How Climate Change is reshaping Environmental Services companies’ value proposition

Since the creation of Intergovernmental Panel on Climate Change (IPCC) in 1988, thousands of papers have been written to warn policy makers on the increasing danger of global warming. If there is currently is no consensus around the full effects of global warning, it is fair to assume that limiting the climate change means keeping the increase below 2 degrees Celsius.

The potential social, economic and environmental consequences of global warning will affect every business, but some, by the intrinsic nature of their activity are on the forefront of the battle against climate change, this is particularly true for Environmental Services companies.

 

Traditional business model

Looking at this sector through the prism of this industry, in particular its two largest players Suez and Veolia, might be interesting to understand how the climate change is affecting its business model.

For these firms, value creation is derived from three main activities: Water management, Waste management and Energy services. These divisions or activities are echoing certain Sustainable Development Goals, especially those relating to climate change.

These companies, through their traditional activities, are having a direct impact on climate change but are also highly dependent on the current availability of the planet’s resources. As an example:

• Water and Wastewater Services division shares a lot with SDG 6 – Clean Water and Sanitation, as drinking water networks efficiency is a key contractual component of the its operations with municipalities,
• Waste management division, which scope is as large as collecting waste to recover material from it, or produce energy from it will contribute to SDG 11 – Sustainable cities and communities,
• Energy services division is ultimately tightly linked to SDG 7 – Affordable and clean energy, as the company favorise renewable and alternative energy production, ensure district heating networks operates efficiently and reduces CO2 emissions per MWh produced.

But more interesting that these traditional business models is the recent change of paradigm in the company mindset, and how its value proposition evolved.

 

How their business model is evolving

Over the last few years, these companies have indeed tried to rebalance their growth from municipal clients toward industrial one, and along with this change the company has made strong efforts to come up with innovative business models while engaging into some strong circular economy commitments. These two themes are could be helpful to help the realisation of SDG 9 – Industry, innovation and infrastructure and SDG 12 – Responsible consumption and production goals.

The way business model innovation materialise varies depending on its clients’ sectors, but to name a few projects, this can be done through increasing the by-products production recovery for the oil and gas industry, increasing R&D to enable treatment of hazardous waste, or work along the food and beverage industry to recycle organic waste, invent less resource intensive packaging and expand agricultural valorisation.

 

Circular economy through closing the loop

Over the recent years, both Suez and Veolia have also been strong promoters of circular economy, which is being a shift in their company culture.

For decades, these companies did not have a financial incentive to have their clients consume less resources, as the more their clients consumed, the more they were billed, de facto increasing companies’ revenues.

Whether this is due to external factor (resource constraint, public opinion, etc.), by internal belief or by business opportunity (or all three…), they are now promoting circular economy as a viable way to preserve and renew water, energy and material resources at local level.

This translate at the company level in developing pilot that would later become financially viable business opportunities to convince their client (and the general public) that one person’s waste was someone’s else new resource.

It also involves taking risk by conviction and for the benefit of the local community, they for instance invested in Plastic recovery facilities in Germany, United-Kingdom or France a couple of years back, when the vast majority of the world’s plastic waste was shipped to China for peppercorn rates.

Circular economy also involves changing the relationship with their clients, increasing trust through information transfer, defining technical solutions that might be more expensive but more efficient to move away from the “extract-manufacture-dispose” logic.

 

But some loopholes are still to be closed…

Whilst is industrial contracts are often offering financial incentive’s alignment regarding the saving of resources, thereby limiting the resource consumed as compared to a base case; part of their business models dos not accompany their customers in a more resource conscious mindset.

This is particularly the case for their municipal clients, where revenue is generated on a per consumption basis, therefore their financial incentive is not necessarily that the end-user consumes less.

Also, if these two companies are often proactive in developing innovative pilots and projects and not wait for regulation to impact their business, they are still quite dependant to regulatory measures. The point is not to challenge robustness of their business model, but to highlight that part of their circular economy initiatives (especially their innovative ones) are quite dependant on subsidies or subject to taxes impacting substitutes resources (e.g. polluter pays principle for the carbon resources).

Lastly, one could question if these companies are doing their best to address a direct response to targets 6.1 – achieve universal and equitable access to safe and affordable drinking water and 7.1 – ensure universal access to affordable, reliable and modern energy services. As privatisation of drinking water networks in certain part of the world is impacting negatively the lowest fringes of the society.

 

Mauro Basile Dos Santos Mello, Manuel Silva, Himanshi Vij, Franklin Villamaux