What a resource-constrained economy means for cleantech

Below is the text of a talk I gave at the Rushlight Clean Technologies Show, a gathering place for, guess what, cleantech companies, their advisors and funders. I was asked to talk for 15 minutes on a resource-constrained economy. My key point was that there are business opportunities in overcoming the constraints, especially through resource productivity and business model innovation.

Let me start by asking, ‘What resources constrain the economy?’ In the 20th century the McKinsey Global Institute Commodity Price Index fell by half. This is despite population going up fourfold, and the global economy growing by 20 times (For this and other McKinsey references below see their excellent report on Resource Revolution). Malthus was proved wrong; we didn’t live in a resource-constrained world.

But that’s no longer true. In the last 10 years that commodity index has gone all the way back up. Why? There are more people, and more of those people are prosperous than ever before – –3 billion will be added to the global middle class in the next 20 years. Expanding existing sources is more expensive and more difficult. The world is more interlinked; a small crisis in one commodity can quickly affect many more, creating a bigger shock. And, crucially, we’ve degraded the natural world so much that it cannot withstand shocks like it used to, making us all much more vulnerable.

The consequences: higher, more volatile prices; more household budget taken up by food, fuel and other necessities; and increased uncertainty for business has led to reducing investment. All of which adds up to lower profits and growth. The other consequence is social unrest – resource constraints were a factor in the Arab Spring last year. Higher food prices broke the implied promise of the regimes to provide for people, and proved to be straw that broke the camel’s back.

But, we need to be careful about saying we will run out of stuff. In 1980, the economist Julian Simon bet Nobel-prize winner and biologist Paul Ehrlich that there was no resource constraint and so commodity prices would fall. He won. Higher prices drove investment in new supply and extractive technologies, and the short-term constraint went away. Today shale gas is being touted as a fossil fuel that replaces oil which, supposedly, has ‘peaked’. There are market incentives to overcome restrictions on raw materials inputs.

All of which points to the real resource constraint: the ability of natural world to absorb our actions, whether coping with pollution and waste in the air, climate and seas or producing what we need like food, timber and so on. Fundamentally, we’ll run out of climate before we run out of fossil fuel.

Fortunately there are ways we can overcome resource constraints. I can point to four opportunities:
Expanding existing supply. Unfortunately, we will still be using oil for some time to come. We should do this as little as possible.

• Increasing the supply of renewable resources, especially energy. The McKinsey research “suggests that a much more rapid scaling of renewable energy technologies could lead to rapid declines in cost. Solar power capacity could become available at around $1 per watt by 2020, down from more than $8 per watt in 2007 and $4 per watt in 2010.”
• Boosting resource productivity. The 20th century was about labour productivity – getting more value from each hour someone worked. The 21st century will increasingly be about getting more value from each unit of resource – kilogram of timber, kJoule of energy, or kilogram of carbon emission. McKinsey think there will be at least $2.9 trillion of global savings in 2030 from capturing resource productivity potential. Some 70% of productivity opportunities have an internal rate of return of more than 10% at current market prices – they are commercially viable right now. Specifically, there are tangible opportunities in energy efficiency, farming, water leakage, food waste and more.
• Changing consumption patterns. Have a look at Consumer Futures to see some of the ways these might change.
   

Delivering on this resource productivity will require more than just tinkering; it needs business model innovation. We need to create business models that enable efficiency, close loops, sell performance and more. 

So, who needs to step up and how? We need disruptive innovation at scale. We need many experiments, that fail fast and fail well; and we need to scale up what works quickly. There is plenty for everyone to do. 

• Government needs to have strong, consistent price signals. It needs to dismantle perverse subsidies, estimated at $1.1 trillion every year globally. It needs to share the risk of failure with the private sector so there is commercial case for experimentation. It needs to help scale up what works through things like Knowledge Transfer Networks and product standards.
• Venture capitalists need to move beyond looking for the latest ephemeral social media app. There are enormous challenges here, which will become large markets for successful companies. Let’s support some disruptive entrepreneurs. That’s why Forum is working with NESTA and StartUp Bootcamp on an Accelerator programme for sustainable business entrepreneurs. It’s also why we are looking for places where we can observe new business models as they bubble up; we want to inspire the companies we work with practical examples.
• Financial institutions need to shift financial capital from unsustainable to sustainable activities. We gave 10 recommendations in our recent Vision of a Sustainable Economy (see page 10). Two of them are relevant here: create funds that invest in overcoming resource constraints, and institutionalise long-termism through, for instance, pay and communication channels. Forum knows from direct experience that more big businesses want to profit from this area. Our Sustainable Business Models Group brings together leading businesses who want to create step-change internally and externally. Our first piece with the Group is on how to do disruptive innovation (more on which soon). Part of the answer will be about corporate venturing, where a large firm takes an equity stake in a small but innovative or specialist firm to gain a specific competitive advantage.
• Finally there are the entrepreneurs themselves. They need to make sure their fantastic disruptive businesses do not have unintentional negative impacts. But we need the creative destruction their experimentation can bring. 

Humanity has faced up to tremendous challenges before, and we can do it again. Our most precious resource is our ingenuity. We need entrepreneurs to put their commercial skills to the test. We need the political will to shape an economy where we can all prosper and flourish within environmental limits. It is the task of our generation. 

Good luck!