Investing in a net-zero economy: Scaling blended finance

| Podcast

McKinsey’s Bharath Sattanathan speaks to Gillian Tan, chief sustainability officer at the Monetary Authority of Singapore, about solutions to the financing challenge, particularly in Asia. She reports on the key highlights from the Transition Finance towards Net Zero Conference that MAS hosted in October last year. These include the need for private finance, rethinking public finance, and risk clarity, and for addressing the role of regulation to achieve a successful, sustainable transformation. An edited version of the conversation follows.

Gautam Kumra: I am Gautam Kumra, chairman of McKinsey Asia, and you’re listening to the Future of Asia Podcast Series. The Asian century has begun. The region is now the world’s largest economy. As Asia’s economies evolve further, the region has the potential to fuel and shape the next normal. In each episode, we are going to feature conversations with leaders from across the region to discuss what Asia’s rise means for businesses across the globe. Join us.

Bharath Sattanathan: Hello everyone. Welcome to this episode of McKinsey’s Future of Asia Podcast. My name is Bharath Sattanathan and I’m a partner in McKinsey’s Singapore office. Today, I have the honor to speak with Gillian Tan, chief sustainability officer of the Monetary Authority of Singapore (MAS). As MAS’ assistant managing director of the Development and International Group, Gillian oversees Singapore’s development as an international financial center, as well as its sustainability strategies and international relations. Gillian and I will be discussing a range of topics, starting with key takeaways from the Transition Finance towards Net Zero: Scaling Blended Finance Conference, an event that was organized by MAS in October 2022.

We’ll also speak about Gillian’s journey to becoming the chief sustainability officer and MAS’ agenda for 2023. Join us as we discuss how Asia can take tangible steps toward the net-zero transition, and the role of finance in enabling it.

Gillian, I must start with congratulating you for becoming the new chief sustainability officer of MAS. How did you find yourself in public policy and arrive at MAS?

Gillian Tan: I got here via an unusual route. I’m legally trained and started my career in the Singapore government’s legal service where I worked for more than a decade. I was a justice’s law clerk, a deputy public prosecutor, and a district judge. So my day-to-day work was civil procedure, murder cases, drug cases, sex crimes, and visiting crime scenes. In 2015, I joined MAS to head its enforcement function. About three-and-a-half years ago, I moved into market development work. Now, as head of the Development and International Group, I work with my team to develop Singapore as an international financial center. I also oversee MAS’ international relations and engagements.

The portfolio has always included developing Singapore’s sustainable finance market and capabilities, some of which are really from ground zero. Whether it’s about reaching out to universities overseas to set up centers of excellence here or working with the Association of Southeast Asian Nations’ (ASEAN) counterparts on the ASEAN taxonomy, there’s always a lot to learn. I’m very excited to have the opportunity to continue to work in this space.

Bharath Sattanathan: As part of the market development team, what are three things that you are exceptionally proud of over the last 12 or 24 months?

Gillian Tan: The financial sector is doing well; growth has been good. We have announced our five-year plan, the Financial Services Industry Transformation Map 2025, and sustainability plays a key role there. We also hosted the Transition Finance to Net Zero Conference. We’re not really in the business of hosting conferences, but we felt strongly about this because of the urgency of climate change and the need for global awareness.

The number of severe weather events in ASEAN is phenomenal. I think that in 2020, there were more than 400 disaster events in the region. If you total up the damages, you’re already talking about $200 million. And this year alone has seen severe weather in Pakistan and South Korea. We really have our work cut out for us. At the same time, we need to be mindful of the broader context. These are challenging times globally. Given the stresses that the world is facing, you can understand how it might be tempting to postpone climate action until things settle down.

But we know that delay is going to make the adjustment we have to make even sharper and more abrupt, so we cannot afford to wait. In light of that, it was important for us as the central bank and regulator to highlight the huge transition and scale of the financing that will be required. Data coming from the McKinsey Global Institute shows that, globally, we need $9 trillion annually  over the next 30 years if we’re going to have a chance at reaching net zero. The figure speaks for itself. Governments alone cannot afford the scale of financing required. We need to find ways to crowd in private capital, whether it comes from financial institutions or philanthropic sources. We also require a fundamental rethink and a reorientation of public finance.

So how do we work in partnership with philanthropic and concessionary capital, and mobilize private investment on a scale that we’ve never experienced before? We have seen good small-scale pilots here and there that have been promising, but not at the scale needed. The conference brought stakeholders together to discuss what’s needed for blended finance. We want to do this regularly, probably annually, so that it can be an anchor event around which we have roundtables, technical deep dives, workshops, and specific practical collaborations that are executed throughout the year.

We want concrete deliverables. We had a good start—500 senior leaders and distinguished guests from all over the world came to the conference. And various key announcements came out of it. For example, MAS is supporting the launch of the Asia climate solutions design grant that we co-developed with Convergence. The Glasgow Financial Alliance for Net Zero (GFANZ)’s Asia–Pacific (APAC) network announced that it’s working with MAS and the Asian Development Bank (ADB) to develop guidance for financial institutions to facilitate the managed phase out of high-emitting assets. This is challenging work, but very important for the APAC region.

Bharath Sattanathan: With regard to the rethink of public finance and the need to mobilize private finance, both in the context of climate action, what were some of the key highlights and important messages from the day that participants took away? And, for people who didn’t attend, what are most important themes for them to take inspiration from?

Gillian Tan: The first key message is that the financing gap is significant. I mentioned earlier that, based on McKinsey’s estimates, we’re looking at $9 trillion a year that’s needed for the next 30 years. And, depending on what estimates we use on the amount of investment that already is in the mix, there’s financing gap of anything between $3 trillion to $5 trillion a year.

The other takeaway is that, notwithstanding the massive challenge ahead of us, there’s good reason to be optimistic. We’re starting to see promising global developments that will help us bridge the gap. For instance, the High-Level Advisory Board on Effective Multilateralism is looking to explore reforms to the global financial architecture that will help channel more public and private financing to issues that relate to the global commons. These would include health and social needs, as well as climate change and sustainable development.

We’re starting to see promising global developments that will help us bridge the gap. For instance, the High-Level Advisory Board on Effective Multilateralism is looking to explore reforms to the global financial architecture that will help channel more public and private financing to issues that relate to the global commons.

Gillian Tan

Dr. Rania Al-Mashat [minister of international cooperation for Egypt] spoke about the Sharm El-Sheikh Guidebook for Just Financing—an operational guide for how we actually go about implementing a just transition. I think this will provide important and useful guidance on issues that sometimes have been neglected such as climate adaptation and blended finance. We also heard about how the GFANZ Asia–Pacific network is developing guidance; they’re going to work with us and the ADB on how to facilitate the managed phase out of coal assets. In Asia, we still have something like 5,000 operational coal plants, and they are still young—the average age is about 11 to 13 years. They’ve got decades of good life left.

So, how do we retire these assets early and responsibly? It’s good to know that GFANZ is looking at this with an Asian focus but, let’s be honest, more work is required. We still lack bankable projects; we need shovel-ready ones in the pipeline. They don’t just pop up overnight organically. There is a lot of work that goes into preparing projects, launching feasibility studies, and looking at derisking. I suspect we will need more donor support at the early stage.

There was also a call [at the conference] for standardization across the board, like templates, so that projects are replicable and we create a much broader pipeline of bankable projects at scale. This will help accelerate investor familiarity.

Another big theme that came out of the conference and one where work is much needed is on the risk side. Professor Lord Nicholas Stern emphasized the need to be crystal clear about what risks are at play. Are they currency risks? Are they project risks, political risks, or credit risks? Only when we have truly targeted what we’re dealing with, can we derisk. Another significant theme was the role that philanthropies and foundations need to play. They have a different risk absorption capacity—they’re willing to come in where traditional financial returns may be low but the social returns are high. I would like to see them get more involved in blended risk. In addition, Singapore’s Senior Minister Tharman [Shanmugaratnam] commented about how we need to take a step back and look at how our financial ecosystem works. How do we make it work more synergistically? How do we integrate blended finance as a key objective for global financial architecture to achieve?

There is so much capital out there that isn’t being getting deployed where it needs to be, which is where the financing gap emerges. We need to have an operating environment with strong regulation, where clarity is given to the market. This could be in the form of standards and taxonomies—a clear policy on carbon taxes and a forward-looking view as to what the regulatory stance will be. All this needs to be supported by good quality data. How do we improve sustainability data and make it more accessible to everyone, including investors and governments?

Finally, should we rethink multilateral development banks’ (MDBs) roles and how they work? Do they need to pivot toward greater derisking mechanisms, given the important role that derisking will play? Or should they place less emphasis on direct lending and more emphasis on risk mitigation mechanisms?

Bharath Sattanathan: One of the highlights of the day for me was the panel discussion with Senior Minister Tharman and Dr. Rania Al-Mashat that was hosted by Sven Smit, a senior partner at McKinsey and chair of the McKinsey Global Institute. Senior Minister Tharman gave an almost provocative call for action, urging not just the MDBs but also financial regulators, to really rethink their roles and what they can do to stimulate the demand that is required. And to consider the pain points around taxonomies, data, infrastructure, and so forth.

Can you share some reflections around that core call to action from Senior Minister Tharman?

Gillian Tan: It’s a fairly well-established belief that the financial sector should and can play a significant role in our transition—at the simplest level, by ceasing financing carbon-intensive sectors and facilitating financing for transition. I think it’s quite unsurprising, then, that the role of financial sector regulators should come into the spotlight. How do you regulate this key engine? It’s not a new area for us. The focus of many regulatory conversations across the world has thus far been about mitigating financial stability risks, and looking at the risks carried by financial institutions on their balance sheets through exposure to real economy players, and through carbon-intensive activities.

It’s a fairly well-established belief that the financial sector should and can play a significant role in our transition—at the simplest level, by ceasing financing carbon-intensive sectors and facilitating financing for transition.

Gillian Tan

On the Securities Commission side, there has been a sharp focus on listed company and corporate disclosures. I think there has been good progress here. On the disclosures front, the International Sustainability Standard Board’s (ISSB) work on delivering a global baseline sustainability disclosure standard is an important deliverable. That will go a long way to ensuring we have comparability and good quality disclosure data. On the risk side, many regulators have stepped forward. MAS has issued guidelines (for example, on environmental risk management or stress testing) across banking, asset management, and insurance. These are much broader than just climate change; they look at issues like pollution and biodiversity, and so on.

There has been good progress and increasing awareness from the regulatory community. But the million-dollar question really is, should regulators do even more? For example, should regulation be used to align incentives, whether through risk weights or adjustments to capital standards—such as financial institutions being incentivized to take even more significant action in favor of the transition. Is there scope perhaps for green differentiated capital requirements that reduce the capital charge on green loans and increase the charge if the loans are for non-green areas?

These are important, complex questions that need to be carefully considered. Some of the toolkits that are being used were designed for very different purposes, so is it appropriate, for example, to use a prudential risk tool to incentivize transition?

At MAS, we’ll explore these types of questions, and we’ll work closely with our international regulatory colleagues so that a coherent, standardized approach is taken. Various financial institutions have raised these issues with us for some time; we’ve taken on board their feedback and we’ll continue to study this carefully. What we aim for are practical steps we can implement to incentivize action, and how we can take a more targeted, differentiated approach that delivers the impact we want to see—meaning that it contributes clearly to carbon-emissions reductions over time, while minimizing financial stability risks. We will also respect the prudential tools that have served us well over many years.

Bharath Sattanathan: You mentioned about practical actions, as well as needle-moving themes. Ravi Menon [MAS’ managing director] has spoken about creating the right set of interventions to ensure that the right climate actions happen. Could you tell us about the design grant you are establishing with Convergence, its ambition and the plan to scale it, linking that to some of the challenges that you outlined earlier?

Gillian Tan: Ravi Menon announced at the conference that the MAS will be injecting seed capital into a $5 million Asia Climate Solutions design grant, which will be hosted by Convergence. Convergence is a leader in the blended finance ecosystem with a strong track record of supporting investable solutions, some of which have been successfully scaled in the market. This grant will provide funding for early-stage feasibility studies and for proof of concept work on innovative, blended finance solutions.

We are looking at target sectors that have traditionally been underfunded, like nature-based solutions, clean-energy access, sustainable transport, and adaptation. There tends to be a lot of focus on mitigation and less on adaptation, even though in Southeast Asia adaptation is key. The initial funding is small—$5 million—but we expect with that alone that this facility will have a four-year window and should be able to fund two to four solutions a year. We hope to kickstart these solutions and then, after they scale and draw in more capital from other sources, that we have helped them with some degree of derisking.

The market reception toward the announcement has been very heartening. Several institutions have stepped forward and indicated that they’re keen to co-seat the design grant and support it in various ways. With this, hopefully we can increase the facility size and scope, or set up additional facilities. While MAS is injecting seed capital, I think the important element is that it signals our commitment to support blended finance in the region. There’s so much more that needs to be done beyond seeding facilities; for example, as I mentioned, the philanthropy segment plays a huge role in derisking and providing concessionary capital.

This has good synergies with our broader portfolio, because one of the issues we look at is wealth management and its family offices. This has grown healthily in Singapore. From speaking with family officers, we see that they’re very keen to deploy more philanthropic capital toward causes in the region. We could achieve this by sitting down with them and raising awareness about the urgency of climate change and how a small amount of concessionary capital can catalyze a huge amount of public and private sector funding. That is a focus area for my team and me in the next few months.

Bharath Sattanathan: Where do you think this design window will be in 2023? What would be a concrete action that MAS would expect?

Gillian Tan: I hope, first and foremost, that we will be able to deploy the grant across a range of promising projects. It would be amazing in a year’s time to see some of the early feasibility studies concluded, even have proof of concepts being executed, and to see whether these lead to more capital coming in. We won’t wait for the conference in June 2023 to work on this; we’ve already had parties reach out and ask us to facilitate deep dives on various issues, like early-stage funding or philanthropic capital.

Bharath Sattanathan: Clearly the conference was not a one-off event. Can you give us a sneak peek of what the event will be in 2023? And what are MAS’ priorities over the next 12 months?

Gillian Tan: It’s about keeping up the momentum from the conference. Many people came to us afterwards expressing an interest to work with other institutions on similar projects. Keeping that network going is vital and actually working on projects together, whether it’s early-stage funding, the managed phase out of co-limiting assets, or how to deal with hard-to-abate sectors.

Quite a few institutions and individuals asked us for guidance, whether this comes in the form of guidelines or a transition taxonomy of some sort. I think this will be another area around which partners will coalesce. We will work closely with them—GFANZ, EDB, and anyone else who has an interest in this space—to see what we can achieve over the next few months. I’m afraid I can’t give you a sneak peek [of the conference] but I hope that, come June, we will have made headway on some of these issues, including greater clarity around managed phase out.

Bharath Sattanathan: Thank you, Gillian. We are all looking to MAS to set the standard on how a path for transition could be laid out.

Gillian Tan: Thanks, Bharath. Great speaking with you.

Gautam Kumra: Thank you for listening to McKinsey Future of Asia Podcast. To hear more from global experts on the net-zero transition, visit our shapers of sustainability page on

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