High inflation. Conflict in Ukraine. Political instability. Pain at the pump, and the meter.
Finding the balance between energy security and greenhouse gas reductions has never been more difficult. Even so, more than a third of the world’s largest public companies have pledged to reach net zero by 2050, and the number is growing: in Britain, France, and Germany, it is more than two-thirds.
I believe these companies have the right idea. Earlier this year, McKinsey estimated that to reach net zero emissions, an additional $3.5 trillion a year must be invested in on physical assets for energy and land-use systems until 2050. That is the greatest reallocation of capital in history.
Great companies and leaders will not let the challenges of the moment deter them from making the big decisions and investments needed to transition. Firms that act boldly will position themselves to create new kinds of enduring value for the future and capture new market opportunities for their organizations. Firms that don’t will likely find themselves playing catchup in decades to come.
We need to nurture a global energy system that is reliable, clean, affordable and safe. To solve this conundrum will require a combination of idealism and realism.
It’s important to recognize the scale of the challenge: right now, 80% of the global energy supply comes from coal, gas, and oil. As winter beckons in the northern hemisphere, many people are understandably more concerned about their bills than the goals of the energy transition. In the developing world, which did little to create the climate crisis, it is also understandable that access to energy is a top priority.
Even so, it is possible for businesses to develop momentum toward net-zero, while also keeping the lights on and serving shareholders. To do so, three principles stand out.
Seize the possibilities offered by transition
McKinsey analysis shows that demand for green offerings in just 11 categories could generate more than $12 trillion of annual sales by 2030. That explains the wave of capital deployment in sustainable goods and services, including materials, climate tech, and energy. Taking a private equity mindset–investing at scale in a variety of different technologies and deal types–is essential to make it happen.
Invest in both current and future solutions
Net zero by 2050 is an ambitious goal–but it’s 28 years away. For companies, the operative principle is to balance short-term, “no regrets” moves with big long-term investments. They can begin by decarbonizing core operations through initiatives that pay for themselves: efficiency, design, waste reduction, and the introduction of cleaner energy sources. In parallel, companies can gradually introduce emerging technologies and work on processes, such as modernizing the grid and converting methane delivery systems into clean fuel networks, which will be critical to long-term decarbonization.
With carbon regulation likely to tighten, high-emission sectors such as steel, cement, mining, chemicals, and energy will need to integrate technologies like carbon capture use and storage (CCUS), hydrogen, energy storage, and negative emissions. These technologies are expensive but their costs are already falling.
Maintaining resiliency and profitability while scaling up efforts to reach net zero will be complicated, but companies do not need to go it alone. Partnerships can help.
One possibility is to start and expand voluntary carbon markets, which could be an economically efficient way to reduce emissions. These work best with many players to buy and sell. Voluntary carbon markets could make clean energy investments more affordable and bring them to market sooner. Clean fuel consortiums, such as those developing around hydrogen hubs, can speed up innovation, reduce risk, and spread costs.
It’s not yet certain that the world will do what it takes to find the $3.5 trillion annually required to transition. What is certain is that businesses can do their part to support the transition and capture new sources of competitive advantage. The choice is to be part of the wave of change or to be swept away by the tides.
Bob Sternfels is the global managing partner of McKinsey & Company.
The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.
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