We’re at a critical and complex moment for building green businesses.

On one hand, we’re seeing an increasing urgency to scale climate technologies. As companies and governments continue to make net-zero commitments, demand for green products should continue to grow. According to our analysis, net-zero offerings could generate more than $12 trillion of annual sales by 2030 across 11 key value pools. There’s also the issue of energy security. In Europe, for example, there’s a real question around the sufficiency of both heating and electricity for the coming winter season due to gas supplies from Russia being at risk. The importance of alternative sources of energy—from renewables, for example—has never been more apparent.

At the same time, uncertainty in the financial markets and supply chain challenges may be creating a sense that launching or scaling a green business is more complicated. Funding may not be as easy to come by as it was six months or a year ago. Input materials for certain technologies, such as batteries or solar panels, might be costlier or in shorter supply. The growth potential and need for green businesses haven’t gone anywhere. But it’s even more important for green business builders to do the homework on cost positions and creating supply chains, for example, in order to scale.

One interesting way we’ve seen green business builders approach financing is to sign up customer demand before fully scaling—as a way to build production capacity against that demand. We’re seeing this in green steel, electric-vehicle batteries, and sustainable airline fuels. That way, others who are investing in these ventures may feel more confident in the business potential. Over time, these products could also fetch a green premium. Right now we’re seeing a premium of 20 to 30 percent on some sustainable goods compared with products that have a higher carbon or environmental footprint. 

Many of these climate technologies are financially viable only when they’re at a certain production scale, too. In our experience, players that are able to scale quickly have the potential to reach cost-competitiveness faster and earn an early market position. For a technology that is not yet at a commercial scale, identifying a “scaling break point” could help leaders understand when cost advantages might be realized during the growth trajectory. In our analysis of a textile-recycling technology, for example, we learned that only when the average plant size and the number of plants reaches a critical scale could costs be expected to become competitive.

Of course, scaling quickly is easier said than done. It can be a challenge to validate new technologies while also planning for future capacity. This is why start-ups have typically been first to build and scale climate technologies. Start-ups tend to put more emphasis on technological innovation. They operate quickly. And they have a higher tolerance for risk. In many cases, it’s “scale or die.” 

For corporates, the funding structure, risk profile, and timescales for growth are different. The objective is to deliver what has been promised to investors on a quarterly basis. Scaling quickly doesn’t come as naturally. But that’s beginning to change. In different energy and process-technology fields, for example, we are seeing corporate leaders asking, “What can we do?” One potential advantage for incumbents is resources. A big company might have the ability to build, say, $100 million to $300 million in green-tech investment into its P&L.

Leaders looking to build a green business might begin with a little soul-searching. It’s not easy for a CEO to say, “I’d like to be part of this revolution—which might require trillions of dollars of overall investment.” But a leader can start by asking, “What do we feel we have the courage to go after?” and start creating and testing hypotheses from there. You can start building courage with facts.

ABOUT THE AUTHOR

Anna Granskog is a partner in McKinsey’s Helsinki office.

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