Economic transformation takes courage

The growing need to respond to the worsening climate crisis is the driver for the biggest economic transformation since the Industrial Revolution. That transformation is just beginning.

Companies must transform because they are part of the wider economic transformation that is affecting global business. Why do we call it a global economic transformation? Because the global economy cannot function if we don't tackle climate change. We’re already seeing disrupted value chains, uninsurable risks and reduced access to finance.

Why ‘economic’ transformation?

Whole markets are transforming. It started with energy, now it's transport, but most sectors are affected. The opportunities for those who get ahead of the curve are great, but the transformation curve is exponential and anyone who does not act will likely lose market share.

But there is plenty to celebrate. Energy is a good place to start. Solar energy output has been doubling every two to three years, and wind generation is showing a compound annual growth rate of 14%.

The vehicle sector is transforming rapidly too. In 2020, one in 25 cars sold was an electric vehicle but in 2023 this had risen to a significant one in five. Electric vehicle sales are predicted to rise by the same amount this year. And battery storage capacity is doubling every one to two years.

We should not be surprised by the exponential rate at which transformation is taking place. Historically, that’s the way industrial transformations happen – very slowly at first and then very fast. This was the case with the Industrial Revolution, the age of oil and the information revolution.

It's easy to deny that economic transformation is happening when you're at 1% electric vehicles, 2% electric vehicles or even 4% electric vehicles, but that exponential nature of change means that the number quickly rises to 20% market penetration – where we are now – and manufacturers soon realise they have lost market share to newcomers and those that took economic transformation seriously.

Ultimately, boards must have the intellectual clarity to see this pattern of economic transformation writ large across the global economy. It is their responsibility to recognise it, and they must also register the speed at which it is now happening.

And boards must have courage

Leading in stable times – despite the economic cycles – is one thing. Economic transformation calls for a different type of leadership and it requires courage to allocate resources in a way that’s appropriate for transformation.

Now it’s incumbent on boards to interface with their Exco in a way that ensures board appointments, Exco appointments and Capex decisions (including R&D, product development and new facility funding) enable their companies to thrive in that transformed future. And the balance sheet must be ready for the transformation too.

As a corollary to that, boards must prepare for resistance to change to ensure the steps that must be taken for the company to participate in the transformation are not slowed down.

While change is inevitable across most sectors, this change might not be obvious or easy to navigate. But it will be easy to get wrong: companies can go too fast, or they can go too slowly. Timing is vital. And it’s almost impossible to get everything right. Boards must have the courage to act, even without clarity from consumers, competitors and policymakers.

Let’s remember that a lot of disruption in the market will come from unusual competitors. Boards must familiarise themselves with where innovation is happening and learn how to bring it to their companies, be it through investment in R&D or through acquisition.

At this time of transformation, governance must be future fit. The board must have the breadth of skills to understand the nature of the transformation, and they must embrace diversity of people as well as diversity of experience across sectors to assist the transformation.

And there must be space for difficult conversations because economic transformation will mean stopping doing some things. That takes courage too.

Every sector is at a different stage. But boards of companies in all sectors must think exponentially. In reality, we have the solutions – extraordinary transformations are already happening faster than we think. The world added 50% more renewable capacity in 2023 than in 2022, and the next five years will see the fastest growth yet.

Let's not forget that we are building more than we need for net zero, transformation is already happening, and courage will become the common currency for bringing about further change.