Mobilizing capital for the climate

A net-zero transition would involve an enormous reallocation of capital to retire or overhaul carbon-intensive assets and to build new green businesses, while expanding access to renewable, secure sources of energy. The change is likely to be difficult, but it also creates immense possibility. One illustration of this: the 17 investment-opportunity roadmaps, spanning six sectors and all regions, which were identified in a new report launched today by UN Race to Zero and the Glasgow Financial Alliance for Net Zero (GFANZ), with support and analysis from Vivid Economics, a McKinsey company.

To mark COP26 Finance Day, McKinsey convened finance leaders for three panel discussions on activities and mechanisms for financing net-zero goals. Here are some of their comments on those topics. (Remarks have been edited for clarity.) To join us virtually for an upcoming session, visit our agenda page.

Financing the transition

Funding the transition in developing markets: “In the developed world, it’s pretty easy to see where 60 percent or 70 percent of the financing gap is going to come from. But when you get to sub-Saharan Africa, where we operate in 17 countries, the visibility is less than 10 percent. … So we’re going to have to create new facilities to get that financing in place.”
—Bill Winters, CEO, Standard Chartered and chair of the Institute of International Finance’s Taskforce on Scaling Voluntary Carbon Markets

Using blended finance to mobilize capital: “Our feeling is that if we could work with the treasury of the US, the treasury of the UK, and elsewhere, and aggregate capital from all of those sources, including ourselves, and apply it to blended finance opportunities, that would help renewables move more quickly. It could also bring down the carbon emissions, from concrete and other day to day things, that remain even when you get past fossil fuels.”
—Anne Finucane, vice chairman, Bank of America; chairman of the board, Bank of America Europe

Supporting small- and medium-sized enterprises: “There are a lot of SMEs who will not have read that much about COP26 and won’t even be thinking about it. They need a much more direct selling approach. They also need to be given tools to understand what their problem is, because they don’t know what their problem is.”
—Sir Howard Davies, chair, NatWest

Accelerating progress around the world: “If we have a 15 to 20 percent or 25 percent market share in a country and that country doesn’t move along, it will be very hard to do banking with zero emissions. What we’re trying to do is bring them along and convince them that this is for good. There’s so much low-hanging fruit—energy efficiency, electric vehicles, renewable projects. So that’s where we’re focusing our efforts.”
—Carlos Torres Vila, chair, BBVA

Taking risks to achieve impact: “Funding the green transition is really about funding the hard stuff. It is about bringing down the green premium. It is about scaling up existing solutions. It’s about risking capital in new technology. And I think a lot of clients are starting to want to deploy capital for a bit more impact, and are willing to show the way with an approach of more risk and high impact for the green transition.”
—Hubert Keller, managing partner, Lombard Odier Group

Watch a replay of this session here.

Panelists discuss financing for asset decommissioning. On stage, left to right: Keith Tuffley, Keryn James, Paul Bodnar, and Daniel Stephens. On screen: Donald Kanak.
Panelists discuss financing for asset decommissioning. On stage, left to right: Keith Tuffley, Keryn James, Paul Bodnar, and Daniel Stephens. On screen: Donald Kanak.
Panelists discuss financing for asset decommissioning. On stage, left to right: Keith Tuffley, Keryn James, Paul Bodnar, and Daniel Stephens. On screen: Donald Kanak.

Voluntary carbon markets

Securing trust: “The key that you mentioned, as we’ve heard throughout the day and in this project [the Taskforce for Scaling Voluntary Carbon Markets], is that it’s about high integrity. We must have high quality and high integrity. That has been our motto since we started this project.”
—Tim Adams, president and CEO, Institute of International Finance

Implementing new standards: “Standardization basically reduces transactional friction in the market. This has been a highly fragmented market. It’s been a cottage industry. If you look at the various [carbon credit] registries, you’ll find about 2000 projects on there and about 1000 project developers, so things are highly fragmented. I think you can see the positive impact of standardization already.”
—Scobie Mackay, head of origination, structuring and sales, global carbon, Macquarie Group

Consolidating demand for natural climate solutions: “I think we need to see pools of demand [for natural climate solutions] coming together and being clear about what they want to invest in, because you don’t want the separation of compliance and voluntary [markets]. As with the financial sector, you want blended public-private projects.”
—Claire O’Neill, managing director, climate & energy, World Business Council for Sustainable Development

Defining the role of market intermediaries: “If you think about what an intermediary like us can do, it depends on trust in execution. It is absolutely crucial that we can trust the [exchanges] that are in there. We’ve got to make sure that they have the right infrastructure in place, they’re connected, they’re transparent, and they have ongoing monitoring.”
—Mikkel Larsen, interim CEO, Climate Impact X

Watch a replay of this session here.

Decommissioning high-carbon assets

Seeking alternatives to divestment: “I think there was a point in time when people thought divestment was going to work. Well, we saw examples where an international company would sell off a coal asset, and then an opportunistic investor would buy it. [Because] if it’s only 13 years old, on average, it’s got another 20 or 30 years to run on a normal lifetime.”
—Donald Kanak, chairman, Prudential Insurance Growth Markets, and chairman, EU-ASEAN Business Council

Easing strain on communities: “Transitioning coal communities takes time. If you’re going to shut down coal mines and coal-fired assets, then you have to support the communities that are dependent on those assets for their livelihoods and their sources of energy. … Unless we support those communities with their transition, that will continue to be a major blockage.”
—Keryn James, CEO, ERM

Transitioning personal assets: “Passenger vehicles in the United States, for example, are on the road an average of 15 years. Then many of them are sold into other markets where they continue to operate until they fall over. You can't just roll out EVs to deal with transportation emissions. You have to figure out how to incentivize the scrapping of internal combustion vehicles.”
—Paul Bodnar, global head of sustainable investing, BlackRock

Developing specialized capabilities: “There’s a resistance to closure for any sort of business. So, we need to get more capital and more funds set up with a dedicated purpose to do this. There’s different skills involved in building a business, to closing a business, along with different people and different capital flows.”
—Keith Tuffley, global co-head, sustainability & corporate transitions group, Citi

Watch a replay of this session here.

From our venue at COP26

Yesterday in Glasgow, McKinsey senior partner Ruth Heuss took a moment to explain the changes that are unfolding as the automotive supply chain decarbonizes.

At a glance

Voluntary carbon markets can play an important role in funding decarbonization projects. The Taskforce on Scaling Voluntary Carbon Markets (TSVCM), sponsored by the Institute of International Finance (IIF) with knowledge support from McKinsey, estimates that demand for carbon credits could increase by a factor of 15 or more by 2030 and by a factor of up to 100 by 2050. A recent joint paper by GIC, the Singapore EDB, and McKinsey explores the role that institutional investors could play these markets to achieve global climate goals while also fulfilling institutional investors’ own mandates.

Demand for credits in voluntary carbon markets could grow by 100 times by 2050.

In depth

Learn more about climate finance with these McKinsey publications:

Aligning portfolios with climate goals: A new approach for financial institutions

Banking imperatives for managing climate risk

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