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Systems change for a sustainable future

Rethinking corporate climate strategy

Climate change is transforming the global business landscape, but many corporate leaders continue to underestimate the speed and scale with which the shift to a low-emissions economy is likely to unfold—and they are failing to recognise the substantial business opportunity associated with the transition. As leaders shift from ambition to action, understanding and accelerating systems transformation will be crucial. Explore a framework that can help organisations design a corporate climate strategy to drive change and create new value in the climate-aligned economy.

Navigating systems transformation

To capitalise on—and catalyse—the urgent systems-level changes we need requires business leaders to adopt a different approach to tackling the climate crisis. We must collectively break free from linear, business-as-usual mindsets, where tomorrow looks nearly identical to yesterday. To do so, corporate leaders must understand systems thinking and systems transformation.

This is the first in a series of reports from Deloitte and RMI laying out a new approach for corporate climate action in an era of rapid disruption. It is a creation of Deloitte’s Sustainable Systems Initiative, launched to catalyse systems change through activations in the marketplace and collaborations with leading companies, non-governmental organisations (NGOs), academic institutions and government agencies.

The world is on the cusp of a fundamental reconfiguration of our economy. Explore how systems thinking can help organisations design a corporate climate strategy that drives change and positions them for long-term value creation.

Why business leaders should explore a different approach to corporate climate strategy

The climate-aligned economy is the economy of the future—and its design is vastly different from today’s. Already, policies and market forces are driving innovations that are cascading across industrial systems and supply chains, opening new avenues for value creation. The pace of change is almost certain to accelerate even further as governments, companies, employees, communities and investors rise to meet the urgency of the climate crisis, aiming to hold global warming to around 1.5°C to avoid triggering critical planetary tipping points. All of this points to a collective effort to transform the economy at unprecedented speed and scale.

This transition offers tremendous business opportunity—and risk. Deloitte analysis suggests that rapid global decarbonisation could yield an economic dividend of US$43 trillion by 2070 compared to a world of unchecked climate change. Which companies are likely to be best positioned to create and capture this new value? Those that challenge the existing systems underlying their industries.

As the shift to a climate-aligned economy unfolds at pace, there is a window for companies to both accelerate the transition and position themselves for long-term advantage. Responding with incremental or compartmentalised initiatives—too often the norm—could lead to missed business opportunities, investment in stranded assets, or even the failure of the enterprise.

Source 1: Deloitte, Turning Point; Source 2: 2070 report

What is systems transformation?

It is critical for business leaders to identify when systems change is happening and understand how to respond, especially when forces such as climate change are disrupting the economy on many levels simultaneously. To do so, leaders should ground themselves in the “what” and “why” of systems transformation.

Systems are sets of interconnected elements that are organised such that the elements work together to achieve an objective. Whether a value chain, a forest, or a human body, each system interacts with others and the sociotechnical and socioeconomic systems responsible for the bulk of planet-warming emissions—energy, transport, industrials, food and land use—are part of a larger system of systems. For companies, example elements could include their client base, suppliers and assets.

In this context, an innovation is a change to the system and can be technology-based (e.g., electric vehicles), idea-based (e.g., smoking bans), or a combination of both (e.g., social media). To scale, innovations often need to break some existing trade-off between price and one or more dimensions of performance—for instance, speed, durability, or emissions.

A reinforcing feedback loop is the process through which the impact of a small change can be amplified, making change elsewhere more likely. Reinforcing feedback loops may include learning curves, economies of scale, technological reinforcement, or social diffusion and help drive the adoption of innovations. Because the private sector often plays a key role in creating and boosting these feedback loops, a central component of systems-aligned emergence strategy is recognising which of these reinforcing feedback processes are in play and understanding how companies can work to accelerate them.

If feedback loops take hold, they can create a “runaway” effect, marked by a tipping point. Innovations that reach scale typically follow an S-curve pattern of adoption: slow at first, then rapidly rising, before flattening out again as they reach market saturation

Source: RMI, “Harnessing the power of S-curves,” October 28, 2022

Harnessing the power of systems transformation

The transition to a climate-aligned economy won’t just happen. Facing severe climate disruption with worse to come, global actors are deliberately and proactively—albeit disparately—working to reconfigure the energy, transport, industrial and food systems. Companies have the power to drive virtuous, reinforcing feedback loops to help make this happen. Often this requires collaboration across the value chain.

All transitions can be harnessed, as they follow the same pattern of shifting dynamics in five phases. Barriers and system dynamics to accelerate the transition to a climate-aligned economy are often predictable, manageable and solvable through each of these phases. As transitions unfold, stakeholders with a solid understanding of innovations and their related phases can develop targeted strategies to stay ahead and take advantage of rapidly changing conditions.

Early-stage research drives development of new innovations

This phase is often initiated by an event, disaster, or scientific discovery that generates attention or other momentum. In the sustainability transition, the first step has been a broad acceptance of responsibility for the causes of the climate crisis and a commitment to finding and making the changes necessary for a sustainable 1.5°C future.

In any transition, the first phase involves experimentation and learning to define problems, market opportunities and available solutions. Challenges to progress often come from a general lack of motivation or limited understanding of the problem.

Innovations are piloted, often through public-private partnerships

This phase is characterised by new market dynamics, in which increasing amounts of capital are directed to the development of pilots, prototypes and demonstrations. These may be developed by spinoffs from early research, entrepreneurs, or larger corporates that are looking to reinvent themselves, often financed by subsidies, philanthropic capital and early private investors. Idea-based innovations are more likely than technological breakthroughs to involve civil society, public-sector and private-sector projects. Incumbents may face reputational risk for not investing in projects.

Promising innovations can become stuck in the “valley of death,” a gap in available resources and apparent market demand for innovations to make the jump from R&D to commercial product development. Companies can engage research organisations to tap early-stage innovations, providing funding and support systems via incubator programmes and public-private partnerships.

Innovations are scaled by frontrunners and established in niche markets

This phase is characterised by the formation of niche markets, connecting supply with demand. Initial demand, often including a set of customers willing to pay a premium, encourages frontrunner companies to invest in these innovations and attempt to capture early-mover advantages in niche markets. Reinforcing feedback loops scale the solution, lower costs and improve performance as customer demand builds.

Even the most promising solutions can languish in phase 3. Producers may be unwilling to ramp up capacity because they lack confidence there will be customers willing to purchase it and would-be customers perceive insufficient supply to meet their needs. At this phase, innovations typically come with a price premium, which can further deter producers concerned about their competitiveness.

To break this impasse, companies can explore various mechanisms to signal demand for climate-aligned innovations. Engaging with private-sector peers, competitors and governments can help kick off positive feedback loops of increased market confidence and activity. Offtake agreements, book-and-claim accounting and buyers’ coalitions can help give producers the confidence needed to accelerate production.

Supply-and demand-side frontrunners push to strengthen the enabling environment

Once it has reached phase 4, the innovation becomes viable for a mass market audience as it reaches the steep part of the S-curve. Subsidies and incentives are no longer needed to make the business case and the focus shifts to building up the enabling environment (for example, supporting infrastructure, workforce development, complementary products and services, and regulations), which can struggle to keep pace with the rapid adoption of the innovation itself.

Companies can address market growing pains by collaborating with governments and value chain partners to invest in infrastructure, worker reskilling and other market supports. As agencies engage in rulemaking and standardisation, companies can also lobby for regulations that support the innovation’s development and growth. Investors can increasingly direct private capital toward strengthening key enablers.

The innovation reaches scale and is widely adopted or met with broad compliance

In this final phase, new cultural conventions help both consumers and ecosystem players view the innovation as “normal.” Frontrunner companies that led the growth of the innovation may be firmly established as market leaders. Legacy incumbents that failed to adapt may find themselves with stranded assets, rising costs and dwindling profits as consumers adopt the new option. The reconfigured system can begin to inform similar transitions in other sectors and geographies.

Building on phase 4 approaches, companies may collaborate with governments to create rules and regulations that ensure robust adoption of the innovative solutions and an organised phase-out of the incumbent. They can also turn to development of new markets, supporting technology and knowledge transfer, and engaging in transition risk management practices.

Source: RMI analysis

Accelerating systems transformation

In times of systems-level disruption, recognising and capitalising on the opportunities presented by these fundamental shifts demands a different approach to strategy. An emergence strategy takes a systems view, with a focus on how a company can accelerate change through engagement of other key system actors, especially those up and down the value chain.

A corporate emergence strategy often involves these key considerations:

  1. Frame corporate strategy based on transformational change versus incremental change.
  2. Recognise when and where systems transformation may be occurring or could emerge.
  3. Diagnose phases of systems transformation and tune strategy accordingly.
  4. Engage a wide range of stakeholders to shape system-level outcomes.
  5. Adopt a beginner’s mindset, open to continuously learning and adapting to changing environments.

Climate change and the global response to it, are altering the business landscape everywhere. Everyone has a role to play and by taking meaningful action today—investing at the speed and scale that is necessary—business leaders can thrive in the economy of the future.

Future reports will explore these topics further, examining how companies can craft a tailored emergence strategy and the ways transformation is playing out in the energy, food, mobility and industrial systems. We stand ready to help businesses at this critical moment as they work to make this happen.

Deloitte

Scott L. Corwin

Managing Director

Chief Strategic and Commercialization Officer

Deloitte US Sustainability, Climate & Equity Growth Practice

Deloitte LLP

Mobile: +1 917 853 3735

scottcorwin@deloitte.com

Preeti Pincha

Director, Sustainable Systems Initiative

Deloitte US Sustainability, Climate & Equity Growth Practice

Deloitte LLP

Mobile: +1 347 266 5412

ppincha@deloitte.com

Derek Pankratz

Climate Change & Sustainability Research Leader

Center for Integrated Research

Deloitte Services LP

Mobile: +1 920 242 1141

dpankratz@deloitte.com

Allison Connell

Manager

Deloitte US Sustainability, Climate & Equity Growth Practice

Deloitte LLP

Mobile: +1 224 423 3295

aconnell@deloitte.com

RMI

James Newcomb

Senior Expert

Strategic Insights

RMI

Tel: +1 720 317 1019

jnewcomb@rmi.org

Laurens Speelman

Principal

Strategic Insights

RMI

Tel: +1 720 314 3511

lspeelman@rmi.org

Jun Shepard

Manager

Strategic Insights

RMI

jshepard@rmi.org

Core research team

Deloitte

  • Anna Ng
  • Suraj Sehgal
  • Hanna Bogrow

RMI

  • Yuki Numata
  • Addy Sonaike
  • Julia Fontales

The authors would like to thank the many colleagues who contributed valuable insights for this report, including: Blythe Aronowitz, Andrew Ashenfelter, Matthew Budman, Charlie Bloch, Jon Creyts, Matt Majsak, Marissa Medina, Pradeep Philip, Freedom-Kai Phillips, and Jon Raphael.

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