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What Henry Ford can teach us about sustainable innovation

<p>The father of the automobile saw innovation as a problem in need of an integrated solution. Why can&#39;t green businesses do the same?</p>

Henry Ford faced the same challenge in the early 1900s that people examining sustainable business face today. Ford saw opportunity in a market where cars were a niche product -- expensive and for the rich only. Why not, he reasoned, innovate to lower production costs while raising factory workers' salaries? This innovation concurrently would create a new product, new pricing and a new buyer group.

Today, we see niche products, and companies, that have attributes of being eco-friendly, fair trade or even holistically "sustainable," in terms of being consonant with and not undercutting the structure and function of ecological and socio-cultural as well as economic systems. The opportunity for sustainability-focused business players is to make a seismic leap in terms of innovations in product design, materials, supply chains and production processes as well as business models, as Bill McDonough laid out in his recent article.

Why not view all of these environmental and social business issues -- from product design through sourcing input, user groups and re-use -- in the way that Ford did as an integrated problem space that requires an integrated solution?

Of course, some already do view the issues in this way and inspirational work is underway. For example, Interface long has been, and rightly so, offered up as an example of a company thinking about -- and working on -- its sustainability challenges holistically. Newer entrants are crafting their own approaches that offer great promise by focusing in on key leverage points, such as Puma's development of an "environmental profits and loss" (EP&L) statement that likely will motivate avoidance, mitigation and possibly offsetting of impacts in the future. Rio Tinto and the Walt Disney Company have set "net positive impact" corporate goals associated with biodiversity and ecosystems, with the potential for whole system review and innovation.

Yet the number of corporate decision-makers who are thinking expansively about their impacts and opportunities for innovation remains limited. Simply put, much of the current work in the private sector is quite humble in its ambition and reach. Few of today's corporate environmental and social goals -- and the associated activities -- are as expansive as the Henry Ford full-system innovation approach. Ford and his team re-designed the product (which became the Model T), as well as the manufacturing process, and addressed the (lack of) buyers by raising pay for its own employees. Yet few corporate leaders rise to this level of a challenge in their thinking about business opportunities.

Perhaps more leaders will have to do so in the near-term, as a growing number of companies are (or will soon be) struggling with questions from investors about risk posed from climate change and other environmental issues, following on a recent Trucost report on natural capital and business risk issued by TEEB for Business. Companies also face an increased set disclosure requests in terms of social and environmental impacts, such as on carbon disclosure, water disclosure and even forest footprint impacts.

Amidst all of these discussions today, however, an opportunity is being missed.

A robust and growing set of self-identified "social entrepreneurs" exist who are actively inventing new products and processes that offer economic as well as environmental and social returns. Many individuals in the social entrepreneurship domain seek funds to test and scale up their ideas.

Some philanthropic organizations have been stepping into the breach to support this work on innovating new sustainability-focused businesses. For example, the Ashoka Foundation supports a wide range of social entrepreneurs and is launching its "nutrients for all" initiative, focused on supporting entrepreneurs who can positively invest in "nutrient systems" with a goal of moving to "where foods are valued based on the nutrients they deliver to the body; where food processors and commodity traders procure agricultural crops based on nutrient content, in addition to traditional factors like quantity and storage life; and where farmers and investors pay for land based on its capacity to generate nutrients in soils (and thus reap related benefits like carbon financing as well)." 

Other funders of social entrepreneurship invest in distinct issue areas and also have established robust selection and screening that have been tested over the years, such as the Acumen Fund, Echoing Green, the Skoll Foundation and the Draper Richards Kaplan Foundation. In addition, the B-Lab, in association with a range of partners, has established its GIIRS rating system for social enterprises.

For business, there is an opportunity to reach out to the "social entrepreneurship" domain on innovations that can solve specific corporate environmental and social adverse impacts. Ideally, innovations would shift companies from negative impacts to positive impacts -- ecologically, socially and economically.

If a company (or an entire industry) is using a material or industrial process that has significant environmental and social impacts, why not let the social entrepreneurship domain know that innovations about that specific problem would be welcome? A list of these problems is found in any company's sustainability (or corporate social responsibility) report. Why not highlight this list of needed areas of innovation to the social entrepreneurship community?

And why not use the social and environmental entrepreneur screening and support model for corporate players to outsource much-needed R&D on lessening their corporate impacts -- through new materials, products, services, supply chains and business models -- to the growing set of social and environmental entrepreneurs? Why not leverage the promising model of corporate impact investing -- focused on private debt and equity as compared to publicly traded securities and investments -- with the intent of creating environmental and social value in addition to financial returns, particularly focused on current corporate impact areas that need to be addressed?

For companies, the immediate pathway forward to seed a Ford-like wave of innovation and re-invention could be by establishing internal impact investing divisions -- that answer to CFO with input from the CSO for overall goal setting -- with the objective of making corporate investments in:

  • innovations that will laser in on a company's specific environmental and social impacts (or environmental and social losses, in Puma's terminology) in order to focus priorities for designing problems out of (and positive ripple effects into) a company's products, supply chains, transport, re-use/end of life, etc.;
  • testing applications of these new ideas that could solve strategic sustainability issues; and
  • scaling up the most promising innovations as a way to mitigate risk and ideally, with associated institutional innovations, balance corporate social and environmental profit and loss statements.

Ultimately, this approach could expand outsourcing innovation (R&D) through strategic acquisitions. It would maintain a focus on innovation that decreases the expected return-to-risk ratio in compensation for measurable positive social (or environmental) return on investment.

While this kind of focused sustainability problem-solving and innovation approach remains a business opportunity at this time, there are likely scenarios in which it could become a business imperative for companies to address their environmental impacts, particularly in terms of "green infrastructure" restoration and maintenance. Specifically, concern about natural capital and ecosystem services is on the rise. Investors, including the 79 Equator Banks, are including impacts on ecosystem services in their due diligence processes. Disclosure of corporate environmental impacts continues to gain momentum, as evidenced by the growing number of companies that complete the Carbon Disclosure Project (CDP), Water Disclosure Project and Forest Footprint requests, as well as the Dow Jones Sustainability Index inclusion of ecosystem services in the forestry sector screening and consideration of expansion to include it for other sectors.

The opportunity is now to seed the leapfrog innovations that investors and other corporate stakeholders are increasingly inquiring about as they ask about natural capital and ecosystem services related risk, as was so starkly highlighted in the recent TEEB for business report by Trucost.

Corporate impact investing to drive innovation around company-specific social and environmental impacts (or losses) could both help companies address their own risk as well as greatly increase the amount of capital flowing to sustainability-focused enterprises.

Why wouldn't businesses want to engage with some of the most innovative and engaged entrepreneurs around eliminating some of their most pressing (and material) business risks?

Most companies already have lists of the issues that they face based on their own ongoing review of environmental and social impacts and risk. The opportunity now is to share their opportunity areas with entrepreneurs and to let the innovation begin. Companies then can pilot test and scale those innovations in a heretofore unseen era of re-invention. And it would be ironic, but fitting, if the grandfather of the automotive industry could inspire the next innovation revolution.

This article originally appeared on the BSR Insight blog and is reprinted with permission.

Henry Ford photo in the public domain, via Wikimedia Commons.

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