Magazine Fall 2021 Issue

Can We Afford Sustainable Business?

Taking a creative approach to pricing can benefit society, the environment — and your company.

Marco Bertini, John Pineda, Amadeus Petzke, and Jean-Manuel Izaret Reading Time: 24 min 

Topics

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Image courtesy of Gary Waters/theispot.com

“How are we going to pay for this?”

In that question lies the conundrum faced by the growing ranks of corporate leaders who recognize that business must, at the very least, stop contributing to the most urgent problems facing humanity and ought to, at best, help solve them. In mission statements and strategic plans, many companies are making commitments to improving sustainability and reducing inequity — but when it comes to meeting those goals, they are tripped up by the financial implications.

In reality, we have no shortage of ideas on how to provide greater and more equitable access to goods and services, use them conscientiously and more effectively, and leave the least amount of waste behind. But we are frequently held back in implementing those ideas because of the presumption that any sustainability initiative invariably leads to higher costs, higher taxes, higher fiscal deficits, and, ultimately, higher prices. “How are we going to pay for this?” becomes a killer question seemingly designed to stifle progress.

Overlooked in the debate, however, is one factor that unnecessarily limits the scope that leaders in all spheres — whether business, politics, or nonprofit — need to implement solutions that can scale to meaningful impact.

That factor is the price mechanism. We contend that it’s possible to find creative solutions that rally all market actors around responsible behaviors that mitigate the negative externalities of commerce before businesses tally them up and price them in. In one sense, we argue that organizations act more as caretakers of markets than as simple producers, using the incentives and information embedded in the price mechanism to allocate the responsibility for broader and fairer access, for conscientious and effective consumption, and for handling waste more efficiently.

At the root of the problem is the premise that the only way companies can ease the burden of commerce on our society is to account for it properly and find someone to foot the bill. This premise corners businesses into what we call a taboo trade-off. A company can try to pass the incremental cost of environmentally or socially responsible practices onto customers, but they may not be willing or able to pay it and thus flee to cheaper competitors or leave the market entirely.

Topics

About the Authors

Marco Bertini is a professor of marketing at Esade Ramon Llull University and a visiting professor at Harvard Business School. He is also a senior adviser at BCG. John Pineda is a partner and director in BCG’s San Francisco office. Amadeus Petzke is a partner and associate director in BCG’s Berlin office. Jean-Manuel Izaret is the global leader of the marketing, sales, and pricing practice at Boston Consulting Group (BCG).

References

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2. A. Bris, “Danone’s CEO Has Been Ousted for Being Progressive — Blame Society Not Activist Shareholders,” The Conversation, March 19, 2021, https://theconversation.com.

3. T.D. Hubbard, D.M. Christensen, and S.D. Graffin, “Higher Highs and Lower Lows: The Role of Corporate Social Responsibility in CEO Dismissal,” Strategic Management Journal 38, no. 11 (November 2017): 2255-2265.

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6. “The Paris Agreement,” United Nations Climate Change, accessed July 14, 2021, https://unfccc.int.

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8. J. Brady, “The Great Solar Panel Debate: To Lease or to Buy?” NPR, Feb. 10, 2015, www.npr.org; and A. Hobbs, E. Benami, U. Varadarajan, et al., “Improving Solar Policy: Lessons From the Solar Leasing Boom in California,” PDF file (San Francisco: Climate Policy Initiative, July 25, 2013), www.climatepolicyinitiative.org.

9. Ibid.

10. This report lays out energy need tiers, with the focus for clean energy in refugee communities on tier 2 needs (around 50 watts): B. Giæver, N. Hjellegjerde, B. Gomez Rojo, et al., “EmPowering Africa’s Most Vulnerable: Access to Solar Energy in Complex Crises [PDF file],” (Norcap and Boston Consulting Group, Sept. 1, 2020), www.nrc.no. Prices mentioned in the following policy brief are for a 20-watt solar home kit in 2018: R. Fetter and J. Phillips, “The True Cost of Solar Tariffs in East Africa,” policy brief (Durham, North Carolina: Nicholas Institute for Environmental Policy Solutions, Duke University, February 2019), https://energyaccess.duke.edu.

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12. “Hepatitis C,” World Health Organization, July 27, 2020, www.who.int.

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14. “Methods,” Drug Pricing Lab, accessed July 14, 2021, https://drugpricinglab.org.

15. H. Liu and A. Mulcahy, “Why States’ ‘Netflix Model’ Prescription Drug Arrangements Are No Silver Bullet,” Health Affairs, July 1, 2020, www.healthaffairs.org.

16. “Innovative Pricing Solutions,” Roche, accessed July 14, 2021, www.roche.com.

17. A. Helhoski and R. Lane, “Student Loan Debt Statistics: 2021,” NerdWallet, July 15, 2021, www.nerdwallet.com.

18. E. Kerr, “Income Share Agreements: What to Know,” U.S. News & World Report, April 13, 2021, www.usnews.com.

19. A. Berg, K.-H. Magnus, S. Kappelmark, et al., “Fashion on Climate” (Copenhagen: McKinsey & Company and Global Fashion Agenda, 2020), www.globalfashion.agenda.com.

20. “UN Helps Fashion Industry Shift to Low Carbon,” United Nations Climate Change, Sept. 6, 2018, https://unfccc.int.

21. “The Impact of a Cotton T-Shirt,” World Wildlife Fund, Jan. 16, 2013, www.worldwildlife.org.

22. M. Gunther, “Fast Fashion Fills Our Landfills,” JSTOR Daily, Sept. 27, 2016, https://daily.jstor.org.

23. “The True Price of Jeans,” True Price, May 23, 2019, https://trueprice.org.

24. Gunther, “Fast Fashion.”

25. “The Green Premium,” Breakthrough Energy, accessed July 15, 2021, www.breakthroughenergy.org.

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Comments (2)
Anonymous
Thank you for this thoughtful article. As an operator turned investor, teacher and writer in the fashion space, I appreciate your creative exploration of ways to internalize externalities. To date, the business model transformations that you suggest have not delivered much yield.  Patagonia's Worn Wear program, for example, represents far less that 1/2 of 1% of revenue..and it is one of the more established programs.  Though Rent the Runway just went public, it did so after consuming over $500M of funding and now has revenue of $150M and loses of $187M 10 years into their life as a company.  Worse yet, a recent academic study from Finland highlighted that new business models such as rental, may have a higher global warming potential as compared to a traditional linear model. Unfortunately, the underlying problem is the system..and overarching goal of growth.  The fashion industry is 5X the size it was four decades prior.  Closets are expanding and average wear time is decreasing.  At the same time, polyester (essentially oil) now represents more than 50% of all apparel inputs. In order to reorient to live within planetary boundaries, change must extend well beyond the price mechanism oriented rethink that the authors suggest...to include a different set of rules (laws) including EPR legislation (extended producer responsibility), taxes on high externality inputs, extended product warranties and much more.
Lorenzo Rattazzi
I wish the creative approach suggested in the article could be used on dealing with issues like the recent increase in energy cost (i.e. why not install a PV system with storage on top of every building to provide free energy instead of discussing how to introduce discounts on the energy bills for individuals and companies?)