Roundtable

Tokyo 2022: Navigating the transition to net-zero investment portfolios

Transitioning infrastructure portfolios is complicated because they often consist of multiple asset types across geographies, each with distinct carbon footprints, decarbonization levels, and required legislative approaches. McKinsey and GIIA collaborated to create a perspective on decarbonizing specific assets, and pathways for getting there.

On October 21, 2022, McKinsey’s Global Infrastructure Initiative convened a roundtable discussion in Tokyo titled “Infrastructure investment: Navigating the transition to net-zero portfolios.” The audience comprised owners, operators, and senior leaders across the infrastructure investment and asset management spaces. Roundtable participants sought to answer several important questions:

  • What steps do asset owners and investors need to take to manage risk?
  • How do stakeholders realize the opportunities presented by net-zero commitments?

The following key themes emerged from the roundtable:

  1. Commitment is real, but converting commitment into action remains challenging. Increasingly, investors, owners, and operators are committing to real decarbonization targets, often at a rate faster than regulators are requiring the targets. At the same time, investors struggle to create full transparency on emissions in their portfolio, and individual assets tend to apply decarbonization levers piecemeal, rather than as programmatic efforts by owners across portfolios.
  2. Substantial decarbonization can be achieved in many asset classes and often through measures that result in positive net present value (NPV). There is a high variance in emissions levels even within a specific asset class, suggesting that decarbonization leaders are doing something right. Even today, many asset classes—such as data centers, ports, and airports—can achieve 40 to 50 percent decarbonization using existing technology and deploying changes that create value for the owners. Systematically applying these levers can facilitate change across the industry without hurting returns, ensuring that emissions remain in check even as the industry grows.
  3. Cross-industry collaboration is key to escalating decarbonization. Implementing available solutions is already challenging, and difficulties are rising across the stakeholder landscape. Governments often rush to establish targets but do not always provide the zoning and planning cooperation required to execute projects. Offtake risk for low-emissions assets is substantial, and many potential customers are reluctant to support early-stage development, particularly that of new technology assets. Moreover, regulated tariffs do not always increase in tandem with higher cost structures. Resolving these inconsistencies will require much more cross-industry collaboration—and some degree of institutional memory. Even measures that lead to positive NPV amortize over long timelines, so ensuring the capital expenditure invested is recognized as a value-add by future owners will be crucial in unlocking a wave of investment. This can be achieved through the implementation of industry-wide targets.
  4. The industry needs real entrepreneurship. Delivering NPV-positive business cases requires a leap of faith. Traditional entrepreneurship can be useful because it focuses on deploying capital at risk and creating innovative offtake agreements with public- and private-sector players to justify the investment, even before all players have subscribed. Increasingly, private investors are willing to take the leap, deploying substantial resources into the development of new sustainable projects and procuring electrified equipment for rollout across portfolio assets.
  5. Asset managers are critical to pushing change and can start to organize to deliver. Many investors are creating sustainability and decarbonization teams to manage processes and inject expertise. At the same time, experience shows that success is dependent on radiating sustainability to the entire organization, therefore becoming fully embedded in transaction teams and asset managers. Large-scale portfolios can also leverage their size to create economies of scale on procurement, both of green power and electric equipment, with some leaders already developing multiasset power purchase agreements for their portfolios. Furthermore, leaders can use their clout and buying power to work with OEMs to develop and accelerate the scaling of new equipment and technology, which is key to future decarbonization initiatives.
  6. Sustainability is quickly becoming a competitive advantage. With a $9 trillion investment required per year in infrastructure to support a net-zero transition, the commercial opportunity is clear and compounded by limited partners’ increasing appetite for assets anchored in environmental, social, and governance (ESG) best practices. In addition to investment opportunities, at the asset level, there is potential to gain an edge by supporting customers in reducing their Scope 3 emissions, creating a new value proposition and competitive advantage across many use cases, including ports that can provide access to low-carbon bunkering fuels (such as hydrogen and ammonia) and airports that replace on-ground fuel burn with electric-assist power. Moving fast to create the supporting infrastructure can help asset owners guarantee higher volumes of preferred offtake for many years to come.