Incumbent Investments in Climate Tech Businesses
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.
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. 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. 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’ 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.
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.
Conclusion
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.
FAQ
Q: What are the main drivers behind incumbents’ investments in climate tech businesses?
A: Incumbents have typically prioritized investment in climate tech businesses for a unique business opportunity for growth, a potential decline in their core business, or regulatory requirements.
