Tag: Paris Climate Agreement

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REBOOT World View

10 Takeaways From COP 26

It is difficult to understand what was truly achieved at COP 26.  After pre-weeks of media to COP 26 and then the concerted media campaign during the week of COP 26 how do we sort the wheat from the chaff or the greenwashing from the truth.

Fundamentally, there is still a long, long way to go.  COP 26 was not the breakthrough that was needed. Both the public and private sectors did not step up and demonstrate the urgency that was needed.

Here are my 10 key thoughts:

1. COP 26 was more than blah, blah, blah, as Greta Thunberg said; but, it fell far short of what was needed.  It was inevitable that we would fall short of 1.5 degrees Celsius, the question was really how far?  The best guess seems to be that the commitments added up to about a 0.3 degree Celsius improvement moving our current likely outcome tracking from +2.7 Celsius warming at 2050 to 2.4 degrees (per Climate Analytics Tracker or CAT).  In Climate Actions latest publication,  they noted that not only do the commitments fall short of the +1.5C target of the Paris Climate Agreement, there is no single country that has put short term policies in place to put itself on track to its net zero target.

2. Out of Glasgow, there is recognition that this push to improve commitments cannot just happen every 5 years.  This is a good move. They are now asking countries to each year look at ratcheting up their targets and actions.  For most countries, setting 2030 targets rather than earlier targets is also a way to delay the need to address the problem to the next leadership group whether in the political or private sector arena.  Given that the carbon emissions problem is a cumulative problem there should be a further goal of each country committing to a set of annual activities and targets; and, couple this with ‘naming and shaming’ of those that fall short.  Ramping up public pressure is fundamental to proper progress.

3. COP 26 recognised that it is vital to solve the biodiversity issue as part of the climate problem even though it has a set of other issues.  The reduction of deforestation pledge by 118 countries by 2030 is a start in the right direction.  This should be enacted much faster.  Nine more years of deforestation is a problem.  The devil will be in the detail of the agreement; including, the addressing of illegal logging and the need for reforestation.  The three regions of particular concern are the Amazon, the rainforests of Indonesia and the Congo Basin.

4. The announcement of GFANZ (Glasgow Financial Alliance for Net Zer0) having 450 organisations that manage $130tn of private wealth saying they will participate in the financing of the climate challenges is a good start.  Mark Carney has made good progress to pull this together.  The cynic would say that if there was $100tn of investment opportunities (the size of the climate challenge) that will add 2% per annum of economic growth and they were presented as good investment opportunities who wouldn’t want to be part of the club.  The key question is in reality will this result in large scale material changes in investment allocations and what will it also take to make this happen in terms of reporting, policy and regulatory changes, carbon tax, last mile of risk security, etc.  The reality is this is a step in the right direction; but, there is a long way to go.

5. COP 26 forgot the oceans which is the biggest carbon sink. Where is the equivalent pledge to deforestation for the Oceans.  What never seems to be included in the Net Zero discussion is that the goals required do not consider any indirect impacts of carbon emissions (including other GHCs) that are in carbon sinks on land and in the oceans.  Only a very small percentage of GHCs are in the air vs. absorbed in the land and oceans and their biodiversity. The melting of ice and permafrost, the warming and acidification of oceans, and the equivalent of ocean deforestation from over fishing are likely to release GHC’s into the air.  There are also other indirect sources of warming that have also not been considered.

6. COP 26 needs to get away from the sole narrative of clean energy and focus on the reality of a practical transition to clean energy. The coal and methane pledges are helpful but are really subsets of existing pledges that should already have been made or identified in terms of carbon emissions reduction to meet the 2030 targets that each country committed to.  Countries should be solving not just the optimal future state of energy provision but also the economics of transition vs. the related cumulative impact of emissions.  Optimal transition will require continued fossil fuel extractions (hopefully focused on the least climate damaging approach), being realistic on the ideal role of nuclear power and other credible low emission sources, and ensuring there aren’t economically disruptive shortages on the way.  Governments have a big role to play in this in terms of creating the right economics of alternative energies (through carbon taxes, subsidies, other policies) and their own commitments to ensuring the appropriate energy grids are in place to maintain steady supply.

7. We still need more discussion on adaptation not just carbon emissions reductions. It has been good to hear that there are now some more realistic discussions on climate that are appropriately also talking about adaptation.  The short to medium term economic benefits of dealing with climate change come from adaptation while the longer term benefits are from reaching Net Zero.  Developing and underdeveloped countries are primarily concerned about adaptation to deal with the economic consequences of extreme weather. The first things they need are economic assistance to social and economic development to help deal with the ravages of droughts, increased heat, floods, etc. resulting from climate change.  These include factors such as access to water, crops which are more resistant to the new climate reality they are facing, and access to 24/7 low cost energy ( and ideally low emission energy) for development.  Given that a significant proportion of those in extreme poverty are subsistence farmers specific targeting of assistance programs will be essential.

8. Carbon tax hesitancy.  It could be argued that the one thing that would indicate how governments are taking climate change seriously would be the agreement of a global carbon tax, or cap and trade, system.  This also includes dealing with addressing the issue of heavy subsidies on fossil fuels in many countries including the United States.  The shifting of the relative economics of alternative energies is vital to accelerating the investment in and adoption of new energy consumption habits.  There has been no apparent progress on a global carbon tax program.

9. Global North and Global South was not properly recognised in COP 26.  In the climate conferences, the Global North refers to developed countries; and the Global South are the developing and underdeveloped countries.  The Global North completely dominates both the emission of GHCs and the use of fossil fuels.  The global south has a small fraction of per capita consumption of energy; although, they do contain the large and growing proportions of the population.  These countries have primary priorities on social and economic development which involves growth in energy consumption before achieving net zero is even considered.  Very different programs of climate action should be targeted for common clusters of countries; rather than the chasing of universal agreement on a common set of actions.  Why do we keep chasing all countries to sign up to the same agreements?

10. The increased level of stakeholder activism and engagement needed to drive change was not properly incorporated into the conference.  There needs to be a much higher level of activism by stakeholders to drive change and hold politicians and private sector leaders accountable.  The activism needs to include the public voting out of politicians, the boycotting of companies and withdrawal of funds from irresponsible companies by investors and insurers.  In the same way that there needs to be activism there also needs to be proactive engagement of stakeholders in changing their own behaviours with respect to both the shift to Net Zero and addressing adaptation requirements.  This means that every individual, town, municipality, city, province, country and region, as well as every other organisation in any form, has the simple requirement of acting themselves.  This was completely missed at COP 26 as they tried to focus on newsworthy narratives vs. practical solutions.

As an optimist, I do think that we have the wherewithal to succeed.  To do this we need to face the truth, deal with reality, and stop greenwashing problems and challenges.  Transparency is essential, programs must be put on the ground and managed to time, results must be monitored, and actions must be taken against shortcomings.

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Democracy and the Role of Government

fyuDespite the cynics view that the government is a necessary evil and they are bureaucratic and inefficient, the governments play a critical role in the welfare and wealth creation in a society. Strong infrastructure, a well educated and healthy society, good social services, the right to work, economic support in down cycles, and research and development investment all contribute to drive economic growth and well being. Critical questions relate to whether the services are inclusive and fair; is there proper control over the dark sides of capitalism and freedom for the strengths it provides; and, are the services delivered in an efficient way. And, overall is there progress towards delivering the “North Star” social contract. The market economy, and capitalism, may contribute to some of these requirements; but, they don’t solve them against societal requirements. It is a myth that for example outsourcing services to the private sector is always more efficient than direct delivery of services by the government. The US healthcare system which is the most privatised healthcare system of the leading countries is by far the most inefficient healthcare system of the successful economies in terms of cost per person and overall health outcomes. There are many examples of efficient infrastructure and public services systems run by governments. Of course, that is not to say that there aren’t many opportunities to improve what is done, just as there are in most companies. In the UK, privatisation of many of the public service sectors has only caused higher prices, reductions of service levels and imbalanced delivery of services across the whole of society. The motivations of private companies are not aligned to the needs of society. Unprofitable customers are ignored or excluded from service provision. Investors add significant debt to their companies causing high interest costs and then also take significant dividends before any reinvestment. The short-term time horizons of investors do not match the long-term thinking required for the development of infrastructure or public service delivery. The UK government privatised sectors without creating the proper rules and regulations for inclusiveness and fairness, price control, and the right number of service providers to get the benefits of free markets. Finding the right balance of involvement of the private sector in infrastructure and public service delivery is not an easy equation; but, having a principle of outsourcing where ever possible is certainly not the right answer. Operating a government well to deliver on their social contract and create the right conditions for a highly vibrant market economy to drive economic growth is a quantum more complex than running a company; especially, with companies primarily with a short term profit optimization focus. Solving the financing of government service delivery is also a complex issue with many views on fiscal and financing policies. Getting the right balance of legislation and regulations, funding and fiscal policies to move a society forward is a game of continual adjustments interlaced with political agendas. This complexity is then also exacerbated by all the globalisation, multi-lateral issues and the geopolitical challenges that need addressing. There will never be one model to do this; however, that does not preclude looking for best practices to help on the journey forward. In the next blog, I will explore in more detail the role of the market economy. It is the dominant part of an economy and is the engine for innovation and economic growth.

In the last blog, I explored the need for societies to be citizen centric and not government or corporate centric.  In addition, the need for a clear social contract was defined.  I now want to explore the role of a democratic government in a citizen or individual centric society.  

I will take the liberty to deviate a bit from this topic just to reflect on the state of democracy after the unbelievable showing in Washington on January 6.  I am still amazed at how the Trump supporters were able to infiltrate where all the key Federal representatives, except for the President, were sitting to finalise the announcement of Joseph Biden as the next President.  Clearly, there are challenges in a democracy as there is in any political structure.  It reminds me of Winston Churchill’s quote in 1947, “Many forms of Government have been tried, and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all-wise. Indeed it has been said that democracy is the worst form of Government except for all those other forms that have been tried from time to time.…”.

The rise of democracy has stalled (Figure 4-1).  We have seen rising populism and the growing visibility of authoritarian leadership including Xi Jinping, Vladimir Putin and Recep Tayyip Erdogan.  In the background, we have also seen a rapid growth in government run tech operations groups, such as in Russia and China, manipulating social media news in democratic countries to influence and discredit the democratic process.  

Figure 4-1

In the US, thankfully we have hopefully seen the end of Trump’s authoritarian style attempt to thwart of the role of democracy.  In the New York Times, 11 December 2020, Michael McFaul, the U.S. ambassador to Russia under President Barack Obama, described the president’s “refusal to accept the results of the election” as “his parting gift to autocrats around the world.”

The V-Dem Institute attempts to assess the commitment of political parties to democracy around the world.  They use 600 political scientists to help them with these assessments.  According to them, the US Republican party has been on the slide since just before 2000 (Figure 4-2).  This is reflected by the growing partisan gap that the party’s actions have been largely responsible.  Trump has taken it to another level and this was before the latest refusal of his to accept the election results and the subsequent impeachment process related to the insurrection activities on Capitol Hill.

Figure 4-2

This partisanship in America is unlikely to go away anytime soon.  In the US, we can see that from the 1960’s, there has been a massive decline in overall trust from above 75% trust at the Federal level to below 20% (See Figure 4-3). This compares with about a 38% average trust level in OECD governments in 2014.  Surely, this decline must also be related to the increasing partisanship of politics in the US in the last 20 years.  The legitimacy of a government comes from the people. With declining trust comes declining legitimacy.  This is the importance of having a clear view on the social contract the government needs to deliver against for legitimacy.

Source: Pew Research Centre Figure 4-3

The social contract “North Star” that was defined in the last blog had 5 components.  The first three components were linked to the themes of basic needs, well-being and decent work.  The fourth component was the right to live in a climate and environmentally sustainable world.  The fifth component included the right to privacy (including digital privacy) and access to facts and truth.

The role of government has evolved over time. There are responsible for three categories of activities (Figure 4-4).  Firstly, core roles linked to the basic functioning of a country.  Secondly, the delivery of public services. Thirdly, contributing to economic development and stability, and the sustainability of society and its environment. It has also included to a lesser extent the management of multi-lateral and long term issues such as climate and environment, humanitarian issues, cyber and nuclear security.

Figure 4-4

Firstly, the core requirements for a country include:

  • Defense, protection and justice
  • Infrastructure for transport, energy, water access, sanitation, etc.
  • Market development and protection – the creation of a market based economy

These factors are the most essential areas of investment of government for the basic functioning of a society.  The maintenance of borders and safety of citizens; a justice system for both social order and ownership of assets; infrastructure for basic health, such as clean water and sanitation, and for the distribution of goods; and, a market system to create economic growth. I will talk more about the government in its role in a market economy in the next blog.

The second phase of services are very much focused on public services for the citizens.  These include education, health and the full range of social security services including unemployment, pensions and disability coverage.  The top countries focus on education and health is a national issue, and their goal is inclusivity and quality for all.  Finland has now been regarded as a top country for education for a long time.  They combine high rankings with only a narrow performance difference between the top schools and the weakest performing schools.  The leading countries also extend their thinking to affordable education for all in post secondary/high school and an emphasis on reskilling of workforces over time to maintain employment and mobility.  

In the US, the local tax intake very much drives the quality of education and the facilities within the school.  Wealthy communities have schools that access the best teachers and have the best facilities.  The US is also renowned for the prohibitive cost of university and the lack of access to the key universities which are vital for strong job opportunities.  Cost is an access and fairness issue.  The level of debt from education in the US exceeds all credit card debt and for many locks them in the poverty cycle. The university participation rate of the lowest decile of income is about 20% vs. the highest decile where participation is at 90%.  

In health, Singapore is often identified as a strong model for low cost – high quality Universal Healthcare.  They blend the understanding of how some paying for services drives efficient use with a primarily employment funded health system. Their health costs per person are about one quarter of the US and are fully inclusive.

For social services there are many different models.  The key factors seem to be an employment system that pays fair wages, understands the need for increasing mobility within the workforce, and the need for proper income protection between jobs.  They also understand the need for gender balance in wages, maternity/paternity time off, and pensions which is a growing need as populations age.

The third category of state involvement is contributing to economic development and stability, and the sustainability of the society and its environment.  Unfortunately, these challenges are not declining over time.  Historically, the thinking has been that economic spend by the government should be counter cyclical in order to smooth out economic cycles in the private sector.  The 2008 great recession, or sub-prime crisis, required unprecedented levels of quantitative easing.  The current pandemic has required economic interventions at levels in excess of 20% of GDP so far, as well as massive interventions in health delivery, education and freedom of movement.  Overall, there has been a growing trend of material disruptions to society over time from a mix of sources including climate, health, economic and cyber.

One of the areas overlooked within society are the commons.  The commons are the resources that should be accessible to all members of a society including clean air and water, and a habitable earth.  These resources are held in common and not owned privately.  Government investment in electric mobility, and wind and solar energy, is linked in to the managing of the commons. The critical right of society to live in a sustainable environment drives the need to deal with climate change, biodiversity destruction and growing levels of pollution.  This requires urgent attention, investment and multi-lateral coordination.  

Another part of the commons that has developed over the last 20 years is the need for ubiquitous access to the internet as a great leveller.  This means full quality coverage of the internet across all countries and fair access and use (including the need for devices such as smart phones).  The internet has already proven to be a great economic enabler in developing countries and the pandemic has reinforced the value of the internet for the economy and also for remote health services and education.  

The other part of driving economic growth and societal development is government role in research and development.  The private sector that is understood to being the source of great innovation, such as we see coming out of Silicon Valley, has not been the core source for research which has driven new waves of growth, such as the internet.  Government investment dominates the discovery of new technologies and early stage market applications.  The private sector tends to drive the innovations once there are visible timelines of economic returns from new technologies (Figure 4-5).

Figure 4-5

In the US, Federal Government R&D expenditures was a as high as 2% of GDP  in the mid 1960’s and now has dropped to about 0.6% of GDP.  The US is no longer the dominant leader in cutting edge research in many areas. China is increasingly the leader in a number of areas of research that drive economic growth, and are expected to become the overall leader in research output in the next decade.

Overall, the total R&D expenditure as a percent of GDP in the US was 2.84% in 2018.  This compares to Japan and Germany who spend 3.26% and 3.09% respectively and South Korea which spends 4.81% of GDP. 

Research spend in the US, underpinned by the government, has generated the internet, and been a major contributor to the nanotech, biotech and the clean energy sectors.  Almost all the core technologies behind the Apple smart phone have started with government spend.  Core government spend has been driven through focused agencies in the US such as DARPA (Defense Advanced Research Projects Agency), ARPA-E (Advance Research Projects Agency – Energy) and the NIH (National Institutes of Health) which is the largest biomedical research agency in the world.

Mariana Mazzucato through her book ‘The Entrepreneurial State: Debunking Public Vs. Private Sector Myths’ and through her work at the UCL Institute for Innovation and Public Purpose, has been championing mission oriented innovation such as the US has historically been doing.  Mission oriented innovation combines research and development expenditure, funding and tax incentives.  This approach is taking shape in the UK and EU.  A great example of this currently is in Denmark, who has become a world leader in offshore wind energy generation and is now the lead external partner helping China cement their position as the largest offshore wind energy market in the world with a capacity goal of about 450 times that of Denmark.  

Aligned to, and integrated with research spend, is the overall need for governments to step up in addressing key global and national issues such as climate change, inequality and digital privacy.  Governments provide the essential leadership on these factors to drive coordinated responses, urgency, risk mitigation, continued economic development and appropriate social protections.  The current state of market economies, and capitalism, on their own have not and will not solve these issues without the right market sector frameworks and economic opportunities visibly in place.  Government policies, regulations, legislation and economic incentives create the conditions to solve them.  The private sector then has the scale, impact and innovative capacity to deliver the bulk of any major solution.

As an example, in November 2020 the UK government announced a 10 point plan to move onto the next phase of addressing climate change towards a 2050 Net Zero target.  This program will mobilise £12bn in government investment and is expected to generate 3 times the amount from private sector investment.  

With the current pace of technological innovation and monetization of it, we are seeing major cracks around the collection and use of private data.  The social concerns linked to the gathering and use of personal data, especially by the dominant technology companies, will only get bigger as everyone is increasingly tracked and manipulated in real time. The abuse of data can only grow as you add genetic, neurological and increasing levels of contextual data as technology becomes embedded in our lives. The moral and ethical parameters of technological innovation and privacy of information protected through regulations should be have been dealt with a long time ago. Slow reactions driven by growing social unrest related to privacy cannot be the answer.

The final area in this category is humanitarian/development aid without which many countries cannot address specific crises and create the initial momentum required to create economic growth.  It is also an essential component of addressing the UN Sustainable Development Goals and the Paris Climate Agreement.  

With these responsibilities it is no wonder the best performing countries tend to have higher government involvement in society, and higher taxes, than lower performing and less developed countries (Figure 4-6).  As countries develop, they are able to finance the provision of additional services.  There is clearly a strong relationship between economic prosperity and the three categories of government activities – core requirements, public services, and economic resilience and growth. 

Figure 4-6

Despite the cynics view that the government is a necessary evil and they are bureaucratic and inefficient, the governments play a critical role in the welfare and wealth creation in a society.  Strong infrastructure, a well educated and healthy society, good social services, the right to work, economic support in down cycles, and research and development investment all contribute to drive economic growth and well being.  Critical questions relate to whether the services are inclusive and fair; is there proper control over the dark sides of capitalism and freedom for the strengths it provides; and, are the services delivered in an efficient way.  And, overall is there progress towards delivering the “North Star” social contract.  

The market economy, and capitalism, may contribute to some of these requirements; but, they don’t solve them against societal requirements.  It is a myth that for example outsourcing services to the private sector is always more efficient than direct delivery of services by the government.  The US healthcare system which is the most privatised healthcare system of the leading countries is by far the most inefficient healthcare system of the successful economies in terms of cost per person and overall health outcomes.  There are many examples of efficient infrastructure and public services systems run by governments.  Of course, that is not to say that there aren’t many opportunities to improve what is done, just as there are in most companies.

In the UK, privatisation of many of the public service sectors has only caused higher prices, reductions of service levels and imbalanced delivery of services across the whole of society.  The motivations of private companies are not aligned to the needs of society.  Unprofitable customers are ignored or excluded from service provision. Investors add significant debt to their companies causing high interest costs and then also take significant dividends before any reinvestment.  The short-term time horizons of investors do not match the long-term thinking required for the development of infrastructure or public service delivery.  The UK government privatised sectors without creating the proper rules and regulations for inclusiveness and fairness, price control, and the right number of service providers to get the benefits of free markets.  Finding the right balance of involvement of the private sector in infrastructure and public service delivery is not an easy equation; but, having a principle of outsourcing where ever possible is certainly not the right answer.  

Operating a government well to deliver on their social contract and creating the right conditions for a highly vibrant market economy to drive economic growth is a quantum more complex than running a company; especially, with companies primarily with a short term profit optimisation focus.  Solving the financing of government service delivery is also a complex issue with many views on fiscal and financing policies.  Getting the right balance of legislation and regulations, funding and fiscal policies to move a society forward is a game of continual adjustments interlaced with political agendas.  This complexity is then also exacerbated by all the globalisation, multi-lateral issues and the geopolitical challenges that need addressing.  There will never be one model to do this; however, that does not preclude looking for best practices to help on the journey forward.   

In the next blog, I will explore in more detail the role of the market economy.  It is the dominant part of an economy and is the engine for innovation and economic growth.   

#public sector #privatisation #democracy #insurrection #Trump #Biden #populism #political regimes #government trust #UN SDGs #paris climate agreement #DARPA #ARPA-E #NIH #DFID #FCDO

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Successful Societies

“It is not the strongest species that survive, nor the most intelligent, 
but the most responsive to change”, Charles Darwin

To address the three challenges, that I identified in the last blog – decarbonisation and biodiversity regeneration, inclusivity and fairness, digital privacy and collective truth – it is worth understanding where we are starting from.  Looking at the components of successful countries and societies is a good place to start.  Most comparisons of countries are focused on GDP per capita, the growth of GDP per capita, and the unemployment rate.  I think we all know that there is much more to life and a society than just these factors.  Income is important but there is also health, education, happiness, safety, freedom, fulfilment and purpose.

Lyndon B. Johnson said, ”The Great Society is a place where every child can find knowledge to enrich his mind and to enlarge his talent…  It is a place where the city of man serves not only the needs of the body and the demands of commerce but the desire for beauty and the hunger for community…It is a place where men are more concerned with the quality of goals than the quantity of their goods”.  The language may not be gender appropriate for today, but the idea of what makes a society is captured. 

Yet, as we sit here and watch what is happening around us we know it is even deeper than this.  It is the ability of someone being able to go to church or to teach a class and not have any risk of being attacked. It is the ability of someone of BAME origin or any gender to have equal respect, equal opportunity and equal justice. It is the ability of a young woman to be able to travel unintimidated on public transport late at night.  It is the feeling that you are safe at home and that your job is secure even though you may different political views.  It is not just freedom of thought but also freedom of speech.  

In my analysis, I tried to look at successful countries and societies based on a simple composite ranking across a set of factors including GDP/Capita, Exports as a % of GDP, GINI coefficient, life expectancy, mean years in school, democracy index, gender inequality, homicides, and CO2 emissions per capita. On a GDP per Capita basis, the USA is 9th; and surprisingly, from a composite rank perspective, 25th out of the top 25 countries with the highest GDP per Capita (populations over 4 million people).  This jars with the American narrative we have been fed over generations; although perhaps not, when we watch with amazement the reducing presence of America globally, the polarisation of the country and its massive decline in global respect, especially in the last four years.  More specifically, this is reflected by America’s withdrawal from the Paris Climate Agreement and the World Health Organisation, the levels of social division, the growing gap between the haves and the have nots, the implicit caste system that still to some extent exists, the rapid rise of the public buying of arms and munitions through fears for their own safety and the conduct of the US Presidential Election.  Xi Jinping, Putin, Erdogan et al. are salivating as they watch the main symbol of democracy and prosperity in disarray and broadcasted around the world.  

The common thread across the top 25 countries in GDP per Capita is that they all have market economies and 23 of the 25 (excluding UAE and Kuwait) have democratic forms of government.  It is also worth noting that looking across other countries, there are no strong and progressively developing economies that don’t have market economies.

The top 10 countries (Switzerland, Norway, Sweden, Denmark, Ireland, Netherlands, Singapore, Austria, Finland and Germany) based on the composite ranking outperform as a result of having a much more balanced society.  As well as a high GDP, they have less inequality and higher levels of upward mobility, a higher life expectancy, a more educated population, a more effective democracy, better gender equality, lower homicide rates and are more environmentally friendly.  I would argue that these countries have been able to create an overall better balance between the role of the market economy and the state, and how they together contribute to the well being of their citizens.  

These top 10 countries also outperform across all measures (except CO2 emissions) vs. groups of upper middle income, lower middle income, and low income countries.  It should be no shock that these dimensions are all intertwined to create more prosperous and sustainable societies.

Definitions
Developed countries – Top 10 overall ranking – Switzerland, Norway, Sweden, Denmark, Ireland, Netherlands, Singapore, Austria, Finland, Denmark
Upper Middle Income – Selection of 5 countries – China, Turkey, Brazil, Botswana, Colombia
Lower Middle Income  – Selection of 5 countries – India, Indonesia, Nigeria, Egypt, Ghana
Low Income – Kenya, Bangladesh, Tajikistan, Rwanda, Ethiopia
Note: The data is based on simple averages across the countries

If you look at government spend as a percent of GDP across the country groupings in Figure 2-2, small government involvement in the economy is not a characteristic of advanced economies. More advanced economies do have higher rates of taxation and larger investments in the delivery of public services than less developed countries. Looking across the most advanced economies, there is no apparent clear model of the optimal involvement of a government.  Most of us intuitively believe that a well functioning market economy should create more opportunities, innovate faster, grow more quickly and therefore have more potential to create a better society across a range of dimensions. Perhaps less intuitive, is that strong delivery of public services and the creation of a well balanced society also appears to be an important contributor to economic performance.

So, what is the role of the government to help create a well functioning society.  Lee Kwan Yew, Prime Minister of Singapore from 1959 to 1990, stated, “the ultimate test of the value of a political system is whether that society establish conditions that improve the standard of living for the majority of its people.”  He always stated that the proof is in the pudding; rising incomes for the broad middle class, health, security and economic opportunity.  Today, I would argue that there should also be a concept of ‘no one left behind’ and an opportunity for all; which would be encapsulated by ensuring that there aren’t rising levels of inequality and there are increasing levels of mobility within a society.  In addition, most people would also add responsibility to ensure that society operates in a climate and environmentally sustainable way.  

Arguably the primary fuel behind the growth of the standards of living has been the development of market economies and the driving force of capitalism.  The personal rewards of taking risks and succeeding and of hard work has accelerated progress and built strong economic foundations to many economies. 

Yet, capitalism without frameworks has never worked sustainably.  Unstructured accumulation of wealth and power leads to self destruction of a free market economy, exploitation of the masses, environmental damage, and inevitably social instability.  Since the 19th century, combinations of legislation, regulations, other frameworks and tax policy have been required to manage against the creation of monopolistic powers and the retention of competitive market sectors. Legislation has been required to deal with slave and child labour and to institute the concept of minimum wages.  Rules and requlations have had to be put in place to deal with city air pollution, water pollution, land waste, environmental destruction, the erosion of the ozone layer.  Extensive regulations have also had to be put in place to control financial markets.  Finally, consumer protection has required regulations and legislation for food and drug safety, minimum product warranties, mis-selling and misuse of personal information.  

So, let’s not kid ourselves that unbridled capitalism is in a societies interest.  The real question is – what is the right combination of the freedoms of a market economy and the participation of the government.   A lighter touch is always ideally preferred; however,  in most countries we are still a long way from having the right balance.  To move in the right direction and prioritise actions it is vital that there is clarity on what the social contract is within a society.  Societies are complex systems and there are no simple solutions.  Any individual initiative by either the market economy, the government or the public will inevitably have trade-offs and shortcomings.  The UN Sustainable Development Goals illustrate this complexity in living colour with 17 areas of focus and 169 subsidiary goals!  

Looking at the most successful societies gives us insights into what they have done and where they have been successful in creating their broad based societal success.  R. James Breiding’s book “Too Small To Fail” which focused on the innovative approach of smaller successful countries provides a number of good examples.  Examples include Finland’s transformation of their education system, Singapore’s low cost-high quality inclusive healthcare system, Denmark’s leadership in renewable energy, Israel’s building of a Silicon Valley style ecosystem, and the Nordic story on leading in gender balance. These are best practice examples that give guidance on better ways to move forward.  The challenge is to move towards these best practices globally and then well beyond.  

The three challenges are steeped in the historic practices of our take-make-waste culture, the singular focus on the maximisation of short term profitability and minimally regulated use of technology and data at the expense of the citizen.  Each country sits in a different place on the continuum of progress to solving these issues locally. But we should not forget that all three challenges need to be solved also at the global level.  Isolated examples of progress against climate will not solve this existential crisis! The context for progress is also now different.  There is urgency. There is a recognised need for a unified approach to tackling these issues. There must be an accelerated development and adoption of critical technologies.  And, there is a need, and a demand from the public, for a fundamentally more purpose driven, values driven and sustainability focused approach to how we live and how our societies operate. 

In the next blog, I want to talk about a framework for solving these issues and the social contract. 

#climate change #global warming #decarbonisation #biodiversity #species extinction #regeneration #rewilding #carbon sequestration #inequality #inclusivity #fairness #privacy #digital trust #cyber #mass manipulation #truth #social contract #Too Small To Fail @James Breiding #Sustainable Development Goals #SDGs #Paris Climate Agreement #WHO #take make waste

Categories
REBOOT World View

The Three Challenges

We have a choice!  Kneel before and be conquered or rise 
above and turn the challenges into opportunities.

In this third series of blogs, I will be exploring the three big global challenges that we need to address and the role and needs of the individual, the market economy and the state to solve them to move towards a resilient and sustainable world.  

As a backdrop to this, and with the most serious threat of climate change to achieve resilience and sustainability, we should see ourselves not as inheritors of the earth from previous generations rather as borrowers from future generations. Our burning platform is the threat to the lives of our children, our grandchildren and future generations. 

Overall you can look at where we are from two perspectives.  If you were a pessimist, you would say that even excluding what is happen to our climate and CO2 emissions our situation is disastrous. We have about 1 billion people in extreme poverty, of which most are in sub-Saharan Africa, and income and wealth inequality is growing not shrinking.  We have an exploding population that started at under 1bn people in 1800 that has reached 7.8bn today and could be as high as 11 bn by 2100.  The child mortality rate for children up to 5 years old is as high as 12% in some countries.  The life expectancy rate in Africa is about 63 years old which is dramatically below the top countries where the expectancy is over 80 years old.  About 13% of our population are illiterate, over 250 million children are out of school and learning outcomes are much lower in countries with low levels of GDP per capita.  The level of pollution and waste is continuously growing. We have been over exploiting our resources – energy and minerals.  We continue to destroy key forests especially in the Amazon for beef and soy, and in Indonesia for palm oil.  People are working too hard.  We have too many wars and too much terrorism. There is a large gender gap and real issues of racism.   And the list goes on.  

The optimist would say, yes but.  Yes, there are lot of challenges in the world; but, on almost every dimension we have made significant progress and therefore we should be confident that we can solve the issues that lie in front of us.  Despite population being 8 times larger now vs. in 1800, world GDP has grown by about 100 times.  In that same period, life expectancy has increased from about 30 years to over 80 years in many countries.  The share of population in extreme poverty has dropped from about 90% in 1820 to 44% in 1980 and is now below 10%.  The average work week was over 60 hours in the late 1800s and is now below 40 hours.  In terms of education, in 1800 about 87% of the global population were illiterate, in 1980 it was 30% and now it is only 13% of the population. School enrolment and attendance is improving every year, as well as mean years of schooling and learning outcomes. Our death rates from pollution, disease and homicides are all dropping.  Our farming yields in grain production have allowed us to cover all the needs of a growing higher income population without needing additional land since the 1960s.  We have been successfully covering off our increased consumption of fish since the 1990’s with fish farming. Our shift in use of energy use from wood to coal, to oil, to natural gas, to nuclear and now to clean energy sources has helped reduce our pollution rates per kilowatt hour.  Just since 2010, solar energy generation has increased twentyfold with wind energy generation tripling.  With technology and asset sharing we are dematerialising our spend.  Our levels of gender bias are reducing. Almost everywhere people’s lives overall are improving.  The optimist would summarise this by saying on virtually every part of our life there is a clear long term learning curve of progress and there is no reason for this to not continue. 

Although the positions look diametrically opposite giving us a perspective of two different worlds, both sets of facts are true.  It is all about which lens you look through at the world.  We have made significant progress however there is still a lot of work to do to make the world a better place.  Solving these issues is not just a matter of economics and technology.  Its complexity is like creating a beautiful symphony, it requires getting a lot of different musicians to play their instruments in an orchestrated way.  The musicians in this symphony, or actors in this play, are us as individuals, the market economy, the state and the third sector.  We should remember as individuals we are consumers, we are participants in the different sectors and if activated we are voters that drive our political systems explicitly or implicitly.  

No matter which lens’ you look at our situation, there are three big challenges in a peaceful world that need to be significantly progressed to continue our slow climb towards a better place – Shangri-la. If we don’t address them with the right urgency we could be on the slippery slope to an inferno.  We are at an inflection point!

I think of myself as an activated optimist. We can solve the problems in front of us if we have the will and commitment, because we do have the wherewithal.  To a large extent we already have all the knowledge and capabilities we need; and, for the areas we don’t the technologies and solutions are in sight.  Sitting back and naively expecting these challenges to be solved and with the right urgency is irresponsible.  Taking the view that these challenges are all someone else’s problem and they will solve it, is misconceived.  Everyone can contribute at a minimum by being more thoughtful in their consumption of food and energy, generation of waste and participation in recycling programs, and involvement in their community and society.  

So, what are the challenges.  Firstly, and with urgency, global warming and collapsing biodiversity.  These are two highly interconnected issues and effectively part of the same family of challenges.  Global warming is well documented and confirmed to be largely human driven by virtually all scientists.  It can be measured in terms of CO2 parts per million (including equivalents for GHG gases such as methane) and the short term impact can be felt in terms of average increase in temperature vs. the industrial average temperatures and the level of weather extremes.  We are now sitting at CO2 levels of about 415 ppm (part per million), with the world having fluctuated between 150 ppm and 300 ppm for over a million years.  Also, up to early 20th century we have been in a unique 12,000 year period of climate stability – seasons, weather and temperature predictability – that has provided optimal conditions for the human race to spread around the world and develop.  Slowing down climate warming also helps to significantly reduce the release of C02 and other GHGs from what will occur from melting ice, melting permafrost and warming oceans.  The land, oceans, and ice are large carbon and methane sinks that hold multiples more of these gases than currently exist in our air.  

Biodiversity comprises the genetic, species and ecosystem diversity that has developed and helped created this stable environment.  It is also what has created the environment for effective carbon sequestration in the land and sea.  We are now running at an unprecedented loss rate of flora and fauna which is affecting our food supply, carbon sequestration and environmental stability.  The current rate of diversity loss is estimated to be 100 to 1000 times the naturally occurring extinction rate.  David Attenborough effectively describes this in his latest book and documentary, “A Life on Our Planet”.  The solutions include shifting to regenerative farming, regenerating fishing stocks in the seas, and rewilding land and seas. 

The second challenge is inequality.  Inequality manifests itself at one level in terms of the extremes in distribution of income and wealth, and the shortfall in the basic necessities of life – food, shelter, clothing, health and education.  However, it also is reflected in freedoms, our access to opportunities, and our rights to safety, security and equal justice.  Unfortunately, the absolute levels of inequality are significant both within and across most countries and continue to persist.  It is no wonder that there appears to be rising social unrest across many countries, LGBTQ+ and BLM movements and many other areas of social concern. Clearly, our market economies and governments have not been effectively addressing these issues.  A focus on these issues and adjustments to how governments and market economies operate can solve this situation. There is global consensus that this is a critical issue that must now be solved.  

The third challenge is digital trust and mass manipulation.  At its base level, this is about privacy and the need for enlightenment and truth in a society.  These components are key drivers of freedom, transparency and trust.  For a period now we have seen increasing levels of theft of private information, expansive monitoring and surveillance (accelerated during this pandemic), rising populism and increasing distrust of governments.  We just have to look at the US elections, and other recent elections, to see evidence of this.  

The digital world has provided us with some amazing levels of progress and benefits; but, unfortunately it can have a dark side.  This includes the program to monitor, manipulate and control the Uighurs in China and the building of their overall digital social credit system.  The Western world has a somewhat equivalent system that gathers all forms of data to make credit evaluations of individuals; good and bad behaviours are judged on risk, reliability and trustworthiness of individuals with respect to financial transactions.  The dark side also includes the targeted delivery of fake news to drive votes in democratic elections as is shown in the movie ‘The Great Hack’ describing the use of social media in the US 2016 election and the Brexit vote, among others.  A growing number of countries have tech ops groups to drive misinformation and manipulate election outcomes among other clandestine objectives. The targeting and selection of news/fake news comes from intimate analysis of people’s use of social media.  The ease with which you can micro target the delivery of real or fake information through social media to shift people’s thinking and behaviour is growing.  The fragmentation of truth, the growth of conspiracy theories, a missing common base of facts and increasing levels of misinformation for a population will cause growing problems.  Democracy has been an essential component of social progress across the world and needs to be protected.  The value of democracy has not been helped by the shambolic display of US 2020 presidential election; thankfully, it appears that is has held up this time.   As well as an economic recession we now appear to be in a democratic recession with rising populism and the growth in power of China; 

Extensive problems are caused by  the social media companies (Facebook, Twitter, Instagram, etc.) which are driven by their advertising business models which are fed by building addictive dopamine generating behaviour for billions of users.  Their success is based on gathering every conceivable piece of information about you and combining it with AI to serve you content and create the desired outcomes/behaviour shifts that provides a return to their clients for the money they spend on the social media site.  You are the product and the information they have on you includes – every piece of content you generate, every piece of content you look at and for how long, the web of friends and people you interact with, likes, follows, comments, reactions to content you look at and is served up to you, every website you visit, all the times you are on each site, GPS coordinates, etc., etc., etc.  At the same time, there is very little control and no direct responsibility for the content they serve you, which may also be content from foreign trolls and bots, conspiracy and extremist groups, and false advertising.  The implications on the individual of social media addiction, misinformation, distortion of the real world, breach of personal privacy and freedom is significant and the accumulation of this across whole societies is extremely concerning.  

These challenges can be translated into the need to focus on three things.  Firstly, decarbonisation and biodiversity regeneration.  Secondly, inclusivity and fairness. Finally, digital privacy and collective truth.  The first two challenges are well covered off by the UN Sustainable Development Goals (SDGs).  The third challenge is recognised and looked upon with increasing concern around the world and is highlighted by the World Economic Forum as one of the key risk factors we are facing.

There are three critical issues to solve in addressing these challenges.  Firstly, ensuring there is clarity on the potential solutions for each of the challenges.  This concerns having clear solutions that will drive us to address the challenges within the required timeframes.  Inevitably, this will be a combination of existing solutions that are already in place but not pervasive enough; existing technologies that are proven but only in early stages of rollout and need to cycle through further generations of development to increase their effectiveness and drive down their cost position; and, emerging technologies and applications that are in sight to be available within the next 10 years or so. 

Secondly, to be clear on roles of the individual, the market economy, the state, and the 3rd sector to drive the implementation of solutions.  This is very much about finding the right approach that does not disrupt the ongoing innovation and development that has progressed us to where we are today.  Probably, the most critical issue is to find the right balance between the role of the state and the reliance on the market economy and capitalism.  Within the state there are the supra-national activities and then the roles of the government at the state, regional and local levels.  Within the market economy, investors, asset managers, and corporate boards and executives all have vital roles. And, there is also an important role of the individual as a member of the public, a consumer, a worker/contributor, and a voter who has a stake in the outcomes.  Finally, there is also the 3rd sector which includes charities, voluntary and community organisations, social enterprises and cooperatives, advocacy groups, think tanks, private research institutes and large philanthropic organisations.  We are seeing a growing role of philanthropic groups, such as the Gates Foundation, that are focused on large global problems including health, education, poverty and now climate change. 

Thirdly, implementing the incentives and checks and balances to ensure progress is being made to time.  The most critical challenge in this regard is to maintain a focus on the actions and time frames agreed in the 2015 Paris Climate Agreement which is to try to keep climate warming below 2 degrees centigrade and targeting 1.5 degrees.  We are already well behind the goal as we are currently trending towards a 3+ degree Celsius outcome, so there is a lot of work to get back on track.  These incentives, checks and balances need to be keeping the pressure on each set of participants to meet their responsibilities, solve how to make adjustments, and have back-ups to shortfalls. 

I think we have a pretty good idea of what we could do for ‘Decarbonisation and Biodiversity Regeneration’ and ‘Inclusivity and Fairness’.  The challenges have been understood, potential solutions have been identified and quantified, and the goals have been set within the 17 UN SDG’s and the Paris Climate Agreement.  What is missing is a well thought through program accompanied by the commitment, mobilisation, resourcing, incentivisation and monitoring that is required to ensure we meet the goals within the timeframes identified. 

‘Digital Privacy and Collective Truth’ perhaps sits as a different type of problem given that is likely viewed more at a national level and within the purview of each country’s political system; yet, it sits within the global scope of the internet and the global footprint of the large social media companies.  Privacy and the need for facts and truth are a human right, they are also vital for the effective long term development of a society; however, cyber and all its manifestations are also seen as a new form of, cross border and internal, warfare and mass manipulation.

I will be exploring in more depth, these three challenges – decarbonisation and biodiversity regeneration, inclusivity and fairness, digital privacy and collective truth – along with the roles of the individual, the market economy and the state in subsequent blogs. 

#climate change #global warming #decarbonisation #biodiversity #species extinction #regeneration #rewilding #carbon sequestration #regeneration #rewilding #inequality #inclusivity #fairness #privacy #digital trust #cyber #mass manipulation #truth @David Attenborough @Gates Foundation @Bill Gates

Categories
REBOOT Strategy

REBOOT Business Strategy

“You cannot avoid the responsibility of tomorrow
by evading it today”, Abraham Lincoln

Blog 15 of the Business Strategy Series

This is the final blog on the strategic framework and of the Business Strategy Series.  I will be continuing to write on related subjects.  I am also working on another series that will look at the roles and linkages of the market economy and the state – another critical subject as we work through these turbulent and challenging times.  A coordinated response between the market economy and governments is mission critical for solving our climate crisis and we can see how vital it is for other disruptions such as the pandemic we have now lived with for 6 months.  

The components in the strategic framework (Figure 15-1) that have been introduced are focused on helping business executives and their boards create a long term sustainable business that has a true purpose in society by delivering both economic returns to investors and impact to other stakeholders.  

Figure 15-1

To date we have discussed purpose and the delivery model.  In this blog, I want to talk a bit more about impact, strategic timeframes, sustainability and resilience.  I will then complete the discussion with a short piece on portfolio strategy.  

Starting with environmental/climate impact.   Through the ESG reporting requirements (Environmental, Social, Governance), companies are being asked to look at the environmental at both level 1 impact, which is the company’s direct impact, and level 3 impact which considers the full supply chain impact including product use.  Clearly, at the environmental level the specifics of each sector, and its supply chain, will have different environmental dependencies and different opportunities to create impact.  Key sectors such as energy, food, packaging, retail, manufacturing and fashion which have high resource use, significant energy and water usage, and large supply chains will have high environmental impact unless they have already taken action (Figure 15-2). The urgency to create full circular strategies and lead the way is most vital for these high dependency companies; although, that should not stop all companies from moving forward as well.  

Figure 15-2

Taking the view at the societal level, that the climate problem can be solved by just focusing on the major companies that are contributing to climate change, reduced bio-diversity, high water use, etc. is definitely insufficient if you look at the science.   Part of the solution is for the public to be also looking at their consumption and making it more in tune with the needs for environmental sustainability. So the full and necessary challenge is to create a major shift in how we all live and how businesses, the government and NGOs operate. 

As I noted in Blog 14, for companies delaying this shift to a societally responsible strategy will only result in an increasingly challenging shift for each year of delay as the need to hit targets by certain dates will not shift.  Each company in each sector needs to set ambitious and timely targets to make its contribution to this.  It is management’s, and the Board’s, challenge to ensure that the strategy they set meets both its economic needs and its responsible level of impact.  

In addition to the sector, the geographic footprint of a business has implications for the impact focus and targets that it sets (Figure 15-3).  For example, companies that have large supply chain footprints in the developing world need to be thinking much harder about its specific social impact goals that it wants to achieve.  Truly exploring the UN Sustainable Development Goals will help define these.  Business as usual in many parts of the world will perpetuate the fundamental environmental, social and economic challenges that need to be overcome.

Figure 15-3

A helpful approach to thinking about how to incorporate impact programs and goals into the business is to look at the leading companies that are already a long way into this journey to be a responsible company.  

One of the companies leading the way is Unilever, who have been focusing on this now for over 10 years.  They now report on their progress against their goals each year (Figure 15-4). 

Source: Unilever Website,
Figure 15-4

From their website, you will see that they have created specific time based targets that roll up to overall ambitious goals, they have linked them to the Sustainable Development Goals, they are tracking their performance over time and they are publishing their performance publicly.

Other good examples covering different sectors are IKEA, Patagonia, Interface, Orsted, Tata and Microsoft.

As noted in Blog 12, strategic timeframes need to be extended vs. the typical 3 to 5 year timeframe (Figure 15-5).  A longer term time frame needs to be added to consider fundamental impacts such as climate, major changes in technology adoption and putting in place the right components for resilience.  3 to 5 year thinking and short term ROI horizons will not ensure adequate thinking on the sustainability of a strategy.  

Figure 15-5

Linked to this, it is critical that there is a proper review of the potential activities and events that change markets and/or generate new opportunities (See Figure 15-6 for examples).  These events will range from changing views on environmental responses required, SDG compliance, new regulations, a changing geo-political environment and of course the potential for massive impact from new and converging technologies.

Figure 15-6

More important than ever is to develop strategic scenarios that would be effective based on different views of what could happen in short, medium and longer term horizons (Figure 15-7).  The approach for doing this is to pressure test strategic options against different externalities and come up with some plausible scenarios to evaluate.  These scenarios need to be developed holistically and need to be comparable. The components of the scenarios should cover off customers, products/services and supply chains, investment, metrics, people, processes and technology. 

Figure 15-7

With a real analysis of alternative scenarios, the comparison should provide further clarity around the performance opportunities for the business as well as the risk parameters.  The true strategic options can be explored along the key dimensions of profitability/ROI, impact, implementation risk, meeting of key stakeholder needs, sustainability and resilience.  

This moves strategic thinking significantly on from a pure profit and shareholder only focus.  In the short run, realigning the business to survive this pandemic and be able to prosper in the post Covid world, having an organisation that is proactively progressing on gender and race issues, as highlighted by the ‘black lives matter’ and ‘me too’ movements, and making a real contribution to the global climate/environmental targets that need to be met are big topics in most board rooms, and with investors, employees and customers.  These challenges need much more than tactical reactions, they are strategic and structural challenges that will inevitably require some major changes to most businesses in terms of how they operate, who they do business with, where they invest, and what performance targets can be expected.  

The overall strategy and each of the components should fit coherently into the strategic framework (Figure 15-8). Continuous evaluation of the components of the strategy over time and looking for ways to continuously improve and refine the strategy is equally as vital as the initial setting of the strategy. As the rate of change in the world accelerates, dynamically adjusting/refining the strategy and improving execution is mission critical. Speed and agility are much more important than a singled minded short to medium term focus on efficiency.

Figure 15-8

The final subject, I want to touch on is the implications of this in a company with a portfolio of businesses. Investors and stakeholders will be looking at the overall economic and impact performance of the business. Non-performing business units within the portfolio will have an overall effect on the attractiveness of the business to investors, employees and other key stakeholders.

The proposed approach to evaluate a portfolio of businesses is a four step process (Figure 15-9). Firstly, evaluate the portfolio of businesses from an economic perspective. Secondly, overlay the environmental impact of the businesses on to the economic performance of each of the businesses. Thirdly, look at the full alignment of the set of businesses against sustainability impact which will include social and economic impact. Finally, look at the portfolio options from a resilience perspective. This review should be done considering the realistic potential scenarios of each of the businesses.

Figure 15-9

Now looking at each of these components in a little more depth. Starting with the stand-alone economic strategy, we have the traditional grid looking at business position vs market attractiveness (Figure 15-10). Both components of the strategy should be looked at from a short, medium and longterm perspective. Business position is the combination of profitability, market position, and ability to maintain performance over time as markets change and evolve. Market attractiveness is the combination of size, growth and the economic attractiveness of the market. The grid should be fairly self explanatory. If you have a strong market position in an attractive market then you ideally want to stay in the market and should be willing to invest and grow your position. Whereas, if you have a weak position in an unattractive you would rather manage the business for cash or divest from the market and reinvest the capital in more attractive businesses.

Figure 15-10

Moving on to the Environmental overlay (Figure 15-11), this takes the overall position from the economic strategy grid in Figure 15-10, Business Attractiveness, and matches it against the Environmental Attractiveness of the business. High environmental attractiveness has a low or positive environmental footprint within the timeframe of meeting the targets set by the Paris Climate Agreement and the environmental focused SDGs. For many businesses, the key target is the year the company will achieve a Net Zero carbon emissions equivalent level 3 footprint (ie. including the full supply chain of the business).

Overall, unattractive businesses, unless you have clear sight on how to transform them, should be harvested and/or sold. If an unattractive business is also very unattractive from an environmental perspective, such as a coal business, it is more likely that this should be divested as attracting investors and raising funds in your overall business will tend to be more challenging. In an equivalent way, if you have a small business with real potential in an environmentally attractive sector it may well be that you should be diverting your investment capacity into this business to build it. An interesting set of companies to watch on these dimensions will be BP, Shell and Exxon. Both BP and Shell have committed to reach a Net Zero CO2 emission target by 2050. It is not yet clear that they have strategies set out on how to achieve this; but, what is clear is that they will be redirecting their cash generation to the renewables sector where they have much smaller strategic positions. It has been a broad set of stakeholder pressures, including collapsing share prices, that have driven the adoption of these strategic commitments.

Figure 15-11

The third component of a portfolio review is the review of the alignment of impact overall with the business portfolio options (Figure 15-12). Although, climate impact tends to get the lion share of the attention from the press, economic and societal impact are vital components of the SDGs, and in many business and geography combinations, as you can see in Figure 15-3, they may be more important than climate impact. The food sector, including food retailers, are a great example of this with their broad geographically spread supply chains.

Figure 15-12

Finally, having evaluated the businesses, and their strategic options, in an overall and comparative context, the final step is to compare realistic combinations of businesses from a portfolio perspective. In particular, given the businesses have been evaluated against the three areas of impact, the portfolio options should be looked at from an economic return vs. a risk diversification perspective (Figure 15-13). The risk assessment is against the longterm sustainability and resilience of the portfolio scenarios. Adjusting a portfolio to reduce risk has real value, as we have seen in this pandemic. The potential benefits of a tight focus of businesses in terms of sector, geography, supply chain, efficiency and commonality of disruption risks may not be justified from a sustainability and resilience perspective. As I have noted before flexibility, adaptability, and diversification can provide real value to the business overall.

Figure 15-13

This brings to a conclusion, the series on Business Strategy. I hope you have found it thought provoking and useful; and hopefully, it will help you make a difference in your business and create a deeper impact in the world around you.

I will continue to write blogs to delve in deeper to sectors and subjects that will explore strategy and sustainability in a deeper context. As noted in the about section of my blog, REBOOT is not just about business, it is about the need for structural changes, or a new operating system, across all areas connected to our lives and our world.

Please continue to follow, share, engage in conversation, contribute and also reach out to me if you want to talk about this further. I can be reached through LinkedIn.

Categories
REBOOT Strategy

REBOOT Business Strategy

Blog 13 of the REBOOT Business Strategy Series

This is the first blog discussing a new strategic framework relevant for the world we now live in.  To date, I have covered off some background on how the world is getting increasingly complex from a societal, environmental, technological and disruption perspective; and the implication of this is a need to look at business strategies from a system based perspective so that business are aligned with economic, society and environmental goals.  Critically, linked to this are that the general consensus on these goals globally are best defined by the 2015 UN Sustainable Development Goals for 2030, which also link in with the 2015 Paris Climate Agreement.

The next section then went on to cover off 8 gaps in traditional strategic thinking that need to be covered off for a strategy in the 21st century.  These gaps were driven by deep interconnections of a business with their environment, which is not just their business sector.  These interconnections are vital to understand as there is continuous change and ongoing disruptions that are and will be affecting a business.  These factors include societal and economic factors as we can see now with the Covid 19 pandemic and ‘Black Lives Matter’ movement, the impact of new technologies, and most importantly the need to globally address the challenges of climate change and other key environmental issues. 

This new framework tries to create a shift in how we think about our business, away from just profitability for shareholders to goals that are also aligned other stakeholders including the public, consumers, suppliers, communities and governmental interests.  It is worth noting that investors are now requiring this shift given that the long term interests of businesses are for a sustainable world and they can see real business risks on the horizon from climate change.

The traditional stand alone thinking (Figure 13-1) can be summarised by, firstly, a virtually exclusive focus on the shareholder as Milton Friedman had summarised,”the social responsibility of business is to increase its profits”. Secondly, an industry and competitor analysis as defined by Michael Porter’s five forces analysis matched to an understanding of the business’ internal capabilities.  Thirdly, profit and market based key metrics.

Figure 13-1

A  new system based framework needs alignment from the business through to the economy, society and to the environment (Figure 13-2).

Figure 13-2

To create alignment a business needs meaningful purpose that aligns with the business on delivering against both its own economic goals as well as creating impact (Figure 13-3).  This is the challenge of strategy design, to cover the needs of both profitability and impact.  

Figure 13-3

Clearly, this can add complexity as the performance measures are now broader; however, it also creates opportunity and new ways of differentiating and competing.  For deeply entrenched players in the market who have adverse impact on the climate/environment, they are going to have to think about how they will use their resources and market position to evolve to a new sustainable strategic position and focus.  For the younger and nimbler companies, they will need to think about how to use their speed and flexibility to create a stronger positioning ahead of their key competitors.  If you are already there, then take advantage of your position.

A key part of this system-based framework is that it is relevant for all types of organisations whether in business, government or as an NGO.  Clearly, each type of organisation, as with each business, has to be clear on their economic model and what their impact targets are in order to get clear on what delivery model they need.  In the government and with NGO’s, they will have very different sources of funds; but, in any event they need to solve a sustainable financial model to survive rather than to make a profit.  A governments whole raison d’être should be impact; although, for many of us it may well be that their targets and metrics of achievement are unclear!  

Surrounding these triangles are three components that need to be full addressed within a strategy (Figure 13-4).  Firstly, having a clear view of the key stakeholders of the business.  Secondly, the business must be built to last – it must be sustainable.  This means the business must be able to continuously deliver value to it customers, it must deliver the right economic performance for investors, and it must provide the appropriate impact for other stakeholders. And, the business must be able to adjust, adapt and move forward in a way that this continues over time.

Thirdly, the business must be resilient and thus have the capability to withstand and manage through different scenarios of disruption from the 5 types of macro forces – societal, environmental, economic, technological, and geo-political – to the core challenges specific to the   

Strategic Framework
Figure 13-4

There are six tests of a business strategy:

  1. Is the business Purpose Driven?
  2. Can the business create real differentiated value for its target customers over time?
  3. Can the business perform at a level to attract and retain investors?
  4. Does the strategy integrate generating economic, social and environmental impact at ambitious levels for key stakeholders?
  5. Does the business strategy create sustainability and resilience?
  6. Does the strategy have ambitious and achievable triple bottom line metrics covering profit and impact targets?

At the heart of a business lies its purpose.  It is the driving force and acid test of all business decisions.  It is what attracts and retains employees, customers, other participants in the supply chain and investors.  Sitting above the strategy are three components Vision, Mission and Values.  There are a lot of different views about how to define vision and mission, and sometimes they are combined; so to clarify, I have created definitions that fit with this strategic framework.

Figure 13-5

Within this strategic framework, the purpose defines how the world will be a better place as a result of the business.  The first component of the purpose is the Vision.  The Vision is the business’ view of the better world that the industry or sector will contribute to.  The Mission is the part of the vision that the company is targeting to fulfil.  I like to describe the Mission as the North Star that the company wants to be continuously moving towards.  Finally, the Values defines behaviourally how the Company‘s operates – what drives it, what motivates it, and how it will behave with its employees, customers, suppliers, communities, society and environment.  The combination of the vision and mission should be something that engages, and gains agreement from, all key stakeholders.

Here are some examples of the vision and mission, or a combined statement, for purpose driven companies.  

Orsted

Our vision is a world that runs entirely on green energy.

Mission: “We want to be a company that provides real, tangible solutions to one of the worlds most difficult and urgent problems.”

This is a Danish Company that started life as a state owned organisation focused on coal and oil.  Most recently it has been recognised as ….

Within this strategic framework, the purpose defines how the world will be a better place as a result of the business.  The first component of the purpose is the Vision.  The Vision is the business’ view of the better world that the industry or sector will contribute to.  The Mission is the part of the vision that the company is targeting to fulfil.  I like to describe the Mission as the North Star that the company wants to be continuously moving towards.  Finally, the Values defines behaviourally how the Company‘s operates – what drives it, what motivates it, and how it will behave with its employees, customers, suppliers, communities, society and environment.  The combination of the vision and mission should be something that engages, and gains agreement from, all key stakeholders.

Here are some examples of the vision and mission, or a combined statement, for purpose driven companies.  

Orsted

Vision: “Let’s create a world that runs entirely on green energy.“

This is a Danish Company that started life as a state owned organisation focused on coal and oil.  Their current primary focus is on offshore and on shore wind farms. Most recently it has been recognised as the most sustainable company in the world in the Corporate Knights 2020 Global 100 Index.

Novo Nordisk

“Our purpose is to drive change to defeat diabetes and other serious chronic diseases such as obesity and rare blood and endocrine disorders. We do so by pioneering scientific breakthroughs, expanding access to our medicines and working to prevent and ultimately cure disease.“

How many other pharmaceutical companies have a missions to ultimately cure diseases where it derives all its revenues from?

Unilever

Vision – “to make sustainable living commonplace.”

Mission – “To add vitality to life. We meet everyday needs for nutrition, hygiene and personal care with brands that help people feel good, look good and get more out of life.” 

Tesla

Mission: “To accelerate the world’s transition to sustainable energy“

We all know Tesla for it’s pure electric vehicles; however, it now has a full suite of energy products that incorporate solar, storage and grid services.

Ikea

Vision: “To create a better everday life for the many people”

“Our business idea supports this vision by offering a wide range of well-designed, functional home furnishings products at prices so low that as many people as possible will be able to afford them.”

Microsoft

Mission: “To empower every person and every organization on the planet to achieve more”

“Our platforms and tools make small businesses more productive, multi-nationals more competitive, nonprofits more effective and governments more efficient. They improve healthcare and education outcomes, amplify human ingenuity, and allow people everywhere to reach higher.”

Patagonia, an outdoor clothing company, has had a sustainable mission since the beginning and has self imposed an earth tax of 1% of revenues for support activities to save the planet.  It has a very broad mission, “we’re in business to save our home planet”

It has defined it values in a different way to most companies that state the obvious ones of honesty, integrity, etc.  Their values are more action oriented, very honest,  and I think much more engaging:

“Build the best product – Our criteria for the best product rests on function, repairability, and, foremost, durability. Among the most direct ways we can limit ecological impacts is with goods that last for generations or can be recycled so the materials in them remain in use. Making the best product matters for saving the planet.

“Cause no unnecessary harm – We know that our business activity—from lighting stores to dyeing shirts—is part of the problem. We work steadily to change our business practices and share what we’ve learned. But we recognize that this is not enough. We seek not only to do less harm, but more good.

Use business to protect nature – The challenges we face as a society require leadership. Once we identify a problem, we act. We embrace risk and act to protect and restore the stability, integrity and beauty of the web of life.

Not bound by convention – Our success—and much of the fun—lies in developing new ways to do things.”

With a broader awakening of Boards and executive teams, as well as investor pressure, we should expect an increasingly rapid shift to much more purpose driven vision, mission and values? The companies not moving in this direction will inevitably be left behind.

The overall strategic framework tries to achieve 3 core objectives. Firstly, to ensure the business is systemically integrated into its economic, social and environmental situation context. Secondly, provide absolute clarity that the business is also focused on impact as well as profit to meet the needs of all key stakeholders. Finally, to have a true longer term perspective that considers both resilience and sustainability.

In the next two blogs, I will fill out the other components of the framework.

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REBOOT Strategy

REBOOT Business Strategy

“Without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the licence to operate from key stakeholders.” Larry Fink, CEO, Blackrock

We have now covered the first six of the eight topics for strategic focus.  As a reminder, the eight topics are:

  1. From shareholders to stakeholders
  2. From Michael Porter’s five forces to macro models
  3. From risk monitoring to business resilience
  4. From product-market fit to customer–product fit
  5. From simple to multi-factor business models
  6. From product to company based technology, innovation and design
  7. From profit focus to triple bottom line
  8. From medium term strategies to long term scenario based strategies

The seventh topic, from profit focus to triple bottom line, is a major shift for most companies from being shareholder focused to stakeholder focused.  This shift in the purpose of the business requires new thinking, different leadership and major adjustments to incentive systems to create alignment.  Simply put, a company must now extend their objectives beyond measurements almost exclusively focused on shareholders to also add measurements on environmental, social and economic impact.  

Let’s start by looking at the pressures to move beyond a pure profit focus. These pressures are from nations, central banks, investors, consumers and the public as illustrated by Figure 11-1.

Figure 11-1

In 2015, the UN reached agreement, with all United Nations Member States, on 17 Sustainable Development Goals and 169 targets focused on economic, social and environmental goals for 2030.  193 countries are signed up to this agreement.  

Also in 2015, the Paris Climate agreement was signed.  The Paris Agreement sets out a global framework to avoid dangerous climate change by limiting global warming to well below 2°C and pursuing efforts to limit it to 1.5°C. It also aims to strengthen countries’ ability to deal with the impacts of climate change and support them in their efforts. There are now 197 countries signed up to this agreement.  Shockingly, the US under Donald Trump said that it was going to withdraw from the agreement and the effective date is 4 November 2020, 1 day after the next presidential election.  You can imagine who the rest of the world is voting for!  

As of June 2020, twenty countries and regions have agreed net-zero targets by 2050 –  Austria, Bhutan, Costa Rica, Denmark, the European Union, Fiji, Finland, France, Hungary, Iceland, Japan, the Marshall Islands, New Zealand, Norway, Portugal, Singapore, Slovenia, Sweden, Switzerland and the United Kingdom.  Denmark is leading the way and has legislated a target of reaching a carbon emissions target 70% below its 1990 levels by 2030.

About 50 central banks have now joined the NGFS, the central banks’ network focused on climate change risk management. .  Mark Carney, former Governor of the Bank of England, has been one of the global leaders in pushing forward this climate agenda. The Bank of England will be the first central bank to test how well the financial system can withstand risks posed by climate change.  Under this test the largest lenders, insurers and asset managers will have to stress test their portfolios against different climate scenarios.  In turn, they will need to engage the companies behind these loans, insurance policies and investments to provide information for this reporting. The Federal Reserve has declined to participate; but, it is realising that this position will not be tenable for much longer (FT.com 120120, Gavyn Davies).

Investors representing about $130tn in investments are now starting to require ESG (Environmental, Social, Governance) reporting.  Some of these portfolio managers have also set climate targets for their portfolios as part of their criteria for investment.  Two of these funds are the Norwegian and Japanese Soveriegn Wealth Funds, each of which have fund valuations well in excess of $1 trillion.

There is also a group of over 450 investors, Climate 100+, who represent $40tn in investment that are initially focused on 161 global companies that cover up to 80% of global industrial emissions with 3 goals.  Firstly, to improve corporate climate governance, secondly to curb emissions in line with the Paris Agreement and finally to strengthen climate related disclosure.  

Shifts in investment focus and willingness to lend money to certain sectors is already underway.  One of the first sectors to be hit hard has been the coal industry.  Investors are looking more intensively at the ESG focus of companies and adjusting their decision making on investments. Banks are under increasing pressure to do responsible lending and are also starting to restrict their focus towards companies that are impact focused; although, there is still a long way to go.  

The fourth group of stakeholders are customers who are increasingly voting with their wallets on social and environmentally responsible companies.  This involves shifting their purchasing from companies who breach fair trade principles, are not diversity inclusive, support Amazon deforestation, are high CO2 emitters, and are plastic and types of polluters.

Finally, there is the public that are showing that they want things to change whether it is climate protests all over the world linked to Greta Thunberg, who has twice been nominated for the Nobel Peace Prize, or the response to the recent ‘black lives matter’ protests.  Both of these are driving significant rethinking in Board rooms regarding environment and social responsibility. 

The memorable way to capture this approach is to use the phrase John Elkington coined over 25 years ago, the ‘triple bottom line’ (TBL) or as it is also named ‘people, planet, profit’.  The idea is that as well as profitability of the company there needs to be impact measurements linked to sustainability.  

The use of this phrase has gone in different directions, so I will define it specifically as to how I am thinking about it.  Given the need to integrate with the UN SDGs (Sustainable Development Goals), which is the best current consensus on the set of components required for long term sustainability of the planet, there are three areas of external impact that need attention – economic, social and environmental impact.  Clearly, also for the company to be sustainable it must focus on its profitability and growth in order to attract and retain capital. In this context then the company has two factors in the economic component (Figure 11-2).  Firstly, its own economic performance; and secondly, its external economic impact at the local, national and international levels.  

Figure 11-2

Companies now need to both align their Triple Bottom Line strategies with their key stakeholders as well as building the reporting and measurement requirements for internal use, for ESG reporting and for the needs of investor rating agencies.

These are the impact definitions that need to be considered to establish the impact measurements the company chooses to focus on.  

  • Economic: the positive and negative impact an organization has on the local, national and international economy. This includes creating employment, generating innovation, paying taxes, wealth creation and any other economic impact an organization has.
  • Social: the positive and negative impact an organization has on its most important stakeholders. These include employees, families, customers, suppliers, communities, and any other person influencing or being affected by the organization. 
  • Environmental: the positive and negative impact an organization has on its natural environment. This includes reducing its carbon footprint, usage of natural resources, toxic materials and so on, but also the active removal of waste, reforestation and restoration of natural harm done.

There is confusion on how a company should define its own situation specific impact factors.  Clearly, this is going to be affected by sector and geography as well as the specific strategy of the company, and how impact ties into the value proposition to its customers and other key stakeholders.  The concern is that companies must focus on ambitious impact targets aligned to ambitious profitability targets.  With the fuse on climate change and other critical environmental issues burning, just reporting on ESG without a deep understanding, thinking and commitment to a strategy with impact will fall far short of what is required and ultimately expected by key stakeholders.   

Setting impact factors can start with understanding the current impact of a company; however, it does not stop with just setting tighter targets within the existing strategy that require moderate changes to achieve.  From an environmental perspective, if you are depleting resources, are an energy producer, have high energy consumption, are a manufacturer or you have high volumes of waste (eg. packaging) then a major rethink of your strategy is probably needed to ambitiously reduce your environmental footprint and reposition yourself.  The broad goal would be to shift from a linear strategy of ‘take-make-waste’ towards a wasteless or circular strategy.   One of the leaders in this space who are helping drive this shift is the Ellen MacArthur Foundation (www.ellenmacarthurfoundation.org ).  

The core elements of a circular strategy, to create a circular economy, is to firstly design out waste and pollution.  Secondly, to keep products and materials in use and finally to regenerate natural systems.  From an economic and social impact view, the goal is very much about responsible management towards employees, customers, other players in the supply chain and related communities.  Considerations include anti-slavery, fair trade and work practices, providing living wages, the provision of health services, education/skills development, paying taxes (eg. not working through tax havens), and enhancing  and supporting the key communities that interact with the business.  Decisions on the impact focus, as well as profitability, also need to be tied into resilience considerations.   A strong and sustainable strategy will create alignment of the business with the economy, society and environment (Figure 11-3). 

Figure 11-3

In summary, businesses need to shift their thinking to focus on both profitability and impact.  Impact factors are defined by the UN SDGs. The specific impact targets that a business sets as its goals will be affected by the industry sector, the businesses geography and the particular strategy of the business.   Businesses need to revisit their strategies and in many cases make some fundamental changes in order to set ambitious impact targets along with their profitability ambitions.