Last year in Glasgow at COP26, we outlined the nine requirements for a more orderly transition, which highlighted the complexities—fraught with challenges and also opportunities—of solving the net-zero equation. With the conclusion of COP27 in Sharm El-Sheik, Egypt, we are reminded that while the annual UN climate gathering is a predictable event—the path to net zero is anything but. The transition was never going to be easy, and recent headwinds such as surging inflation, rising energy costs, and an ongoing war in Europe have brought greater challenges to the journey.
In the context of a turbulent macroeconomic environment and fractious government negotiations, it is clear that the transition has to deliver not just net-zero emissions, but also energy security, resilience, and affordability. It is less obvious that some of the critical targets that deliver a 1.5°C temperature outcome will be reached, which makes a focus on adaptation even more crucial. But whether we are focused on carbon reduction, removal, or adaptation, the time to act is now.
This year, at our meetings in Sharm El-Sheik and beyond, leaders and their organizations demonstrated an eagerness to move beyond goals and commitments to action and impact, despite current challenges. While there is ongoing debate about whether enough is achieved at COP, private sectors leaders showed up with a mindset of “let’s get it done,” even if precise measurements and outcomes are not yet exactly clear.
Based on our conversations with hundreds of executives, government leaders, and official delegates at COP27, we see 10 key takeaways to accelerate the transition and preserve security and affordability.
The role of the private sector: From commitment to action
Like in Glasgow last year, the private sector showed up in force in Sharm El-Sheikh ready to roll up their sleeves at the “Implementation COP,” with a focus on doing more to turn their commitments into action. While COP26 highlighted that net zero is a core principle for business, global leaders and delegates arrived at COP27 in Sharm El-Sheik, Egypt, facing a different economic and geopolitical reality.
The leaders we spoke to did not shy away from these new challenges and came together to deepen their collaboration on innovative solutions. For example, the members of the World Business Council for Sustainable Development’s Partnership for Carbon Transparency—for which McKinsey Sustainability is a knowledge partner—shared the results of pilot projects where companies across product value chains successfully exchanged standardized product-level emissions data to address Scope 3 emissions. Such tools and cross-business collaboration allow companies to accelerate decarbonization at scale by identifying, tracking, and reducing emissions.
The power of “and”: Shaping strategies that square resilience and net-zero commitments
Finding the balance between energy security and emissions reductions has never been more difficult. As McKinsey recently wrote, leaders will have to be much bolder and nimbler to create value and capture new opportunities for their organizations on the path to net zero. The zigs and zags of present conditions will tempt some leaders to question if their choices are binary and exclusive. For example, does solving the energy crisis today come at the expense of achieving a net-zero pathway? Or does investment in renewable energy mean the abandonment of existing energy infrastructure? Our discussions made clear that the best response to the current moment is making the choice of “and,” not “or”—that is, maintaining focus on the long term while adjusting in the face of present conditions, rather than opting for one or the other.
This approach allows leaders to shape strategies around resilience now to tap value-creating businesses tomorrow as the world continues to head toward net zero in the long run. For example, diversifying the current energy supply with renewables, green hydrogen, and green power can promote national energy security and economic competitiveness. Augmenting existing methods of carbon-intensive production with additional enabling technologies—such as carbon capture, direct air capture, and hydrogen fuel blends—can lower carbon intensity while transforming existing systems into cleaner alternatives. Done well, pursuing these opportunities should create a virtuous cycle for economies among affordability, decarbonization, energy security, job creation, and resilience.
The opportunity in playing offense: A strategy for the private and public sectors
McKinsey analysis shows growing demand for net-zero offerings could generate more than $12 trillion of annual sales by 2030 across 11 high-potential value pools, including transport, power, and hydrogen. But costs for most climate technologies and approaches are declining too slowly to abate emissions in line with 2050 net-zero targets. Our discussions at COP27 focused on how to move down the cost curve through capex-intensive investment, R&D, and thoughtful industrial policies that could de-risk the build out of net zero solutions through grants, subsidies, and other incentives.
McKinsey global managing partner Bob Sternfels recently wrote that the challenge facing CEOs at this moment is how to position their companies for such an important journey in such a complex, fast-moving, and volatile environment. Great companies and leaders will be those who seize opportunities to play offense now, making bets on new green energy businesses, deploying capital at scale, and decarbonizing incumbent businesses with new technologies.
Accelerating capital deployment will also require innovative policy decisions and incentives from governments. In the US for example, the Inflation Reduction Act aims to distribute more than $410 billion in credits across supply chains and projects, promising to bring substantial scale to some sectors such as wind, solar, and clean hydrogen. As in other countries with far-reaching climate policies, achieving these ambitions will require substantial collaboration with the private sector to mobilize the domestic labor force and supply chains, among other actions.
The spark of innovation: Advancing new climate technologies
The transition will require innovation across green technologies, from carbon capture and storage and carbon removals to sustainable fuels and sustainable agriculture. Now is the time to start building out these promising technologies so they can fulfill their potential to transform the energy system. The new low-emissions asset class that is forming can have attractive returns if investors provide support beyond money, lending also their expertise and guidance.
Discussions at COP27 highlighted the momentum behind collaborations to scale new technology systems. In the past year, for example, McKinsey’s research with the Hydrogen Council has shown investment in hydrogen product development has accelerated in the past year. Indeed, by 2050, hydrogen could contribute more than 20 percent of annual global emissions reductions.
In addition, we hosted the Long Duration Energy Storage Council leaders in Sharm El-Sheik to discuss findings of their latest research—conducted in collaboration with McKinsey—on how thermal energy storage could be among the most cost-effective routes to decarbonization of heating, while also providing resilience for heat and power sectors as they transition to net zero.
Nuclear energy was also a key part of the energy transition discussions, highlighting its potential to address the intermittency challenges of renewables and to bring stability to the energy system in the net zero transition.
The biggest capital reallocation of our lifetimes—for companies and nations
Navigating the net-zero transition while building energy resilience will entail a significant shift in demand, capital allocation, costs, and jobs—likely the greatest we have seen in our lifetimes. McKinsey analysis estimates that the cumulative capital spending on physical assets for the net-zero transition—such as technology, infrastructure, and natural resources—would need to increase by $3.5 trillion annually through 2050. This investment would bring growth opportunities, as decarbonization creates efficiencies and opens markets for low-emissions products and services.
Discussions at COP27 focused on how to bring together stakeholders to de-risk lending and drive demand for net-zero technologies; accelerate the development of new financial instruments; scale effective and transparent carbon markets; and establish compensating mechanisms such as reskilling and redeployment programs for workers affected by the transition.
COP27 saw several announcements around voluntary carbon markets, which were met with skepticism by some stakeholders who express concerns about companies using carbon credits to avoid emissions reductions, appropriate safeguards on quality, and the ability of markets to achieve scale. To help solve these challenges, coalitions of companies, governments, and NGOs discussed ways to ensure carbon markets can fulfill their potential to contribute to biodiversity protection, emissions reductions, capital mobilization to the Global South, climate project financing, and job creation.
The promise of nature-based solutions: Improving biodiversity and lowering emissions
While net zero commitments have become the norm in the private sector, our analysis shows that companies have a limited understanding of how to structurally and responsibly engage on the topic of nature degradation—preventing many from making quantified commitments. Several CEOs talked about a net-zero transition that is net nature positive. This year, industry-led organizations, such as the Taskforce on Nature-Related Financial Disclosures (TNFD), discussed progress on setting the framework for how businesses report and act on nature-related risks and opportunities.
In addition, discussions focused on the role of natural climate solutions (NCS)—conservation, restoration, and land-management actions that increase carbon storage and avoid greenhouse-gas emissions—to help address the converging crises of climate change and nature loss. Recent analysis by the World Economic Forum and McKinsey suggests that natural climate solutions could provide up to one-third of the emissions reduction needed to achieve a 1.5-degree pathway—at a lower cost than other methods of emissions abatement—while also stemming the loss of nature.
The ecosystem mindset: Collaborating to move faster and achieve more
We saw a great openness among businesses to collaborate in new ways across the value chain to solve sustainability challenges. Indeed, we are seeing new forms of collaboration among the private, public, and philanthropic communities.
The Greater Houston Partnership, for example, shows how cities are taking control of their own destiny and leading the energy transition by strengthening the end-to-end ecosystem encompassing new technologies, supporting entrepreneurs driving innovative projects, nurturing diverse talent, increasing financing across the entire capital stack, and incorporating favorable policies and regulations. Elsewhere, the US, Japan, and other nations finalized a $20 billion climate finance deal—a collaboration among countries and across the public and private sectors—to help Indonesia move away from coal.
The push for parity: climate adaptation and a just transition
On average, lower-income countries are more likely to be exposed to certain climate hazards compared with many upper-income countries, primarily due to their geographical location but also to the nature of their economies. Our discussions with business leaders focused on ways that nonstate actors can help build resilience and create a more just transition. For instance, insurance companies could lower the reliance on public money to recover from climate events by offering insurance products for those that make climate resilient investments. Civil-engineering companies can participate in innovative public–private partnerships to accelerate infrastructure projects. And companies can invest in building resilience throughout their supply chains. Accelerating these types of innovations, and scaling solutions that work quickly, could help us build resilience ahead of the most severe climate hazards.
This year, “loss and damage”—which refers to the adverse effects of climate change on nature, people, and developing countries—secured a formal spot on the COP27 agenda this year. The result was what many are extolling as a unique “breakthrough” deal to create a fund to pay poorer countries to cope with climate disasters. While debate continues about whether enough was done at COP27 to address the underlying causes of climate disasters, we heard collective agreement from stakeholders on the importance of improved collaboration among the Global North and Global South to ensure parity on the path to net zero.
The role of Africa in the transition: a pivotal moment
The location of COP27 this year highlights the importance of the Africa and Mid-East regions on global net-zero objectives. Africa is set to take an increasingly pivotal role in the energy transition. Both its greatest challenges and greatest opportunities lay in the fact that its energy infrastructure is still largely under development, and thus a transition towards greener energy alternatives is highly feasible. The orderly energy transition could then unleash the crucial economic growth that the region is committed to, per the 2063 Agenda, becoming an economic, social, and climate win-win-win scenario.
At COP27, we saw several new and expanded initiatives focused on Africa, including projects to improve food security, climate investment, resilient infrastructure, and nature-based climate solutions. The launch of a new African Voluntary Carbon Market initiative is targeting over 1.5 billion credits produced yearly in Africa, leveraging over $120 billion and supporting more than 110 million jobs. Egypt Green, the first integrated renewable hydrogen plant in Africa, went into operation. And the African Union, the African Development Bank Group and Africa50 launched the Alliance for Green Infrastructure in Africa to raise $500 million of early-stage project preparation and development capital. Bloomberg Philanthropies and Sustainable Energy for All also announced an expansion of their partnership focused on mobilizing finance to accelerate the energy transition in developing countries in Asia, Africa, and Latin America.
The road to COP28
Leaders are already looking ahead to COP28, which will take place in Dubai next year and hosted by the UAE. We expect to see a continuation of the shift from commitments to actions, as organizations make progress on balancing net-zero targets with long-term energy resilience and ensuring a secure, affordable, and clean transition. We anticipate more commitments from both corporates, countries, and coalitions, around the power of the “and”: creating energy resilience and accelerating the net zero transition.