Why you should invest 3.5% of your revenue in planet-positive business models

December, 2022

Why you should invest 3.5% of your revenue in planet-positive business models

In the transformation to a sustainable society, everyone has to take responsibility. Also companies, which is underlined by the Shell case, in which it became clear that 45% CO2 reduction in 2030 and 100% in 2050 are realistic guidelines to stick to as an organisation. And that’s just CO2 legislation; on nitrogen and other planetary boundaries the same could just happen: we now exceed 5 out of 9 boundaries. We believe that every organisation would like to get rid of its negative impact. The question is; how do we do that? We believe you need to focus on 2 tracks: 1) reduction and 2) developing planet-positive business models. Below we explain why you should invest 3.5% of revenue in planet-positive business models.

Can you get to 100% reduction?

If we focus purely on the ‘Paris Agreement’, 45% reduction of CO2 emissions by 2030 is a challenge, but not unachievable. By looking at the whole lifecycle of your services, you can make choices everywhere that lead to efficiency, cleaner raw materials, less waste, among other things. Only, as you can imagine, each choice comes with a different price tag. Each percent reduction becomes more difficult and requires more investment. If you extend that line to 2050, is 100 percent reduction achievable?

1. If we look at reducing the footprint from energy consumption, reducing your consumption often requires “something” (e.g., insulation, smart switches, energy storage, solar panels or heat exchangers). But all these interventions also have their own footprint – purely ‘Zero on the metre’ is not enough.
2. In terms of waste, it’s also a challenge; if you want to reuse, refurbish, repair or recycle 100% of your products (or anything needed to provide your services), then you also need to have control over 100% of your products. Certainly a difficult challenge for organisations that sell physical products.

In short, just reducing negative impact is not going to get you there. Even pioneers like Interface have experienced this in practice. You have to work on new business models – which are basically planet-positive.

The case for planet-positive business models

In many organisations, negative impact is ingrained in the business model. You quickly see this with product organisations; as a linear chain they currently have no influence on how their products are treated at the end of their lives, and negative impact is always caused there (such as CO2 emissions and pollution). This is why circular business models are quickly being looked at. Only, as Patagonia also shows, this is not a simple reorganisation of your own chain. Finding a sustainable – planet-positive – business model is at its core similar to what we know as “disruptive innovation: creating new successful business models that recognise the risks of original business models and manage to change the market. This is an uncertain process of trial and error, with only a small proportion of projects becoming successful. But the only path to long-term relevance. That similarity to disruptive innovation has the side effect that the Investment – Impact curve runs completely differently than that of reduction. It is known from insights from investors in innovation (Survival rate, Dave McClure, Dow Jones VentureSource) that if you double your investment, the probability of success more than doubles. So every extra dollar you put into new business models pays off more than the previous dollar.

3.5% of your revenue

Whereas reduction is characterised by a quick start, investing in planet-positive business models is a long-term approach. To avoid investing all your resources on the “reduction” track, it is important to determine how much you need to invest in planet-positive business models to transform yourself in time. For an average company, this is 3.5%. By investing 3.5% of your revenue you will develop planet positive business in 10 years. Where there are some caveats to this percentage:

1. We make the assumption that finding a planet-positive business model is as uncertain as “ordinary innovation”
2. Non-financial value is not included in this model (ecological & social)
3. By doing valuation at below average, above average and average (a percentile of 25, 50 and 75) from the benchmark, the more extreme industries are not included in the calculation (benchmark for margins & for valuation)
4. When calculating back from portfolio size to investment we assume a certain innovation maturity
5. This is a long-term investment strategy: the budget must be structurally invested over the next 10 years. A ring-fenced budget and resource allocation that cannot be cut – even if cuts have to be made.
6. This percentage is independent of existing R&D; it is really about investing in new business models.

So: 2 tracks and start investing now

To remain relevant in 2050 and be part of a sustainable economy, in addition to addressing reduction, you also need to start developing an alternative, planet-positive business model now. Because you never know if you’re going to need 10 or 100 projects to find one. That requires a sustainability strategy that connects disruption and sustainability. And, above all, a belief and determination that corporate responsibility starts now. Paul Polman also knows how to put it well: “Much of the focus of today is to become ‘less bad.’ But that’s not good enough anymore. Some CEOs go further, they want to be net-zero or sustainable. The only viable business models however, are the ones that are restorative, or ‘net positive.'”

Want to know how much your organisation should invest in planet-positive business models? Send pieter.vanderboog@elementalstrategy.com or ferry.vanhalem@elementalstrategy.com a message and we’ll make the calculation with you.