Riding the Green Wave: How Incumbents Can Capitalize on Climate Tech's Trillion-Dollar Potential

The global push towards sustainable solutions has sparked a significant shift in investment strategies, particularly within climate technology. While recent economic headwinds have caused some fluctuations, the long-term imperative to reduce emissions remains critical. Established corporations, or "incumbents", are increasingly recognising the vast potential of climate-driven businesses, demonstrating a surge in capital allocation from 2019 to 2023. However, with current low-emission technology deployment levels only at 10% of the required target for net-zero emissions by 2050, the journey is far from over.  

The Rising Tide of Climate Tech Investment

A comprehensive analysis of 377 major capital-intensive incumbents reveals a sixfold increase in investments in climate-driven growth businesses, culminating in a cumulative total of $683 billion between 2019 and 2023. This financial commitment encompasses capital expenditure, research and development, equity investments, venture capital stakes, strategic portfolio shifts, and the creation of climate tech-focused spin-offs. Notably, these investments are concentrated within 12 key climate technology categories that collectively address up to 90% of man-made greenhouse gas emissions.  

Sectoral Leaders and Regional Dynamics

The power, automotive, and oil and gas sectors have emerged as frontrunners in climate tech investments, with the latter two experiencing the most rapid growth rates. Capital expenditure constitutes a significant portion, ranging from 73% to 90% of annual investment across these sectors. Interestingly, while the power sector allocates an average of 24% of its total investment to climate tech, the automotive sector commits 19%, and the oil and gas sector 8%. Geographically, European and Asian companies are driving approximately 80% of incumbent investment in this space.  

Drivers and Maturity of Climate Tech Investments

Incumbents are primarily driven by three factors: unique growth opportunities, potential declines in core businesses, and regulatory mandates. These investments span various stages of maturity, aligning with the "three horizons of growth" framework. Horizon one represents core businesses, horizon two encompasses emerging growth opportunities, and horizon three focuses on future growth options. Notably, over 80% of incumbent investments in the past five years have targeted commercially viable horizon two technologies like solar, onshore wind, electric vehicles (EVs), and batteries.  

Strategies for Success: Pioneer Scalers and Fast Followers

Success in climate tech investment hinges on strategic approaches. "Pioneer scalers" invest early in nascent technologies, driving innovation and shaping regulatory landscapes. Conversely, "fast followers" capitalise on proven technologies with established demand, leveraging their execution capabilities for rapid scaling. Both strategies offer unique advantages, provided incumbents avoid investing too early in unready technologies or too slowly in scaling opportunities.  

Case Studies: Lessons from Leading Incumbents

Several incumbents have demonstrated exemplary success in climate tech investments. NextEra Energy, a pioneer scaler in wind and solar energy, has grown into a leading renewable energy producer. LG Chem, initially a cosmetic chemicals company, has become a pioneer scaler in EV batteries, spinning off LG Energy Solution to capture a significant market share. Tata Power, an Indian power company, has successfully scaled solar projects and diversified into related ventures, achieving substantial market value growth.  

Future Opportunities and Market Dynamics

The climate tech market, projected to reach $9 trillion to $12 trillion in annual sales by 2030, presents numerous opportunities for incumbents. While horizon two businesses offer immediate scaling potential, horizon three businesses are gradually approaching commercial viability. Venture capital firms are increasingly focusing on horizon three technologies, contributing to the creation of approximately 175 climate tech unicorns since 2015.  

Navigating Market Cycles and Strategic Imperatives

Like emerging industries before it, climate tech is poised to experience boom-and-bust cycles. Incumbents must strategically time their entry and leverage their assets to navigate these fluctuations. Balancing short-term priorities with long-term resilience is crucial for sustained growth. The current landscape necessitates a thorough evaluation of climate-driven opportunities to ensure future prosperity. 

Conclusion: A Call to Action for Incumbents

The surge in incumbent investment in climate tech underscores the sector’s growing importance. With significant market potential and ample room for expansion, incumbents are well-positioned to drive the next wave of sustainable innovation. By learning from early movers and adopting strategic approaches, they can secure a leading role in this transformative industry.

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