro (systems-level) link for sustainable management of common capital resources within their carrying capacities
- Multicapitals: Synergies between and amongst capital-based resources
- Scalability: Prioritizes potential for spurring broader economic transformation
- Governance: Embeds responsibility for transformation at board level
- Innovation & Strategy: Aligning future value creation with sustainability imperatives (eg <2°C / net zero GHG) spurs innovation opportunities
- Risk: Integrates Enterprise Risk Management (ERM) with outside-in as well as inside-out sustainability impacts
- Metrics: Measures current and future value creation and incentives linked to sustainability norms
- Roles: Requires level-setting of work functions to transformative capacity
And as with all R3 Blueprints, many of these aspects go further / deeper than current best practice frameworks and guidance. For example, the Financial Stability Board Task Force on Climate-Related Financial Disclosures (TCFD) Final Recommendations Report released late last month was a watershed publication, yet it still falls short on several counts advocated by the New Business Models Blueprint. Taking a cue from Working Group Member Mark Van Clieaf, lead author of a Public Comment Letter to TCFD from the Network for Sustainable Financial Markets (NSFM), the R3 New Business Models Blueprint will assess specific recommendations that were not taken up by TCFD. Specifically, the NSFM letter calls for:
- Extending traditional financial metrics, such as positive Return on Invested Capital (ROIC), or Cash Flow Return on Investment (CFROI), to longer time horizons than TCFD calls for; and
- Assessing executive and board cognitive capacities necessary for transforming business models that can create sustainable future value in a <2°C world (see figure below).
- Work productively (not obstructively) toward positive change
- Challenge the constraints, structural limitations, unconscious bias and shadow agendas of the institutions and organizations they work with
- Backcast from a desired future, building bridge foundations on the far side of the river
- Work collaboratively in networks with other positive mavericks
- Think and act at systems levels
- Seek transformative (not just incremental) change
In addition to the Working Group Members mentioned above, the following experts have expressed interest in contributing to the project:
- Nancy Bocken: TU Delft
- Nathan Gilbert: B Lab Europe
- Stuart Hart: University of Vermont
- Antony Upward: Flourishing Business Model Canvas
- Bob Willard: The Sustainability Advantage & Future-Fit Business Benchmark
- Robin Wood: Project Synergise!
After pulling together a full Working Group, the standard R3 Blueprint process calls for a literature review, and the writing of two Exposure Drafts, each of which is reviewed in a virtual dialogue and in-person Working Group meeting (as well as a Public Comment Period for Exposure Draft 2.0) before the publication of a Final Report with fully vetted Recommendations. Thereafter, these Recommendations will join those from the other three Blueprints being piloted by companies and others in the Reporting 3.0 Beta Testing Program that also launched at the recent R3 Conference.