Imagine this: You’re standing in front of the committee that approves investments, palms sweating, hoping that the audiovisual equipment doesn’t malfunction. You’ve carefully honed the business case (and perhaps sculpted reality) to conform to your organization’s norms and the predilections of the individuals who will fund or kill your big idea. You’ve rehearsed the pitch 100 times. Executives with sharpened pencils and sharper glares sit around the table. This is your moment.
This is also where transformational ideas go to die.
The corporate investment process is typically designed to minimize risk. There are standard hurdle rates to meet and minimum returns on capital to deliver. You have to show profit on the horizon and the potential for scale. It’s theater, carefully choreographed to ensure that there are as few surprises as possible. You, the presenter, do not want to ding your reputation by proposing an idea that could get shot down. The investment committee wants to burnish its expertise for picking winners by only green lighting the safest bets. The process overprotects the present at the expense of the future. All hail incrementalism!
However, we have reached a place where such thinking not only endangers your company but also the entire planet. We’re facing major threats and with them come massive opportunities for those companies willing to place a few big, audacious bets. Andrew Winston—a globally recognized expert on the nexus of business and environmental issues—argues that one can no longer deny that the climate is changing. In his latest book, The Big Pivot, he argues that resources are becoming scarcer and our societies increasingly transparent.
I recently sat down with Winston to explore how companies need to think differently in these shifting circumstances. If a company is to survive, even thrive, in such turbulence, it must be willing to move past the significant (yet insufficient) projects that pay back quickly, he says. Companies must get radical, which means exempting some (though not all) investments from the requirements of the standard business case with a two-year ROI.
Winston’s first admonition is to free yourself from the shackles of short-termism. “If we ran our lives the way that analysts expect us to run companies or in line with investment committee metrics, no one would ever go to college or exercise for long-term health,” he says. “You wouldn’t take on debt or defer earnings to get a degree because the payback period is too long. You probably wouldn’t run every day and keep weight in control for a longer, healthy life. We make long-term bets all the time, except in corporations where quarterly returns are all important.”
“We make long-term bets all the time, except in corporations where quarterly returns are important.”
He adds, “I think that it is crazy that we’re willing to risk the future of humanity because certain new technologies can’t make the two-year hurdle rate.” I agree. My most enduring takeaway from the study of economics in my long-ago undergraduate days was that you can make the case for or against anything by tweaking your assumptions. So, for example, whether or not you include a changing climate in your assumptions dramatically alters both the risk and potential upside of any investment. Winston pointed out that if you assume a hotter planet and a five-year return horizon, you may uncover a blockbuster product or service that a traditional business case would not reveal.
Winston’s second bit of advice is to make science-based decisions. “Factoring accepted science into your model both helps deter short-termism and sets the stage to ask heretical questions of the kind that many companies overlook,” he says. For example, studies have shown that water is becoming increasingly scarce, yet, as Winston’s data shows, the garment industry uses a quantity of water equal to the Mediterranean Sea every two years. Adidas came to the realization that the scientific evidence made dramatically reducing its water usage a strategic necessity, not just a nice thing to do, and asked a radical question: “Can we dye garments without water?” They worked with a small company in Thailand to develop a water-free dying process that also reduces energy and chemical use by half. In a world with scarcer resources, such frugal ingenuity is good for the planet and the bottom line.
So why are so many companies averse to science-based evidence? For one, they may be thin in the scientist department. Science is not part of most MBA curricula. Second, accepting the climate change projections for one project could mean having to rethink other parts of a business and could possibly disrupt the currently profitable status quo. The present always has a larger constituency than the future.
Still, there you stand in front of the investment committee. What do you do?
Start by putting a fence around the perceived downside. For example, Winston points out that Microsoft charges an internal price for carbon—each of its divisions pays money based on how much energy and carbon it uses. Microsoft uses that money, in part, to fund investments in renewable energy and energy savings over the short and long term. Such a charge is simply an extension of activity-based costing, a well-known approach to cost accounting that helps CFOs sleep soundly. That’s not so risky after all. Suddenly, you are seen not as a tree-hugging type but instead as a hard-nosed cost-cutter and innovator.
You can also reframe the calculation. Winston draws on Unilever CEO Paul Polman’s uncoupling of growth from inputs and outputs: Polman committed to double the company’s sales while cutting its environmental footprint in half. In essence, he challenged his company, suppliers, and board to think of a world that is hotter and scarcer as a catalyst for game-changing innovation, not as a cost-busting constraint on their success.
“If companies would just integrate those two principles in their thinking—fighting short-termism and incorporating science—the other principles of the pivot I outline in my book would fall into place,” Winston says. “We would have companies that are both more profitable and better positioned to meet the needs of a hotter, scarcer, and more open planet. They would help themselves and us all be more resilient through turbulence that tests the limits of our current systems.” That is the kind of resilience that customers, employees, and shareholders should all embrace.