The Challenge of Innovating against declining resources

Anyone pursuing sustainability through innovation faces the defining challenge of finding growth in the face of declining resource stocks. It’s not a new challenge, by any means, but it is at the core of pursuing sustainable innovaitons. And you won’t find it in the typical narratives celebrating innovation or understanding how to manage it.

(this post is part of a series exploring the unique challenges of sustainable innovation)

The business environment of the last half-century can be seen as a moment when available resources grew at a rate never seen before and, likely, never again. For established companies, international markets for their goods expanded; the stocks of cheap labor expanded; computing and communications technologies expanded time, communication, and control; and capital markets expanded. Corporations like IBM, 3M, GE, the U.S. auto industry, and the rest of the Fortune 500 grew along with this international expansion.

In fact, historians have argued the past 400 years of Western civilization were shaped in the same way. Europe’s westward expansion brought new world gold to fund old world ventures; new world crops to raise old-world agricultural productivity; low-cost raw materials for its mills; and new markets for its finished goods.

A few companies ran up against limits, but usually as a result of their own voracious growth. The most recent, for example, include Home Depot, one of the fastest growing companies until it ran out of zip codes. They hit a point where every new store bit into existing store sales, and had to change their growth strategy from finding new customers to finding more things to sell to old customers (or making more money selling the same old things). Starbucks essentially went from coffee shops to coffee counters to coffee-flavored drinks in the beverage aisle. But for the most part, such rate-limiting experiences were written off as the costs of success.

That may be changing. Since 1900, the world’s population has grown four-fold and our economy (as a measure of consumption) roughly forty-fold. We have reached the point where running out of resources is no longer a local phenomenon, nor limited to only the very largest or fastest growing companies.

As I have described elsewhere, sustainability covers everything from climate change to social equity to global health to fresh water to conflict minerals (and beyond). At its core, however, is a single simple equation: annual global human consumption of resources exceeds the earth’s capacity to replenish those resources. Sustainable innovation represents the conception, development, and successful launch of new products and services that consume fewer resources than the products and services they replace, thus reducing the annual deficit.[^1]

So what, from a sustainability perspective, are the declining resource stocks?

The first few are easy to see, but can be misleading. Are we really running out of fossil fuels? Peak oil is highly debatable, and fracking is changing our perceptions of how much natural gas we have in our known reserves. But long before we run out of oil or gas, we will run out of hospitable “climate,” fresh water, environmental diversity, health, nutrition, social equity, critical (conflict) minerals. And before that, we may run out of the tolerances of societies around the world for our current business practices.

Lawyers call this the changing social contract. The cigarette companies didn’t run out of customers, they ran out of public acceptance for their methods of attracting and keeping their customers. Utility and merchant power companies—deciding whether to build another coal-fired power plant—now worry whether their stock of public acceptance will last as long, 40 years, as the typical plant does. 40 years ago, cigarette companies weren’t worried either. And now, McDonald's and other major food producers and purveyors worry they are only a few mobilephone videos away from running out of the public's tolerance for the industrial scale and manner with which they raise, butcher, and serve food.

Accounting for resource stocks

Running out of the very resources that once drove growth is arguably a defining feature of human civilization. In 1798, english scholar and cleric Thomas Malthus provided the world with one of the first modern ecological views of society when he noted that, while population increased geometrically, food production increases only arithmetically.[^2] He was easily forgotten as the world population increased from roughly 800 million then to 7 billion today.

But Malthus was asking a more basic question: how do environmental limitations shape populations? And his work influenced both science and business. In it, Darwin found the seed of his theory of evolution (survival of the fittest in competition for limited resources) while the British East India Company, the worlds first and largest corporation, found valuable though sometimes abhorrent insights for managing India.

When population exceeded carrying capacity, Malthus predicted war, famine, and disease.So what kept the Malthusian specter at bay for the past two centuries? Innovation.

Civilizations responded with innovations that, from the industrial revolution of the 1800s to the Green Revolution of the 1900s, have increased their available resources: more energy resources (from wood to coal to oil) and agricultural productivity (from crop rotation to irrigation to fertilizer to hybrid seeds to GMOs).

Unfortunately, not all innovations are created equal. Some, like more efficient crops and agricultural practices, widened the closing gap, but most have simply enabled us draw down resources more quickly—running a higher deficit that future generations will have to deal with. As Jeffrey Sachs noted:

Our increase in know-how has not only been about getting more outputs for the same inputs, but also about our ability to mine the Earth for more inputs. The first Industrial Revolution began with the use of fossil fuel, specifically coal, through Watt’s steam engine. Humanity harnessed geological deposits of ancient solar energy, stored as coal, oil, and gas, to do our modern bidding. We learned to dig deeper for minerals, fish the oceans with larger nets, divert rivers with greater dams and canals, appropriate more habitats of other species and cut down forests with more powerful land-clearing equipment. In countless ways, we have not gotten more for less but rather more for more, as we’ve converted rich stores of natural capital into high flows of current consumption. Much of what we call “income,” in the true sense of adding value from economic activity, is actually depletion instead, or the running down of natural capital.

Interestingly, the modern extraction industries are already used to accounting for their resource stocks. In fact, the Reserves-to-production ratio (RPR or R/P) represents the remaining amount of a non-renewable resource (expressed in years). The numerator, reserve, represents the amount of a resource known to both exist and be economically recoverable. The denominator, production, represents the amount of that resource produced (extracted) in one year at the current rate.[3]

 

RPR = (amount of known resource) / (amount used per year)

 

This works for the mining and oil and gas companies, but most other companies are unable to account for the external resources that have enabled and even driven their growth. And even less able to innovate in the face of their decline.

It will take some work to adapt this static RPR model to account for the stocks of environmental, social, political “tolerances” and to learn how to use it to guide innovations in companies and entire sectors, but it is already happening implicitly (see for example the legacy of Ray Anderson at Interface) and now increasingly explicitly (see the Sustainable Apparel Coalition).

Thus the challenge of innovating against declining resources is one that grows more important everyday. Yet, because of 50 years of expanding markets, expanding economies, and expanding resources and because of shortened corporate time horizons (as in, “five years from now it will be someone else’s problem”), this challenge is absent from the agendas and conversations of most executives.

That won’t last.

 

[1] It’s tempting to set a bar at those new technologies that are neutral—consuming only as many resources as can be replenished—and certainly the most sustainable innovations are those that actually replenish resources. However, this approach favors the impossible better at the expense of the possible good (incremental improvements).

[2] Malthus’s views sparked as much controversy then as today. Not for the insight, which was inarguable, but for the implications (particularly about population control).

[3] Of course, since these numbers influence the perceived health of any operations that depends on external resources, they are subject to enormous debate and deception. Nonetheless, it is an important ratio to make explicit.