Getting to net zero will require tremendous, rapid change and large-scale technology deployment across industries. The transition will create massive opportunities to build entirely new businesses.
A recent McKinsey report found that reaching net zero by 2050 could entail a 60 percent increase in capital spending on physical assets, compared with current levels. The required investments amount to $9.2 trillion per year until 2050, of which $6.5 trillion annually would go into low-emissions assets and enabling infrastructure. Our analysis also shows that growing demand for net-zero offerings could generate more than $12 trillion of annual sales by 2030 across 11 value pools, including transport ($2.3 trillion to $2.7 trillion per year), power ($1.0 trillion to $1.5 trillion), and hydrogen ($650 billion to $850 billion) (Exhibit 1). Such a transformation of the global economy could create significant growth potential for climate technologies and solutions.
Some technologies will be key in propelling the transition to net zero. In Europe, for example, our research suggests that just 15 technologies could drive 70 percent of the emissions abatement required to reach net zero in the region. Technologies that are mature and already available at a commercial scale, including onshore wind and solar photovoltaic, account for about 25 percent of the abatement potential in Europe, while an additional 45 percent could come from technologies that have an opportunity to be commercialized in the near future. This means that, in addition to renewable-energy technologies and electric mobility, technologies for zero-carbon residential heating (such as heat pumps), carbon capture and storage, green-hydrogen-based fuels, and industrial electrification could support decarbonization at scale.
In many markets, start-ups have been the first to scale up climate-tech businesses (renewable energy and electric vehicles, for example), while incumbents have been slower to adapt. But it’s not too late for established companies to break into still-maturing climate-technology domains, where the playing field remains wide open—provided that they move quickly. In addition, there will be room for thousands of surrounding players as these businesses develop and mature.
A recent McKinsey report found that reaching net zero by 2050 could entail a 60 percent increase in capital spending on physical assets, compared with current levels.
Building green businesses is top of mind for many leaders. In Leap by McKinsey’s state of new-business building report, 92 percent of executives say that new businesses built in the next five years will address sustainability to some extent—and 42 percent expect to put sustainability at the center of their new businesses’ value proposition. In our work with organizations that have built green businesses, we have identified ways companies could set themselves up not only for entry into a market but also for significant growth. Green business builders will likely need to plan and scale at the speed of digital companies to accelerate the transition to net zero. They’re ambitious with their growth goals and have cost advantages, often because they move quickly. Here, we share key lessons from successful green business builders.
While it took many years and significant governmental support to scale up renewable-electricity generation, broadening support for the net-zero agenda could enable the next wave of green businesses to grow more quickly.
By now, more than 3,000 companies across the world have set or are in the process of committing to an emissions reduction through the Science Based Targets initiative, 1 1. “Companies taking action” dashboard, Science Based Targets, accessed June 3, 2022. an institution that has created a framework around reduction commitments for businesses. Additionally, regulation (the EU taxonomy, 2 2. “EU taxonomy for sustainable activities,” European Commission, accessed June 3, 2022. for instance, which helps to define what economic activities in the region can be considered environmentally sustainable), investor activism, and rising consumer interest, among other factors, are pushing companies to benchmark and improve the sustainability performance of their offerings. For example, suppliers in B2B value chains are facing increasingly stringent emissions-reductions requirements as more of their customers pursue net-zero strategies. All of this is likely to accelerate the adoption of cleaner materials—such as low-emissions steel in the automotive industry, as one example—and solutions (for instance, the electrification of thermal-energy processes in manufacturing). Some sustainable products, such as low-emissions steel and recycled polyethylene terephthalate (PET), the plastic most commonly used for beverage bottles, are already seeing a price premium due to a shortage of supply versus demand.
The development of green businesses could be much faster for an additional reason: some climate technologies can only compete on price when they are being manufactured at a large enough scale (more on this idea in a later section). The need to scale up quickly to compete could propel new green businesses to achieve execution speeds that are more familiar to the digital economy. Commercializing many green technologies will likely require significant investments in physical assets, which aren’t required for software development or digital engineering; these investments could reach billions of dollars or euros per plant. Nevertheless, green business builders can learn lessons from digital-business builders, including aggressive growth plans, working with agility, and being a first mover. Historically, scaling sustainable technologies has been done carefully, step-by-step over years, to manage both the technological and commercial risks involved.
A few companies in the alternative-proteins and alternative-dairy categories illustrate how embracing the speed of digital could create a market advantage. For one, some of these players did not allow their lack of manufacturing capacity to get in the way of growth. They were early to get their products distributed through leading fast-food and coffee chains, which helped to elevate brand awareness. Some relied on co-manufacturing, even though this typically hurts margins in the short term. And now, as their revenues have grown, some of these players are building up their own manufacturing capacity to help meet demand, often with larger plants that produce goods at lower unit costs.
In some cases these players could experience scaling pains—when demand outpaces expanded production capacity, for example. However, being early to market and growing quickly has resulted in strong market share, with the distribution and cost advantages that come along with such a position. Gross margins tend to be strong for these players, too, since many consumers have been willing to pay a premium for their products. These companies have typically reinvested profits back into the business.
The alternative-proteins and alternative-dairy examples are, of course, B2C cases. However, scaling early and quickly is an approach that, based on our experience, may help to separate strong green businesses, whether B2B or B2C, from competitors or followers in the same space.
For green business building, incumbents may have advantages, including access to capital and deep institutional knowledge. Some corporate leaders have identified success factors for building a new business in general, such as providing ring-fenced investment in the new business and setting realistic expectations with both internal and external stakeholders on investment needs. However, building a green business can also come with new challenges for incumbents. For example, when scaling a new climate technology, it may be difficult to balance the time it takes to validate the technology on a demonstration scale while also planning industrial-scale installations across different conditions and geographies. Start-ups typically have been the first movers on some green ventures, as they are often equipped with a higher tolerance for risk-taking and the ability to operate at faster speeds.
Through our work with organizations that have built and scaled green businesses successfully, we have identified seven key principles.
Proactively create business ecosystems. Many green business building efforts are also value-chain-building efforts. Consider circular materials, like the recycled textiles example mentioned earlier. There is a need to secure effective collection, appropriate sorting and processing, and market-based demand for the recycled textile fibers. No one player is the natural investor in all steps of the value chain. But investments in a single step may be less feasible without all the other steps already in place. Similarly, many new green businesses require new infrastructure around them. In the case of the e-ammonia project, substantial investments in upstream hydrogen and renewable electricity capacity are needed, as well as new transportation and fueling infrastructure downstream. Green business builders look to collaborate with players in their value chains and make sure that the infrastructure and investments come together in a coordinated manner. This could be done through joint feasibility studies or demonstration pilots where relevant players team up. When done successfully, these collaborations could also lead to the captive-demand arrangements described earlier. Once the framework of a new value chain starts to operate and has a financial underpinning, more ecosystem players may start gravitating toward it.
One example of new ecosystem players getting together is the Long Duration Energy Storage (LDES) Council. 7 7. McKinsey has collaborated with the LDES Council as a knowledge partner, including on the reports Net-zero power: Long duration energy storage for a renewable grid, November 2021, and A path towards full grid decarbonization with 24/7 clean Power Purchase Agreements, May 2022. The CEO-led group has brought together key actors—from technology providers to end customers—with the aim of understanding the technology landscape and pathways to economic breakthrough and scaling. Council participants are in a position to help shape their industries and drive collaborations.
Green business builders often tackle the commercial side of investment risk by signing up captive demand for their output before they start to physically scale.
Building a green business is no small feat. It often requires moving at unprecedented speed, setting ambitious growth targets, and planning multiple steps ahead. The mindset green business builders have demonstrated is very close to that of the digital leaders of our time: they have been adept at creating and shaping markets rather than spectating and waiting for the markets to appear, and they have embraced the notion of accelerated scaling. This mindset combined with a few key principles could help propel green business building on the global journey to net zero.
The authors wish to thank Jonatan Janmark and Sean Kane for their contributions to this article.
This article was edited by Andrew Simon, a senior editor in the Seattle office.
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