Playing offense to create Nordic sustainability champions

This article is the second in a series on Nordic champions and builds on insights from the first article, “Bold moves to forge Nordic champions.”

Nordic companies are well positioned to capitalize on the growing global push for sus­tainability,¹The Nordic countries are Denmark, Finland, Norway, and Sweden. and some have already established themselves as leaders in the effort. Between now and 2050, Nordic companies can unlock large global value pools by playing offense in the green transition—that is, developing knowledge and solutions to help the rest of the world decarbonize rather than focusing defensively on their own decarbonization challenges.

While Nordic countries and their firms already focus on sustainability, they have a significant incentive for going even further: doing so could mean capturing up to €130 billion in GDP and creating nearly one million new jobs. This would be particularly beneficial at a time when Nordic countries are trailing global peers such as Italy, Germany, and France in terms of growing and scaling large companies.² Jens Riis Andersen, Fredrik Dahlqvist, Tobias Lundberg, and Magnus Tyreman, “Bold moves to forge Nordic champions,” McKinsey, June 7, 2021. Recent McKinsey research suggests that the Nordics also have a less dynamic corporate landscape than the United States; according to McKinsey analysis, only about 35 percent of the most valuable Nordic companies have been founded since 1975, compared with almost 50 percent for the United States. The global sustainability agenda presents an opportunity to reverse this trend and generate significant economic growth for Nordic countries while combating climate change.

Successfully capitalizing on sustainability will not be easy, and there are challenges to overcome, including reluctance among some companies to go green before their customers are ready. But if companies, investors, and policy makers set clear goals and make bold moves to capture critical new value pools—and do so sooner than later—these countries could create global sustainability champions. By leading the world on the net-zero transition, the Nordics could become a veritable Sustainability Valley.

Bold actions for a net zero future

Ready for the biggest capital reallocation of our lifetime?

Learn more

The undeniability of net-zero emissions: Why Nordic countries should make a move

The net-zero transition has considerable momentum worldwide: 90 percent of emissions are now targeted for reduction under net-zero commitments, and there’s about €130 trillion of capital from banks that have declared they will manage these assets to keep global warming below 1.5°C.³Data taken from the Net Zero Tracker by the Energy & Climate Intelligence Unit (ECIU), Data-Driven EnviroLab, New Climate Institute, and Oxford Net Zero, 2021. This includes countries that have achieved their net-zero targets or have put them in law or policy documents. It also includes those that have made a declaration or a pledge via the Glasgow Financial Alliance for Net Zero (GFANZ).

Recent McKinsey research suggests that achieving net-zero emissions by 2050 will cost 7.6 percent of global GDP per year. That’s equal to an average of €9.0 trillion of spending, mostly on capital expenditures, an increase of as much as €3.4 trillion per year compared with today. The current energy crisis could accelerate these investments, but only if major bottlenecks are effectively removed—for example, in permitting and project approvals.

Like the rest of the world, the Nordics will need to make massive investments to reach the net-zero goal. However, they have a relatively lower share of high-emissions and hard-to-abate sectors than many other countries and will need to invest a smaller share of GDP (about 5 percent, corresponding to €60 billion a year) than the average country (about 8 percent).

The world will also need to reverse its spending on low- versus high-emission assets from today’s 35 percent and 65 percent, respectively, to roughly 70 percent and 30 percent. This reallocation of capital will create significant new opportunities for bold moves within new and rapidly growing markets for low-emission goods and services. Indeed, globally, McKinsey has identified 11 high-potential value pools that collectively could be worth nearly €12 trillion of yearly revenues by 2030 as the net-zero transition advances (Exhibit 1). These value pools provide significant opportunities for existing Nordic companies to scale and for new sustainability champions to emerge.

1

Many CEOs worry that if their companies move too quickly, they could get ahead of their customers—investing in new assets and incurring production-cost increases before customers demand low-emission offerings or are willing to pay green premiums. However, initial experience suggests that in many sectors, companies that are among the first to pursue net-zero opportunities enjoy greater success. In some industries, bold new entrants in the Nordics are getting ahead of global peers by locking in customers in markets where customer relationships are difficult for competitors to undo. For example, H2 Green Steel, a Swedish start-up, was quick to secure purchasing contracts from automotive OEMs and construction companies in need of low-emission steel—and then used these contracts to raise €100 million in initial funding.

First-mover advantages are still up for grabs in many value pools where Nordic companies have specific opportunities. It’s a prime time for Nordic countries and companies to make a move.

The Nordics’ unique opportunity to capture and create value

The Nordics are in a strong position to launch this offensive. In some ways, Nordic countries are to sustainability today what Silicon Valley was to technology in the 1990s. Indeed, much of what is needed to scale and achieve dominance in this area is already present, ready to be harnessed.

Silicon Valley in the 1990s was home to numerous venture capital funds eager to scale up start-ups. Similarly, the Nordics today have access to capital via top global private-equity (PE) funds focused on sustainability. And 90 percent of the largest Nordic PE firms publish transparency or climate change reports, compared with 40 percent of their largest global peers.⁴Based on McKinsey analysis of data from the United Nations’ Principles for Responsible Investment. The sample included ten Nordic firms and 30 global firms.

Additionally, a key element of Silicon Valley’s success in the 1990s was a strong culture of collaboration among start-ups, established companies, universities, and other public institutions. Similarly, the Nordics can build on a long tradition of public–private collaboration that has already helped launch new sustainable industries, including the Danish wind industry. The industry also has the support of the public sector via government incentives for green transformation and decarbonization targets, much as Silicon Valley benefited from ambitious public support for research and commercialization.

And while Nordic countries have limited natural capital in some areas—such as solar potential and reserves of natural minerals—they are leading on technological capital. They’re home to research institutions that lead the world in sustainability research, and Nordic companies top global rankings on R&D investments as a share of GDP (Exhibit 2). This has resulted in a high proportion of climate-related patents per inhabitant and a large share of sustainable companies. In addition, the Nordics have a leading clean-energy system, environmentally conscious consumers, and a globally focused culture.

2

Silicon Valley in the 1990s was characterized by an entrepreneurial environment that fostered start-ups such as eBay, Google, and PayPal. Similarly, the Nordics have already fostered several climate tech unicorns and promising start-ups in areas ranging from power, mobility, and circular products to water and waste management, buildings, and carbon capture and storage (see sidebar, “Nordic start-ups are addressing new value pools”). Indeed, the Nordics are home to 12 of the 100 most sustainable companies in the world, according to a recent ranking, while accounting for only about 2 percent of global GDP. In addition, three Danish companies are in the top ten most sustainable companies.⁵“The 100 most sustainable corporations of 2022,” Corporate Knights, January 19, 2022. And while the vast majority of tech unicorns still come from North America, two Swedish companies are among the top 47 climate tech unicorns.⁶“Global climate tech unicorns,” HolonIQ, accessed August 11, 2022.

Nordic countries have an opportunity to harness these existing assets and promising start-ups to take an offensive approach to decarbonization.

Building on existing assets to capitalize on new green value pools

The Nordics could capture some of the nearly €12 trillion of value and growth potential—and create a Sustainability Valley—by establishing an environment that encourages the scaling up of new green technologies. While each of the aforementioned 11 value pools presents opportunities for the Nordics, six offer particularly good targets, given existing efforts and assets:

• Carbon management. Nordic companies have a unique opportunity to develop and demonstrate large-scale carbon capture and storage by capturing industrial CO₂ and storing it in depleted oil and gas fields in the North Sea. The Northern Lights project led by Equinor is an example of this type of move. Another opportunity for Nordic companies is to demonstrate and scale up technologies and business models related to carbon capture and use (CCU) given the high availability of biogenic CO₂ (from pulp and paper plants, as well as from biomass combined heat and power plants), in conjunction with the availability of large-scale renewable energy (including offshore, onshore, and hydro).
• Hydrogen. The hydrogen market is forecast to grow exponentially toward 2030 and 2050; total hydrogen demand is expected to grow by a factor of four to six by 2050, and installed electrolyzer capacity is expected to grow from less than one gigawatt in 2022 to 150 gigawatts by 2030.⁷McKinsey analysis of currently announced projects. The Nordics are already home to a number of established electrolyzer manufacturers and a large number of smaller technology start-ups with promising solutions, presenting a significant opportunity to build an industry around these solutions and capture a sizable share of the growing global market. Nordic companies are also engaging in hydrogen production, which is becoming an important market opportunity—both for exports directly and for further processing into green fuels.
• Power and energy storage. The Nordics have some of the globally leading renewable-energy players across the supply chain, including Vestas and Ørsted, and the region has proved that it can scale up a significant renewable-energy industry within a relatively short amount of time. While continuing to scale and stay ahead on renewable energy—including in new frontiers such as floating offshore and energy islands—Nordic countries should look for the next major growth opportunity in global energy. One such opportunity could be in flexibility and energy storage, and the Nordic battery manufacturer, Northvolt, could be an example to follow.
• Buildings. Finding sustainable ways to decarbonize buildings will be paramount to achieving net-zero emissions by 2050. Nordic companies should consider focusing on solutions addressing the two major sources of emissions from buildings: cement, concrete, and steel production (which together account for 22 percent of building emissions) and heating and other building operations (76 percent). The Nordics are already home to leading producers of sustainable materials for buildings, including insulation, energy-efficient windows, and green cement equipment, and new start-ups such as Ekolution are offering CO₂-negative insulation materials. Nordic companies should build on this position of strength.
• Transport. The Nordics could play a critical role in solving one of the major global decarbonization challenges: developing technologies and solutions for production and offtake of green sustainable fuels for maritime and aviation. Leading Nordic maritime and aviation companies, along with renewable-energy and technology organizations, have already launched visionary initiatives across the supply chain for green fuels. Developing, scaling, and deploying the required solutions and business models could become a major opportunity for the region. Similarly, Nordic countries could continue encouraging adoption of electric vehicles (EVs) and building required infrastructure—for example, by producing batteries and charging stations and adopting EV fleets, including heavy vehicles.
• Consumer. The Nordics are home to some of the world’s leading players in sustainable consumer goods sectors such as sustainable fashion and packaging. In addition to established global consumer companies headquartered in the Nordics, a wide variety of smaller start-ups are emerging. Sustainable consumer packaged goods is one of the largest value pools of the net-zero transition, and Nordic companies could capture a disproportionate share of future growth by building on their current momentum.
• Waste. Nordic companies are already leading on materials recycling, and several companies are developing technologies for circular business models including waste-sorting and textile-recycling technologies. Building on this position of strength could unlock significant value potential for Nordic companies.

Aligning on a vision—and setting bold targets

These current conditions combine to create an unprecedented financial opportunity for Nordic countries—one that demands a clear vision of where to go and how to get there. Based on the size of the opportunity, our analysis has revealed a few bold targets that could set the Nordics on the path to building Sustainability Valley:

• Develop four to five new world-leading industry clusters in high-potential value pools linked to the net-zero transition—including carbon management, hydrogen, and green transport.
• Scale a minimum of 125 of today’s promising start-ups into global green unicorns (corresponding to 25 to 35 start-ups for each Nordic country or five to six start-ups within each new industry cluster for each Nordic country).
• Accelerate the green transition of existing corporates to be front-runners in bringing new sustainable technologies to global markets.

If the Nordics achieve these targets, they could capture an additional €130 billion in GDP by 2030 and create as many as one million new jobs.

Getting to Sustainability Valley: How stakeholders can take action to achieve the vision

Unlocking the full potential of the opportunities and achieving targets will require bold moves and approaches from all stakeholders—from large companies and small start-ups to the public sector.

Large Nordic businesses can learn from the strategies of Nordic companies that are already capitalizing on net-zero growth opportunities. Three complementary moves, in particular, can help these companies play offense in the net-zero transition.

• Transform the portfolio. Nordic executives should carefully assess growth potential in their industries and proactively reorient their business portfolios toward areas with high potential for growth, particularly in the 11 value pools. Ørsted’s green transformation and growth in offshore wind sets a good example: the company shifted more than 80 percent of annual capital deployment from legacy business to new green growth areas within just five years.
• Build new green businesses. As noted, green start-ups in the Nordics have successfully captured market momentum, but incumbents generally have found it harder to build successful green businesses. In some cases, corporations struggle to develop small, agile start-ups within large, sometimes bureaucratic, organizations. In other cases, they lack the ambition and willingness to play an active part in disrupting their old business. But established companies have several advantages in creating and scaling new green businesses compared with start-ups: they often have better access to assets (including both balance sheet and intellectual assets), more capabilities, and stronger relationships with key stakeholders. Some Nordic companies have successfully taken advantage of this position. For example, Polestar built its first models using automobile platforms from its parent company, Volvo Cars, allowing for a fast scale-up and asset-light business.
• Seek price premiums through differentiation. Businesses should develop an outlook on markets for sustainable products. Companies selling products with strong sustainability attributes have seen sales increase 50 percent faster for these products than for conventional products.⁸“Playing offense to create value in the net-zero transition,” McKinsey Quarterly, April 13, 2022. To unlock green premiums for sustainable products, companies need to overinvest in explaining the sustainable attributes of their products and solutions. For example, Maersk’s new carbon-neutral vessel, which runs on e-methanol produced through power-to-X, will offer a sustainable solution to growing customer demand for reduced emissions in the supply chain.

As we have seen in the realm of digital disruption, significant value can be created by first movers, which are often small, agile start-ups. The green transition presents a significant opportunity to quickly scale start-ups into global champions. McKinsey research has found that successful start-ups in the climate sector share some common characteristics:

1. Game-changing ambition. Successful climate start-ups have the ambition to disrupt existing technology or solutions rather than make incremental improvements, and they have a material impact on their focus area within the green transition. They also take a global perspective from the start, tapping into global value pools.
2. Cost and capital expenditure advantage. These start-ups have a clear path to cost and capital expenditure advantage over incumbent technologies or business models.
3. Captive demand before scaling. Successful start-ups form early partnerships with captive customers before scaling; some even invite these customers to invest in the business.
4. Parallel scaling for speed. Scaling several business models or technology steps in parallel accelerates the process and helps organizations reach their goals faster.
5. Business ecosystems that reach the supply chain. Successful start-ups form relevant partnerships across the business ecosystem, locking in critical supply partners early for items that could become bottlenecks.
6. Sustainable operations. Successful players build sustainability into all key activities.
7. Globally leading talent. They create an envi­ronment ripe with opportunity and incentives for growing and shaping the company to attract critical local and global talent.
8. Low-cost financing. Climate start-ups focus early on accessing low-cost financing and think outside the traditional financial providers.

To unlock this potential, policy makers could put the right framework conditions in place to create both a push and a pull for new climate technologies—and they could potentially build on lessons learned from past experiences, such as scaling the Danish wind industry and enabling the Swedish start-up environment.

It’s early days, but Nordics countries have cause for excitement about the path to net-zero emissions. First-mover advantage in sustainability could be enormous. Given their existing assets in this space, their access to capital, the nature of public–private relationships, and their technological capital, the Nordics are well positioned to move fast and get on the road to becoming Sustainability Valley.