Show 112 – Circklo Sustainability Index
Produced in partnership with the Think Tank Circklo, where the topic of discussion is the release of their Sustainability Index.
- Marco D’Attanasio, Co-Founder, Circklo
- Natasha Franck, Founder and CEO of Eon
- Laz Tyrekidis, Founder and CEO, Aristocracy London
Marco began by explaining that Circklo is an online community for people in the consumer industries that are looking to accelerate their business transformation towards a more sustainable future. It’s a collaborative platform for members to connect, share, innovate and just find lots of useful tools and information workshops and online training and learning. He explained that Circklo felt that a lot of the debate about sustainability was happening at a philosophical level, which is great, but what they wanted to create was something very practical and aimed to be useful for people who are actually doing things in the field of sustainability and sustainability transformation. Also, they do see business as a very positive force for change towards sustainability. So, they believe businesses will drive the transition to sustainability. He said that they have a very strong view about what a business should have in order to become truly sustainable in the medium term, and they identified three dimensions that are really necessary for business to thrive in a more sustainable world;
- sustainability and circularity of the business model
- a very high degree of digital maturity
- a strong financial performance.
So, as a start, they wanted to take a quantitative snapshot of where we are today and create a useful tool for other companies and smaller companies to benchmark themselves. They decided to create the Circklo Sustainability Index in which they analysed the 50 largest public consumer companies in Western Europe and the US over those three above dimensions. The aim was not to celebrate the best businesses, but really to motivate acceleration towards sustainability and to start a conversation. Marco said that they used metrics that are completely independent of the size of the company, which allows the methodology to be applied across any range of size of business, they analysed the results and divided those 50 companies into three groups.
- The Game Changers: the companies that tend to score very highly in all the three dimensions and are leaders in sustainability with both a strong strategy in terms of integration as well as a high market impact.
- The Change Champions: they tend to have a clear sustainability strategy and good execution but have a gap to fill in at least one of those three dimensions.
- Challengers: a very broad category, which ranges from companies that need to develop the strategy but are behind in terms of execution, down to the ones that have yet to formulate a clear sustainability strategy.
Marco explained that they felt it was important that there is an independent group looking at their results and their sustainability strategy and benchmarking them against the other large companies. So, they would like business leaders to understand that sustainability is an important, very relevant topic for the business operations and to really embrace digital transformation, which to them is a necessary ingredient. They also want businesses to understand the importance of transparency in annual reporting of both financial and non-financial metrics and to explain the circular business models and what they are planning to do with their business. Beyond this, they are hoping that smaller companies will find this index as a useful tool to benchmark themselves against the corporate leaders in the area.
The main conclusion was that there is a huge space for improvement when it comes to businesses becoming more sustainable. According to Marco, it’s interesting that only one company, L’Oréal, achieved the ‘Game Changer’ score. Five more only were ranked change champions, Henkel, LVMH, Nike, Inditex and Hermes. Only L’Oréal and LVMH, for instance, managed to achieve a top 10 position in all the three dimensions as well as the overall index. Another very interesting conclusion is that there is a clear geographical divide with the performance of European companies that occupy eight of the first 10 positions, while North American companies fill nine of the last 10 spots in the index. It’s clear that European regulators and policymakers have shown more sensibility in this area, as well as European consumers are becoming more and more aware.
What does sustainability mean for a business?
Marco said that you need to be transparent to consumers, regulators and investors as well. You need efficiency to eliminate wastage, in particular your supply chain. You need to be resilient to external shocks, like what we saw with COVID this year. You need circularity to extend your product life cycles. All those things point to digitalisation. In order to be sustainable, you need really to be digital at the core of the business and you need to be able to use data as an enabler of change towards sustainability and future innovations. Marco added that this is not a one-off transformation, it’s a radical change that businesses will have to undergo in order to survive in the future in the longer term. He said it’s really interesting to look at practicalities in case studies here and there are lots of them. If you look at Circklo’s findings in this dimension, you would expect to find Amazon as one of the highest ranking businesses because their marketplace strategy has been highly digitalised since inception. But perhaps surprisingly, you find that other companies like Inditex and Nike scored very, very highly. And this is really about strategy, Inditex has a very high level of maturity and understanding on the supply chain, like no other companies in this index, they have been investing in digitalisation over the years. And two years ago, the companies embarked in a process of digital transformation and sustainability driven innovation. They do have the objective of becoming a fully sustainable digital platform for consumers worldwide, although they started as a traditional retail business. While as for Nike, the innovation is one of the cornerstones underpinning the business. They really score highly in technical innovation in design and manufacturing processes, a lot of the products and they are investing and striving to minimize waste and extend the life cycle of the products.
We then spoke to Natasha Franck, who founded Eon in New York back in 2015, and her business aim is very much about extending the life cycle of every item of clothing. She explained that Eon is a connected products platform and that they work with brands to digitise their physical products and bring them online. Their mission is to power a circular future for commerce, essentially to enable every product to be identified from the moment it’s produced, through use they use next life and beyond, such that they can enable circular economy and circular business models across industry.
The shift that Eon is trying to drive is a business model transformation for brands and retailers. So today, brands ID products in their supply chain in a rudimentary way with some form of barcode or RFID tag, and they track and ID that product from point of production to point of sale. And then, that identifier is removed, the product is sold and basically that product is essentially lost, and those materials are lost. So, there’s no real way for that brand to either monetise that product again through new business models like rental and resale and recycling. And there’s no way for the brand to also keep that connection with the customer. So the connected product is about creating this ongoing relationship between brands and products and customers such that, one, the commercial value is there for the brands and that ongoing relationship and also so that those products and materials can be managed sustainably and be recaptured and be used and be recycled. And instead of lost, as they are today in the linear model.
Natasha added that they are seeing data that shows that resale and re-commerce will be growing over the next few years, 21 times that of fast fashion. And so, there is a lot of business model transformation that is going on within fast fashion retailers to prepare for this wave of circular business models. The customer appetite for new business models, for sustainable business models and for higher quality products is really there.
Eon works with a wide consortium of industry leadership to develop and pioneer the circular ID protocol, which is the framework in which Eon digitises products, you could think of it as a shared language for connected products. They developed that protocol in partnership with groups like H&M, PVH, Target, GS1, SAP, Microsoft and different players across the circular value chain, recyclers and resellers like I:CO and Renewal Workshop and Waste Management. So really getting together a cross-sectional group of counterparts in the circular value chain in order to enable them to communicate through connected products in the circular ID protocol. Now the circular ID protocol is in pilot and Eon’s connected products platform is digitising products in partnership with the brand partners and additional brands to create and introduce these connected products with all of that circular ID data across industry.
Natasha believes that it’s a confluence of factors that is driving change in business models. It’s the new technology that can start to enable brands to manage these new business models. It is the customer interest in sustainability and demand for more sustainable business practices. And it’s also this global shift in terms of resource availability and cost and supply chain scarcity of these virgin materials. So, there is all three factors the customer behaviour, the resources and the digital shift that are coming together in this super exciting confluence to enable a real future for circular commerce.
We then wanted to find out what Laz Tyrekidis, Founder and CEO of Luxury Menswear Brand Aristocracy London thought about this topic.
Laz said that fast fashion is a vicious circle. Brand’s launch new collections every few weeks and we feel we need to buy new clothes all the time to look trendy. The clothes are so cheap that we don’t feel guilty when we barely wear them. So, as consumers, we’re addicted to buying clothes and suppliers treat that addiction with cheap, disposable fashion. But actually, the cost is huge both to the environment and to the people working in the garment industry. So, Laz posed the question, where does he stand as an individual and someone who makes clothes and clearly wants people to buy them? Aristocracy London doesn’t make cheap, disposable clothes, they create quality suits that they hope people will wear for years and they even tell them how to keep them looking fresh for longer. So, their business model is completely different. As much as they would love it if someone came and bought 10 suits, they don’t need them to because they don’t need that level of consumption to stay in business. That’s because they don’t waste resources. Their suits are limited edition, they only produce 100 pieces by design, so they don’t waste fabric, they don’t waste materials and they don’t end up with lots of unsold suits. Laz said he thinks people appreciate that people are becoming conscious of the impact of fast fashion. And in addition to that, they love this exclusivity as they don’t want to wear the same suit as thousands of other people.
Marco then explained that when it comes to financial performance, the focus is on medium to long term results with a typical time horizon of five years. The components that Circklo look at in the Index are:
- gross margins
- operating margins
- balance sheet strength
- sales growth.
Gross margins are simply the difference between how much a product sells for and how much it costs to produce. And a higher gross margin product is a sign of a stronger and higher quality product offering and therefore a structurally more profitable business model and value-added product. As you would expect, the beauty and fashion industry score very highly in this section, while classic bricks and mortar retail do not. So, Hermes was the top company in this space.
The other really important contributor to the financial performance is sales growth, Marco added. We live in a world where growth is very scarce and consumer companies who can successfully grow the sales, have a far better chance to be the winners of tomorrow’s sustainable world. Some of the food and beverage companies like McDonald’s and Coca-Cola meet single digit sales contraction year over year, it’s clear that’s not very sustainable in terms of products while there is a series of consumer companies that have no sales growth whatsoever.
Laz explained that when they first launched the Aristocracy London brand, they tried to do things the right way. Whilst he is aware, that there may still be a lot to learn, he said they went for reusable boxes and bought tissue paper from the company that plants trees for every order that they make. But they wanted to do more. So, they give people the option to buy online so they don’t have to travel down to their showroom in London. And actually, that worked well for them, especially now that people tend to avoid traveling because of the Covid-19 pandemic. But the problem with online shopping is size. So, what do most people do? They buy two or three items in different sizes and then return the ones that don’t fit. And that’s a lot of going back and forth and using packaging material and so on. So, what Aristocracy London did is partner with Sizer, a body measurement app. So, you effectively need a mobile phone or tablet, you download the app for free and Sizer scans your body, takes your measurements and using intelligent algorithms it converts these measurements into your Aristocracy London suit size and then you can order the correct size. You’re happy because you don’t have to go through the trouble of returning clothes, they are happy because you’re a satisfied customer. And from their side they save a lot of time and pollution and money because they didn’t have packages all over the place. So, it’s good for the environment and also, it’s really good business. This is important for brands to consider sustainable solutions, it may take some investment at the start, but you do save money and resources in the long run.
Natasha explained that she thinks the customer is making more demands and looking beyond the traditional marketing messaging of sustainability. Brands have, for a long time, relied on marketing as a way to put a leaf on the image and the marketing and communicate sustainability, but not really be transparent about what substance or impact is behind that. And now the demand is really around, ‘how have you reduced your impact?’ ‘What is your business model transformation?’ ‘How are you being transparent around that?’ And a demand to go beyond communications and into real impact and innovation. She added that the consumer is better educated now and that even if they’re not better educated, the consumption patterns are changing. So, the customer is interested in resale. They want that higher quality product that’s already been used. So, regardless of whether they’re making that decision from a vested interest in sustainability or just an overall change in trend, this shift in consumption pattern is really taking away business from the typical fast fashion retailer.
She said that VF group and their North Face Reworn program that’s operated by the Renewal Workshop is a really exciting example of a circular business model in practice and one that is driving revenue toward the brand. They have launched a resale program, operated by the Renewal Workshop and you can resell your North Face through that. The program generates revenue and now you can start to see really exciting economics there, now a jacket can be resold two, three, four times and ultimately have more revenue associated with that item across its lifecycle. To Natasha, that is what’s really exciting, because there you have a business model transformation, and that is what’s ultimately going to make sustainability in business or circularity in business really aligned because you’ll be generating more revenue by having a circular business and these objectives will start to work in sync.
Marco then explained that, in terms of circular integration, where we find the geographical split, where Europe performs much better than North America, the three best performing companies are European – Diageo, L’Oréal and Henkel. This is clearly a consequence of a higher degree of sensibility in Europe towards the issues of sustainability. Going into details, they looked at a number of different metrics here; the environmental impact associated with the company’s products and services was clearly featuring prominently, carbon emission and different metrics in terms of wastage and wastage per employee. They did focus on metrics that are independent of the size of the company, so that the methodology is completely applicable to any size of business. Circklo looked at social capital, which means relationships with local communities and human rights track record. They looked at strategy and business model and innovation, which is so important, with big emphasis on companies’ investments in innovation and sustainability. It all fits together in their Index because you need to be profitable to have the capital to invest in innovation and you need to have a very highly developed digital strategy to be able to achieve something in terms of innovation. So, the management of supply chain was really important, especially in relation to environmental and social impacts.
Marco said that they then looked at the leadership and governance. So, the principles of diversity and inclusion, which have become a very sensitive topic recently. The results are that they have found a better overall performance from companies in the consumer product sector versus companies in the retail sector. Again, most likely as a consequence of the much tougher business environment that is faced by most of the retail industry. The other interesting finding is that there is a very high dispersion in scores in the fields related to environmental and carbon emission, so there are some companies that do not seem to care at all, and they tend to be retail companies that are typically performing poorly also from a financial point of view. However, the reassuring thing is that most companies have initiatives in place to address or reduce both social and environmental risks, risks in their supply chain and the guidelines to policies to protect human rights and implement ethical codes of conduct. One interesting point is that they found that out of these 50 large companies, only 20 are signatories of the United Nations Global Compact, which Marco said they found a bit surprising. For instance, neither Amazon nor Wal-Mart, who are the two largest companies in terms of the new and old economy, are not behind such an initiative.
Supporting this global compact does not cost much. And it’s an important effort, on a global scale, to push for some of these principles and just show that companies care. Circklo are really curious to see how these metrics, not just this, but other metrics, will evolve in the future and see where progress has been made and also where there is more investment and more sensitivity. They are already starting to work on the next version of the Index with more up to date and newer data input. The interesting thing that they look to monitor is regarding diversity and inclusion. Of the companies they analysed, the average age of boards of directors is 62, which they find a little bit high, and only 29 percent of directors are women, the metric that they feel should increase in time.
Natasha explained that there are so many challenges that we see within the traditional brand in retail corporate structure that prevent impactful digital transformation. Eon as a platform is digitising products and when they connect a product, it requires and gives value to the marketing team, the new business models team, the digital team, the returns management team, it connects, the digitised product touches every different department of an organisation. Because of that sweeping impact of the digitised product, it’s very hard to figure out who is the project owner because there’s very traditional silos into how innovation gets embarked upon within these brands. She said it’s been exciting for Eon to work with their brand partners because they are bringing together two or three different departments when they work with them. And in that cross-department innovation, they really can create transformative value for those companies. But it is more like running a therapy session and bringing all these counterparts together and shared objectives and different KPIs. So, it’s exciting and challenging, but the human obstacles and the organisational obstacles are more challenging, interestingly enough, than the technical.
When asked how confident he was that brands can become Game Changers or Change Champions, Marco responded on the medium term, they are highly confident. And the reason is really simple, they will have to in order to survive and grow and gain market share from their competitors, we are moving towards a more sustainable world. Change towards sustainability is driven everywhere by investors, by consumers, but also by policymakers. And the way he sees the circularity and financial success and digitalisation, feed into each other in a form from a virtuous loop and together drive the development of true and sustainable business models, which will win in the future. Circklo strongly believe so. This is clearly a medium, long term trend each one of us will be working on for the next decades. And you’re seeing some of these very large companies that understand this and have a strategy in place to become sustainable. But they’ve also seen that there is a lot of work to do for companies they analyse, to formulate a strategy and execute it. He said that they are already seeing the signs of some of these companies that will probably not make it in the longer term, so very few of those top 50 are actually clearly pulling out of the park and have sustainability at the core of this strategy. Circklo’s analysis clearly shows that bricks and mortar businesses appear to be struggling and are finding it difficult to develop their strategy and to execute it. And clearly, they are also under financial pressure, which does not bode well for the future. So, there is going to be the classic capitalistic survival of the fittest. And the fitter businesses in the consumer space and retail will be sustainable, will be digitally mature and perform strongly financially.