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George Serafeim is the Charles M. Williams Professor of Business Administration at Harvard Business School, where he co-leads the Climate and Sustainability Impact Lab in the Digital Data Design Institute.

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.

Implementing a climate-transition strategy has become an essential responsibility for every executive who manages a company’s portfolio of products and services.

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.

A climate-transition business strategy outlines how a company plans to evolve its procurement, operations, and products and services to meet global or country-specific climate goals. It identifies the organization’s current state by assessing carbon footprints, determines where the organization needs to go by setting targets for emissions reductions, and develops the strategy to meet those targets in the future through a defined set of actions. It includes engaging with stakeholders, adapting corporate governance, and leveraging funding mechanisms to support investments. The goal is to integrate sustainability into the core business model, thereby not only reducing risk and complying with regulations but also positioning the company favorably in a low-carbon future economy. Though the implementation of a climate-transition strategy requires both developing plans to manage physical, regulatory, and legal risks, and innovating to provide climate solutions, this article focuses on the development and deployment of climate solutions.

Climate solutions are everywhere around us: solar panels, electric vehicles, energy storage systems, plant-based food, energy-efficient appliances and machinery, building automation systems and insulation, recycling and reuse of materials and products, and many more. They are products and services that typically develop or deploy new technologies in a transition to a low-carbon economy. Defining characteristics, according to Project Drawdown, include current availability, financial viability at scale in the future, net positive impact, and quantifiable impact under different scenarios. Climate solutions not only address mitigation, meaning the prevention or reduction of carbon emissions. They also address adaptation to current and future changes in climate, through such mechanisms as drought-resistant crops, climate-resilient buildings, protection from heat waves, and effective water treatment.

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.

From trade-offs to payoffs: CEOs on creating value with climate action

by Renate de Lange and Will Jackson-Moore

Ten questions for a winning climate-transition business strategy

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