Introduction

Recent shifts in investor sentiment signal a growing commitment to climate solutions, yet the urgent need to address emissions remains paramount. Despite increasing investments in climate technologies, deployment levels are still significantly below the required thresholds for reaching net-zero emissions by 2050.

Investment Trends Among Incumbents

Between 2019 and 2023, 377 prominent capital-intensive firms markedly escalated their investments in climate technology, resulting in a cumulative total of $683 billion. This investment covers various vectors including capital expenditures, research and development, equity stakes, and shifts toward climate-focused business models, with the potential to reduce up to 90 percent of man-made greenhouse gas emissions.

Leading Sectors in Climate Investments

The dominance of the power, automotive, and oil and gas sectors in climate-driven financial commitments is notable. These industries accounted for the largest share of investments, though the percentage of overall budget devoted to climate tech varies significantly—from 8% in oil and gas to 24% in the power sector.

Motivations Behind Investments

Investment in climate technologies among incumbents generally stems from three key drivers:

• Opportunities for unique growth prospects
• Anticipation of declines in traditional core operations
• Compliance with increasing regulatory demands

The Three Horizons of Growth

Utilizing McKinsey’s three horizons of growth framework, businesses can effectively categorize their climate tech investments. Horizon one focuses on existing, established cash-generating businesses, while horizon two presents emerging opportunities poised for profit generation. Horizon three involves future growth options, where most climate tech innovations reside.

Current Focus Areas

Over the last five years, significant investments have targeted commercially viable technologies such as solar energy, onshore wind, electric vehicles (EVs), and batteries. These technologies typically reside in horizon two, showing promise for scalability across various regions.

Success Factors for Incumbents

Investing in climate tech, while fraught with risks, can yield substantial future value. Successful incumbents display a clear understanding of business imperatives and demonstrate effective execution. Two archetypes emerge among successful investors:

• Pioneer Scalpers: These organizations tend to invest early in promising technologies, focusing on innovation and market readiness.
• Fast Followers: These companies invest in proven technologies that are ready for market scaling, leveraging execution capabilities to secure positions quickly.

Common Pitfalls in Timing Investments

Two prevalent failure modes include initiating investments too early in horizon three before market conditions are suitable or delaying investments in horizon two ventures, allowing competitors to surpass them.

Insights from Early Movers

To understand successful investment strategies, we can draw lessons from notable early movers:

1. NextEra Energy: A leader in renewable energy with extensive investments in solar and wind technologies. The company’s proactive approach has positioned it as a top producer in clean energy.
2. LG Chem: Transitioning from a cosmetic chemicals business to a major player in the EV battery market, LG Chem’s long-term commitment to climate tech innovation has yielded remarkable growth.
3. Tata Power: Investing heavily in renewables since the 1990s, Tata Power has successfully expanded its solar operations, showcasing adaptability and innovation in technology projects.

Future Opportunities in Climate Tech

While incumbents have made significant strides, numerous investment opportunities persist, particularly within horizon two businesses that are still developing. There are indications of emerging potential in horizon three technologies, suggesting future avenues for engagement and growth.

The climate tech market is projected to offer between $9 trillion to $12 trillion in annual sales by 2030. Nevertheless, capturing these opportunities necessitates timely investments and robust strategies.

Conclusion

Incumbents are uniquely positioned to leverage climate technology investments for sustainable growth. As they evaluate their strategies, understanding past successes and current market conditions will be crucial in identifying viable climate-driven opportunities.

The time is ripe for incumbent companies to assess their role in expanding climate tech solutions, ensuring they remain competitive and relevant in an evolving global landscape.