Idea in Brief The Background To reach the sustainability targets they’ve committed to, many companies will need to transform their business models and organizational architectures. The Challenge Would-be sustainability pioneers face three fundamental tensions: maintaining a long-term vision while delivering on short-term financial targets, introducing systemwide change while keeping people engaged at the local level, and being open to external collaboration while maintaining internal integration. The Solution Leverage the lessons learned from developing innovation capabilities and address each tension intentionally. Best practices include identifying a concrete path, introducing global change at the local level, and creating integrated innovation units. “Many global companies have made public commitments to sustainability targets. In almost every case fulfilling those commitments will require firms to transform their business models and organizational architectures to a degree that matches or even surpasses the transformations triggered by digital and AI technologies. A select few pioneers have moved from commitment to action and are demonstrating that companies can make sustainability not only a goal but also the driver of their business model. Unlike the companies that have been leading the way in digital transformation, most of which are based in Silicon Valley, many sustainability pioneers are based in Europe, Latin America, and Africa. We studied more than a dozen of these companies and undertook a deep-dive analysis into several of them, including the Italian energy group Enel, the Swiss cement giant Holcim Group, Morocco’s phosphate and fertilizer giant OCP Group, and Brazil’s paper and pulp company Suzano. All are well-known for successful innovation. The solutions these firms have come up with on their journey to sustainability leverage what they have learned from developing their innovation capabilities. Much as large companies do with innovation, would-be sustainability pioneers face three fundamental tensions: maintaining a long-term sustainability vision while delivering on short-term financial targets, introducing systemwide change while keeping people engaged at the local level, and being open to external collaboration while maintaining strong internal integration. As our pioneers have found with transformative innovations more generally, it is imperative to address these tensions intentionally. Doing so increases the likelihood that they will be able to successfully transition to sustainable business models. In this article we draw on our research to identify the specific practices companies can use to address these three fundamental challenges. There is no shortage of CEOs who publicly announce that sustainability is on the agenda. However, in the companies we studied, the top teams went further; they identified concrete goals that were material to their stakeholders and stated how their company should commit resources to meeting them. Holcim is a case in point. The company divested or spun off operations in regions where sustainability was not a viable strategy and established a framework to align its financing with its sustainability objectives. Those two actions freed up capital to make tangible investments in its four key sustainability goals: climate, circular economy, water and nature, and people and communities. To make its road map to sustainability more tangible, Holcim focused on setting medium-term targets. For instance, it became the first global building-materials company to join the Science-Based Targets initiative’s “Business Ambition for 1.5°C” campaign, which has validated intermediate targets for 2030. The innovation portfolios of all the pioneering companies we studied were an integral component of their strategies for achieving sustainability goals. In order to balance long-term sustainability goals with medium-term financial performance, companies typically spread their projects among three categories: Proven ideas that need scaling. This category includes projects that can deliver with an ROI time frame and risk profile that is acceptable to shareholders. For instance, when Enel committed to making the energy transition away from fossil fuels in 2014, neither solar nor any other green-energy technology was economically viable on the scale that Enel and other large utilities required. But solar was already proven in the lab and on a small scale; it just needed larger deployment to gain widespread acceptance. Enel’s top-management team, backed by its R&D experts, realized that Enel’s involvement could help make solar power economically viable at scale. Enel Green Power, a distinct unit within Enel, initiated a range of experiments that enabled rapid learning. Similarly, Holcim is focusing on reducing the costs of carbon capture, utilization, and storage technologies through investments and partnerships. With support from the European Union’s Innovation Fund, Holcim and its partners are already cleared to build seven carbon capture and storage plants that aim to make these technologies more efficient and scalable over time. According to Wright’s Law, the cost of technology tends to fall at a consistent rate each time capacity doubles. In the case of solar panels, for instance, the cost fell by 20%. By accelerating the process of scaling carbon capture and storage, Holcim is helping to make the technology viable earlier and positioning itself at the forefront of sustainable construction. New market opportunities. Making an environmentally unsustainable business sustainable can require a company to make painful trade-offs and even cannibalize parts of its own operations. To cushion the blow in the medium term, our pioneer companies made major sustainability investments in new market opportunities. Enel, for example, set up separate units—Enel X and Enel Way—to establish a presence in smart-home services and electric mobility. Similarly, through its investment unit Innovx, OCP is extending its position in sustainable agriculture and associated food security, green hydrogen and green ammonia, and a range of new products and services associated with phosphates. The Norwegian chemicals group Yara and France’s Schneider Electric have found new growth drivers in the digital-services space by creating digital platforms that help corporate customers manage and optimize their own production operations, enabling them to achieve their sustainability goals. Transformative projects. Long-term projects that expand a company’s sustainability goals and explore unproven technologies comprise the third category. Enel, for example, initially focused its sustainability initiatives on decarbonization, but it has been gradually expanding its goal to circularity, as issues of waste have become prominent in its industry (see, for example, “The Dark Side of Solar Power,” HBR.org, June 18, 2021, for a look at the mounting problem of solar equipment waste). Enel has been testing emergent technologies and even inventing new ones, such as solar-powered panels made from fully recycled plastic, which may hold significant promise in the long term. Similarly, Holcim has made a formal commitment to invest 2 billion Swiss francs by 2030 in transformational technologies that will help it achieve its sustainability goals. Its innovation unit pushes the boundaries of what’s possible through initiatives that Edelio Bermejo, its head of global R&D and IP, refers to as “iconic projects.” These projects aim to achieve radical sustainability goals on a small scale; the company’s technical teams then work to scale them to industrial levels. The Phoenix, a bridge constructed solely through 3D printing with recycled materials, is one notable success. The Essential Homes project is another example: In collaboration with the Norman Foster Foundation, it focuses on creating resilient, low-carbon housing. Achievements like these signal to the industry that bold innovation is possible—and that Holcim is leading the way. Unsustainable business practices are often spread across an entire organization. Purchasing departments may source from suppliers that don’t prioritize sustainability; standard production and manufacturing practices may emit excess carbon; the R&D team may fail to factor sustainability into new products and services. Similarly, opportunities to become more sustainable can emerge from all corners of the organization. Marketing and R&D departments at the unit level, for example, may identify new customer segments that are interested in ethical products or may determine that they can help address some unmet needs of market segments at the bottom of the pyramid. Surfacing and sharing both the problems and opportunities requires a systemwide mobilization of the workforce, which must nonetheless remain responsive to local priorities and business profitability. Our pioneers managed this tension in four ways: Break the challenge-solution coupling. Many employees are reluctant to identify sustainability problems or opportunities because they fear they will be expected to find solutions that are not readily at hand. According to the former CEO of Enel, that fear was a major obstacle to the company’s energy transition. Breaking the coupling, therefore, encourages local employees to bring to light sustainability problems and opportunities throughout an organization. The pioneers we researched asked experienced middle managers in functional and business units to identify which practices, processes, and technologies were causing the greatest environmental damage and which they thought presented the best innovation opportunities for sustainability. Chris Hornbecker explores how bonsai trees embody the love, energy, and time invested in them. For example, Holcim created a specialized innovation unit dedicated to helping its plant managers identify and tackle local sustainability and operational challenges in the manufacturing space. The program, called Plants of Tomorrow (POT), incorporates automation, robotics, AI, predictive maintenance, and digital-twin technologies in roughly 140 plants globally to optimize energy use, reduce CO2 emissions, and improve sustainability. By the end of 2023, POT had successfully executed more than 2,000 applications. The process starts with a POT consultant, who helps local managers identify sustainability challenges and improvement opportunities using new technologies and develop a business case. POT emphasizes speed and efficiency in its implementation process, aiming to deploy new technologies within 100 days and minimizing the financial burden on individual plants. A year after implementation, an independent audit is conducted to verify the real-world impact compared with initial projections. After testing and confirmation of positive impact, POT actively promotes success cases and highlights champions who have deployed new technologies within the organization. Engage business-unit change leaders. Sustainability initiatives and innovation projects often die at the business unit level. Why? Because the managers responsible for change report to a unit CEO who is accountable for short-term business performance and, consequently, is less motivated to support sustainability initiatives, which tend to have a broad and long-term orientation. One way to avoid this outcome is to create a dual reporting system for unit-level managers, in which they report to a specialized sustainability officer as well as their unit CEO. Increasingly, responsibility for sustainability is given to the officer who heads innovation. The pulp manufacturer Suzano, for example, merged its innovation and sustainability divisions in 2023 under the leadership of its chief sustainability, research, and innovation officer. Two directors—one focused on innovation and the other on sustainability—report to him. It adopted this integrated model for managing innovation and sustainability in order to embed sustainability into every stage of product development, from planting trees to final production. This approach ensures that, when developing new products—whether pulp, paper, or bioproducts—the starting point is the careful selection of trees, planted daily and managed with forestry practices that are sustainable both environmentally and socially. Establish a sustainability process for employees. It’s important to create specific entry points where employees become involved. Holcim’s open innovation unit, Holcim Maqer Ventures, helps business owners identify local sustainability challenges and connects them with startups that offer solutions. To increase the receptiveness of local businesses to innovation and startup collaboration, in 2022 the company launched the Maqer Garage, an empowerment program for Holcim leaders that equips them with the tools to drive innovation in their businesses. The Maqer Garage’s first cohort focused on building skills and empowering participants to act as change agents. The initiative spanned three key cities—London, Cologne, and Paris—and aimed to connect participants with local startups and tap into significant markets for innovation. The first module in London highlighted strategies for interacting with customers and leveraging data for sustainable construction and optimized processes. In Cologne, the emphasis was on creating fast prototypes and using data decisively. The program concluded in Paris with a session on integrating innovations into local organizations. Participants learned project management skills and the importance of agile methodologies like “fail fast, learn fast” to modernize the construction industry. Similarly, Suzano’s initiative called “small projects, big returns” empowers its local teams to take charge of impactful projects. The program gives them full autonomy to propose and execute initiatives with significant economic, environmental, or social impacts, managing budgets of up to approximately $200,000. The projects are administered locally, ensuring flexibility and responsiveness, but they follow a centralized methodology that aligns them with Suzano’s broader sustainability goals. As a result, the company can drive a cohesive and scalable sustainability effort through dozens, or even hundreds, of localized projects. Create a culture of experimentation. Enel has implemented various campaigns to normalize failure as part of the learning process, including its “My Best Failure” campaign and ideation competitions that reward creativity. At OCP Group, chief talent and organizational development officer Ibtissam Bensetti and her colleagues are facilitating a bottom-up approach: Lower-level employees are empowered to freely develop and pursue initiatives aligned with OCP’s vision and what it calls its “must-win battles.” They form hybrid teams throughout the organization to bring their ideas to fruition. Some initiatives are business-oriented, exploring growth and market opportunities. Others are operating-model-oriented, centered on culture and internal process improvement. And still others are community-oriented and aim to create shared socioeconomic value with OCP’s ecosystems. “Le Mouvement,” as it is called, has unleashed great energy within OCP’s extended talent pool, resulting in on-the-ground initiatives such as virtual mining simulations, digital maintenance, and decarbonization innovations. Chris Hornbecker Suzano’s approach to fostering a culture of experimentation is deeply rooted in its organizational philosophy of emphasizing trust and empowerment at the local level while recognizing the realities of being a capital-intensive company. For example, a machine operator who has an idea to optimize the performance of a standard piece of equipment is free to implement modifications that could lead to reduced chemical consumption, increased production, or even enhanced energy-export capabilities. This flexibility allows employees to experiment with solutions that align with Suzano’s sustainability objectives. Initiatives are not limited to technical improvements. Employees are encouraged to invest in community projects that foster sustainable income generation, which contributes to the company’s broader mission to lift 200,000 people out of poverty. Because it is a capital-intensive business, it tests ideas on a small scale before committing significant resources. That method enables teams to take calculated risks and explore new ideas with confidence, knowing that successful projects will be swiftly scaled and adopted companywide. Employees’ sense of autonomy is a crucial aspect of Suzano’s culture of innovation: Individuals and teams are empowered to drive meaningful change and feel a deep sense of ownership. Many innovative companies have found that engagement with external players is a key factor in accessing new ideas and capabilities. Sustainability pioneers, too, must collaborate with external players, as many clean technologies and new competencies needed to become sustainable are not available in-house. Many are being developed at academic institutions and startups. The tightening of environmental rules, notably the UN greenhouse gas protocol, is reinforcing the need for partnerships. The new rules make a company responsible not only for the emissions it directly produces when making its products or providing its services but also for the upstream and downstream emissions produced by its suppliers and customers. At companies we studied, a substantial part of their sustainability challenges are either seeded or require action by stakeholders outside the organization, including suppliers, competitors, and legislators. Reducing Scope 3 emissions, as they are known, requires action by parties other than the company itself, which often operate in very different environments. Scope 3 emissions generally make up the largest proportion of emissions that companies are required to disclose. For example, Schneider Electric estimates that its Scope 3 emissions amount to more than 99% of its reported emissions, approximately 14% upstream and 86% downstream. Sustainability, therefore, requires companies to look for innovative suppliers that are interested in providing clean alternatives to traditional inputs. As a result, many of our pioneers adopt the “venture client model” in engaging with startups: They offer startups an industrial-scale test bed for their new solutions. Consider Enel’s collaboration with Nozomi Networks, a cybersecurity solutions company, which began when Enel gave two entrepreneurs an opportunity to test their novel solution for malware detection on one of Enel’s hydroelectric energy-generation facilities. After days of diligent testing, the Nozomi Networks founders won a contract with Enel to develop a proof-of-concept pilot, which helped them obtain financing and other clients. Now Nozomi is a global leader in its field. Although partnerships help generate new ideas, they are often at risk of being kept too closely focused on specific applications and types of partners or remain isolated within one group in a company. Yara, for example, initially managed partnerships with research partners tightly within its R&D unit. Holcim used acceleration and venture client approaches to collaborate with digital ventures, and while its projects delivered good returns, they have not yet reached their full potential for transforming the company’s core businesses toward sustainability. Recognizing that sustainable solutions are needed across their entire businesses, some of our pioneers have built distinct units to explore external collaborations and allowed their core units to continue focusing on efficiency. This kind of ambidextrous organizational structure helps business units explore new solutions even as they expand their core. For example, the fertilizer solutions business at OCP has maintained its focus on its core commodity-fertilizer portfolio while developing specialty fertilizers through a dedicated unit that collaborates with external vendors and OCP’s Innovx unit. Similarly, Enel’s initial move into energy as a service business was executed through Enel X, which was separate from the company’s generation business and whose leader reported directly to Enel’s CEO. To help scale the new ideas and open itself to externally sourced ideas, Enel created a shared virtual innovation tool kit as well as physical innovation hubs. These resources are connected to business units and functions through the processes we described earlier. Enel’s business line representatives and innovation specialists at headquarters jointly identify potential partners and set up proof-of-concept collaborations involving external partners and line representatives that the innovation specialists oversee. . . . The journey toward sustainability in business is not a solitary endeavor but a collective pursuit. Companies that succeed in this mission understand their core purpose and align their innovation projects accordingly. They strategically invest in innovations that are ripe for scaling up and use their resources effectively. They engage employees across the organization in identifying solutions by ensuring that responsibility is shared, by engaging unit leadership in the mission, and by offering clear points of entry into the change process. Moreover, they recognize the power of open innovation and actively collaborate with an ecosystem of innovators and problem solvers, leveraging external ideas and resources to drive their sustainability agendas. Most important, they engage their entire organization in the innovation process, fostering a culture of creativity and shared ownership.
