Bridging the financial gap: How Asia can unlock its sustainability agenda

McKinsey talked to Marisa Drew, chief sustainability officer of Standard Chartered about the financial opportunities in, and solutions for, Asia’s transition to net-zero.

McKinsey: As chief sustainability officer for Standard Chartered, which has a big presence in Asia, how would you describe the challenges and opportunities that face the region in its transition to net zero?

Marisa Drew: We’re going to need upwards of $100 trillion over the next few decades to decarbonize Asia. There is a critical requirement for capital to flow to achieve this goal, particularly from West to East. Yet, many of the standards around sustainability that have facilitated enormous sustainability capital investments have been centered around OECD countries and they do not neatly fit Asian markets.

In some respects, the developed markets are conceptually harmonious when you compare them to a region like Asia, where individual countries have vastly different characteristics in terms of their stages of development, economic drivers, political regimes and access to finance. For instance, a lot of the progressive sustainability regulatory policy has been developed in the EU, which doesn’t necessarily take into consideration the baselines of developing markets which in many cases are dependent on coal as their primary source of energy (if they have energy access at all). That’s a gap that we need to reconcile—we’re talking about basic access to heat, electricity, waste infrastructure, and not about how we move from oil and gas to wind and solar.

As a result, there are different timetables for net zero commitments in many countries in Asia. Whereas most of the developed world has a net-zero target of 2050, in Asia, we have seen commitments of 2060 or even 2070; and in Standard Chartered’s markets, 33 of our 59 footprint countries do not have a net zero commitment by 2050. We need to think about how we bridge those gaps as well.

On the optimistic side, we have seen how technology can be applied to leapfrog traditional, less sustainable development models and jump straight to sustainable alternatives. Given the tremendous investment in green technology taking place globally, I think we have opportunity to see this happen in Asia. There are disruptive sustainable technologies emerging in every industry, particularly in the hard-to abate sectors. We want to jump on those technologies and identify applications that are particularly suited to emerging market development opportunities—without legacy infrastructure in the way—where we can support them to deploy quickly.

McKinsey: Are there any particular unlocks that the global financial community should assemble to help Asia?

Marisa Drew: The collaborative approach is an important one. Financial services have a big role to play, as we can use our experience in structuring and underwriting transactions in other markets to partner with others to help capital flows move at scale. We can also apply the lessons that we’ve learned in other markets to influence policymakers in order to create enabling conditions for the private sector to engage; sometimes that means allowing the market to have the type of playing field and risk profile it needs to present investment opportunities that speak to institutional investors’ requirements.

Another key unlock is general markets standard setting. When we think about what enabled green bonds to reach the multi-trillion market it is today, much of it was about developing a set of agreed, market-adopted ‘green’ principles that gave investors confidence. We need to do that for other types of sustainability asset classes and geographic markets, including for Asia.

McKinsey: What have you seen in terms of structures elsewhere that you feel are the real unlocks for the future?

Marisa Drew: The green bond market began with capital that was raised with a dedicated ‘green’ use of proceeds in mind. Then came the sustainability-linked loan and bond markets. This is where an issuer says, “I’m going to raise capital and I will hold myself accountable to a series of sustainability-driven KPIs.” Investors like this because of the alignment of interests—they know that you’re putting your money where your mouth is as an issuer to set measurable sustainability targets. As we encourage the issuer community to adopt ambitious sustainability KPI-driven financings in Asia, I would expect the enormous pools of sustainable investor capital to follow in size.

The other area is blended finance, where we bring different types of public and private sector actors together in the same structure or project financing and each has a unique role to play—this can be challenging because they are used to historically working in different silos and don’t always speak the same language but, when mission-aligned, my experience has been that breakthrough results can be achieved. This field is reasonably nascent and the first-time transactions are, almost by definition, small and take a great deal of time and effort to get to the finishing line. But once they are successful, a roadmap is created that can be replicated and ideally scaled up each time.

Also, once you’ve done a ‘first-ever’ transaction, you can speed up the process the next time. Documentation is important. With every one of these deals, a lot of time is spent on creating the inaugural structure and documentation. Whereas the second time around, you can cut and paste from the first one and pretty soon, a ‘master agreement’ or standard form for the market is created.

An example particularly suited to the developing markets that Standard Chartered first architected and is now beginning to get traction in size and frequency, is the debt-for-nature swap (financing a debt restructuring in return for the country committing to invest in conservation or ‘nature’). The first one was very small in size—less than $25 million—but those that have followed recently are being executed in the hundreds of millions.

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Shapers of Sustainability

McKinsey: What is scale going to take in blended finance and is it an essential part of the solution?

Marisa Drew: When you break new ground, the first transactions are always challenging and complicated. But scale and speed are the goals for climate and conservation finance; there’s an urgency here to apply new ways of thinking to find creative solutions. In developing markets, we so often see that the financing stumbling blocks exist because the requirements of private sector capital are not lined up with the risk profile or the returns of what the project can deliver. We need to remove those blocks. We always say the world doesn’t have a shortage of capital; it has a shortage of projects that align with what the capital looking for. Blended finance has a great opportunity here.

McKinsey: What do you see Standard Chartered’s role being in sustainable finance in Asia?

Marisa Drew: Given the bank’s 150-year history in the region, the fact that it’s absolutely core to our business, and that sustainability is a critical pillar of the bank’s strategy, it should come as no surprise that leadership in sustainable finance in Asia is a top priority for us.

Sustainable finance is about mobilizing capital at scale to help solve the world’s most pressing environmental and social challenges, and we can do this in many ways.

One of these is with our transition finance and advisory work; we are helping our clients decarbonize through the transformation of their business models and through investments in green alternatives. This requires capital provision, advice, and collaboration. Most of our clients have a net zero ambition, but don’t always know how to execute on it or where to source the required capital investment to accomplish their objective. We’ve built a deep pool of industry sector sustainability expertise to help clients on their transition journey.

A second key area for us is in blended finance. Our work with the Just Energy Transition Partnerships (JETPs) is an example of a blended finance initiative announced at COP26. Western governments coupled with private sector finance providers are coming together to support selected developing countries to implement systemic change across their entire development agenda and infrastructure in order to decarbonize their countries. This involves everything from providing capital, to capacity building and project development work. It is a complicated exercise, but filled with opportunities.

And I want to emphasize that our work in blended finance is not only about addressing environmental challenges. Underpinning what we are doing with the JETPs is the people agenda or ‘social’ side; ensuring that future livelihoods and economic prosperity are at the core of the effort.

A final pillar of our work has its roots in innovation. We are keen to innovate in the field of sustainable finance, to utilize financial tools and architecture alongside our expertise and intellectual capital to develop new market instruments and products that can further facilitate sustainably driven capital flows. I am delighted with the myriad of innovative sustainable instruments and solutions my colleagues and team have created to date, from the launch of an Asian carbon markets exchange like the CIX in Singapore and the work to develop the voluntary carbon markets, to creating the first sustainable banking deposits in many of our markets, to new sustainable forms of trade and supply chain finance.

McKinsey: Is there any other perspective you want to share about net-zero Asia?

Marisa Drew: So much of the world’s focus to date has been (rightfully) directed at carbon emissions reduction, but especially in vulnerable Asian markets where agriculture and healthy oceans are necessary for so much of their livelihoods, we must also drive attention and capital towards biodiversity protection. This is where financial innovation is needed urgently—finding and financing those scalable solutions to protect our natural resources and ecosystems that play a critical role in mitigating climate change and ensuring that we have a healthy planet that can sustain the economic growth developing Asia seeks. We need to foster the notion that investments in natural capital can generate healthy dividends—just like we’ve done with the green agenda and decarbonization.

Finally, no matter how quickly we move to decarbonize and protect what is left of our natural capital, we are going to have to figure out how to live with the effects of climate change; like it or not, it’s here to stay. Therefore another topic the financial markets must address is adaptation. We need to consider how we can invest in solutions like resilient infrastructure and new models for food production that take into account that the world is going to have less fresh water, more extreme heat, rising sea levels and more storm activity.

If at Standard Chartered we can play a similar leading role in financing the global call to action in Asia on these two topics as we are doing every day with the decarbonization agenda, I believe we have the chance to make a meaningful difference.

This interview is part of an ongoing series on Shapers of Sustainability, where we convene leaders on sustainability to discuss challenges and opportunities in the Asia-Pacific region’s transition to net-zero.

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