Governments and companies are committed to the decarbonization agenda. How can banks reconcile their risk appetite and play a role in funding the transition to net-zero?
McKinsey interviewed Mark Whelan, group executive, institutional, at ANZ, an Australian multinational banking and financial-services company. He identified champions of the net-zero agenda and delved into ways in which banks are incentivized to follow the charge and finance green initiatives.
McKinsey: Which sectors and types of companies do you see leading the transition agenda at this time?
Mark Whelan: It may surprise people, but I think it’s the energy and fossil-fuel companies. Customers in oil, coal and gas, and energy production and distribution—they’re the ones that are moving at pace. Infrastructure companies I would add into that mix. The more carbon-intensive industries are the ones that have focused the debate around the need for a transition. Many are really committed, and putting money into decarbonizing, because they see where this is leading. This train’s left the station, and it’s only going in one direction. You can either sit back and not change, or you can be part of that transition.
You’re starting to see this as well in the commercial building area. In transportation, you’re seeing a lot of investment in infrastructure and technology around electric vehicles. And in other technologies like carbon capture and storage, new industries are coming through: they see a significant opportunity.
But the energy customers are the ones that have really had to deal with this. I’m not saying all of them are moving at a pace that will keep everybody happy. But remember this is a transition; it’s a 2050 target. Yes, we need to be moving quickly, but I think many of them are already doing that.
Many are really committed, and putting money into decarbonizing, because they see where this is leading. This train’s left the station, and it’s only going in one direction. You can either sit back and not change, or you can be part of that transition – Mark Whelan
McKinsey: Historically, commercial banks have not been in the forefront of investing in new technologies. Things might be different now. What kind of enabling financing-scheme support would encourage banks to do this at scale?
Mark Whelan: Governments around the world have committed to net zero; now they are assisting businesses in that transition. There are banks, for example in Germany, that are owned by government, that are positioning to support investments into the transition. This makes it easier for other kinds of banks, who can follow with some first loss taken off the table. I think that’s a big enabler.
Secondly, you’re seeing a lot of private money go into this space, which will also encourage the banks to come in at better levels. Private equity and the big funds will have roles to play, taking on layers of risk to get these green technologies off the ground. And that’s needed; if we rely just on the global banking sector to invest in this, I think we’ll be waiting a long time … it doesn’t naturally sit with a bank’s risk appetite, or with a bank’s capabilities in some of those other areas of financing. So capital mix will be what you’ll see: banks will play a role but won’t necessarily be at the pointy end of the risk appetite.
McKinsey: Given governments’ commitment to net zero, do you have any thoughts on what regulators or other policymakers can do to create more of an incentive to invest in transition?
Mark Whelan: I think that regulators are at different stages in different countries: Some will have the carrot approach, with incentives such as capital relief for products that are obviously green in nature. Then there will be the stick approach on the opposite side of the ledger: if you’re lending and you have a carbon-intensive book, you might get higher capital allocation because the regulators see this as significant climate risk.
This is a multifaceted, long-term issue. There’s no one solution in any part of the value chain or from any of the key stakeholders. On a larger scale, institutions like the European Central Bank (ECB) are thinking about how to even the playing field and obtain a balance between carbon-intensive countries and some of the policies they may put in place.
Government will have a role to play in setting policy and setting incentives. Industry bodies will have roles to play in the dialogue and holding member firms and others accountable: getting the disclosures, ensuring that we’re incentivizing in the right way and investing into the right areas. Multiple stakeholders, multiple opportunities and risks add to the complexity. We’re going to continue to learn as we go, but government will play a big role as a potential stakeholder with clear policies, clear incentives, and clear direction on how they want to see companies in the region operate.
We’re going to continue to learn as we go, but government will play a big role as a potential stakeholder with clear policies, clear incentives, and clear direction on how they want to see companies in the region operate. – Mark Whelan
McKinsey: In the past, there was a notion of development financial institutions providing a higher-risk tranche, with private capital and banks coming in on the back of that. Is this viable now?
Mark Whelan: There’s no doubt that you need a mix of capital providers with various tranches to get the money flowing. We’re already seeing a large amount of private money, deals and opportunities in that value chain. Big funds have an enormous amount of money to deploy in this area. They’re looking for opportunities, and they tend to work hand in glove with other financials; they will play in this space, and I think some of the smart-money private equity will do the same.
This is a complex issue that can’t be resolved by one policy or global approach. We can’t always do everything for any particular customer or every opportunity: we sometimes need to partner with different people, with bigger funds or private money, and leverage off each other’s capabilities. The risks can be high, and you won’t have all the expertise in one space.
I think the solution comes from high-quality partnerships with high-quality organizations, targeted at what we think will make a difference in the whole transition. With new green technologies, money will be required, but also advice to customers on how they transition. This is partly why ANZ formed a strategic partnership with climate advisory and investment firm Pollination. It’s exciting, but it’s daunting—we need to have a clear strategy.
Source: mckinsey
