The Climate Innovation Opportunity
Talking about climate is easy — but action is what counts. Here’s how corporates can innovate to win in the transition to a low-carbon future
By Stefan Gross-Selbeck, Raju Sarma, Sid Shah, Danielle Ullner, Daniel Jarosch, and Kanika Chandaria
The science is clear: We need to reach net-zero emissions by 2050 to limit temperature increase to 1.5 degrees Celsius and avoid the most catastrophic effects of climate change. This will require nothing less than the transformation of every sector of the economy, with breakthrough innovation over the next two decades a prerequisite for success.
It will take a variety of players to put us on the right path, including governments, research institutes, and individuals, but corporates face an imperative to act. They need to do so in order to survive against external disruption, to create new value, to enhance their brand and reputation, and to play a defining role in an emerging ecosystem.
The good news is that corporates are well placed to succeed here, with many factors putting them in a strong position to win in the transition to a low-carbon future. They are able to leverage their considerable assets, which include extensive experience, existing market position and scale, capital reserves, established ecosystems, and significant knowledge and expertise.
Ambitious net-zero carbon commitments have already been set by thousands of companies. Now is the time to execute on these promises. But it doesn’t stop at lowering their own emissions: Corporates need to go further and build the solutions we need to hit the 1.5c target outlined in the Paris Agreement, unlocking great value in the process.
There are three key strategies available to corporates who are serious about creating tangible value and impact:
- Diversification and uncovering new business models by finding new ways to satisfy their customers’ fundamental needs.
- Driving efficiency through low-carbon technologies and solutions.
- Greenfield innovation — inventing new technologies and advancing breakthrough science, or developing and scaling new implementations of bleeding-edge tech.
The Climate Opportunity
It’s now clear that there are huge upsides available to those willing to take bold action on climate. These come in the form of unlocking new revenue streams, making cost savings, establishing strong positions in brand new markets, and reinforcing standing in current markets by winning customer preference — not to mention the chance to adapt to a low-carbon future for those who operate in carbon-heavy sectors.
There are myriad climate issues to solve for, and market leader status available for those who are able to provide solutions; we might think of the huge value available to whoever is able to optimize battery performance for electric vehicles, or the company that manages to provide hydrogen at low cost. Companies should start to think of the climate imperative as an opportunity, with investors looking more and more to ESG performance and stakeholders increasingly valuing climate topics.
“Winners will be active rather than reactive and transformative rather than incremental in their approach to innovation.”
Whenever industries face disruptive change and new economies emerge, value pools change and opportunities are created for those who actively attack them. For instance, a market for lower-carbon oil and gas is emerging, as product buyers demand reduced emissions intensity or will look to less carbon-intensive energy sources. Companies like Neste are already leading the way in this and reaping the rewards. The myth that early movers will face disadvantages if others don’t also take action has been debunked, and the big prize is for those who pave the way in a changing industry landscape.
All corporates face the innovator’s dilemma in relation to climate: Those who fail to innovate will be disrupted themselves. Corporates have the assets they need to make a meaningful dent in the transition to net-zero emissions, and they need to be bold in deploying these assets in order to succeed. Winners will be active rather than reactive and transformative rather than incremental in their approach to innovation.
Companies are also facing rising pressure to act on climate. Action is both an ethical imperative and a societal expectation. Leaders risk reputational harm if their company is perceived to be environmentally harmful or apathetic towards climate change, and the growing number of carbon taxes and carbon pricing initiatives present a major threat to carbon-intensive profit margins. These policy instruments, imposed on a national or regional scale, are not only a concern for companies operating under their jurisdiction. The EU’s proposed carbon border is a case in point for the impact of national climate policies on international businesses.
Three Areas for Climate Innovation
Companies who overcome their hesitancy and embrace the key elements of an actionable climate innovation strategy will access lucrative new markets and stay relevant and resilient. Such a strategy will require not only technological innovation, but new business models, new markets, and above all new mindsets: Companies need to think of themselves not just as sources of emissions, but as providers of solutions in a low-carbon future. In turn, climate action becomes an opportunity and revenue source rather than a risk and a financial burden.
With this in mind, we have identified three primary areas in which corporates can and should take action, and we will examine these more thoroughly in subsequent pieces. This series, covering diversification and new business models, efficiency, and innovation, builds upon the Climate Innovation Solution Canvas we developed in collaboration with BCG, which maps out four areas for climate leadership in business: reengineer, reboot, reimagine, and invent. The articles to follow will take a deep dive into each of three strategies to put the Climate Innovation Solution Canvas into action and address how to reduce emissions and build climate solutions while generating value.
Diversification and New Business Models
Corporates can combine existing assets with low-carbon technologies to unlock revenue outside of high-emission activities and open up a path to a sustainable future. This will be a key strategy for many companies seeking to gain access to new markets by reengineering their current offerings in ways that reduce their environmental impact.
One example here is gas stations that are retrofitting their forecourts with EV charging stations, providing an exemplar for what diversification for climate looks like — they will unlock new revenue and replace their current revenue stream, which will disappear once EV penetration truly takes hold. Shell is planning to roll out 500,000 electric charging stations before 2025, expanding their offering to succeed in a low-carbon future.
To reduce emissions, technologies such as AI and IoT can be deployed to reboot existing operations for a low-carbon future. Supply chain decarbonization, smart sustainability insights and analytics, as well as emissions and waste abatement solutions can help companies understand how their activities are impacting their carbon footprint. These insights then help them save energy and other inputs to drive overall emissions reductions and offset impact in areas of the business that are less amenable to adaptation.
BCGDV-built Shell venture MachineMax can provide inspiration here. Construction machines are active for an average of 4.5 hours a day and idle for approximately 40% of that time. With 50 machines running, every hour of activity costs around $50 and 12kg in CO2 emissions. An AI- and smart sensor-powered telematics solution that connects with industrial hardware such as construction vehicles, MachineMax solves the problem of unnecessary idling time in off-road machinery, which results in profit leakage, reduced utilization, wasted fuel, avoidable maintenance costs, and increased emissions.
In the case of our construction example, these savings would add up to $1,000,000 and 250 tonnes of CO2 emissions annually. There are millions of construction machines operating globally; reducing their idling time would lead to massive savings in cost and emissions.
Some of the solutions to the climate crisis have yet to be realized. There are endless opportunities here to invent new technologies or to totally reimagine those that already exist. By investing in innovation, companies can work to uncover the technological capabilities that can help them achieve carbon neutrality and invent new solutions to help protect against disruption and create new markets.
With EVs becoming more and more common on our streets and Tesla’s stock price riding high, we might remember that even a decade ago they seemed like a risky proposition; investment in sophisticated battery technology with greater energy density and range made them a reality — and a huge new revenue opportunity. Yet, even still, a major breakthrough in battery technology is necessary along with advances in other areas in order to foster mass market demand for all-electric and hybrid electric vehicles within the next decade, leaving room for those with the capacity to innovate in this area.
We will be exploring these areas in further detail in the coming weeks, offering examples and guidance for those looking to build towards a more sustainable future and become part of the solution. It will take a whole ecosystem of research institutes, individuals, companies, governments, and others to build solutions, but it’s imperative that corporates find their own role, and invest in climate innovation — they can’t afford to miss the new climate opportunity.