The transition to net zero is well underway, but it is not happening fast enough. Growth in key climate technologies, including wind and solar power and electric vehicles (EVs), has helped accelerate decarbonization efforts worldwide. Solutions such as green hydrogen and long-duration energy storage (LDES) are becoming available and, if scaled, could reduce global emissions even further. But the pace of scaling these technologies has not kept up with projections for a warming planet. Governments and companies have done an admirable job developing and deploying climate technologies to date, but a significant acceleration is required to meet net-zero targets—and stave off the most dire effects of climate change.
This article is a collaborative effort by Rob Bland, Laura Corb, Anna Granskog, Tomas Nauclér, and Giulia Siccardo, representing views from McKinsey''s Sustainability Practice.
Three areas have emerged that should now be priorities for those navigating the challenges and seeking opportunities: building up supply chains (often through cross-sector partnerships), proactively addressing an emerging skills gap, and exploring different avenues for financing and investments.
In this article, we lay out the evolving landscape for scaling climate technologies and explore three areas of potential action for green business builders.
More than 4,000 companies have set or are in the process of committing to emissions reductions
Historically, growth in solar and wind has often outpaced projections, and new players entering the market (oil and gas companies, private equity players, and institutional investors, for example) show signs that the current pace of deployment could speed up.
Climate technologies that are high-potential but relatively less advanced in their commercialization (compared with renewables) would need to scale at an even greater rate. Consider hydrogen. Our analysis indicates that supply of green hydrogen, which is produced with renewables, would need to grow by a factor of 200 times.
Through our work with organizations that have built and scaled green businesses successfully, we have identified seven key principles. This framework is a way for leaders to navigate both the opportunities and risks involved in scaling climate technologies—and potentially set their companies up for significant growth. There is no one right combination of these factors, and most existing players have combined several of these elements.
Lead with game-changing ambition. Effective green business builders tend to set their sights on creating something significant from the start. Game-changing ambition may mean aspiring to produce a zero-carbon product at a competitive cost (which enables a competitive price), compared with a less sustainable alternative, and scaling new capacity fast.
Accelerate to the point of cost advantage. Building a business around a clean technology may require analyzing different technological pathways, including some technology options that are not yet commercialized. When analyzing a new technology, leaders must understand the scale break point for cost competitiveness, to reach lower unit costs faster and potentially be competitive on price from the start.
Sign up captive demand before scaling. Successful green business builders often set up demand with a strong commercial plan prior to expanding, to reduce risk. One way of accomplishing this is through purchase agreements. For example, Swedish battery manufacturer Northvolt signed a supply agreement with BMW.
Build capacity with parallel scaling. To reach scale-up goals, the ability to drive several investments or market introductions in a limited time frame is key. We''ve seen leaders "parallelize the scaling" from the start—that is, initiate additional growth waves before they complete the first one. One approach is scaling through partnerships in the value chain. For example, investing in production capacity in a company''s home region while finding a partner to deploy the same technology in another. Or coinvesting in expanding manufacturing capacity with suppliers.
Proactively create business ecosystems. As we explore in the accompanying article, scaling most climate technologies won''t happen by companies "going it alone." Achieving scale requires coordination among governments and regulatory bodies, investment and financing institutions, incumbent players, and disruptive innovators. Finding the right scaling partners along the value chain—partners that have a similar strategic interest—is key. And coalitions dedicated to scaling access, cost-effectiveness, and supply across green ecosystems are a must for transitioning to a green future.
Lead on sustainable operations, through ambitious targets, innovation, and partnerships. Successful green business builders are leaders in how their operations minimize carbon emissions and other environmental impacts. Sustainable operations start from the beginning—designing with low-carbon inputs (green materials), implementing low-emissions processes (circularity), and controlling for emissions through the value chain. Supply chains for some key materials (lithium, for example) could be in high demand. Solidifying a sustainable, resilient, and cost-effective supply chain is therefore important.
Dedicate recruiting resources early in the process. As we cover in the accompanying article, the range of skills required to scale successful green businesses can be wide—and in an especially tight labor market, scarce. Green business builders can invest early in building their talent base, project the needed skill sets for the future workforce, dedicate resources to upskilling and new capabilities, and create the technical infrastructure to enable superior talent performance.
Scaling climate technologies often requires companies to think and act in bold and innovative ways. While our seven actions for scaling green businesses hold true, they continue to evolve (for a summary of the original framework, see sidebar, "Seven actions for scaling green businesses"). Economic uncertainty, inflation, new public funding, technological risks, and supply chain considerations have altered the landscape for green business building.
Actions that have become particularly important for organizations during these volatile times include creatively developing supply chains (including through partnerships), proactively addressing emerging skills gaps in the workforce, and exploring new avenues for financing and investment.
The net-zero transition has created a shift in needed job skills, as markets are reshaped and organizations institute new operational practices and processes. The range of skills is broad: from honing technical skills in manufacturing EVs, solar panels, and wind turbines to engaging with low-emissions suppliers to having executive expertise in carbon accounting and project finance. Green business building opportunities have encouraged many entrepreneurs, but the available talent to scale operations—in infrastructure, engineering for capital projects, and in process engineering, for example—has not quite caught up.
Financing the scale-up of climate technologies can come with challenges, as many technologies rely on significant up-front investments in physical assets, including large-scale facilities and infrastructure. Technologies that haven''t yet reached technical maturity or commercialization can come with a higher risk profile for investors. As we have written about before, securing purchase agreements and inviting customers to invest in the business up front are some ways that green business builders have successfully addressed these challenges.
Project finance is an increasingly common approach for green business builders that can help mitigate the risks for capital-intensive infrastructure projects. Project finance is a nonrecourse or limited-recourse structure in which the project company shareholders'' liability is limited to their equity investment and the project lenders rely primarily on the project''s cash flow for repayment—meaning principal repayment usually begins after the project is operational. Northvolt, a Swedish battery maker, quickly turned to project financing and has plans for at least a third gigafactory manufacturing plant.
Many green business builders look to blended finance models, which rely on a mix of private capital and public or philanthropic funding. Public-funding pools utilize grants as a means of reducing debt and mitigating risk, for example, and multilateral climate funds, such as the Green Climate Fund, have factored into these blended finance models.
Financing partnerships are also playing a larger role, from joint ventures between local start-ups and global technology companies to multistakeholder-funded research, development, and demonstration (RD&D) programs that provide early-stage and growth-stage equity capital for high-risk first deployment projects. These RD&D programs are particularly showing up in developing countries, to help increase private investments into businesses that serve underrepresented communities most affected by climate change.
When it comes to purchase agreements, inflation could be a top concern for suppliers and buyers. In response, we''re seeing green business builders offer agreements to customers that have inflation-adjustable price formulas.
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