At a time when one of the key challenges facing the cleantech industry is finding ways to bridge the chasm between the laboratory and the marketplace, our survey indicates that corporations will play a critical role in shaping the industry’s next stage of development.
The findings offer further evidence that the world’s largest corporations are hastening their adoption of cleantech products and services to create a competitive advantage through resource efficiency and sustainable growth. Their investments are targeting cost efficiencies, new revenue streams and internal objectives for sustainability and climate change.
For investors and entrepreneurs, the increasing interest and activity of multibillion-dollar companies around the globe underscore the growing market opportunities in cleantech. The survey illustrates that making good on those opportunities will likely depend on identifying new partnership models that enable corporations and emerging cleantech companies to meet their own objectives while facilitating the arrival of a low-carbon and resource-efficient economy.
Cleantech adoption in core operations
For many companies in our survey, spending on clean technology has risen as high as 5 percent of annual revenues, demonstrating the growing importance of a cleantech action plan focused on resource efficiency and sustainable growth. Two-thirds of the survey’s respondents indicated that cleantech has become a corporation-wide initiative championed by senior management, and 85 percent reported significantly or moderately accelerating the pace of their company’s strategic response to climate change compared with two years ago.
Not surprisingly, the largest corporations have led this wave of activity by employing cleantech solutions or partnering with or acquiring cleantech companies. Consumer products and other industries with high energy consumption — as well as high consumption of water and other natural resources — are setting the pace in establishing cleantech action plans as part of their overall resource-efficiency and sustainable-growth agendas.
Importantly, cleantech innovation is being used in companies’ core operations; it’s not a mere science experiment left to the Research and Development (R&D) function. Investments are having the most impact on areas with high energy consumption, such as manufacturing, transportation and logistics and information technology systems.
The economic downturn has done little to blunt corporations’ appetites for clean technologies — in fact, the survey shows it may have had the opposite effect. Nearly 55 percent of respondents indicated that recovering from the current crisis will speed the implementation of their company’s cleantech strategy.
Predictions for future spending on cleantech were equally bullish. The vast majority of respondents project their companies will spend at least $10 million on cleantech investments by 2010, with 22 percent predicting a cleantech spend of at least $100 million. More than three-quarters of the respondents expect their annual cleantech spending to rise over the next five years. The pump is especially primed for companies with lower annual revenues, who will try to catch up to their bigger competitors by quickening their adoption of clean technologies, along with seeking out partnerships and acquisitions involving cleantech companies.
Making the business case
In recent years, the business case for corporate cleantech investments has evolved from a singular focus on the climate change agenda to a more comprehensive view of how cleantech can boost the income statement, whether through new revenues or resource efficiencies. Thus, the global financial crisis of the last two years has not only highlighted and driven the need to employ clean technologies as important tools for operational efficiency and cost reduction, it has also quickened their adoption.
Further, the rising demand for finite natural resources, spurred by growth in population and in the numbers of middle-class consumers in emerging-market countries, is driving the need for corporations to establish a resource-efficiency agenda to ensure sustainable long-term growth and competitive advantage.
The end result is that cleantech investments are guided more and more by efforts to heighten operational efficiency and cultivate new revenue streams. Underpinning these efforts is a greater awareness that cleantech delivers financial returns right away.
Survey respondents rated “operational efficiency to reduce costs” as the most important factor in formulating their company’s cleantech strategy, with “meeting internal sustainability and climate change goals” and “increasing revenues through existing or new products and services” not far behind. And they ranked cost benefits as the top factor in determining their company’s spending on cleantech products and services, with 77 percent describing it as “very important.”
The Stern Review on the Economics of Climate Change, an oftencited 2006 report prepared by economist Nicholas Herbert Stern for the British government, concluded that “driving an effective, efficient and equitable response on the scale required” to address climate change must be based on international cooperation and include three forces working together in tandem: government policy, technological innovation and adoption by consumers.
Similarly, our study demonstrates a strong correlation between climate change objectives and rising investments in technology and innovation. One indicator of this relationship is the leading role chief sustainability officers are now playing in directing cleantech investments.
Among those who are directing cleantech procurement decisions, sustainability or environmental executives and managers rate as the most involved within the corporations we surveyed, ahead of R&D, individual business units and the office of the chief executive officer. Thus, companies looking to sell their cleantech solutions to or to partner with large corporations need to understand the decision-making roles of the chief sustainability officers and the operations managers.
The study also reveals the relative lack of participation by finance departments in cleantech investments. Finance showed the least involvement — signaling that projects are being funded by business lines at the local facility level and not on a company-wide basis. However, the role of the chief financial officer will likely increase as projects gain more momentum and are deployed across multiple facilities across the organization’s global operations.
Predictably, the respondents viewed the role of government as critical in the response to climate change and the rapid adoption of clean technologies. The top four regulatory measures they deem most effective are providing subsidies to consumers and businesses for employing cleantech products and services, offering tax incentives and credits, putting a price on carbon and mandating the use of renewable energy.
A call for collaboration
Corporations’ growing participation in the cleantech space is stoking interest in technology collaborations, laying the foundation for what is promising to be an active period for cleantech mergers and acquisitions and other partnership opportunities.
Almost 80 percent of respondents said they had acquired or might consider acquiring cleantech companies; 53 percent expect their rate of cleantech company acquisitions to rise over the next five years. A significant number of respondents — 38 percent — indicated these combinations would take place through corporate venturing units. Vendor relationships and research or innovation partnerships were seen as the top two vehicles for driving cleantech collaborations.
The reasons respondents gave for seeking acquisitions and partnerships — to enhance internal innovation capabilities (42 percent), complement existing products and services (32 percent), source innovation (30 percent) and reach new customers (28 percent) — point once again to the business case corporations are employing in their rationale for greater cleantech spending.
For emerging cleantech companies looking to partner with corporations, several key lessons arose from our survey. The key takeaway was that multibillion-dollar companies have few qualms about buying cleantech products from or otherwise partnering with nascent companies.
Only 2 percent of respondents said they would be unlikely to buy products or services from an emerging cleantech company while 46 percent said they would not hesitate to do so. Other respondents were more deliberate, expressing a willingness to purchase products from such a company only after conducting a thorough risk assessment (36 percent) or a “substantial” pilot project (16 percent).
In a similar vein, product quality was listed as the most important factor in determining whether to partner with emerging companies. Asked why planned cleantech investments were sometimes later cancelled, more than half of the respondents pointed to untested technology or poor or unclear potential Return on Investment (ROI).
Other factors that hinder partnerships include: an unclear road map to future product or service offerings; the lack of a documented track record; and general cost pressures unrelated to a specific project. If the technology is promising, though, being a small company with a limited balance sheet and operating history is not a huge impediment, as only one-third of the respondents indicated that as a major deterrent to doing a deal.
It can be inferred from the responses that preparation is everything when emerging companies are looking to approach a large potential customer or partner. The preparation should take into consideration the risk assessment and/or pilot project that will be required.
Gearing up for growth
Despite the economic downturn, the outlook for the cleantech industry’s continuing development is very positive. Corporate demand for clean technologies will likely provide a critical impetus as emerging companies seek access to commercial markets.
Multibillion-dollar organizations are actively seeking cleantech innovation and are open to technology partnerships so long as they can meet internal ROI guidelines. For investors, entrepreneurs and other leaders in the cleantech sector, this should be welcome news. Cleantech’s evolution will continue to produce its fair share of fits and starts, but the prospect of escalating corporate purchases, acquisitions and partnerships, as suggested by our survey, points to robust growth and plenty of opportunity in the months and years to come.
Gil Forer is Global Cleantech Leader and Joe Muscat is Americas Cleantech Leader for Ernst & Young.