The industrial sector—including automotive, machinery, and semiconductors—has never hesitated to explore new businesses. It has already produced some of the world’s most advanced technological innovations, such as leading-edge electronics and state-of-the-art transport systems. Now, it is deeply enmeshed in developing solutions for one of the world’s most pressing problems: climate change. Industrial companies provide some of the most important green products, components, and services, such as electric vehicles (EVs) and wind turbines. Much of the sector’s ongoing R&D focuses on sustainable solutions.
But which green opportunities should industrial companies prioritize as they seek to build new businesses? The stakes are high because a bad bet could jeopardize not only the bottom line but also—by diverting R&D funds from more promising solutions—efforts to control global warming. Although most industrial companies are accustomed to navigating uncertainty during product development, the sustainability market combines multiple challenges: immature technologies, evolving regulations, a lack of clarity about market size, and rapid changes in required capabilities. These issues may be particularly problematic during the early stages of R&D, when companies contemplate their options and allocate resources.
To provide guidance during this critical period, we reviewed the business case for sustainable offerings and the potential obstacles to their success. These insights allowed us to develop a new five-step framework that can help industrial companies identify the best green business opportunities and chart a path forward. Our framework involves assessing the value prospects, identifying enablers, basing priorities on climate impact and technological maturity, aligning with future policies and regulations, and defining a strong business plan.
The business case for sustainable offerings
Many businesses and government leaders are heeding the call to limit global warming to an increase of 1.5° Celsius above preindustrial levels—the target established in the 2015 Paris Accord. More than 1,800 companies have already set decarbonization goals inspired by the Science Based Targets initiative (SBTi), and these may necessitate changes in their operations, manufacturing processes, or upstream and downstream supply chains.
Equally important, the emphasis on sustainability is encouraging industrial companies to explore new opportunities in green products and services—either adaptations of existing offerings or entirely new ones. Their efforts usually follow one of these patterns:
- Leveraging technology from existing products. A turbo machinery manufacturer, for example, used technologies from its existing compressors (mostly for oil and gas customers) to build entirely new green heat pumps that multiple industries can use.
- Adapting existing infrastructure. A chemical reactor manufacturer, for instance, reconfigured reactors originally used for nonsustainable production to create green methanol and green kerosine.
- Leveraging existing strengths. A producer of combustion engines, for example, decided to leverage its existing competencies and customer relationships to create new hydrogen-based offerings that complemented its classical combustion-based drive systems. By doing so, it established a niche within the fields of electrolyzer and fuel cell production.
Even more green offerings will enter the market over the next few years to meet the 1.5° Celsius target, and sales of existing sustainability solutions will probably increase. One hundred percent of road transport, for example, must be electrified to achieve net-zero emissions, and all low- and mid-temperature industrial processes must be fossil free by 2050.1 Over the past two years, this prospect has led to an eightfold increase in the number of OEMs committed to decarbonizing their supply chains, and this number could continue to surge.2
The value of sustainable solutions is already impressive. The total sustainability value chain of transport, for instance, could be valued at $2.3 trillion to $2.7 trillion by 2030. As the sustainability market continues to grow, investors are expected to funnel an additional $4 trillion into creating and scaling up new decarbonization businesses by 2025.
The Titanium Economy
So green opportunities already abound for industrials. Consider green steel. Demand already exceeds supply. Emissions across the steel value chain account for approximately 10 percent of global CO₂ emissions,3 yet only a few companies have invested in producing low-carbon steel. Global demand for it is expected to increase from about 15 metric tons in 2021 to around 200 metric tons by 2030. At that point it would represent some 10 percent of total steel demand—and that could rise to 25 percent by 2040. If supply doesn’t rise soon, companies may not get enough green steel to keep the manufacture of sustainable products on track.
Although industrial companies are eager to advance their sustainability ambitions, the sector is new to them. Certain factors, including the following, might influence their perceptions about the best path forward and potentially hold them back from taking rapid action:
- Unclear market size and growth rates. Some green products and services have just emerged, so it is difficult to predict their future revenues. Carbon capture technologies, for example, are now a niche market, but many analysts expect demand to surge. The market for these technologies is very likely to become substantial at some point, but the exact size is hard to estimate.
- Early-stage technologies. Many sustainable products are in a very early stage of development. It still isn’t clear whether many of them will be both technologically and financially feasible on a large scale: researchers still have many questions to answer and obstacles to overcome. The sustainable production of hydrogen, for instance, clearly requires new and more efficient electrolyzers. But R&D has yet to identify the best technology for the purpose or the type of infrastructure required to support them.
- A lack of clarity about the required competencies, facilities, and product characteristics. Companies are still learning which features will give green products unique selling propositions. Consider battery cells. Some machinery companies are interested in providing new coating mechanisms for this market, but the specific requirements for next-generation batteries are still unknown. With so much uncertainty about products, it is also difficult to predict which skills employees will need, which materials must be sourced, and which facilities will be essential (for instance, whether large plants will be needed).
- Changing regulations. Rapidly evolving sustainability regulations could eventually have a significant impact across industries. Until companies have more detail about which, when, and where regulations will apply, they cannot be sure that potential products and services will meet future guidelines.
Charting a path forward
If industrial companies develop perceptions that inhibit their drive to pursue sustainability opportunities, they may have difficulty striking the right balance between their core business and new green growth. Leaders may struggle to allocate time and resources between these competing imperatives because management attention and funding are always limited. In any case, core businesses deliver stronger short-term returns than new ones, and leaders may have difficulty making a case to divert resources from these more profitable lines.
Such issues require immediate attention because sustainability is the business opportunity of the century, and really the only way of future-proofing any industrial company. Our new five-step approach can help change companies’ perceptions, mitigate risk, and allow for more accurate evaluation of sustainability opportunities.
Step one: Assess the value prospects
Within the industrial sector, the number of green opportunities may seem overwhelming because they encompass so many products and services. McKinsey’s knowledge of developing technologies, regulations, and customer demand leads us to estimate that $9 trillion to $12 trillion in sustainability investment opportunities will emerge by 2030. To gain greater clarity about the market, companies might benefit from identifying specific investment themes within different sectors and assessing the value for each theme.
We followed this approach by mapping opportunities for industrial companies along 11 customer sectors: agriculture and land and forest management, buildings, carbon management, consumer goods, hydrogen, industrials (aluminum, cement, chemicals, mining, and steel), oil and gas, power, transportation, waste, and water. For each sector, we identified investment themes, such as carbon offsets, the electrification of vehicles, green cement, and renewable power (Exhibit 1). By providing more clarity about the potential for value, such segmentations can help leaders not only to prioritize their opportunities but also to build support for new green ventures.
One sustainability investment company looked at opportunities related to each of the investment themes that we identified. As part of its assessment, the investor examined the dynamics and the cost of building a new business. It eventually decided to fund a hydrogen-based, zero-carbon steel production company that became the world’s first large-scale fossil-free steel plant. This facility is expected to produce five million tons of zero-carbon steel annually by 2030.
Step two: Identify important technology and infrastructure enablers
While market value is a major consideration, companies cannot set priorities based solely on potential revenue; they must also examine their existing infrastructure and capabilities to narrow the prospects. The first consideration is whether their existing products can support sustainability applications or be adapted to do so. Next, companies should determine if any factors—including infrastructure, the supply chain, the customer base, and the geographic footprint—might give them an edge.
After companies complete the internal assessment, they should review, with fresh eyes, the opportunities they identified in the first step. Some of the most promising ones may not be a good option for their business because they would require the acquisition of new skills or facilities. Likewise, companies may discover that their capabilities are a strong fit for an opportunity they had not originally considered.
All businesses will reach a different conclusion after the internal review, since they all have unique strengths and weaknesses. Consider machinery players that manufacture components such as valves and engines. Our value analysis found that these companies could find multiple sustainability opportunities, although the best vary, depending on the area of specialization. With batteries, for instance, the total value at stake for machinery players ranges from $70 billion to $80 billion (Exhibit 2). Machinery companies that specialize in drive technology might achieve the best results by focusing on electrode coaters. Those involved with robotics and automation might win by concentrating on cell or pack assembly tools.
One multinational company that produces large-bore diesel engines and turbomachinery identified more than 40 potential green business opportunities, in areas such as energy storage, green-energy production, heat pumps, hydrogen, and synfuels. By evaluating these opportunities in relation to infrastructure, competitive positioning, and customer access, the company pinpointed two options that offered the greatest chance of success.
Step three: Base priorities on climate impact and technological maturity
The third assessment step focuses on two major considerations in combination: the climate benefits and the technological maturity of each potential opportunity (Exhibit 3). To assess the impact on climate, companies can use tools such as McKinsey’s Catalyst Zero, which typically determines the baseline sustainability metrics of a company, product, or process. The tools then predict how different solutions could improve these metrics. To assess the maturity of a technology, companies can draw on their proprietary research, as well as insights from analytical tools. For instance, McKinsey’s Zero Carbon Product tool helps companies determine the abatement prospects of a technology by evaluating its level of maturity.
Just as capabilities may differ, companies may have varying attitudes about the climate impact and technological maturity they want. Those with a high risk appetite may be more likely to favor opportunities in emerging technologies that could deliver the most promising returns. Others may be less comfortable with immature technologies, even if their potential sustainability impact is high.
Step four: Align with future policies and regulations
Many regulations, such as those related to the EU Fit for 55 program and the US Inflation Reduction Act, could act as catalysts by creating incentives for the development of green products or providing economic benefits to companies that cut emissions. Companies should follow regulatory developments and consider how current or future policies might affect their strategies. That holds true for any project across industries, of course, but it is particularly important for green businesses because regulations are often missing, nascent, or rapidly evolving.
Companies can use analytical tools and research insights from diverse sources to assess how future guidelines could evolve. They might, for example, consult the Inevitable Policy Response (IPR), a consortium that conducts research and models scenarios. The IPR includes groups (including the Carbon Tracker Initiative and the Climate Bonds Initiative) with many different perspectives. It also offers a range of applications that can help companies map potential regulatory considerations and remain in compliance with guidelines.
Step five: Define a strong business case and plan
Before executing a green strategy, companies could benefit from developing a complete business plan, including a business case with a five- to ten-year outlook. Again, this advice is standard for any company, regardless of product or sector, but may be particularly important for green products because of the heightened uncertainty. When developing business plans, companies may benefit from asking some basic questions, including these:
- What are the company’s ambitions—financial and otherwise? Are these game-changing ambitions?
- What is the current demand? Can the company captivate demand before scaling?
- What is the market sweet spot? Can the company create a cost advantage with new technology?
- How can the company fill competence gaps, and can it do so while scaling the business?
- In which five to ten areas (for instance, operations, partnerships, and recruiting resources) should the company double down?
- How can the company define and track success during implementation?
Some companies might benefit from testing the business case externally by presenting it on a capital markets day or by sharing it with an advisory board.
A European equipment and machinery supplier for automotive OEMs followed all five steps when it looked for new green growth opportunities. After examining multiple options, the company identified near-term growth opportunities for battery cell manufacturing: a revenue potential of €900 million to €1.6 billion by 2030. Internal capabilities, infrastructure, the maturity of the technology, the impact on climate, and regulations were all considered. The company identified more than 80 longer-term opportunities and narrowed them down to three by taking the same considerations into account. In addition to identifying the essential resources, such as employees and capital expenditures, the company created a detailed business plan that included a timeline and assigned responsibilities.
Identifying the best green opportunities may require a new strategy of the kind we have outlined here. The rest of the product development journey will be more familiar to most companies: the stages often include establishing proof of concept, beta testing, forming partnerships, and scaling up the business. If a company has thoroughly assessed its green opportunities through our five-step process, these additional stages will most likely proceed more smoothly, and the eventual returns on investment will be optimal.
