Green tech and climate technology companies are rapidly altering the competitive landscape. With sustainability now a business imperative, incumbents need to move quickly—or risk being left behind.
Sustainability has become an imperative—for companies, as well as for the planet. A decade ago, reducing environmental impact was merely a “nice to have” for organizations. Today, leaders face ever-increasing pressure from employees, customers, and investors to act decisively on environmental issues. It’s now a necessity—as well as a genuine and enormous business opportunity.
There’s a problem, though: too many incumbents are lagging, perhaps unaware of the boom in climate technologies—or, more likely, unconcerned about it. Around the world and across all sectors, emerging climate technology companies are changing the game when it comes to how organizations can and should approach sustainability. They’re increasingly well funded, and, as one CEO told us, they’re “moving quickly and boldly. You can’t make small things in a small way—you have to think about making something massive.”
We’ve seen this pattern before—notably in the realm of digital disruption. Rewards often flow disproportionately to first movers or, at a minimum, to companies at the forefront of addressing the disruptive threat. So what can established companies do? They can understand what makes disruptors different, lay a foundation for taking action, and prioritize four imperatives:
Incumbents hold numerous advantages over disruptors, from access to capital to deep institutional knowledge. While it can be difficult for incumbents to apply the playbook of the start-up world, it is possible. By learning what makes their emerging competitors tick, they can learn how to be faster, compete more effectively, and win.
It’s hard to imagine today, but until little more than a decade ago, sustainability was a niche issue for many organizations. Concern about the changing global climate—and the effect of human activity on emissions—had been gathering momentum and urgency over decades, but in 2011, just 20 percent of companies in the S&P 500 published sustainability or corporate social responsibility (CSR) reports. And while these reports paid lip service to sustainability, tangible action was rare.
Then the wave accelerated. Greenhouse-gas reductions stemming from 1997’s Kyoto Protocol were implemented from 2008 to 2012 for select countries, and in 2011, the groundwork was laid for what would become the sweeping Paris Agreement, sealed in 2015. The rapid increase in public and investor awareness, coupled with the emergence of policies driving decarbonization, sparked immediate action: by 2013, the number of S&P 500 companies publishing a sustainability or CSR report more than tripled to 72 percent.
In the past five years, sustainability has emerged as a critical value driver. As it became apparent that existing efforts may not be sufficient to cap temperature increases, businesses began to recognize the opportunity of addressing the challenge. Organizations began adopting and promoting environmental, social, and governance (ESG) measures, and from 2020 to 2021 alone, the number of companies committing to science-based sustainability targets tripled. Finally, corporate newcomers fostering sustainability as a strategic lever to create value began to appear, and we started to see the rise of “climate unicorns.”
Would you like to learn about our business-building practice, Leap by McKinsey?This leads to today. If the first era viewed sustainability as an idealistic domain and the second era viewed it as a value driver, this third era views tech-enabled sustainability not only as a business opportunity but also as a necessity. Just as the emergence of the technology sector challenged incumbents to rethink their business models—or to have disruptors rethink them on their behalf—the rise of new companies driven by deep tech poses a significant threat to incumbents that are too slow to embed sustainability into their corporate DNA.
We’ve long examined the way incumbents respond—and don’t respond—to disruptors. And we understand the dilemma they face: threats to traditional business models often don’t become truly visible until long after incumbents need to begin marshaling their forces, and it requires courage to take steps to emulate emerging threats by disrupting your own, still-profitable operations.
The good news for incumbents is most relevant technology is still at an early maturity stage—or even unproven. The bad news, however, is companies are beginning to capture the business opportunity of climate technologies by drawing on five building blocks (Exhibit 1):
Climeworks, the Swiss company developing technology to directly and permanently capture CO2 from the air, was started in 2009 with “a small laboratory device and a bit of stubbornness,” CEO and cofounder Jan Wurzbacher told us. “But we wanted to build up a company which really has an influence—which makes something big—and climate change is one of the biggest, if not the biggest, topic humanity is currently dealing with. We really wanted to take the hard way and the long way and build up and enter a new industry over the next 30 years.”
This deep sense of purpose is common across disruptive start-ups in the climate technologies sector. For many, that belief helps early on, when funding is tight and technology is still being developed. Yet it can also persist long after those concerns have faded. “There’s an atmosphere of support,” Wurzbacher said. “Everyone really knows the greater cause for what we’re doing, and that’s very helpful. We have to be careful that we really stay disciplined in terms of what we plan and what we deliver versus our plans.”
Succeeding in any industry requires deep knowledge, being a disruptor requires deep knowledge empowered by creative thinking, and being a start-up in the climate space requires not just knowledge and creativity but also deep technological understanding. In some respects, companies know the rules—and then break them. “We focused on making ethanol in the first instance—nothing fancy, nothing groundbreaking—but with a very, very novel process,” Sean Simpson, cofounder and chief scientific officer of LanzaTech, told us.
Both Simpson and CEO Jennifer Holmgren have acquired vast additional knowledge as LanzaTech has developed its process of producing chemicals and fuels, including sustainable aviation fuel. “My cofounder, the late Richard Forster, and I did a lot of reading,” Simpson said. “We were both biologists—we didn’t know anything about engineering. We approached biology with deep knowledge, but we also knew that no one had ever scaled gas fermentation. So that was the place that we had to bring smart people in.”
Few disruptors work alone while trying to independently crack seemingly insurmountable problems. TAE Technologies, for example, collaborated with Google AI, using machine optimization and data science to achieve the major goals for its fusion platform. LanzaTech has married synthetic biology with bioinformatics and AI, as well as machine learning with engineering. And Carbon Engineering, which, like Climeworks, is focused on commercializing the direct air capture (DAC) of CO2, has combined DAC technology with hydrogen generation to deliver near-carbon-neutral synthetic fuels—and has partnered with LanzaTech.
Pulling in complementary technologies and collaborating with companies that fill gaps in specialized knowledge is a feature of start-ups in this space. While companies are highly competitive, there is a sense that they are together seeking to place big, bold bets—driven by a shared purpose of sustainability. “You have to bridge the gap between different disciplines,” said Michl Binderbauer, the CEO of TAE Technologies, which is developing commercial technology based on nonradioactive nuclear fusion power. He urges people to work in niche areas of expertise, arguing the combination of deep individual knowledge adds up to a process that “will work better in the end—higher quality and faster.”
One common belief among start-ups is that larger, traditional organizations struggle to empower disruptive technology because their organizations are, by default, risk averse. Binderbauer notes that academics also prefer situations with less risk. “They want predictability,” he said. “What drove people to us was saying, ‘You can do things here quickly that you couldn’t do in ten years in your academic job.’”
PsiQuantum cofounder and CEO Jeremy O’Brien said it “just didn’t compute at all” when people questioned why he would leave academia to start a company seeking to develop a fully functioning quantum computer. “The crazy thing to do would be to spend 20 years, crack the problem, and then decide—oh, I’m just going to stay in academia and not build a quantum computer because you can’t build a quantum computer in a university, right?” O’Brien told us. “I left academia to start PsiQuantum when my cofounders and I realized that we could leverage semiconductor manufacturing to build a useful quantum computer on a sensible time and money scale, a machine capable of creating world-changing advances in climate, healthcare, energy, and beyond.” PsiQuantum has received $665 million in investment capital to date and is valued at more than $3 billion.
For others, the risk is less personal and more systemic. Carbon Engineering—founded in 2009 by Harvard professor David Keith—is seeking to develop and commercialize technology to capture CO2 directly from the atmosphere. Its vice president of strategic development, John Bruce, said that while the science pointed Keith to the opportunity, the company is taking the risk that the world may not do anything with the technology. “Our biggest competitor is actually complacency and not addressing net zero,” Bruce told us. “I don’t think it’s a technology question. Can we remove CO2 at scale? I think we can figure that out between us and many other technologies. The question is whether we will pay for it as a society.”
Binderbauer said because TAE Technologies’ purpose was to achieve “dramatic” rather than incremental change, it had to take a trial-and-error approach. “You don’t necessarily know everything up front,” he said. “You’re not designing for that. You have the vision of where you want to go: finding a solution to the generation of power that’s completely free of carbon and radioactivity in the space of fusion. That defined the product we were aiming for. But we then began a journey toward this fairly tight vision statement that actually ended up being much more rocky than I thought.”
It took a decade for TAE Technologies to evolve from running tabletop experiments to building something at scale, all the time working to convince investors of the merits of its technology and approach (today, the company holds more than 1,400 patents). Development also took years for Climeworks, with engineers predicting the project would be very difficult or even impossible—skepticism greeted with what Wurzbacher called “persistent optimism.” “We were a little bit like the two crazy guys,” he said of himself and cofounder Christoph Gebald. “Either you are full speed ahead or nothing.” There was also another motivator for Binderbauer: “There’s no better force than knowing we’re going to run out of money tomorrow if we don’t deliver. You earn the living for tomorrow by what you do today. That’s very different to an established company.”
Looking at the history of many climate technology companies may prompt an obvious question: What’s different now? For incumbents, the answer is almost everything. Not only is the technology increasingly advanced, but three other major factors have altered the competitive landscape.
First, the price of carbon is rising while the cost of renewables continues to fall, making sustainable energy solutions increasingly competitive (and, in some cases, cheaper than traditional energy). Second, public pressure to take decisive action to avert climate catastrophe demands real behavior change by companies—because actions speak far louder than words. And the third factor is driven by the first two: capital is pouring into the sustainability space.
This is why we believe incumbents are at an inflection point. Most have fallen behind new companies in the race toward tech-enabled value creation. They’re encouraged to act now or risk being left behind while others build competitive advantage and own the future. But where should they start? Our green business–building catalyst model recommends implementing a three-step approach that can be customized to each company’s circumstances (Exhibit 2).