Growth in key climate technologies, including electric vehicles (EVs) as well as wind and solar power, is helping accelerate decarbonization efforts worldwide. But the pace of change is not yet fast enough to achieve net-zero emissions by 2050. To stay on track, both start-ups and established players would need to immediately begin hyperscaling green businesses – and do so at the kind of rapid pace most often seen only in the digital sector. Success could be the decisive factor keeping the world on a path to limit global warming to about 1.5°C, the threshold for averting the worst effects of climate change.
To catalyze success in hyperscaling, McKinsey convened a two-day “Hyperscaling Green Business Summit” in San Francisco on March 14 and 15. Senior leaders from some of the most successful players in the climate space discussed the state of green business, the need for “absurd ambition” and rapid innovation, as well as the enabling power of new ecosystems.
Here are key themes from the summit, which have been edited for clarity:
Companies that can innovate and scale rapidly could be setting themselves up for exponential growth. The race to net zero is creating an unprecedented need for major investments in physical infrastructure. According to McKinsey research, reaching net zero by 2050 would require investment to increase from an annual average of $5.7 trillion today to $9.2 trillion a year until 2050, or an additional $4.5 trillion a year.
“The magnitude of what’s needed is tremendous,” said McKinsey senior partner Laura Corb. She pointed to research estimating that the scaling required to remain on a net-zero pathway would be 6x for wind power, 14x for solar, 200x for green hydrogen electrolyzer capacity, and 100x for carbon capture.
While economic and geopolitical headwinds have complicated the path to net zero and shifted the market dynamics for green business building (GBB), ventures and technologies with real scaling and impact potential are being funded as before. In addition, capital markets and public-sector institutions have begun to galvanize behind green investments. And policy initiatives, including the Inflation Reduction Act (IRA) and the Bipartisan Infrastructure Law (BIL), have the potential to incentivize companies to build green businesses and scale up. That has created growth opportunities for companies that are able innovate and scale quickly.
An emerging formula could provide a road map to successful launch hyperscaling. Building on a hyperscaling framework first developed last year, McKinsey senior partner Tomas Naucler, said that new and existing companies need to lead with game-changing ambition; secure a cost and capital expenditure advantage; sign up captive demand before scaling; build capacity with parallel scaling; build business ecosystems including supply chains; ensure sustainable operations; attract leading talent; and secure low-cost financing. Naucler called on participants to show “absurd ambition,” given the huge scale and scope of the transition.
What it takes to hyperscale today. Scaling climate technologies means building physical assets such as plants or funding the development of unproven technology, which often entail high capital costs. As a result, green business builders need to find ways to lower expenses and manage them as efficiently as possible. “It’s radical thinking that will bring capital costs down,” Naucler said.
A core theme was the importance of “capital efficient growth” and developing the right kind of talent, including some functions – treasury, tax, audit, risk management – that may seem mundane but are crucial to a successful scaling journey. To enable that growth, developing talent is as important as attracting it, if not more so. For example, by creating “a kind of apprenticeship environment.” Such “training at scale” was seen as particularly important to address the massive shortage of workers with the skills needed for the net-zero transition. One missing piece for many start-ups is the layer of talent that provides the governance needed to help a company move fast. Ventures need to prioritize developing that layer of infrastructure, experience, and skills.
One of the critical factors in scaling green business is financing. Panelists noted that co-investor ecosystems have come a long way, enabling activation to happen more quickly. Hyperscaling will require blended finance and other financing models such as leveraging project finance, securing purchase agreements, using blended finance models, and engaging in multistakeholder-funded research, development, and demonstration (RD&D) programs. The availability of low-cost financing “will be at the center of who wins”.
Be open to partnerships and build your ecosystem. Innovation is needed not only in technology and products, but also in supply chain integration. Different models will work and have advantages at different times in the life cycle of a company, technology, and the market’s cycle. For many participants, building green businesses means developing new supply chains and ecosystems. Producers of an emerging climate technology often need assurances on the demand side before scaling up. As an example, a lack of buyers is one factor delaying the scale up in the clean hydrogen sector, despite the maturity of existing technology.
Creating partnerships and alliances is one way to help solidify both the supply and demand side. One of the biggest challenges can be finding end users who will take the risks needed to pivot an established company to a new green business. An ecosystem push can provide clarity on risks and returns, including by building ties with incumbents that are willing to put their balance sheets into the game to help address risk.
Nonetheless, would-be partners should expect ups and downs. “These relationships are like marriages,” a participant said. “There will be bumps.”