Sustainable products make sustainable companies (NOT vice versa)

At the start of the 1992 US Presidential Election campaign, polling showed that Bill Clinton had the support of only 25% of voters.

Clearly, the Clinton campaign had a mountain to climb, with just 8 months to reconnect with the American people.

The legendary political strategist James Carville told campaign staff to hammer home the importance of the economy at every chance they got. He even went so far as to hang a banner in the campaign headquarters reading “THE ECONOMY, STUPID” to act as a constant reminder.

The phrase became a mantra for the Clinton campaign. By focusing on a fundamental concern in every American home, Clinton redefined the issues on which the election was being fought. The rest is history.

Why am I telling you this?

Because when working with companies on sustainability, I am always reminded of this story and the importance of focusing on what really matters to a company's suppliers, employees, shareholders and customers.

I have often wished that I could follow James Carville's example and put up a banner in every office:

“The PRODUCT, stupid”

Disconnected

New reporting standards such as CSRD are setting rigorous benchmarks, and companies are being forced to take sustainability seriously.?However, it often feels as though these reporting frameworks are seen almost as an end in themselves.

When it comes to sustainability, I see many manufacturers that seem somehow disconnected from the products that they make. That’s a problem because their organisational impact is, in effect, the sum total of every product that they have ever produced.

What we see in this graph is an aggregation made by S&P of corporate GHG reporting from 3 manufacturing sectors. As you can see, operational emissions account for no more than 10%. The vast majority of emissions are embodied in the materials that they source or are a consequence of those products in use. Most obviously the energy that they directly consume (fuel for a car, electricity for a household appliance, etc.), but also the resources consumed indirectly - washing clothes, refrigerating, and cooking food, etc.

By comparison, business travel, employee commuting, downstream transport and all of the other 13 other factors that make up an organisation's GHG Scope 3 emissions, are statistically irrelevant.

So, progress on sustainability must come from innovation in product design and supply chain management, as well as sustainable operations.

For that to happen, managers need insight into every element of a product and its environmental consequence over its entire life cycle and value chain. They must understand what drives impacts and where they occur. They must ensure that any changes designed to reduce those impacts don't simply shift the burden elsewhere in the value chain, or create different forms of environmental damage.

Without product-level analysis, the many, many small innovations on product design and supply chain management that incrementally and cumulatively lead to sustainable progress cannot be made.

That's why LCA is now an essential management tool.

The Role Model

There is one company that really understands why it all comes down to the product.

Whenever I am asked to name a company that should act as a role model for other manufacturers, I always reply 飞利浦 .

The way in which they have achieved real leadership in sustainable manufacturing and circularity is a perfect example of pragmatic and applicable innovation management.

2023 was the 11th consecutive year that Philips was awarded CDP ‘A’ rating, and they were also one of the first companies to publish a Taskforce on Nature-related Financial Disclosures (TNFD) report.

So, they have an great record in ESG best practice, but most importantly their achievements are based upon a product-centric understanding of where their impacts lie.

In their 2023 annual report, Philips acknowledge the importance of LCA

"Philips has been performing Life-Cycle Assessments (LCAs) since 1990. LCAs provide insight into the lifetime environmental impact of our products. They are used to steer our EcoDesign efforts by reducing the environmental impact during the lifetime of our products and to grow our Green/EcoDesigned/EcoHero and Circular portfolio."

Many other companies may have been performing LCAs for just as long, but most of them will have done so on just a small selection of their portfolio. Usually in order to comply with a customer request, or to justify the environmental claims of a particular product.

By contrast, Philips have committed to LCA at scale, and have constantly assessed more than 450 different products as an ongoing part of their management reporting process.

This enabled them to do something unique.

They compared all of those products to its leading competitor.

From what they had learned from their own LCAs, they estimated the comparative impact and assessed both their own product and is competitor against 4 eco design criteria:

Energy

"Energy?consumption is often the single most important factor in determining a product’s lifecycle environmental impact. By improving the energy efficiency of a product, we can reduce its energy consumption and carbon footprint."

Substances

"Products are made using a range of substances, some of which may have an impact on people’s health or the environment. By minimizing or eliminating the use of hazardous substances, we can reduce our products’ health and/or environmental impact."

Packaging

"Material, weight and volume reduction, along with smart material choices (e.g. from recycled and/or certified renewable sources, 100% recyclable, easily separable), helps minimize resource consumption and environmental impact over the life cycle of the packaging. At the same time, designing packaging to be reusable, recyclable or compostable also ensures it is circular economy-ready."

Circularity

"Circularity refers to the potential of a system, product or component to contribute to the circular economy. It is calculated by assessing environmental performance over multiple life cycles, taking into account, for example, the recovery of materials and their reuse in new products. Upgrading, serviceability, refurbishment, spare parts harvesting, increased recycled content and recyclability, weight reduction, selection of more sustainable materials – these all help to reduce resource consumption. Circularity also includes product lifetime; longer lifetime reduces the resource consumption and transportation emissions associated with the introduction of new products."

https://www.philips.com/a-w/about/environmental-social-governance/environmental/ecodesign.html

That decision to benchmark their products against their competitors shows an important aspect of their corporate culture. For Philips, sustainability is the source of strategic, competitive advantage. Sustainable innovation is driven by a serious commercial imperative; their motivation goes far beyond the need to meet compliance requirements or score PR points.

As a result of the process, Philips found that some of their products were already market leaders in environmental terms.

These ‘Green’ products may not have originally been designed to be sustainable; nevertheless, they all had the essential characteristics of what a sustainable product should be.

They provided both a model for future products, and a sustainability-lead offering which could be marketed with confidence. All claims for environmental leadership could be backed by hard LCA evidence. There could be no ‘green washing’ here.

This promotional video shows the Philips 'Green Series' monitors. As you will see, the 4 eco-design criteria listed above feature in the way that they position these products

https://youtu.be/72h2i7y7RxI?si=gYATdYB0TRrO_wDy

In 2012, around 45% of Philips revenue came from these products. It is now >70% and Philips aim to reach 100% by 2030.

What’s more 20% of revenues are now from circular products and offerings, which reflects the fact that Philips have been working on their transition to circular business models since 2011.

Currently, the manufacturers best placed to adopt circular models are in capital goods, where the products are of high-value and produced in relatively low volumes. Philips reflect this in their circular product strategy, as the product ranges where circular offerings are made are from their professional medical portfolio of devices such as MRI, CT and ultrasound scanners. This ‘Circular Edition’ offering has enabled Philips to bring a unique value proposition to the market.

"Circular Edition systems undergo a rigorous refurbishment and/or remanufacturing process to ensure same-as-new quality and performance, but at a price that is 25% lower than a new Philips system, on average. A future-proof and cost-effective solution, giving you the Philips experience and offering a great return on investment."

Again, Philips have shown that progress toward circularity should not depend upon designing a new generation of circular products, but by understanding what is viable from existing products. The lessons learned and efficiencies gained from establishing reverse loop operations on a sub set of products can be built upon, so that in future even low value / high volume Philips products like irons and electric toothbrushes can be processed as cost effectively as a piece of hospital equipment worth thousands.

Clearly what Philips have achieved is not simply the result of committed leadership (powerful though that is). What they have done has required serious financial investment and the way that they have addressed that issue also provides a model for other companies, or even whole sectors.

In 2017, Philips was one of the first companies to develop a Revolving Credit Facility with an interest rate linked to its sustainability performance. Meeting sustainability targets meant cheap credit for working capital, with the financial partners able to make up for the shortfall in interest revenues by trading the carbon derivatives.

In 2019, in partnership with Rabobank, the Philips Green & Sustainability Innovation Bond Framework was launched, under which it issued Sustainability Innovation Bonds as a means to specifically finance its sustainability activities, including product innovation, circular economy and low carbon operations.

The Philips story is a remarkable one.

I see many companies that are struggling to find ways to execute sustainability strategies that they have committed to. In April 2023 a report from 安永 showed that although 78% of FTSE 100 companies has set objectives to become net zero by 2050, only 5% had disclosed “credible” and sufficiently detailed transition plans.

For me, the major cause of that disconnect is that those companies lack the tools and perspectives to tackle their impacts at source and at a tactical level.

That requires a product-centric understanding of corporate impact, product level insight and a culture of innovation. That’s what has made Philips different.