Decarbonization: The new frontier for investment and innovation
McKinsey’s recent conversations with Dr. Andrew Steer, president and CEO at the Bezos Earth Fund, and Dr. Jang Ping Thia, lead economist at the Asian Infrastructure Investment Bank (AIIB) respectively, illuminated the importance of collaboration and the sharing of a collective vision in achieving decarbonization. Mindset, industry collaboration, and communication are key to moving Asia forward to net zero.
Andrew Steer: Perhaps the most important is a mindset challenge. It’s grappling with and understanding the new economics of decarbonization. The second challenge relates to whether there’s a plan and a collective vision led by the government, the citizens, and the corporations of the country in question. The third challenge is dealing with the fact that while a country as a whole will benefit from moving toward net zero, some vested interests will understandably fight against it.
The economics of even up to ten years ago was really an economics of trade-off. It was believed that if we did address climate change, there’d be gains to be had down the road—ten, 20, 40 years from now; but in the short term, there would be costs in terms of jobs, competitiveness, and dynamism in the economy. We now have a new economics where the best economists in the world are showing that smart, bold action on climate change leads to more economic efficiency: we use resources better; it drives new technology, lowers risks, and reshapes expectations about the future. Those four things together are powerful drivers of dynamism in the economy.
That message is not yet intuitive to many politicians and even some businesspeople, but it’s starting to take root in some parts of the world. We see it when President Xi Jinping says, “Green is the new gold.” When Prime Minister Modi comes into power, instead of accepting his previous government’s goal of 20 gigawatts of solar, he says, “No, let’s go to 100 gigawatts.”
He’s saying that because he understands the new economy: that if you do things incrementally, you won’t get that boost. You have to do things disruptively. That then creates a shift in expectations. Entrepreneurs say, “I see, there’s a new industry here. There’s a brand new world out there, therefore I will invest in it.” There’s a revolution that’s just beginning in economics. Asia, to some extent, is at the forefront of this.
Andrew Steer: One of the exciting things that’s happened in the last few years is that leading corporations haven’t waited for governments to paint that glorious vision with perfect policies. The best way that a corporation can help is not only to be willing to put its own risk capital on the line, but to engage with others on a pre-competitive journey. There are now new multi-stakeholder groups, the Mission Possible Partnership for example, that say, “Let’s take seven hard-to-abate sectors, like steel, shipping, aviation … Let’s ask what it would take to decarbonize those.”
If you get the leading steel producers, cement producers, and shipping organizations together, all of them will need new sources of energy. If someone’s going to put $2 billion into a green hydrogen plant, they need to know that other serious stakeholders are committed. And if you have a group that’s ready to come alongside those investors, you can talk to governments and say, “We need the right kind of confidence in policies, and we need some de-risking in the short term.”
What emerges is an ambition loop, when you have an ambitious leader who can only do so much on her own, so you put her together with 20 other leaders in both a horizontal and vertical sense. That way, you can change the world and you can change government policy. What government doesn’t want to join in when the corporate sector is saying, “Hey, this could work for us, this can actually be good for our long-term profitability and jobs”? Government responds to this, and we’re starting to see it in some exciting areas.
Indonesia is in the lead-up to G20; they’ll be hosting the ASEAN Conference next year to champion the idea of decommissioning coal plants or transforming coal plants into plants that are fueled by novel, cheaper, renewable energy. That cannot be done just by government, nor by any individual set; it’s a jigsaw puzzle. And what’s happening in Indonesia, where different players are wanting to be part of a solution to decarbonize, is quite exciting. It’s not easy; it only works if you have all the key players taking their own flags down and working as a team to drive monumental change.
McKinsey: How does the mechanics of blended finance help to encourage these partnerships that cut across public and private sectors, and balance the risk-return trade-offs to mobilize even more capital into decarbonization?
Andrew Steer: In its early days, when risks seemed high, it was very unlikely that individual financial institutions could solve the problem. Blended finance can now bring different financial players to the financial stack.
A part of that is de-risking. It’s important when you consider, for example, the role of philanthropy in blended finance—which is not just to take a piece of that stack and the first loss or the direct-cash subsidy. It’s to play a role upfront as well because philanthropists can act more quickly. They can take much bigger risks. They don’t expect a return to themselves; they expect to return to the world. They can finance early work, political lobbying, and elements of the overall package that are required to put things in place. They could also finance accountability and monitoring, because there’s too much greenwashing in all of this, of course. The multilateral institutions can also play the role of honest broker, supporting the good governments that are wanting to make change.Read More…
Source : mckinsey
