There is an opportunity for corporate-backed ventures to play a big role in the net-zero transition. Can these businesses scale fast enough to help meet decarbonization targets and prevent the worst effects of climate change? In a conversation with McKinsey partner Subu Narayanan, Hitachi ZeroCarbon CEO Ram Ramachander shares his insights on the opportunities for digital net-zero businesses, the dynamics of overseeing start-ups within a larger company, and the role of purpose and leadership in businesses built around climate solutions. An edited version of their conversation follows.
Key insight #1: Addressing climate change is actually good for business.
Subu Narayanan: Have you seen an acceleration by companies to build net-zero businesses?
Ram Ramachander: I started in climate change 16 years ago. When I went to see CEOs then, I had to take a chart that showed how man-made climate change was real and discuss how to convince cynical CFOs that this was something worth investing in. Today I don’t have to do that.
What companies increasingly understand is that we need to redesign the planet’s infrastructure from the industrial-age revolution to a climate change–age revolution. That is a massive opportunity. Before, climate change was about doing the right thing. Now it’s just good business, whether you’re thinking about share valuation or moving your business toward building a new, green infrastructure.
Key insight #2: Data is a key asset.
Subu Narayanan: What are some of the opportunities for your business?
Ram Ramachander: We’re seeing the electrification of everything. We’re moving to a world where millions of assets are going to be connected to the grid. Some of these devices are not just using energy—they’re also able to store energy and put it back into the grid. When you add the dimension of zero-carbon power generation, you end up with a very distributed, complex energy system.
Data is the underlying optimization engine for that new world. Data can help optimize everything that’s connected to the grid and provide an understanding, at a very detailed level, of the impact these connected devices are having on the underlying infrastructure. Data can help in the planning for future infrastructure in a very knowledgeable way.
Take, for instance, the program that we’ve built for Optimise Prime,1 where we included more than 6,000 electric vehicles [EVs] from different fleets—from Royal Mail to Uber to Centrica—in the UK Power Networks grid. When you understand how far, say, a postal van is going to travel the next day and understand when there are constraints on the grid, you can now charge that vehicle at a time when there’s limited constraint on the grid, when there’s more energy available. Going forward, you could put big batteries in the depot to store energy and push it back into the grid, or you could surround that depot with renewable energy installations. Now, you’re transitioning into a new energy pathway. That is all doable today.
Key insight #3: Large corporations could play a significant role in solving the climate crisis, but it requires a shift.
Subu Narayanan: You’re launching new ventures, particularly sustainability businesses, within a larger corporation. What’s that relationship like?
Ram Ramachander: Large corporations can have a massive impact on climate change. But there is an ongoing challenge, which is the ability to change quickly or the ability to be as agile as an entrepreneurial organization.
For us, I visualize the large corporation as a big tanker going in a direction that’s very difficult to steer. The new ventures are like lots of little motorboats that are around the tanker—satellites that are moving very quickly. The organization I run at Hitachi represents those little motorboats. We work in an entrepreneurial style, we fail fast, we have agility. And we want to bring the tanker in the same direction.
Subu Narayanan: What are some of the challenges that you’ve faced, especially with your operating model? How have you balanced the quarter-by-quarter expectations of the corporation and the growth mindset of start-ups?
Ram Ramachander: Large companies can find it difficult to engage in the risk profile of seeding new ventures. For example, being able to say, “Look, I’m going to seed-fund this thing. It might fail. I’m going to keep my funnel of incubations quite big, and I recognize that at the end of this, we may get only one or two ventures that are going to turn into the next billion-dollar venture. I’m happy for there to be a bunch of initiatives that don’t go anywhere.” That’s a really big shift for companies that are quarterly focused or R&D focused.
Subu Narayanan: What role does your portfolio of sustainability businesses play in that environment?
Ram Ramachander: We ask, “How do you take the disruption that’s happening in the market today, and all the future technologies that are coming down the line, and turn that into a business in the next three years?” Existing businesses are not necessarily wholly focused on these disruptions. They’re connected to these disruptions, but they’re not wholly focused on them. That is our role: we look at the near-term commercial opportunity for zero-carbon businesses.
EVs are a really good example of an opportunity where corporate expertise and the start-up mentality can come together. There’s still a lot of R&D that needs to go into scaling EV technology, but it’s ready to go commercial. And the EV market is now moving at an exponential pace.
Key insight #4: For new net-zero ventures to thrive, leaders may need to rethink traditional measures of success.
Subu Narayanan: How do you manage the different timescales for investment and ROI, if these new ventures might take multiple years to become self-sustaining?
Ram Ramachander: If you were to put the revenue and profit KPIs [key performance indicators] on these ventures as they start, you would end them immediately. I’m often asked, “What’s your forecast for next year? What’s your profit?” Of course, we’re totally focused on that. I’ve done enough start-ups in my life to know that you’ve got to get to profitability. But in the early stages, you need to invest without necessarily knowing where all of the revenue opportunities exist. You’ve got to be very open-minded about that. If you force your way down the revenue chain too early, you might leave other revenue-making opportunities behind.
Subu Narayanan: What are the points of friction that can pop up between the larger corporation and the ventures you’re incubating?
Ram Ramachander: There are a few points of friction that need to be managed. The first is about funding and financing the new venture. I go back to the idea that you need to create a venture or private-equity kind of investment culture in the organization. That’s one shift that needs to happen—and it’s not an easy one to do. There’s a level of impatience that you need to deal with. The ROI and KPIs need to be thought about in terms of timelines and how we come to meet those goals. It’s also important to measure the carbon impact of what we do. Changing the perspective on how you view these ventures from an ROI standpoint is really important. I see that as my responsibility.
I think the second piece is around the operating model. We function with a very small, agile team and a lean operating model. Working with a big conglomerate, we get a lot of questions: “What is your quality process? What is your delivery? How do you minimize risks to 100 percent?”
When you’re a start-up with a digital backbone, you have to take a slightly different view. I absolutely back thinking through quality, delivery, and risk, especially when you’re looking at IoT [Internet of Things] and infrastructure. It is important to do that. But you can’t build it all first. You need to get engaged with the customer. You need to solve the problem with the customer. You need to be on the ground. You need to be able to say, “Look, if you hit a problem here, neither one of us knows where we’re going with that. But let’s have a relationship where we fix it together and move forward.”
It’s not a supplier relationship. It’s very much a partner relationship. And that’s sometimes difficult to explain to the mothership.
Key insight #5: Climate change and COVID-19 have made purpose more important than ever for business leaders.
Subu Narayanan: What role does purpose play in how you keep and attract talent?
Ram Ramachander: As an entrepreneur, I had to bring everybody along on a journey. We have to be on the same boat, rowing in the same direction. If one of us fails, everything goes wrong, because we’re a small, tight unit. The purpose is almost a given.
At a large corporation, it’s very easy to lose yourself as a cog in a much bigger machine and not think about the impact that you’re having. I’ve found that purpose-driven leadership and building a purpose-driven organization are far more important in a large company than what I was doing as an entrepreneur.
I’m very lucky running a social-innovation and climate-change business, as it naturally has a purpose.
When I was at COP26,2 we had a great experience. I met a lot of young people from our rail business and our energy business. They were just so excited. Their whole mindset has shifted toward the question, “How do I have more of an impact in this area?” I think purpose is absolutely critical to keep the climate-change agenda moving forward.
Subu Narayanan: How does a growth mindset factor in with purpose-driven leadership?
Ram Ramachander: It’s easy to talk about purpose in an idealistic way. But life is much more nuanced. There are days when I might struggle a bit more with staying rooted in purpose. There are ups and downs. Trying to stay in a growth mindset as often as you can is the best you can do. But you can’t be there all the time. There are things that will happen in your life that don’t always allow you to connect with a growth mindset. You have to be OK with that. It’s only human.
Subu Narayanan: Is purpose now more important than ever?
Ram Ramachander: COVID-19 has made purpose more important at an individual level and an organizational level. This concept of people saying, “You know what, I don’t want to do this anymore. I’m getting another job, or I’m going to start my own business”—this happens because they can’t connect their personal journey to the purpose of their organization. As a leader, you have to be able to communicate to your employees why you are doing what you’re doing. You have to tell them that what they’re doing is meaningful and create the space for them to connect their personal journey to the organization’s purpose.
That’s one of the biggest transformations right now. It forces CEOs, for example, to talk about why their company is going to do something good for the planet, why an employee should be there, because it’s an opportunity to have a positive impact. That’s a good thing.