Ten questions for a winning climate-transition business strategy

Two years ago, the CEO of storied car manufacturer BMW found himself facing a quandary. How fast and how much should the company shift its product portfolio toward climate solutions—namely, electric vehicles (EVs)—in the face of regulatory, customer, investor, and employee pressure?

To some, the answers are simple: today and 100%. BMW’s CEO, Oliver Zipse, saw the decision as more complicated, bound up with multiple factors. Could BMW deliver an EV with design and performance worthy of the company’s promise to engineer a superior driving experience? Could the company sell such an EV at a price its customers could afford? Would an extended charging network and a sufficiently robust electric grid be developed to serve EV owners? Could BMW secure a steady supply of EV materials and components, amid volatile markets for such commodities as lithium and cobalt? And would an electric BMW represent a genuine climate solution, a model that produces fewer carbon emissions over its life cycle than a comparable gas-powered car?

Many of these considerations gave the CEO pause. Several were commercial. It wasn’t clear that BMW customers were ready to hunt for charging stations, put up with lengthy charging times, pay a premium for EVs—or give up the thrill of hearing a gasoline engine growl and roar. Nor could BMW count on being able to source batteries at a reasonable cost. Environmental factors also arose. Working with BMW’s suppliers, managers estimated the level of carbon emissions that resulted not only from the manufacture of an internal combustion engine (ICE) vehicle and everything that went into it but also from the yearslong use of the vehicle itself. They performed the same exercise for EVs. The conclusion: eliminating ICE cars from BMW’s lineup in favor of EVs exclusively wouldn’t cut emissions as much as conventional wisdom suggested.

After discussing matters with BMW’s management team, the CEO reached a decision. He announced that BMW would seek to increase EV production by adding all-electric models to every vehicle class—while continuing to sell vehicles with other powertrains indefinitely. The statement was met with skepticism from many commentators. They saw it as a sign of aversion to change, one that represented a real risk of falling behind other established carmakers that had pledged to sell only EVs by 2030 or so.¹ Yet in the years since, several of those companies have delayed their plans to end sales of ICE vehicles. BMW, meanwhile, is selling more EVs, as a percentage of vehicles sold, than its main rivals.

This is an all-too-familiar situation for countless business leaders in the context of the transition to a low-carbon economy. Implementing a climate-transition strategy has become an essential responsibility for every executive who manages a company’s portfolio of products and services—and whose duty to generate financial returns for investors, by winning in a competitive market, remains paramount. And the responsibility applies to leaders of businesses in every sector. Restaurant companies such as McDonald’s are thinking about adding menu options that have lower carbon footprints. HVAC manufacturers such as Carrier are adjusting to the evolving market for heat pumps. Energy companies such as AES are expanding their portfolios of power generation assets with solar, wind, and other renewables installations.

The rewards to companies that do manage the climate transition sensibly can be great. The payoff shows up not just in a handful of anecdotes but also in the hundreds of annual reports analyzed by the Digital Data Design Institute at Harvard Business School. Using large language models to study the Item 1 business descriptions of the 10-K filings of 3,610 publicly listed US companies—more than 10 million sentences published over 18 years—my colleagues and I tracked how firms have added climate solutions to their portfolio of offerings. Then we compared their transition approaches with their financial results. Our findings show that many companies have implemented and benefited from climate-transition strategies:

• There has been a significant increase over time in the number of companies developing and deploying climate solutions—that is, products and services based on technologies that could lower carbon emissions in the economy (see chart, below).
• Climate solutions appear in the business portfolios of companies across the economy: consumer goods, transportation, energy, hospitality, materials, and more industries.
• Firms transitioning their product portfolio toward climate solutions experience a revenue growth premium of about 2 to 3 percentage points per year, relative to competitors—a significant amount for the large, mature companies in our sample, which on average had more than US$5 billion in yearly revenue and about 9% annual revenue growth during the analysis period.²

Of course, nothing in business comes for free. Climate-transition efforts also lower companies’ profit margins, on average, by about 1 percentage point for two to four years, a “worse before better” performance dip that is not unusual for companies making strategic shifts. For those companies making very large capital and research investments, the dip could be even deeper and longer, making the shift still more challenging.

One reason for the dip is fundamental: innovation of any kind, not just climate innovation, requires substantial investments in supply chain relationships, research and development, talent, and brand building, and these investments take time to pay off. For example, as companies procure new materials and hire talent to manufacture next-generation climate-solutions products, their ratio of cost of goods sold to revenues increases by 2 percentage points. The innovation process for climate solutions also tends to differ from the innovation process for other types of goods and services. Many climate solutions involve significant scientific and technological risks, up-front capital requirements, and long time horizons to commercialization. Until companies achieve economies of scale and learning, the development and deployment of climate solutions often depends on policies that make the solutions financially viable, such as cap-and-trade systems, carbon taxes, and subsidies.

And as BMW’s CEO learned, these are just some of the dynamics that make it difficult for executives to determine the right pace, scale, and focus for their climate-transition strategies. Evolving regulations, unproven customer demand, well-funded disruptors, and underdeveloped supply chains give CEOs ample reason to go too slow and do too little—which can cause the company to fall behind competitors. Yet the emotion and urgency of the climate crisis can also make a CEO go too fast and do too much. The company that rushes climate solutions to market may get ahead of its customers, squandering investments and registering weak sales. In either case, the organization misses opportunities to unlock growth, to energize employees, and to deliver products and services that help mitigate climate change.

Although the success of a strategic venture can never be assured, my research suggests that executives can better the odds for climate-solutions businesses by determining whether those businesses face five important challenges and setting out steps to overcome them. Then, once they’ve explored those challenges, they can use a framework to assess where they stand—and to identify the moves that will position the company to win in the low-carbon economy that is now taking shape.

What is a climate-transition business strategy? What are climate solutions?

Overcoming challenges in climate-transition strategy

For top executives at leading companies, the work of setting climate-transition strategies begins with recognizing key challenges. Two challenges—customer behaviors and time of product adoption—relate to the demand for climate solutions. Three additional challenges—the use of emotions over data in decision-making, interdependencies in the value chain, and the lack of a balanced focus between new and legacy businesses—relate to the supply for climate solutions. And as I’ll discuss below, each challenge can be met with lessons learned from those companies that have gone through it before.

Behaviors

Business leaders routinely assume that if their company offers a climate solution at a reasonable price, then customers will flock to it. But the reality is often different. Unless climate solutions also match customers’ long-standing preferences and behaviors, buyers will steer clear.

BMW’s experience illustrates this phenomenon. When BMW introduced one of the first EVs, the i3, in 2013, it was celebrated as a technological breakthrough, with innovations such as an ultralight carbon-fiber body. Yet the car’s disappointing sales underscored the ways in which it fell short of customers’ expectations. The car simply didn’t look or drive like the “ultimate driving machine” long pitched as the brand identity. And because many BMW owners used their cars to make long commutes and road trips, concerns arose about driving range and charging availability.

Having internalized the lessons from this early experiment, BMW now designs its electric models, such as the i4, to provide the aesthetics and performance that customers expect from the brand.³ Its EV sales now outpace those of many competitors.

Similarly, several years ago, Arcos Dorados, the single franchisee of thousands of McDonald’s restaurants in Latin America, introduced plant-based burgers to round out its menu with items that have a lower carbon footprint. It soon discovered that customers had little appetite for them. Latin American consumers rank high in terms of meat consumption per capita and price sensitivity, and the new sandwiches didn’t satisfy their taste or fit their budget.

The company altered its approach, developing a strategy to introduce chicken options that could accelerate the growth of the company and diversify away from higher-carbon-emitting beef production. Within a few years, chicken represented a substantial percentage of the company’s product portfolio.⁴

In shifting their portfolio to climate solutions, other companies have had to navigate long-standing behaviors that customers do not want to change because it would be inconvenient to do so. Vytal, a circularity-focused company and the largest digital platform for food container reuse, has been confronting the problem of behavioral inertia for years. The company supplies restaurants with reusable takeout containers, which customers can request at no extra cost with a simple QR code scan. After eating, customers return the containers to any one of thousands of restaurants. Yet Vytal had to contend with the reluctance of diners to embrace a service that’s less convenient than getting food in single-use containers they can throw away. In response, the company has been experimenting with multiple mechanisms to encourage behavioral change, including convincing restaurant partners to impose a small fee for single-use containers, running marketing campaigns to increase awareness about the environmental impact of single-use containers, and offering loyalty points on its app.⁵

Accommodating entrenched behaviors is a key principle of customer-centered design, which KOKO Networks, a fast-growing and digital-savvy company out of Kenya, has worked hard to follow. The company has reached more than 1 million households with its bioethanol-fueled clean cooking equipment, in part because leaders designed their service around customers’ behaviors. They recognized that customers in densely populated African cities would need to buy bioethanol every few days because most lacked the cash to buy fuel in bulk. They also anticipated that such customers were unlikely to make frequent purchases of bioethanol unless vendors were nearby. To work around these constraints, the company partnered with thousands of small shops, where it placed digitally enabled fuel “ATMs” that could dispense small quantities of bioethanol. It developed fuel micro-tanks that could fit in the narrow streets of cities like Nairobi, facilitating last-mile delivery to the ATMs. And because children would often need to pick up the bioethanol refills, the company created a reusable fuel bottle with a shoulder strap that made it easy to carry.⁶

Time

A second challenge influencing demand for climate solutions is time. A transition strategy involves responding to changes in demand that will play out over the decades it will take to reconfigure the products and services we all use, along with the global supply chains that manufacture and distribute them.

But forecasting the distant future is difficult. Ask a salesperson to forecast next month’s orders, and she will do a reasonable job. Ask her to forecast sales ten years from now, and the number will likely be off by a lot. A strategy that’s oriented toward an inaccurate long-term forecast is a strategy for failure. And when forecasts lack a strong foundation, organizations are especially prone to getting them wrong: the forecasts either underestimate demand for innovative products if they focus on reasons that products won’t catch on, or overestimate demand if the organization is too excited about the prospects.

For company leaders thinking about climate solutions, additional forecasting challenges relate to the pace of climate-mitigation efforts. Many businesses base their projections of demand for climate solutions on customers’ commitments to reaching net-zero emissions in 2040 or 2050. However, such commitments can be fragile. Numerous companies and governments have failed to follow up on them.⁷ When that happens, it can jeopardize the financial health of the business.

A better approach than forecasting demand in 20 or 30 years is scenario planning. Scenario planning enables businesses to explore and prepare for multiple potential futures. It involves identifying significant trends, uncertainties, and possible future events to create a range of plausible scenarios that might affect the company. Each scenario consists of a detailed narrative that describes a specific future environment in which the business might have to operate. Critically, those scenarios allow an organization to identify the key drivers—regulatory, technological, or physical—of demand. In turn, the organization can forecast and monitor those drivers in the short term in order to adjust its transition plans as circumstances change.

Climate-informed scenario planning has helped the Coca-Cola system, which includes the Coca-Cola Company and its bottlers around the world, to make big investment decisions related to beverage packaging. Such decisions have long-lasting implications, and they have only become more complicated in the context of the transition to a low-carbon economy. Consider the distinct outlooks for various packaging types. Aluminum cans would be much less carbon-intensive if manufactured using recycled materials and greener electricity, but those methods may not become economical in every geographic location for years. Glass bottles can be reused, but cleaning them requires large amounts of water—a challenge in countries whose water scarcity will only be compounded by climate change. Plastic bottles tend to cause pollution because many countries have low rates of waste collection and recycling. But should waste collection rates and the use of recycled content increase, plastic bottles could be one of the most attractive packaging options.

To aid decisions about its future packaging portfolio, the company built an analytical tool for modeling different scenarios that incorporated a host of variables, such as capital expenditures for new production lines, changes to existing manufacturing processes, consumer habits and needs, distribution channels, and exposure to specific materials. Scenarios also had to account for an evolving set of country-specific factors, including legal standards for packaging reuse, restrictions on single-use plastic, and constraints on resources such as water. Critically, this exercise allowed the company to avoid the trap of designing a “one-size-fits-all” packaging strategy covering multiple geographies. Rather, it developed country-specific strategies informed by consumer preferences, available resources, and the legislative environment.

Emotions

In assessing their company’s ability to supply climate solutions, executives would do well to consider the influence of emotions on their decisions—for the emotions stirred up by climate change can be very strong.

Contemplating the damages and human suffering that result from climate change can make people angry or indignant or sad. It can also instill a sense of urgency to do something. And even though strong emotions can inspire extraordinary effort, they can also cloud a data-driven and analytically robust approach to strategy development and execution. Some managers and employees may feel that a business must radically change 100% of what it does today. Other employees may believe the business should change nothing in the foreseeable future. How should executives make decisions in an emotionally charged environment?

One way to move forward is by investing in data and focusing everyone on a common set of facts. At BMW, managers tallied its carbon emissions from the EV supply chain, specifically battery manufacturing, and explored ways to reduce them. This established the levels of additional emissions from producing EVs, relative to ICE vehicles, and the options for bringing the emissions differential down over time. Coupling those emissions figures with projections of emissions from driving EVs (which vary according to how power is generated for electricity grids), the organization calculated how far its EVs would have to drive to attain lower life-cycle carbon emissions than ICE vehicles in China, Germany, and the United States. The fact-based analysis prevented disagreements inside the company about whether certain products are “bad” or “good” and promoted a more nuanced understanding of how products’ climate impacts vary according to how they are produced and where they are used.

Similarly, Solvay (now Syensqo), a large chemicals manufacturer, has worked to help employees base their assessment of products on data rather than emotions. It developed what it called a sustainable portfolio management tool to measure the environmental impact of each one of thousands of products throughout its supply chain and manufacturing process. Then it asked employees to rank each product’s applications according to environmental challenges that the product is likely to face and how attractive the application is for customers. This helped employees see that products are neither uniformly beneficial nor uniformly harmful for the environment, but rather that their environmental merit depends on the product’s application. For example, soda ash is produced in a carbon-intensive process. The climate impact may not be justified if the soda ash is used to make a glass beer bottle that might never be recycled and is heavy to transport. But it could be considered acceptable if the soda ash is used to make double-glazed windows with superior insulation properties that make homes more energy-efficient, thereby reducing their carbon emissions over many years.⁸

Sometimes emotions are amplified by beliefs among employees about the priorities of the company. Transitioning a company’s products and services requires buy-in from employees across the organization; after all, they will be the ones to work on developing new products, procuring different materials and services, and creating new brands and distribution channels. Research I performed with several colleagues shows that a lack of internal strategic alignment can inhibit these efforts, and leaders must make a concerted effort to align employees’ beliefs.⁹ Internal strategic alignment can be particularly challenging for companies that have a large percentage of their employees in regions with low climate-change awareness. These employees might not observe policy, market, and societal signals that the climate transition should be a priority for the organization. In those settings, providing managers with incentives for meeting the firm’s transition-strategy targets can help align their efforts.

Interdependencies

A company’s ability to supply climate solutions will often be governed by a different factor: whether a host of other market players and policymakers also do their part to develop or enable the needed solutions.

Take the business of manufacturing EV batteries. Several battery makers got started when subsidies and other government incentives supplied them with much of the capital needed to launch the business—only to struggle because they hadn’t established a supply chain efficient enough to allow the company to operate at a profit.

By contrast, more successful battery ventures took deliberate action to ensure that they would align with a supporting ecosystem and vertically integrate to take control of their direction. Like other battery companies, they opened factories in countries where policymakers provided subsidies, such as loan guarantees, and imposed restrictions that lifted demand, such as future bans on ICE vehicles. But these ventures also located their production facilities in places with other favorable conditions: abundant, affordable supplies of low-carbon energy, which allowed them to achieve cost efficiencies and a relatively modest carbon footprint in battery manufacturing; and proximity to mining operations that produce key minerals. These battery makers have looked after their demand profile too, locking in revenue streams by establishing offtake agreements with customers. With key interdependencies secured, these companies managed to raise ample financing at a reasonable cost—gaining another advantage over competitors that neglected to establish good business relationships.

Such interdependencies can decide the success of many climate solutions products. In the case of KOKO Networks, the bioethanol company mentioned above, several critical interdependencies existed. KOKO needed the government of Kenya, an important growth market, to lift punitive taxes on bioethanol that had been imposed because ethanol was also used to make alcohol. It needed large energy companies to agree to provide their pipeline infrastructure for the transportation of liquid fuel. And it needed carbon markets to develop so that the company could sell carbon credits, earning revenues that would sufficiently subsidize cooking stoves and fuel to make them widely affordable. By working to bring about these changes in the company’s environment, managers cleared a path to more rapid growth.

Focus

Maintaining focus is a third challenge that affects whether a company can supply climate solutions to the market. Focus can be difficult to maintain, because the appearance of an exciting business opportunity can cause leaders to forget about the established parts of the company that pay the bills now and will likely pay the bills for a long time. And when leaders turn their attention away from the core business, they run the risk of allowing its performance to lapse—in which case, it might not generate the profits they’ll need to finance investments in a new climate-solutions unit.

The key lesson here is that a firm attempting a transition should ensure that its core business keeps producing profits, not only to pay for the transition of the product portfolio to climate solutions but also to maintain the credibility with investors that’s needed to obtain financing at a low cost of capital. Before AES launched an ambitious plan to increase its renewable energy generation business, it made sure that it restored profitability in its existing core business of power generation. It exited from ten countries where it did not have a competitive advantage and a license to win, and over ten years, this decision led to an increase in its renewable energy generation portfolio from 28% to 43%.¹⁰

Another aspect of maintaining focus is taking a disciplined approach to the choice of which climate solutions to invest in. By answering the question “Where can we add value?” executives will find climate-solutions opportunities that build on and complement their company’s main competencies and capabilities. Many integrated oil and gas firms have seen their ventures in solar or wind energy produce disappointing results because those enterprises didn’t draw on the company’s strongest skills. And when those ventures failed to meet their requirements for cost of capital, the firms retreated from these businesses, leaving employees and investors frustrated with management’s lack of discipline. Other oil and gas firms have allocated capital instead to businesses where their capabilities in geology, drilling, and chemistry would let them add value. These businesses, in industries such as carbon capture and storage, hydrogen production, and lithium refining, are likely to prove more successful if the policy environment supports the development of these solutions.

Putting it all together

Thinking about a company’s position with respect to the five challenges will give executives a better idea about whether demand exists for its climate solutions and whether the firm is well prepared to supply those solutions. The next step is bringing those considerations together, to see whether the demand–supply profile for a company’s climate solutions is aligned or misaligned. This profile, in turn, points toward the strategic moves that executives might want to explore.

Companies whose demand and supply are misaligned are in more complicated situations than others. The combination of low demand and high supply makes firms prone to attempting transition strategies that call for “too much, too fast”: leaders allocate significant resources to the development and deployment of climate solutions, but demand for them fails to pick up. This situation tends to arise when emotions trump data among employees and when senior management loses focus on where the company can add value. Often, firms investing heavily in climate solutions race ahead of their value chains and struggle to procure necessary resources. Meanwhile, on the demand side, the firm’s inability to recognize customers’ entrenched behaviors (and unwillingness to change those behaviors) causes it to deliver a solution that buyers reject—whereupon sales fall short of the company’s rosy forecasts.

For the leaders of these high-supply, low-demand firms, the key is to exercise resource discipline until they cultivate sufficient demand for their climate-solutions products. In the short term, they can benefit from running small experiments with climate solutions, focusing fewer resources in targeted areas, and finding product–market fit. As climate solutions catch on in the market and demand grows, they can build on those early commercial successes by scaling up production.

Healthy demand for climate solutions, though, isn’t necessarily enough for companies to find success. A business might perceive robust demand for climate solutions because those products fit customers’ behaviors and needs, and it might have a strong value chain ecosystem in place to deliver resources. But the firm itself may lack the capacity or the willingness to build up a climate-solutions business to meet demand—leaving it with a “too little, too slow” transition strategy. This typically results from a high degree of strategic alignment in opposition to the idea of a portfolio shift, with managers preferring for the organization to keep doing what it has been doing for a long time.

Either of these two strategic pitfalls—too much, too fast, or too little, too slow—could trap firms as they develop climate-solutions businesses. The details in the hypothetical company profiles, below, outline the shortcomings of each suboptimal strategy, and how those flawed approaches map to each of the key challenges.

If demand and supply are aligned—that is, both high or both low—then the firm’s choices become somewhat simpler. A firm facing both low demand and low supply will want to search for climate-solutions opportunities in segments adjacent to its core offerings, where the firm’s existing capabilities—such as branding, technology, position in the value chain, or customer trust—enable it to add value. Typically, firms will start with smaller projects so they can test the market and learn from experience, and then try to scale up their offerings.

Think about an organization like Oatly, which manufactures plant-based milk. After the company established a successful oat milk business, it moved to the adjacent markets for frozen desserts and cream cheese, leveraging its strong brand recognition. ExxonMobil leveraged its own experience with carbon capture and storage (CCS) to offer a solution to clients. It signed its first CCS project in 2022, committing to sequester 800,000 metric tons of carbon emissions for Nucor’s steel business.¹¹ Since then it has signed agreements for larger projects with Linde, an industrial gases company; CF Industries, a fertilizer company; and Pertamina, the state-owned energy company of Indonesia.¹²

High demand and high supply position a firm to accelerate the transition of its product portfolio and scale up adoption by customers. Organizations in this position monitor changes in key drivers of demand, and they design offerings around customers’ needs and behaviors. Their systems furnish leaders with reliable data on which to base decisions, and they make this data transparent in order to increase strategic alignment across business divisions. As the company invests resources to bring climate solutions to market, it keeps a balanced focus on both the legacy and new businesses, constantly asking how the organization can add value. And it acquires control over critical resources, relying on a strong network of business relationships to ensure a satisfying customer experience and stable operations.

Looking to the future

The transition to a low-carbon economy is a monumental undertaking for society—and for companies. As this transition progresses, businesses will find immense opportunity to develop and deploy new products and services that meet customers’ needs and improve their lives. More than 1 billion vehicles could run more cleanly on electric, plug-in hybrid, and other low-carbon powertrains. Tens of millions of heating systems could be replaced with highly efficient heat pumps, and millions of buildings insulated to save energy costs. Billions of people would get to enjoy tasty, nutritious low-carbon diets; hundreds of millions would be able to cook faster and safer with clean energy rather than charcoal or wood. Thousands of solar and wind farms with giant batteries could be built, so that hundreds of millions of buildings can run lighting and appliances on affordable and abundant renewable energy. Billions of tons of valuable materials, such as steel, aluminum, plastics, and minerals, could be collected, processed, separated, recycled, and reused in global supply chains. Hundreds of millions of hectares of degraded forests, wilderness, and cropland stand to be restored.

Although the overall direction of change is clear, the pace and scale are difficult to predict. Throughout this transition, advantages will belong to the leaders who sharpen their analytical focus—using data to counter emotions when making decisions, aligning offerings with customers’ behaviors and willingness to pay, recognizing and managing the interdependencies that affect their company, tending to the core legacy business while cultivating new climate-solutions businesses, and taking action in line with the gradual movement toward long-term outcomes. For these leaders, success will be personally, organizationally, and societally rewarding.