While there has been a recent, notable shift in sentiment toward investing in climate solutions, it is important to maintain a long-term, through-cycle view, as action to mitigate emissions is needed more than ever. Corporate investments into building new climate technology businesses have been rising consistently from 2019 to 2023, driving growth for those actively investing, but current deployment levels of low-emission technologies are at only 10 percent of the levels required to reach net zero by 2050.
Incumbent companies, particularly in capital-intensive industries, can play a role in bridging these gaps. As some of the most well-established companies from across the globe, these incumbents have inherent advantages including balance sheet size, organizational scale, experience in capital project delivery, as well as strategic and R&D capabilities. There has been recent turmoil—including announcements of delayed investment, abandoned projects, and watered-down corporate decarbonization commitments—but there was also a clear ramping up of investment between 2019 and 2023. In the midst of recent headwinds, it is imperative for companies to also focus on profitability to ensure sustainable growth, as incumbents navigate through cycles in climate technology businesses.
This report looks at the incumbent companies that have invested in new climate tech–driven businesses in the recent past to identify what can be learned from their experiences. We explore how our hyperscaling formula—based on our work on climate technology since 2022—can be used by incumbents to scale climate tech businesses through cycles. The report then analyzes some early movers to distill lessons learned.
Incumbents’ investment in climate-driven growth businesses
We found that investment in climate-driven growth businesses—made by 377 of the largest capital-intensive incumbents by market capitalization—increased sixfold between 2019 and 2023, to a cumulative total of $683 billion (Exhibit 1). The outlays include capital expenditure into climate tech–driven growth, R&D spending, equity investments, venture capital (VC) stakes, shifts in core portfolios toward climate technology, and spin-offs of climate tech-focused businesses (see sidebar, “Our methodology”). These investments have been centered on the 12 categories of climate technologies that could potentially reduce as much as 90 percent of total man-made greenhouse-gas emissions.
Incumbents in the power, automotive, and oil and gas sectors invested the most in climate-driven businesses over the period, with the oil and gas and automotive sectors experiencing the highest growth rates. Capital expenditure accounted for 73 to 90 percent of annual investment during the period.
The automotive, oil and gas, and power sectors have been investing mostly in absolute dollars, although the proportion of these investments relative to the companies’ total investment varies widely. The power sector spent on average 24 percent of its total investment on climate tech, the automotive sector spent 19 percent, and oil and gas, 8 percent.
A minority of the incumbents is leading these investments: 140 of the large companies we researched were responsible for a $683 billion investment, while the rest made minimal investments. Although spending has been accelerating across geographies, companies in Europe and Asia are driving approximately 80 percent of the incumbent investment in climate tech businesses.
What is driving incumbents’ investments in climate tech businesses?
Fewer than 10 percent of the companies are responsible for 50 percent of the $1.3 trillion in announced investments in climate tech businesses between now and 2030. This subset of companies has also been responsible for 20 percent of climate-driven business investment over the past five years.
To date, incumbents have typically prioritized investment in climate tech businesses for one of three reasons: a unique business opportunity for growth, a potential decline in their core business, or regulatory requirements.
Incumbents’ climate tech investments span different maturities
McKinsey’s three horizons of growth framework provides a structure for companies to assess and prioritize their growth opportunities and investments. Horizon one refers to the existing, core (often fossil-fuel based) businesses that currently generate cash flow. Horizon two encompasses emerging opportunities—the growth businesses to invest in now that will scale to generate profit. Horizon three businesses are the growth options for the future. Climate tech businesses can fit into any of the three horizons, although they skew toward horizons two and three.
The maturity of a business is determined by the technology’s relative cost competitiveness, regulatory support, and market readiness, which can vary by region. In the past five years, over 80 percent of incumbents’ climate tech investment has been in businesses focused on solar, onshore wind, electric vehicles (EVs), and batteries. These four technologies are horizon two businesses that are commercially viable in large parts of the world.
While most incumbents focus on adjacent businesses to leverage their core expertise and existing customer base, others are diversifying away from their main business. For example, some metals and minerals producers have invested in renewables and low-carbon fuels to diversify their portfolio and explore alternative ways to create value.
Incumbents’ recipe for climate tech success
Although investing in a climate tech business comes with risk, and not all incumbents have been successful, it can create future value for shareholders. Emerging success stories include NextEra Energy growing into a top renewable energy producer; LG Chem rising to the forefront of EV battery manufacturing; and MAN Energy Solutions accelerating the hydrogen value chain.
Across horizon two and horizon three businesses, successful incumbents understand the business case and take decisive action to improve it. They also drive execution excellence and judge the right time to invest and scale. We identified two archetypes for successful climate-driven business investments by incumbents: pioneer scalers and fast followers.
Pioneer scalers invest early in demonstrated but early-stage technology businesses (horizon three). They innovate to reduce cost and capital intensity, enable performance improvements that make climate technologies viable, shape supportive regulatory environments, find profitable niches, and often seek customers initially willing to pay a premium. They also inject substantial capital when the time is right, for example, when the business is ready to start shifting to horizon two. These incumbents benefit from early-mover advantages.
Fast followers invest in climate tech businesses that are ready for scaling with proven demand and sometimes regulatory incentives (horizon two). The incumbents rely on their execution capabilities to build scale on an accelerated timeline to establish a strong market position. Although fast followers have the advantage of reduced technology risk, they need to build scale quickly.
Incumbents can win with either approach, depending on their risk appetite as well as their ability to lead disruption and execute at pace.
Our research also identified two timing-related failure modes. The first is investing too early in horizon three businesses before they are ready to be scaled. The second is investing too slowly and too little in horizon two businesses and falling behind competitors who have accelerated ahead.
The hyperscaling formula we introduced in 2022 applies to incumbents, with some nuances. All elements are important, but our research suggests that incumbents benefit from building on their inherent strengths, such as balance sheet size, organizational scale, strategic capabilities, existing customer base, and supplier relationships.
The formula provides a guide to help reduce risks and accelerate progress when investing in climate tech businesses, which can often go hand in hand if the business case is clear, the incumbent is ready, and the market timing is right. However, horizon two and horizon three businesses do require quite different approaches (Exhibit 2).
Hyperscaling horizon two businesses requires a focus on high-quality execution and industrialization, while hyperscaling horizon three businesses requires a focus on driving scaling readiness.
Lessons from early movers
Investments in climate technology businesses can be uncertain in the current environment of shifting policy, geopolitics, and macroeconomic conditions. Here, we summarize three case studies of successful investments in climate-driven businesses by incumbents, which are explored in depth in the full report. The learnings may not be directly applicable to all situations but do offer valuable guidance for companies.
NextEra Energy is a leading power company that combines America’s largest electric utility (Florida Power & Light Company) and NextEra Energy Resources, one of the world’s largest renewable-energy-generation companies. It has been a pioneer scaler in wind and solar energy production. NextEra Energy (then FPL Group) started exploring alternative fuels in 1979. In 1997 it established NextEra Energy Resources to focus on clean energy and in 2009 became one of the largest producers of solar power in the United States, a position that the company continues to hold. NextEra Energy Resources has developed renewable generation and storage capacity of around 30 GW with a backlog of around 22 GW and a project pipeline of 300 GW.
Another example is LG Chem, which was established in 1947 as a cosmetic chemicals company. It subsequently expanded into petrochemicals and has been building climate technology businesses for more than two decades, with a broad portfolio including e-mobility, circular technologies, hydrogen and energy storage as well as bio businesses. It has been a pioneer scaler in EV batteries, first expanding into batteries for consumer electronics in 1992 and, two decades later, entering the EV battery market. It has continued to invest in and grow its battery business, and in December 2020, it spun off LG Energy Solution (LGES), which in 2020 became part of the group of Asian companies that supply over 70 percent of the global EV battery market. LG’s xEV batteries are in use in more than 11 million vehicles in the field, making LGES one of the world’s top EV battery manufacturers.
A third example is Tata Power, one of India’s largest integrated power companies, with a history spanning more than a century. A pioneer scaler in solar, it has invested in climate technologies since the early 1990s. It developed renewables generation, scaled its solar engineering, procurement, and construction (EPC) business, and promoted decentralization of power by venturing into EV charging, rural microgrids, solar pumps, and solar rooftops. Since 2018, almost 60 percent of its capital expenditure investment, amounting to more than $4 billion, has been spent in the renewables business, commissioning nearly 11.5 GW of solar projects across India, with many first-of-a-kind projects including floating solar, vertical solar, and solar carport. In the past few years, it spun off its renewable businesses into Tata Power Renewable Energy and expanded its backward integration in solar manufacturing. Tata Power’s market value has grown sixfold since 2018. It is one of the largest renewable-energy companies and India’s largest solar rooftop company with more than two GW of installations today.
Incumbents’ numerous opportunities to invest
Horizon two businesses are far from saturated. Even across commercially mature climate tech businesses—such as solar, wind, EVs, and lithium-ion batteries—there is still significant opportunity for incumbents to invest, primarily as fast followers. Electrification is expected to accelerate across industry, buildings, and mobility, creating opportunities both in renewables and across the electrification value chain.
There are also early signs that some horizon three businesses are getting closer to a point where scaling is viable, creating opportunities for incumbents to develop those businesses and lead as pioneer scalers. Investments in many horizon three businesses are lower than what was expected a few years ago. There have been project delays and cancellations, but overall investment in key horizon three technologies has been growing. Early-stage investment accelerates technology readiness and cost competitiveness.
Horizon three businesses remain a small proportion of incumbents’ climate tech businesses, but spending has increased on those at the horizon two boundary (Exhibit 3). We can also see that VCs have started shifting their focus to horizon three businesses and have also played a part in building the approximately 175 climate tech unicorns that have been created since 2015.
Like cars in early 19th century or mobile phones in late 20th century, climate tech businesses will go through boom-and-bust cycles of proliferating entry and consolidation. But along with risk, cycles provide incumbents with the opportunity to time their entry with the cycle and then use their assets to execute at speed while riding out the storms.
In the midst of both known and new uncertainties and economic pressures, balancing short-term and long-term priorities with resilience has never been more critical. The quality of decisions made in difficult times often makes winners stand out from the rest. Hence, it is a timely moment for incumbents to take stock of their stance toward the growth opportunities in climate tech businesses. Our full report includes a set of diagnostic questions our research has identified that incumbents should ask themselves when considering their investments.
Incumbent investment to grow climate-driven businesses has increased in recent years, but there is space for many more to explore climate-technology-focused business building. Climate technologies have the potential to create significant value over the next decade; McKinsey has estimated the climate technology market could offer $9 trillion to $12 trillion in annual sales by 2030. Even with some delays, the market opportunity remains significant for technologies that reach economic and technical scaling readiness. Building on momentum over the past five years, incumbents can take a leading role in accelerating these climate tech businesses in the large white space that remains for horizon two businesses and the next wave of horizon three businesses.
While we recognize that incumbents are grappling with different questions in their core businesses and pursuing different strategic priorities, our report shows examples of how some have successfully built climate tech businesses. Looking across industries and geographies, the time is right for all incumbents to ask themselves if there are climate-driven opportunities that they should explore to secure healthy growth for the future. And for those companies that decide to pursue these opportunities, there are lessons to learn from those that went before.
Download the full report here.
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