The world is changing, consumer demand is shifting, and sustainable alternatives are moving fast from exception to expectation. Just like with the evolution of technology over the last century, embracing the shift will be non-negotiable for companies who wish to stay relevant. But what does sustainability mean for businesses? Without a clear framework for sustainable transformation, companies risk losing out in the long run. Investing in sustainability now allows companies to maximize the current market opportunities whilst also protecting long-term profitability and viability.
Environmental sustainability in business
Becoming the expectation and no longer the exception
simon-kucher.com
Environmental sustainability continues to develop into an integral part of our business. With pressures throughout the value chain and an increase in consumer demand, companies need to transform now to unlock growth and do good for the planet. As the world is changing so is what people value
We focus on three key areas
The initiatives a company can undertake Why sustainability needs to be on a company’s strategic agenda How to commercialize these initiatives and make a positive impact for both the environment and the bottom-line
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Environmental sustainability in business
What do we mean by “sustainability”?
Simon-Kucher’s Global Sustainability Study: An overview Our annual global study spans all industries that impact a consumer’s daily life from transportation to energy/utilities, from travel and tourism to retail, from financial services to home construction. The study includes insights about the role sustainability plays across a variety of consumer behaviors and highlights differences by region and country. In 2022 we surveyed 11,711 consumers of all ages, genders, education level, and income on their: • Attitudes towards environmental sustainability in general • The importance of sustainability when making purchasing decisions • Whether or not they are willing to pay more and if so, by how much • Barriers that prevent them from purchasing sustainable goods and services The results we have gathered demonstrate that sustainability should not be viewed as a trend, but as an established and evolving approach to thinking, consuming, and living.
We speak to environmental sustainability – raw material sourcing, production and manufacturing processes, and distribution and disposal practices that save natural resources, reduce emissions, and reduce waste. In short, anything that can help save the natural environment across the entire value chain in which a company may participate. One of the typical information gaps that we come across in understanding how businesses can act on sustainability is in-depth consumer insights. Our annual Global Sustainability Study is a powerful data source to overcome this gap.
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Put sustainability on the agenda Make it tangible Drive positive impact and growth How we can help
The survey was conducted between July and August 2022 by Simon-Kucher & Partners in collaboration with Dynata, an independent market research agency.
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Environmental sustainability in business
Every big movement relies on powerful drivers to mobilize business change. Sustainability is no different. There are push and pull factors, external and internal, big and small that are motivating this transformation. Alongside the moral imperative of social responsibility, businesses are facing pressure from many different sources. Regulators are changing the rules and policies around the world. Suppliers, third party vendors, and customers along the value chain are updating their requirements and compliance rules. And finally, one of the loudest voices are the growing number of consumers affirming that a proactive environmental sustainability stance is non-negotiable. Drivers of change The global business ecosystem will require motivation from all angles to drive towards sustainability. When asked, consumers see key roles for themselves, for-profit companies, and international actors to drive change. All will play their part in advancing sustainability and helping companies find the methods, models, and commercial strategies to build a long-term sustainability positioning.
Put sustainability on the agenda
Consumers see themselves as the number one actor towards bringing positive environmental change
24%
Consumers
For profit companies
23%
National political actors Non-profit organizations International political actors
21%
18%
12%
Other
2%
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Environmental sustainability in business
The sustainable business model is evolving
And while these are already fairly compelling numbers, we also know that we are still at that inflection point. This topic is exponentially growing in importance, and soon sustainable product offerings will become the expectation rather than the exception.
Regulation and cost factors The most pressing push factor is the growing regulation in this space. We have classified this as a push factor as there could be tangible negative effects on business operations if it is not taken into account. More and more governments, international NGOs, and international regulatory bodies are requiring companies to provide clarity on their environmental impact and sustainability efforts. While these regulations are currently more focused on transparency, they provide the foundation for both informed decision- making by consumers and accountability via future regulations. This accelerates the second push factor – the need to act fast. Delays in developing more sustainable business practices come at a considerable cost. Carbon permits and green bonds (two of the regulatory tools that have been developed to keep companies accountable) have only become more expensive as they become more established. Companies will have to take these factors into consideration as they increasingly affect their bottom line.
Growing consumer expectations On the other side, the main pull factor is the growing expectations from consumers to have product options that are environmentally sustainable. Our annual Global Sustainability Study found that 75% of consumers said environmental sustainability was important to them when considering purchases. Two-thirds of respondents said it was a top value driver in their decision-making process, and a third of consumers would be willing to pay more for a sustainable alternative.
Stepping forward You may be at the start of your sustainability journey, or you may be ready to level-up. One thing is certain: You must be ready to embrace change. How you do this will be unique to your business but understanding what your consumers expect from you is the best place to start. Knowing how habits are changing will be the key driver for establishing new goals, processes, and logistics. You may need to adjust the way you do business. But you’ll minimize risk and win customer loyalty along the way.
75 % Of consumers said
environmental sustainability was important to them when considering purchases.
2/3 1/3
Two-thirds of respondents said it was a top value driver in their decision- making process.
A third of consumers would be willing to pay more for a sustainable alternative.
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Environmental sustainability in business
Whatever stage your company is in with regards to environmental sustainability, you may be deliberating on the optimal next step in your journey. Simple research and conversations are likely to uncover a dozen different directions your company could go, each with varying levels of success and cost. To truly identify the most advantageous route, there are two main factors to consider to maximize positive effects and minimize corporate risk and costs. The first is top-of-mind consumer sustainability proxies, or how your end consumer defines environmental sustainability for your industry and product. Next, consider what is the level of changes to your current business model that your company can absorb. Combined, these two factors should point to the short list of potential action items for your company. Sustainability proxies Depending on the industry, “sustainability” can have different meanings for your consumers. For consumer goods, automotive, and home construction industries, consumers indicated that a long lifespan or high durability of a product is a strong indicator of environmental sustainability. These industries may also want to look at recycling and reusability potential as well as the environmental impact of packaging. But these indicators change quickly when looking at energy and utilities. The same consumers are scrutinizing the source and production of raw materials to signal sustainability, followed by emission rates and whether the company offsets emissions via carbon permits or other methods. How closely your company‘s actions resonate with the consumer‘s mental sustainability proxy drives the potency of the pull incentive (e.g. increased consumer appeal) for pursuing a more sustainable value proposition. This more potent pull incentive offsets the investment considerations, making future next steps more practically conceivable.
Make it tangible
11 Environmental sustainability in business
It is paramount for your company to understand what actions or features indicate sustainability for your specific consumer segment. The importance of how consumers view sustainability elements vary per industry The importance of how consumers view sustainability vary per industry
Degree of business transformation In general, companies can pursue sustainability in 3 different ways
Offsetting current environmental impacts 1
Altering production and purchasing 2
Reinventing or adding to the current business proposition 3
Ways sustainability can be incorporated into your business •Unchanged production •Unchanged proposition
•New proposition, new markets •New business models •Innovation as a driving force •Higher life-span, recyclability, less waste, etc.
•Unchanged proposition •Use of recycled materials •Use of renewable resources
•Carbon offsetting •Carbon capture •Incentivization in supply chain
DEGREE OF TRANSFORMATION
Category Emissions, pollution and industrial waste
Offsetting emissions
Shopping local
Raw materials and resources
Lifespan and durability
Packaging Recyclability and reusability
Food waste
Each option has a progressively greater impact on your company’s day to day activities and output. Reinventing your business proposition can speak to a complete difference in your company’s vision and objectives, right down to the physical product that is created and sold. An important step in creating your sustainability action plan is to determine your company’s current tolerance and readiness for this kind of change. The final visionary end state isn’t a step your company has to tackle all at once – it can be done in stages. A company just starting the journey may choose an action plan with minimal impact on a business’ day to day, and that will make the transition through subsequent steps more natural.
Taking a leap Substantial change on the day to day doesn’t necessarily translate to sub-optimal business impact. Taking advantage of the strong demand for sustainable options combined with a thoughtful go-to-market strategy may be better for business in the long run.
Energy and utilities Travel and tourism Automotive Consumer goods and retail
1 st 1 st
2 nd 2 nd
3 rd
3 rd 1 st 1 st 1 st
3 rd 3 rd 2 nd
2 nd
2 nd
Financial services
Home construction and renovations
3 rd
1 st
2 nd
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Revamp your business model via the Circularity Loop
Looking at your business on a Circularity Loop will help innovate your revenue model
Input production
Manufacturing
Innovate your business model via the Circularity Loop Looking at your business from the perspective of the circularity loop can provide inspiration for how to monetize your business model. The circularity loop examines which part of the business operation, from material sourcing to customer purchase and usage, becomes more environmentally friendly due to your sustainable path. For example, a recycling program for electronic goods may make the refinement process more sustainable as parts can be reused.
Refinement
Distribution
User/ consumer
Concept
Raw materials
Redistribute
Reuse
Four different ways you can establish a Circularity Loop 1. Circular products Focus on products that already incorporate sustainability best practices in purchasing, materials, and production. For example, developing writing material from recycled paper only. 2. Circular business models Develop business models that are built on circular principles. For example, a clothing rental company allows for easy redistribution and reuse of clothes. 3. Circular services Offer software, methods, consulting, etc., to help suppliers, customers and consumers improve sustainability standards. For example, a trade-in system for batteries can help consumers recycle goods. Another example would be offering consulting services to farmers growing coffee or other goods to help them identify easy ways to make their farms more sustainable. 4. Circular sales Offer services to reduce outbound logistics as much as possible. For example, giving customers and consumers the option to ensure bundled delivery instead of individual packages (usually in return for a longer delivery time).
Repair
Repurpose
Recycle
Regenerate
Offer flexible renting, lending and sharing options Offer maintenance, repair and refurbishing services Offer retrofitting or upgrades for existing products Create a market for (refurbished) 2nd hand products Create a market for recycled raw materials & by-products Potential business opportunities
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Once you have identified your best options to kickstart your transformation towards environmental sustainability, it is important to understand the extent of positive impact you can have today – both on your company’s bottom line and on the environment. A couple of key factors will determine the impact on your company: 1. The potential and realization of any price premiums consumers are willing to pay through a strong monetization strategy. 2. The dampening effect of current market conditions, including strong inflation.
Drive positive impact and growth
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Reducing “green premiums”
As the share of consumers that are willing to pay more for sustainability increases, the average premium decreases Share of consumers that are willing to pay more for sustainability As the share of consumers that are willing to pay more for sustainability increases, the average premium decreases Share of consumers that are willing to pay more for sustainability
While the downward pressure on “green premiums” may not motivate all companies to invest in sustainability, consider this: Companies that do not make changes at all will find their market share slowly eroding as sustainable options become widely available. For now, most industries at an aggregate level are still in either a nascent stage or developing stage when it comes to sustainability – no single industry has developed to the point where sustainability is table stakes. This means companies still have room to invest in sustainability while developing commercial strategies that can capture available price premiums.
In the 2022 Global Sustainability Study, across all industries, 68% of consumers stated that they were not willing to pay more for environmentally sustainable options. For the remaining 32% that are willing to pay more, they accept price premiums between 25 – 40% depending on the industry in question. While the interest in purchasing sustainably continues to grow, the same cannot be said for either the number of consumers that are willing to pay more or for the price premiums consumers consider acceptable. We have seen a downward trend year over year across both. Industries where sustainability has been important for longer are seeing it become a table-stakes criteria, which then has a negative impact on extra willingness-to-pay.
37% 37%
36% 36%
Average: 32% Average: 32%
34% 34%
32% 32%
30% 30%
29% 29%
Energy and utilities Energy and utilities
Travel and tourism Travel and tourism
Home construction and renovations Home construction and renovations
Financial services Financial services
Consumer goods and retail Consumer goods and retail
Automotive Automotive
Average sustainability premium of consumers that are willing to pay Average sustainability premium of consumers that are willing to pay
Average: 38% Average: 38%
41% 41%
38% 38%
38% 38%
37% 37%
37% 37%
36% 36%
Avg: 26% 27% 27% Avg: 26%
30% 30%
26% 26%
25% 25%
25% 25%
24% 24%
Energy and utilities Energy and utilities
Travel and tourism Travel and tourism
Automotive Automotive
Home construction and renovations
Financial services Financial services
Consumer goods and retail Consumer goods and retail
Home construction and renovations
Expensive premium for sustainable option (%)
Acceptable premium for sustainable option (%) Acceptable premium for sustainable option (%)
Expensive premium for sustainable option (%)
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The greatest barriers for consumers for sustainable purchasing today include affordability, accessibility, and communication. Affordability is at the top of that list - 33% of consumers said sustainable alternatives were still too expensive to purchase. Current market dynamics will only exacerbate this trend. Recent inflationary pressures around the world will have a dampening effect on the purchases of sustainable goods and services. Inflation will lower Inflation as a barrier Companies can drive volume by addressing consumer barriers
Recent inflationary pressures have had a dampening effect on purchasing sustainably
consumers’ overall purchasing power, with most households deprioritizing sustainable goods due to their higher prices and households’ need to be more selective in which categories to be sustainable in. According to the 2022 Global Sustainability Study 33%, of consumers said they were less likely to buy sustainable goods and services due to inflation. And since then, inflation has climbed still higher in many markets. Inflation won’t stop the adoption of sustainable products. But it may slow down the shift of sustainability going from the exception to the expectation, and it also has a dampening effect on capturing willingness to pay.
Very few consumers view inflation as a negligible factor to buying decisions for sustainable goods
Higher inflation has negatively affected the buying power of sustainable goods/services
33%
33%
28%
17%
13%
Less likely to buy due to inflation
Other goods are more expensive, affecting my ability to purchase sustainable goods/services
Sustainable goods/services do not have the same problem with inflation as other options
Inflation does not impact my decision
More selective in which categories I buy
Seeing it through
Consumers consider these to be the biggest blockades in buying more sustainably
Affordability Sustainable alternatives are too expensive Lack of Access Insufficient access to sustainable alternative Lack of Clarity Uncertainty on when a product is sustainable
33%
While there are still headwinds and current macroeconomic barriers to address in order to turbocharge growth and volume for sustainable goods and services, the business imperative has never been stronger if companies want to survive for the long-run. A combination of consumers, companies and regulatory bodies must work in harmony to drive towards positive change, especially as sustainability continues the move towards expectation rather than exception.
25%
21%
Lack of Trust Sustainable alternatives are not sustainable (green washing)
14%
Inconvenience Sustainable alternatives are inconvenient
3%
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We’ve outlined what could be the seeds of your sustainability strategy, focusing on how companies with a value proposition centered around sustainability can continue to grow and scale. Regardless of where you are in your journey, Simon-Kucher can help build this into something bigger – for both your company and the planet. By focusing on the growth opportunities, we can create positive sustainable transformation for companies, your customers and wider communities.
How we can help
We can design the front-end of your sustainability strategy: Quantify the size of the opportunity, what is the right level of transformation, who are the right segments to target, how you will take any new products or services to market, the commercial game plan, and how you are going to enable your sustainable business. Whether your business is just starting your journey, completely transforming, or adopting additional sustainable practices, we will work with you to bring it to market. At your pace and in your location. ? Ready to act? Read the latest on sustainability and get in touch with the team.
Europe Olivier Hagenbeek Director +31 20 8965 905 olivier.hagenbeek@simon-kucher.com Americas Shikha Jain Partner +1 617 231 4574 shikha.jain@simon-kucher.com Asia Jannik Schuehle Director +65 6958 1467 jannik.schuehle@simon-kucher.com
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Imprint Publisher Simon-Kucher Strategy & Marketing Consultants GmbH Authors Olivier Hagenbeek Mirnesa Ibisevic Shikha Jain Ryan Lojo Design Created By Us Limited
Photo credits Getty Images Shutterstock Rachel Moss on Unsplash January 2023
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