by , (McKinsey)

Global attempts to move to a 1.5° pathway rely on our collective ability to scale up new green businesses—and to do so quickly. What exactly will it take to make this happen?1

This question was the focus of McKinsey’s recent Green Business Building Global Summit in Stockholm. More than 350 senior leaders from critical players in the green space—including corporates with green growth ambitions, green-tech start-ups, and leading sustainability investors—convened for two days of discussions about the imperative to hyperscale, how to reduce the cost of clean technology, and how to secure necessary talent and establish an operating model for ultrafast scaling.

These discussions revealed just how quickly and to what degree we must scale physical technology to solve the net-zero equation. Capital expenditures will have to reach historic levels, topping $276 trillion across areas including transport, power, and buildings—an opportunity the size of which has not been seen since World War II. Given this reality, our conversations suggest the need for a new formula for building green businesses.

Scale climate technology at the speed of digital

Forces are converging to create a net-zero agenda that’s reminiscent of the execution speeds of the digital economy. Indeed, while the scaling of sustainable technologies has historically stretched over many careful years, we’re now in a moment that calls for the hyperscaling of technologies. This community needs to build not just unicorns but decacorns (unicorn companies worth at least $10 billion)—and a lot of them. The McKinsey Net-Zero Transition team suggests that we would like to see 200 to 300 green decacorns by 2030.

The momentum for hyperscaling is coming from every direction, including regulations, investor activism, and consumer demand. These forces are likely to spur companies to adopt cleaner materials, such as low-emissions steel, much more quickly than they have done historically. “The demand for green materials is going to grow not by 20 percent per year; it’s going to grow by 20 [times],” said Harald Mix, cofounder of Altor Equity Partners AB. Certain sustainable products are already experiencing a price premium. For example, recycled polyethylene terephthalate (PET), the plastic most commonly used for beverage bottles, is seeing an average price premium of $300 per metric ton over virgin PET.2 Furthermore, some green technologies must be manufactured on a large scale to compete on price, which could push new green businesses to scale up quite quickly.

“[There is a] massive opportunity for the ones who are great at scaling to actually win and create a platform,” said Tomas Nauclér, McKinsey senior partner and a global leader of McKinsey Sustainability. Our analysis shows that, by 2030, growing demand for net-zero products could result in more than $12 trillion of sales annually across 11 high-potential value pools (exhibit). The question is: How can businesses move quickly enough to capture this value?

Embrace a new formula for building and scaling businesses

To build and scale at the pace needed to achieve climate goals—and capture some of the immense value found there—green businesses must embrace a new formula. The following actions, which will evolve over time, can help the earliest movers start making progress:

Set absurd ambitions. Succeeding in building green businesses at the pace and to the extent necessary to achieve net-zero emissions will require absurd ambition. Scaling needs are massive. Historically, solar scaling was about 12 times, and mature wind and solar four to seven times. In the years leading up to 2030, however, scaling of early-adoption, demonstrated, and precommercial technologies such as batteries, green hydrogen, and carbon removals will need to reach 150 times.

Secure a cost advantage by identifying a scaling break point for any new technology. “This is about making the technologies economical,” said Nauclér. That is, figure out the scale break point for cost competitiveness, so business viability can be reached as quickly as possible. For example, green-hydrogen costs are projected to come down by 60 percent by 2030. This break point between gray and green hydrogen will require about 65 GW of scaled electrolyzer capacity.

Sign up captive demand before scaling. This is a good way to resolve the commercial side of investment risk. Green business builders may also invite upfront customer investment in the business.

For more visit https://www.mckinsey.com/business-functions/sustainability/our-insights/sustainability-blog/building-green-businesses-to-speed-the-transition-to-net-zero

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