Open innovation: the secret to mastering the climate transition

With all eyes trained on COP26, hopes for improved pledges and multilateral commitments to combat climate change have never been higher. Yet tackling this challenge will require novel approaches—particularly among the private sector, which is expected to play a much larger role in this battle than it did in previous moonshots. “Open innovation” could be its secret weapon—leveraging technology and learnings from external partners, particularly startups, to complement and more quickly and cheaply commercialize new solutions. This has the potential to catalyze a green shift in products, services, and business and operating models, speeding the pace of change in a profitable and market-driven way.

The current business environment provides all the more reason to adopt open innovation. Clearly, large investors have woken up to the risk the climate transition bears for their investments in corporations and infrastructure. Few banks or large institutional investors are foregoing activity around COP26. This is a change from years earlier and shows that investor sentiment is shifting. It also signals to corporations reliant on financial markets: if they want access to the best investors at favorable conditions, they must adapt to changing investor sentiment. A recent example of this is the Net-Zero Insurance Alliance, a consortium launched by eight of the world’s leading insurance and reinsurance companies to help speed the transition by making underwriting contingent on underlying companies having credible net-zero strategies.

At the same time, investors are piling into companies with huge growth potential in the new landscape of tomorrow. The first half of 2021 saw them plow between $150-250 billion into venture capital—more than 90% of last year’s record total—with another $158 billion landing in the third quarter alone. All told, the last 12 months saw more than $500 billion invested in venture firms. While not all this money is flowing into climate tech deals, the trend in the climate sector is no less impressive. With total global research and development (R&D) spend sitting at around $2.2 trillion, recent investment in start-ups has hit a level approaching the equivalent of 25% of this total—a massive figure.

Equally important, this funding sits with highly entrepreneurial teams, dedicated to seizing the advantage amid the climate transition. They will push the limits of innovation, unburdened by corporate overhead that may slow them down. At the same time, many industrial startups in the climate-tech space are more than happy to work with established players who can help them connect to customers and scale more quickly. The vast majority is looking to be acquired by one of the established players anyway.

This gets us to open innovation. In layman’s terms, open innovation is “the use of purposive inflows of knowledge to accelerate internal innovation”. It has gained popularity over the last decade as companies have learned that developing everything in-house is not the fastest nor cheapest way to bring new solutions to market. Utilizing external knowledge and innovation provides a shortcut—if managed correctly. As a big corporation, failing to tap into the fast-moving pool of innovative startups means missing out on the vast pool of dedicated and entrepreneurial experts and managers at these firms, as well as the enormous pot of money being invested into them.

This is particularly salient to firms looking to not just effectively manage their own climate transition, but to flourish in the new environment. The UN has specifically highlighted the role open innovation can play in fostering and scaling up the technologies needed to achieve the goals of the Paris Agreement.

Opening up to open innovation

So what should a company do if not already working on an open innovation strategy?

First, closely observe the fast trial-and-error process of startups helps firms to develop a much more granular view of the quickly changing innovation landscape. It shows what works and what doesn’t, what is too early, what is too slow, what is too expensive and how customers do or don’t adapt to change. Last but not least, it can show who else is out there and how they compare to each other.

This learning and monitoring allows firms to find the most appropriate path and work with partners that best fit one’s own organization and capabilities. Most companies accomplish this by working closely with venture capital funds and/or establishing their own corporate venture activities. This is hardly a new trend: Global Corporate Venturing points out that close to 2,000 large corporations have now started some level of corporate venture activity.

The type of collaboration with a start-up can ultimately take many different forms, often following a process of finding, engaging and connecting with the right in-house champions, and testing and piloting products or services before forming firmer contractual relationships. This may sound trivial, but it is not as simple as it sounds. First, having the right partners to help find and review the constantly shifting pool of emerging startups is vital. Internal champions and teams need to be empowered and equipped to drive these collaborations forward. This means giving them sufficient capacity and budgets and enabling them to make decisions quickly.

For many firms, open innovation also entails deeper cultural change. Yet there are plenty of examples of large corporations who are on track to become black belts in open innovation and start-up collaboration. It will come as no surprise if these same companies also go on to lead the climate transition, moving toward a sustainable future more quickly and cheaply than their competitors. For those not yet active in this space, it is time to take a closer look at how open innovation could be the pathway to a net-zero future.