Going green: How banks are advancing the transition for their clients

McKinsey interviewed Gurdip Singh Sidhu, group chief sustainability officer and group chief people officer at CIMB, a leading ASEAN banking group headquartered in Kuala Lumpur, Malaysia. The conversation explored the role of banks in the green transition and how—with strategic financing—the convergence of net-zero pathways across diverse sectors can catalyze transformation in the region.

McKinsey: As a bank operating in Asia, what are some of the obstacles that you’ve encountered in providing sustainable finance?

Gurdip Singh Sidhu: If you consider the scale of companies, the large corporations tend to be quite progressive in their understanding and internalization of ESG factors and their own net-zero commitments—many of them have put those in place, or are starting to do so. But as you go down to the mid-sized and smaller companies, that journey is still in its infancy; setting targets and working towards them remains a big challenge.

When it comes to mobilizing capital, the foremost obstacle is that we’re in the early days of data gathering and record tracking for green initiatives. Our traditional credit and scoring models are based on historical data; the long-term benefit of sustainable investments has not yet worked through these classic risk models. As a result, there may not be a natural incentive to allocate capital to such projects.

To catalyze transition initiatives, we also need the right ecosystem, including service and technology solutions providers. These companies tend to be smaller, and many are fairly young, reliant on venture capital funding. The faster these companies get access to capital, the faster they’re going to be able to pitch to bigger companies and help them work through their transition.

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McKinsey: What enablers would you suggest to reduce these constraints, or accelerate these processes?

Gurdip Singh Sidhu: A focused and consistent push on disclosures would certainly be most welcome. For example, Bursa Malaysia, the Malaysian stock exchange, is pushing for disclosures aligned to the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. At this stage, the work that financial intermediaries like us are doing entails a lot of proxy data. Disclosures coming from the companies themselves would help a lot to raise confidence in the data.

We are also working on different net zero pathways in different sectors. We have the Net Zero 2050 target, and a lot of effort now is being placed into intermediate net zero targets for 2030. If there was greater convergence at a country or regional level on defining sector pathways, that would be helpful, because then we would be collectively aligned on the direction. So, for instance, if a particular sector is expected to reduce emission intensity by a certain amount come 2030, we could take that as given and work towards that.

Then of course there are market solutions. Whether we’re talking about the compliance carbon market, the voluntary carbon market, or various other benefits and tax-related incentives, all of those definitely help. The carbon markets act both as a carrot and a stick in shaping behaviors, and I think they will be very important enablers.

McKinsey: You operate in a broad range of sectors. Quite a few are heavy emitters, but critical for the economy. How can financing influence the movement of these sectors to net zero?

Gurdip Singh Sidhu: The process starts with understanding which sectors have a disproportionate role to play in helping the country get to net zero, and by extension, also get our book to net zero. In some sectors, we are fortunate because the clients are pretty advanced in their green commitments and action plans; our portfolio is very much in line with that. Where you’ve got that alignment, clearly the opportunity is much easier and more straightforward. Then it’s about thinking about what investments each client will need to hit that pathway, and working with them to finance those appropriately.

Then we have what I call broader sectors, where you have a large number of players, from very big to medium size, with less homogeneity in how they’re approaching their net zero plans. Then the challenge is a bit different—there’s a lot of education and awareness that we need to build first with those clients, before working with them to finance or plan for that shift.

The big picture is that over the next couple of years, you will have this two-pronged approach. One will be for clients who are very much on the same page, or maybe even ahead in terms of where they want to go, and the second would be for clients who are a little bit less advanced, where we will have to spend time aligning expectations for the long term.

McKinsey: In your experience, how do you see the role of blended finance playing out in the shift? Are public-private partnerships an important part of the net zero pathway for many clients?

Gurdip Singh Sidhu: The concept of blended finance in this space has always come into play where a project or investment on a standalone basis does not clear the commercial hurdles. Combining differing pots of capital with various objectives is a game changer. ASEAN, however, is very diverse. If you think of Singapore versus Vietnam or Singapore versus Philippines—the dynamics vary in the sense of what pots of funding are required and where the funding comes from.

We’re still in the early days of understanding the long-term role of blended finance in this part of the world. It requires that classic supply-and-demand matching. As a bank, on the side of demand, we’ve started to do that work of understanding what kind of projects would not clear the hurdles from a traditional banking point of view. From there, we know which projects that, if we combine other sources of capital, make sense.

We’re starting to work with the likes of the Asian Development Bank (ADB) and some sovereign funds, who have a very clear focus on ESG investments, to see how we can combine efforts with them to provide capital in this area. They would come in with the equity and we come in with debt capital. These efforts are certainly underway, but from an impact perspective, it’s still early days in ASEAN.

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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