Green Growth: Capturing Asia’s $5 trillion green business opportunity – EQ Mag Pro

Asia is a critical contributor to the global race to net zero. Proactive moves in pursuit of this goal will result in opportunities that will define tomorrow’s outcomes and successful business leaders.

The physical and socioeconomic impacts of climate change are already intensifying across the world. The science is clear that without concerted action to reduce greenhouse-gas (GHG) emissions the irreversible consequences will be even more catastrophic. GHG emissions are, however, continuing to grow. This challenge is exacerbated by recent events, including Europe’s energy and food crisis caused by geopolitical conflict, and increasing disclosure requirements. Unprecedented change and collaboration between the private and public sector are now required to realize net-zero emissions of greenhouse gases by 2050—the net-zero vision.

Deploying climate technologies remains one of the most important levers to solve the net-zero challenge. Businesses and governments will need to deploy such technologies on two fronts: first, to decarbonize the fossil-fuel base to meet increased demands for energy, and second, as an integral component of building new green businesses.

Asia stands on the cusp of a new era of opportunity linked to both these fronts. The region has accounted for more than half of global CO2 emissions since 2019.1 Across Asia-Pacific (APAC), more than 15 countries and 670 companies have set (or are committed to setting) emission-reduction targets, thereby creating new investment opportunities in green technology.2 Asia also boasts an extensive nature-based capital asset that can play a significant role in contributing to net zero, while simultaneously preserving biodiversity and ecosystem functions.

With sustainability being increasingly valued by investors, customers, and employees alike, building new green businesses could be the key to meeting rising expectations and staying competitive. The addressable market size for green businesses in Asia is expected to reach between $4 trillion and $5 trillion by 2030 (Exhibit 1). Entering the green space will come with risks, but also potential rewards for businesses that move early.

Growth in investment flows for more sustainable businesses

Recent years have seen increased capital deployment into both mature businesses and startups that are paying attention to ESG considerations. Looking ahead, under the Network for Greening the Financial System’s (NGFS) Net Zero 2050 scenario it is estimated that around $9.2 trillion per year on average will need to be spent on physical assets for energy and land-use systems from 2020 to 2050, out of which $3.1 trillion will need to be spent in Asia.3

Incumbent businesses are increasing their investments in greener business operations and new green business lines. For example, investment in sustainable aviation fuel (SAF) is growing in the APAC region, driven by oil and gas (O&G) incumbents seeking diversification opportunities and investing in renewable alternatives, while leveraging the region’s key trade hubs. Engineering services company Neste has invested around $1.4 billion for production expansion in Singapore, resulting in 30 percent of its renewable production capacity being Asia-based.4 Moves are also being made in the renewables space. Multinational conglomerate, Adani Group, announced in July 2022 an investment of $70 billion in green energy transition and infrastructure projects, which includes the development of 45 GW of renewable energy production capacity.5

In the investment space, capital deployment in green businesses is growing in both the private and public sectors. In the former, there is a shift in focus towards businesses demonstrating green credentials, with around 60 percent of global funds including a focus on ESG topics in 2021 in their investment decisions.6 This trend is also increasingly observed in Asia. In the public sector, commitments like the Infrastructure Bill in the United States could potentially be a game changer to open new opportunities across the energy transition value chain.

With momentum for green business building increasing, pivoting to play an offensive value-creation strategy now could be a critical move for companies wanting to become green business leaders in Asia. This is the moment to collectively leverage the advantages that the region has to offer to strengthen its competitiveness for sustainability businesses.

Where to win in Asia: Select business opportunities across four key themes

In deciding where to invest in Asia, businesses can explore a range of opportunities that all contribute to closing the net-zero equation and create a significant new value pool. Four select themes of opportunities are evident: decarbonizing the fossil-fuel core of the economy, participating in the green material transition, leading next-generation climate technologies, and leading in biodiversity and nature preservation.

Theme 1: Decarbonize the fossil-fuel core of the economy

Green business leaders need to play a key role in decarbonizing applications currently dependent on fossil fuel. Electric vehicles (EVs), green power, and sustainable fuel are three key areas that can be pursued here.

Electric vehicles

Transport accounts for roughly one-fifth of global emissions. Vehicle electrification could contribute 10 to 15 percent of the abatement potential needed by 2050, lowering emissions by roughly six GtCO2e. In many Asian countries, EVs, and especially electric two-wheelers (E2W) and light commercial vehicles, are expected to reach price parity with their petrol counterparts by 2025. With increasing government incentives, vehicle models and variants, and advancements in battery technology, a significant shift in sales toward electric mobility is expected.

EVs are expected to make up 60 percent of global passenger car sales by 2030 (Exhibit 2).7 By then, Asia will also be the largest market for EVs, with an addressable market worth of $700 billion to $750 billion, led by China. From 2020 to 2030, global battery demand is expected to increase 15 times to 4,500 GWh. Asia continues to remain a global battery manufacturing hub with new countries like Indonesia joining the ranks, through leveraging its abundant nickel reserves.

Incumbents and newcomers could enter the EV market in four ways.

First, new entrants entering the original equipment manufacturing (OEM) market could consider production in countries that offer attractive incentive schemes, such as India. For instance, motorcycle brand Hero has already started supplying electric two-wheelers in India, with Ather, a new electric-scooter entrant, also planning to launch.8
Second, rising demand could make the EV battery sector more attractive. Backward integration of OEMs into the battery sector is emerging, with Hyundai collaborating with LG Energy Solution to develop a battery-cell plant.9
Third, businesses could enter EV charging or battery swapping networks, serving as charge-point operators.10 As an example, Pertamina, Indonesia’s state-owned oil and natural gas corporation, is partnering with Grab to install charging infrastructure at its existing fuel stations.11
Lastly, as more shared mobility platforms look to electrify their fleets, the new EV fleet-as-a-service business model has emerged—offering vehicle leasing, maintenance, and charging resources to customers like logistics and e-commerce companies.

Renewable Power

The power sector holds some of the largest opportunities for value creation. In some Asian countries, the levelized cost of energy (LCOE) of renewables will be lower than gas- or coal-fired power in the next decade. For example, in Vietnam, solar and wind will be cheaper than fossil fuels on an LCOE basis by 2030, due to declining capital costs and technology advancements.12 At the same time, Asia will see a strong growth in power demand of almost 4 percent per year, driven by population growth.13 To meet this demand under a net-zero scenario, fossil-fuel plants would need to be replaced with other low-emission power sources.

Asia is uniquely positioned to do so given its large regional production capacity and scale. The region has 45 percent of the global share of installed renewable energy (RE) capacity. Half of the regional RE investment is in China, India, and Australia, with pockets in Taiwan, Vietnam, and Thailand. India, which is expected to add approximately 25 GW of renewables capacity annually through 2030, has seen the rise of local RE champions. An example here is Reliance Industries, which has announced investments of $80 billion in green energy.14 Smaller green champions are also on the rise, like ReNew Power that publicly listed in 2021.15
Opportunities are expected to emerge not only for renewable power producers but also for providers of low-emissions generation equipment, electricity storage hardware, and related services. This includes solar panel and wind turbine manufacturers, battery manufacturers, companies involved in extracting and refining minerals needed for batteries and solar panels (like lithium and nickel), and companies building and operating new generation networks. Companies could further explore options for combining RE solutions with local energy-storage systems, similar to Tesla’s 150 MW Hornsdale Power Reserve “big battery” facility in Australia, which serves as grid-connected energy storage. To scale rapidly, companies could use partnerships, new ventures, and investments. An example here is Indonesia’s Indika Energy, which partnered with Indian Fourth Partner Energy to supply solar-power solutions.16 Companies could also tap into corporate power purchase agreements, as has been observed in Enel Green Power’s ten-year PPA with Johnson & Johnson for 270 GWh per year of RE supply.17

Sustainable fuels

Sustainable fuels include biofuels such as hydrotreated vegetable oil (HVO), bioethanol, and synthetic fuels (synfuels) such as ammonia and methanol. Even though the costs of using sustainable fuels are expected to be higher than fossil alternatives in the long term, the use of 100 percent renewable diesel can achieve a life cycle greenhouse-gas (GHG) reduction comparable to the use of EVs. As some sustainable fuels can be used as drop-in alternatives in conventional internal combustion engines (ICE), faster decarbonization of existing fleets can be realized in the short term.

The demand for sustainable fuels is estimated to triple over the next 20 years as they are expected to play an increasingly important role in the transportation subsectors, including in hard-to-abate applications such as aviation and heavy-duty road transport.

With aviation accounting for 8 to 11 percent of total transport sector emissions, sustainable aviation fuel is currently the most feasible and economical way to decarbonize aviation, given the weight challenge of batteries and the nascency of hydrogen for aviation. By 2050, the Asian market could account for 30 to 40 percent of global biogenic SAF demand—equivalent to between 25 and 30 million tons per annum (MTPA).18
While Asia is abundant in SAF feedstocks like crude palm oil (CPO), the use of these feedstocks must carefully balance the need to meet food supply requirements, particularly given the current food shortage due to the conflict in Ukraine. Should the region participate in the international trade of SAF, a transition to greener waste-based or second generation (2G) feedstocks (mainly cooking oil and tallow, made from rendered animal fat) would likely take place. As of 2020, it was estimated that around 40 percent (or 0.9 MTPA) of the EU’s used cooking oil (UCO) came from APAC, making Asia an ideal place to develop SAF production using 2G feedstocks.19
Investments in sustainable fuels are gaining momentum in Asia. For example, South Korea’s Dansuk Industrial has announced plans to build the 1st HVO plant in South Korean, which will come online in 2024.20
In the coming decades, business cases may consider integrated production logic with volumes shifting from road to aviation, where the profitability of production is expected to depend on the supply-demand balance, feedstock availability, and consumer attractiveness.

Businesses can participate in the Asian SAF opportunity in two main ways: supply and scale. They can consolidate and supply second-generation feedstock for domestic, regional, and global production. Alternatively, they could invest to establish or scale up production, or pivot from first generation (1G) feedstock (made from plants with a high content of sugars, fats and starch) production to second generation (2G) feedstock.

Theme 2: Participate in the green material transition

Businesses could consider leveraging green materials that are readily available in Asia. Green steel and alternative proteins are two such investment themes.

Green steel

The steel industry accounts for 7 to 9 percent of global CO2 emissions and would need to reduce emissions by approximately 2,600 gigatons (GT) of CO2 to cap the average global temperature rise at 1.5°C. Of all the multiple pathways available for “green steel”, hydrogen direct reduced-iron (H2-DRI) furnaces, coupled with electric-arc furnaces (H2-DRI+EAF) and scrap electric-arc furnaces (scrap-EAFs), save the most emissions. As hydrogen costs reduce and the cost of carbon emissions kick in, the cost of operating these furnaces is expected to be lower than operating conventional set ups such as blast furnace-basic oxygen furnace (BF-BOF) and natural gas (NG)-DRI+EAF routes (Exhibit 3).

Given its cross-cutting use in a range of applications, there is huge demand for green steel to reduce carbon footprints. Its global market is forecast to grow by more than 20 times, from less than ten million MTPA in 2021 to close to 200 MTPA by 2030. With the market expected to be undersupplied until then, green steel’s price premiums are likely to hold.

Green steel development is promising in Asia, as it already houses around 70 percent of crude steel demand and production. Low-cost green hydrogen production availability adds to the potential for Asian-produced H2-DRI. Direct reduced iron (DRI) will also be available in Australia, China, and India as projects come online and as renewable power capacity is added to countries like India, Vietnam, Australia, and China. And over 500 MTPA of scrap steel as feedstock for scrap EAFs is expected to come from Asia in 2050.

Business could potentially participate in three ways. There is an opportunity to consolidate the scrap-steel ecosystem to supply the scrap EAF operators. Secondly, businesses could invest in establishing end-to-end production for domestic and export demand. Thirdly, companies could play a leading role in supplying low-cost green hydrogen to H2-DRI operators in the region.

Alternative proteins

With the agricultural sector making up around 20 percent of global GHG emissions, alternative proteins are likely to be an important contributor to reducing emissions. Dietary shifts and a rethink of protein production have the potential to abate about 50 percent of these emissions. Several factors, including shifting consumer demand through consumer education, regulation, and innovation, among others, will impact the scale and speed of adoption.

Asia accounted for 45 percent of global meat consumption in 2019, and this is expected to grow as markets develop.21 While the alternative protein market is nascent in Asia, both the public and private sectors are committing to investing in this space. Incumbents are launching their own brands, such as Nestlé’s Harvest Gourmet range.22 Governments are looking to alternative proteins to strengthen national food security. For example, in 2019 Singapore was the first country to approve cultivated meat for human consumption and intends to produce 30 percent of its nutritional needs locally by 2030.23
Three opportunities emerge in alternative proteins in the region. Businesses could support the scalable production of alternative protein products, from supplying feedstock to finished product and accelerating the path to price parity. Secondly, there is a need for R&D and food-science services to develop products that suit local taste and texture preferences. Thirdly, given the nuances and diversity of Asian cultures, local businesses could act as partners for foreign alternative protein brands to assist them in entering the market and matching local taste preferences.

Theme 3: Lead next-generation climate technologies, including those that extend the fossil-fuel core of the economy

New technologies represent a critical component of the world’s decarbonization tool kit. New business builders could aim to be disruptive by bringing emerging technologies into the market while incumbent businesses could spearhead application of these technologies to extend low-carbon fossil-fuel utilization, for example, through integrating carbon-capture technologies into existing operations.

Hydrogen

Given its potential as a clean energy solution in decarbonizing multiple sectors, global hydrogen (H2) demand is expected to increase five-fold by 2050. Today, grey hydrogen, created from natural gas production, makes up close to 100 percent of hydrogen production, but this share is expected to fall to a mere 5 percent by 2050 and be replaced by green hydrogen. Green hydrogen is the cleanest form of hydrogen, being directly produced from renewables, while blue hydrogen is produced from natural gas with carbon capture and storage. This move to green hydrogen will be driven by an expected drop in global cost of clean hydrogen production as the technology matures, from the current price of $4 to $6 per kg to $1 to $1.5 per kg by 2050 (Exhibit 4).

Asia-Pacific is expected to make up 50 percent of global hydrogen demand, representing about $400 billion. Various factors in the Asia-Pacific region will enable the production of green hydrogen at the coveted price point and place the region in a prime position to service inter- and intra-regional demand. These include cheap and abundant renewables and low-cost yet high-end manufacturing capabilities for hydrogen production and supply equipment.

Within the region, there is a clear distinction between supply and demand hubs. Countries like Japan and South Korea are early net-zero movers that rely extensively on hydrogen in their decarbonization roadmaps, but will be largely import reliant. On the other hand, Australia’s cheap renewables will position the country as an export hub. China and India jointly make up over 50 percent of Asia’s 2050 demand and could be predominantly self-sufficient.

There are three opportunities for hydrogen business building in Asia. Firstly, businesses could become hydrogen producers for domestic use and/or export. Energy group, Reliance, in India has announced an investment of $75 billion for renewables infrastructure, with an intent to first produce cheap blue hydrogen and then transition to green hydrogen.24 Secondly, OEM providers could manufacture specialized equipment across the entire hydrogen value chain. Heavy industrials group, Kawasaki, leveraged their heavy-industry manufacturing expertise to develop liquified hydrogen carriers (LHCs) that will be used to move hydrogen from Australia to Japan.25 Thirdly, companies could consider developing and operating supporting infrastructure across hydrogen operations, such as the building and day-to-day operations of transport terminals and storage facilities.

Carbon capture, utilization, and storage

As Asia extends its fossil-fuels base to meet its growing energy demand, carbon capture, utilization and storage (CCUS) can help to decarbonize. Asia already accounts for almost 50 percent of global CO2 emissions, with half of these emissions coming from the coal-reliant power sector.

At present, the use of CCUS is very limited, although businesses are making progress. Costs remain prohibitively high—typically $50 to $100 per ton of CO2 (tCO2)—and CCUS infrastructure is energy intensive. Further research is required to reduce costs, and additional incentives will likely be required to make CCUS financially viable at commercial scales. However, if the full cost of CCUS were to fall below $50/tCO2, it would make many applications economical.

Asia, with its vast CO2 storage capacity and well-established oil and gas ecosystem, could realize the full potential of CCUS. CCUS cluster development would facilitate economies of scale and expedite CCUS adoption. These clusters could be shared by multiple facilities and countries to reduce costs, building a “Pan-Asia CO2 network” across the region (Exhibit 5).

Leveraging the emergence of CCUS clusters, businesses could enter the market as project integrators to foster coordination and collaboration between stakeholders. Project integrators could take advantage of emerging government support in Asia, such as Australia’s AU $250 million ($169 million) investment in scaling CCUS initiatives. Businesses could also consider providing CO2 transportation infrastructure such as pipeline or liquified CO2 (LCO2) shipping carriers to facilitate trans-boundary CO2 transportation. The development of LCO2 technology is essential for countries with limited storage capacity, such as Singapore. In terms of utilization specifically, other than enhanced oil recovery (EOR), CO2 can be used in the manufacture of new products like carbon fiber, cement, and synthetic fuels.

While some emerging technologies are not yet viable, they can still be helpful for businesses to monitor trends in carbon management. For instance, direct air capture (DAC) captures CO2 from the atmosphere (resulting in “negative emissions”). As the technology advances, DAC could become economically viable in Asia, which has ample renewable energy and carbon sequestration potential. By monitoring technology maturity, businesses could move quickly when these technologies become economically viable.

Theme 4: Leading biodiversity and nature preservation

Contributing to nature preservation represents a unique path to net zero by being “net-nature positive” and here Asia can play to its ecological strengths. In the carbon-management sector, for example, Asia’s rich natural resources make it a prime location for nature-based solutions (NBS).

Nature-based solutions (NBS)

Limiting global warming to 1.5°C requires 23 GtCO2 net emission reductions by 2030.26 NBS have the potential to contribute around 30 percent of the required reductions through conservation, restoration, and land-management activities.27 Carbon credits (or “offsets”) generated by NBS projects can be traded on the voluntary carbon market. As more corporations make voluntary commitments to reducing emissions, demand for carbon credits could climb 15-fold by 2030 and 100-fold by 2050, with the potential market value exceeding $50 billion by 2030.28 NBS carbon credits are in high demand due to associated co-benefits including local economic growth and biodiversity preservation.

With Asia holding one third of the global NBS potential, an ecosystem of carbon market companies (for example, project developers, carbon rating and advisory service providers, carbon market aggregators) could emerge in the region to support NBS initiatives.29 Asia currently has a structural shortage of project developers, so businesses entering the market could consider spearheading NBS project design and development. New entrants could also cooperate with or acquire local project developers who understand the local ecosystem, and target locations with rich natural resources like Indonesia.

Secondly, as Asia is a major source of NBS credits (generating 35 to 40 percent of global NBS credits issued in 2021), businesses could build carbon market aggregation platforms to facilitate the carbon-credit ecosystem. Singapore-based Climate Impact X (CIX) is one of the newcomers, offering a digital marketplace and carbon exchange.30
Lastly, businesses could consider providing carbon rating and advisory services to help carbon-credit buyers make informed decisions about NBS project selection.

Six starting points in the green business-build journey

There is a compelling and rapidly growing case for sustainability-related business building in Asia—one that demands a clear vision of where to go and how to get there. However, identifying opportunities remains a challenge. Investors have six potential starting points:

Lead with game-changing ambition, targets, and innovation: New businesses can become green disruptors by setting ambitious targets to gain market share through disruptive models and technology, while incumbent businesses can become green champions by accelerating their transition to net zero to disrupt their old business models. Businesses can keep abreast of the rapidly evolving climate technology environment, draw on their existing engineering capacity, and adopt new technologies as and when these are proven to be viable and efficient. Setting clear production-capacity goals, cost targets, and building a culture of transformation and innovation can be foundational steps to success.
Secure cost and price advantages: Green products incur high costs—for example, SAF produced from waste feedstock costs twice as much as jet fossil fuel. To lower costs and reach price parity, incumbent businesses could consider synergies with existing assets and operations, while new businesses could explore technological breakthroughs or business model innovations. On the revenue side, businesses can unlock green premiums for sustainable products by communicating the sustainable attributes of their products and solutions.
Scale through captive demand and parallel capacity building: Businesses can minimize upfront capital risks by locking in offtake contracts early. Incumbent businesses can leverage existing relationships from their core business to secure offtakes, while new businesses could strategize to take market share from those already present or through market growth. Another option is to scale production capacity in stages by using modular and replicable approaches. The China Baowu Steel Group is using this approach to start a two MTPA H2-DRI plant in two phases.31
Secure the value chain: To gain a competitive advantage, businesses need to consider securing access to raw materials—many of which currently have fragmented supply chains and can be difficult to obtain—as well as building supporting infrastructure and shaping market demand. For example, green steel makers who require hydrogen, DRI-grade iron, and electric-arc furnace plants could gain access to these resources by coordinating with multiple stakeholders. Incumbent businesses could leverage existing supply chains of their core business, while new businesses could seek meaningful partnerships with companies across the value chain.
Recruit talent as early as possible: Businesses can create an environment ripe with opportunity and incentives for attracting and growing talent and then prioritize securing talent with both technical and strategic expertise. This can be particularly important in sectors where talent is limited—such as food-science and technology capacity within the alternative proteins sector. Incumbent businesses could retrain existing employees with the right skillsets to aid their adaptation to the energy transition. New businesses could take a more aggressive approach to securing talent in the labor market with the right value proposition.
Shape the landscape and trajectory: Businesses need to play a more proactive role in shaping the landscape in terms of ecosystem building and setting the standards. At the same time, many countries in Asia are noticeably less developed than Europe and North America regarding regulatory policy. Incumbent businesses could leverage public–private collaborations, an approach that has proven to be pivotal in launching of new sustainable industries. For example, the wind industry in Denmark has the support of the public sector via government incentives for green transformation and decarbonization targets.

Asian businesses can start their green journeys now by assessing the growth potential in their industries and identifying which opportunities align with their business, strategy, and risk profiles. Once identified, they can keep up to date with the evolving technology, business, and regulatory landscapes and start to work strategically within those areas by joining industry alliances. From there, organizations can take the first small steps to success by making minor commitments through testing the market and building capabilities, to prepare for the larger investments needed to scale.

There is abundant opportunity across several high-potential areas that are already welcoming a flood of investment and innovation. Those businesses that move early could play a meaningful role in creating a sustainable future while claiming their place in the green economy of tomorrow.

Source: mckinsey