How can US business lead the net-zero transition in this decisive decade?

Hundreds of large US-based companies have set science-based net-zero greenhouse gas (GHG) emissions reduction targets. Those companies who have set targets need to ensure that they are making demonstrable progress on their net-zero plans. Those who have not yet set targets and developed their net-zero pathways will likely need to catch up, given a range of developments across the region.

The US has announced its own goal of reaching net-zero by 2050, and halving emissions by 2030. The Inflation Reduction Act (IRA), passed in August, could reshape value chains and create new opportunities across the US energy sector. Moreover, business may not have a choice. In March, the Securities and Exchange Commission proposed rules that could mandate that companies not only report their emissions and material risks, but set out their plans to deal with climate-related issues.

The net-zero transition is fraught with complexities and creating an effective plan to thrive on the path to net-zero is not easy. Nor will executing such plans be a simple and linear exercise. Society is looking to transform in 30 years, the energy and land use systems that took 150 years to build. No one can predict the pace and scale of the transition both in the US and elsewhere, and the war in Ukraine and rising inflation have injected more uncertainty.

Fortunately, nearly 90% of the US abatement needed by 2025 could come from technologies that already exist, though continued and accelerated innovation is needed to scale and reduce their cost. And even more, McKinsey estimates that markets for zero-emissions offerings could expand and create unprecedented opportunities: more than $12 trillion of annual sales across 11 value pools could be up for grabs by 2030 (Exhibit 1).

The time for climate-focused innovation, investment, and transformation has arrived and real progress can and needs to be made in the near-term. Leaders should set their sight on 2025 and 2030, not just 2040 and 2050. Here are a few questions that can help them navigate the path forward.

The net-zero transition could shift the basis for competition in many industries, which will likely require business leaders to reconsider their strategic vision and portfolio. One way to think about it is to envision what your industry and the broader economy will look like when it gets to net-zero. It’s important to consider which new green businesses to invest in and which hard-to-mitigate businesses you might want to transition out of.

Let’s not underestimate the potential to reduce costs and emissions by decarbonizing your core business and improving operational efficiency while striving for other co-benefits, such as conserving water, protecting nature and biodiversity, and creating quality job opportunities.

Working with our clients, McKinsey often finds that there are a number of actions that can be taken in the near-term to both reduce a company’s carbon footprint and generate cost savings, which can be reinvested, while also creating social benefits. Companies who take an end-to-end view on redesigning their products and services, procurement and supply chains, while also cultivating the talent and skills that will be needed to do so, will likely be able to deliver meaningful decarbonization.

Rising demand for climate solutions creates opportunities and challenges in virtually every sector, so it’s important to bring a green lens to your business. As has been the case with digital and analytics, companies will need to rethink every part of their business – strategy, marketing, operations, talent and risk – as a catalyst for sustainability.

It is also critical to make investments for the long-term business model or technology transformations required, in a way that preserves options for future pathways to net-zero. This could include investing in industrialized solutions that your company will rely on or enhancing scaled infrastructure.

Furthermore, companies will likely need to go beyond making defensive moves, such as managing risk exposure, and go on the offense for growth with an eye to creating value. This is the time to think more broadly about how to leverage your business’s capabilities to seize emerging opportunities and shift resources away from business units that compete in markets where growth is likely to slow.

If there has ever been a challenge or an opportunity that requires cross-industry and cross-sector cooperation, this is it.

Decarbonizing may require partnering with other entities, including financial institutions and the public sector, to ensure that the right ecosystem is in place for cleaner technologies to be deployed effectively. For example, mass adoption of electric vehicles may depend significantly on the utility sector expanding grid capacity to support charging networks. It may be helpful to join other organizations in addressing shared needs, such as building industrial-scale networks for clean fuel production and distribution, including hydrogen.

Companies should use all the tools available to them. Examples include participating in voluntary carbon markets that leverage nature-based solutions and protect biodiversity; committing to new technologies such as carbon capture; and working with suppliers to find ways to decarbonize as we’ve seen some automakers with net-zero targets commit to buying green steel, while steelmakers are building the capacity to supply it.

And finally, work with communities and embed principles of environmental justice into your strategy. When capital is being reallocated, new infrastructure is being built and new skills are being developed and deployed, there can be significant opportunities to create quality jobs, improve livelihoods and maximize social benefit.

The US is rich in both natural resources and in human, financial, and technological capital; it is well placed to potentially deliver a range of climate solutions. By setting a bold vision, and following through, US companies could thrive during a net-zero transition, while enabling the nation to reach its climate goals.