Global momentum is building to achieve net zero in greenhouse gas (GHG) emissions—and to do so more quickly than previously envisioned. Getting there will require unprecedented levels of innovation. While a fast-rising number of companies and governments are committing themselves to ambitious net-zero goals, most focus the strategy exclusively on emissions and expect the necessary technologies and solutions to become available as needed.
Annual global emissions of carbon dioxide equivalents now amount to about 51 gigatons. Some estimates, such as the P4 pathway defined by the Intergovernmental Panel on Climate Change (IPCC), show that today’s technologies have the potential to reduce global emissions by about two-thirds. More innovation-driven projections—such as IPCC’s low-energy demand pathway, P1—do not bank on any new technologies but instead assume radical business model and policy innovation. It is clear that reaching climate change goals requires new technologies and novel business models and markets. Fortunately, there’s momentum building for a new generation of innovative solutions.
A big reason for optimism is that within the solutions lie major opportunities for businesses, investors, and governments. They should start with a shift in mindset—looking at companies as providers of solutions rather than only sources of emissions, focusing on new sources of revenue over rising costs, and seeking transformative models rather than incremental improvements. Companies can create business advantage and value while accelerating climate action and helping to meet the 1.5°C target envisioned in the Paris Agreement. Governments can boost economic growth with support for what we call climate solution innovation.
Major companies are already on the move. General Motors, among others, has said that it wants to end the production of gasoline- and diesel-powered vehicles by 2035. In February, the chairman of Fortescue Metals Group told the Financial Times, “In 15 years’ time, the world energy scene will look nothing like what it does now. Any country which does not take green energy very seriously, but clings to polluting energy, will eventually get left behind.”
Here’s how we can have our climate cake and eat it, too.
The First Wave of Climate Champions Shows the Way
Seismic shifts are beginning to occur in government policies and public- and private-sector initiatives. Consider a few examples.
In September 2020, the president of China committed the country to achieving carbon neutrality by 2060—an enormous challenge for the world’s biggest annual carbon emitter—but a recent BCG analysis found that China has economically attractive and socially viable pathways to achieve its decarbonization goals. The total cost will be substantial—about $13.5 trillion to $15 trillion through 2050, but the investments will have a material benefit for GDP, contributing 2% to 3% during the first half of the century. Green technology investments alone will account for more than 2% of China’s GDP by 2050. Far from hindering economic growth, decarbonization could in fact stimulate the economy.
As part of South Korea’s Green Growth strategy, the government provided early support for battery storage projects. Investment in R&D enabled breakthroughs in stable multicycle charging and support for early integrated battery deployment. Lithium-ion battery costs declined nearly 90% from 2010 to 2019, and South Korean battery producers captured a leading market share by 2013.
Combating climate change has entered the mainstream, and corporate and venture capital investment in climate technologies is on the rise. In 2020, US investors doubled the money they put into exchange-traded funds focused on environmental, social, and governance (ESG) criteria—rising to $25 billion. Industry groups, such as the influential Business Roundtable in the US, are emphasizing the need to embrace sustainable practices and lead the way through investment and innovation. A January 2020 Bloomberg News article spotlighted ten multibillionaires around the world whose fortunes come substantially from early forms of climate innovation.
The most exciting action is taking place at the leading edge. The first generation of “green champion” companies is generating shareholder returns at levels similar to those of such high-flying tech firms as Amazon, Apple, Facebook, and Google. From October 2017 to October 2020, some companies—including Enel Group, Iberdrola, Neste, NextEra Energy, and Ørsted—generated annual total shareholder returns on the order of 30%. The returns for an emerging wave of second-generation green champs, including Beyond Meat and Tesla, ranged from almost 70% to 80%. The value of Tesla alone far outstrips that of any other car maker.
These and other forward-looking companies are demonstrating that climate solution innovation is all about creating value. They are showing how to create new revenue streams by entering new markets or developing offerings that cater to high-priority economic and social needs. They are winning new customers and strengthening their brands through positive environmental and social contribution. Early movers are using scale and market position to create network effects and lower costs. Innovators are building more resilient business models through reinvention in the most critical parts of the value chain, reducing exposure to increasing costs and regulatory constraints.
While breakthroughs in technology are critical to generate new opportunities, not all companies need to play in the breakthrough tech fields.
Companies can choose from various approaches to climate solution innovation, but they are well advised not to limit their ambitions to one or two options. They can both improve existing models and markets and create brand new ones. Equally, they can scale up existing technological solutions and support the development of more disruptive ones. (See Exhibit 3.) In all instances, though, companies need to move away from looking at themselves only as sources of emissions and see themselves as potential providers of solutions for a fundamental societal need. It’s also important to recognize that they don’t necessarily need new technology to innovate. While breakthroughs in technology are critical to generate new opportunities, both in terms of value creation and climate impact, not all companies need to play in the breakthrough tech fields. There remains huge potential in deploying and scaling up existing technologies through business model innovation and, especially, digitization.
Below we explore the opportunities in each area and examine what leading companies are already doing.
Reengineer. Climate change is quickly altering the context for most businesses. Those that can successfully innovate will outperform others and secure long-term value by moving quickly toward better, accelerated deployment of existing low-carbon solutions. Customers and investors are embracing companies that demonstrate viable solutions.
Consider the example of Neste, which has leveraged technology able to transform fats into molecules that can replace fossil fuels to help customers reduce GHG emissions. Neste has developed renewable fuels for road, air, and marine transport as well as for chemicals (including base oils and plastics).
Originally the state oil company of Finland (the Finnish government continues to own about 35%), Neste envisioned becoming the world’s leading producer of renewable diesel in the early 2000s and has transformed its business to make the transition from oil and gas to renewable fuels. Neste began production of 100% renewable diesel in 2010 and has since expanded to three global production facilities. It owns 1,000 gas stations in four countries, including Finland’s first low-emission service stations, which feature renewable diesel and electric-vehicle charging. It also offers GHG emission-reduction services to customers through Neste Engineering Solutions.
In 2019, Neste helped customers reduce GHG emissions by 9.6 million tons, the equivalent of removing 3.5 million passenger cars from the roads for a full year. Neste’s ambition for a second wave of growth is to become a global leader in renewable and circular solutions. Neste generated overall revenue growth of 6% to €15.8 billion in 2019 with renewables revenue rising 24%. With more than 25% of its revenue considered “clean,” the company has earned high ESG ratings from investors and others.
In a completely different industry, Norwegian crop nutrition company Yara is using satellite technology to help farmers around the world optimize yield and quality while minimizing waste and cost. Established in 1905 as the world’s first producer of mineral nitrogen fertilizers to solve the emerging famine in Europe, Yara today offers crop nutrition products, solutions, and knowledge. According to Svein Tore Holsether, the company’s president and CEO, “Yara’s business model is centered around building a profitable business by solving societal challenges. Over the past decades, Yara has moved from an owner of assets and producer of fertilizer to becoming a complete solutions provider, both for farmers and food companies. We are transitioning from growing volume to growing value. This is a decisive, conscious, and forward-looking development, allowing for improved value creation and answering to stricter regulations and a rightfully stronger public engagement.”
Yara’s portfolio of digital farming solutions enables farmers to maximize the yield and quality of their harvests while reducing environmental impact. For example, professional market solutions, such as Atfarm, allow farmers to monitor crop growth through satellite images, receive fertilization recommendations tailored to their fields, and make in-season adjustments throughout the year. N-Tester is a handheld precision farming tool that allows farmers to measure crop nitrogen requirements in real time. The Yara Water Solution uses crop-sensing technology to increase nutrient and water use efficiency. Yara also has an entire suite of solutions for small farmers that includes a weather forecast app and a networking app that connects farmers to peers and experts.
From a business point of view, Yara’s investment in digital solutions is helping farmers find ways to monetize over a century’s worth of agronomic knowledge. Yara focuses on developing scalable and accessible solutions to meet the needs of more than 500 million small farmers and robust platform solutions to meet the needs of large enterprise farmers.
A few lessons on climate-inspired business reengineering can be drawn from Neste and Yara. First, climate action should be firmly embedded in a company’s strategy, purpose, and culture. This goes beyond simply signing a pledge. It means having a plan, making climate action part of the business, and regularly reviewing progress against KPIs, just as is done in every function and business unit.
Read the full article at https://www.bcg.com/en-mx/publications/2021/next-generation-climate-innovation