The importance of financial viability for the net-zero transition

Asilah Azil chatted to Mikkel Larsen, CEO of Climate Impact X (CIX), about the unique challenges faced and unlocks needed in Asia’s net-zero transition. For solutions to be scalable and for capital to be mobilized into sustainable finance, Mikkel says, regulatory clarity and certainty are needed. Mikkel further talks about CIX’s role in convincing public and private stakeholders that a net-zero future in Asia is both necessary and financially viable.

McKinsey: What do you see as the top challenges in the region’s transition to net zero?

Mikkel Larsen: It’s challenging to try to give an answer that covers an entire region like Asia given how different the dynamics are the region. It is not just one place. The problems that, for instance, Singapore faces are different from those in India or Thailand. The general answer people tend to give is that “they are just behind the curve”, and I think that’s not even close to painting a complete picture.

The first part of my response is very much tied to the politics of the region and I don’t mean that in a negative sense.

Most countries in Asia are emerging economies that need to balance financial growth with environmental protection. And a net-zero pledge often comes at the expense of making progress on a financial agenda. If you don’t help people to meet their basic needs, then you won’t get them to care about the environment and therefore net zero pledges.

On the other hand, for companies, there isn’t really any incentive presently from a regulation point of view. If the priorities of governments are all slightly different, then it’s all too easy not to make a net-zero commitment. I’m proud of what Singapore is doing but we are not the only country in Asia; every single country has an opportunity to set more ambitious targets. Things are moving faster now but more can definitely be done.

Double exposure of trees and buildings - stock photo

Shapers of Sustainability

McKinsey: What can governments or regulators do to encourage their industries and economies to mobilize capital into sustainable finance and develop the ecosystem?

Mikkel Larsen: Projects and solutions must become financially viable. There are many elements to that. First, sustainable projects need to benefit the country, not the financers. Most of these solutions are not yet financially viable—such as climate adaptation, healthcare, and education, or basic investment into waste management and food waste—and we need to change that.

However, some countries in Asia have not made that commitment. Investors want an ecosystem that they can trust, a government that can commit to a long-term, net-zero target, and market transparency to know where the priority investments are. We are seeing that in Singapore now but when you don’t have that certainty, the risk premium goes up, and most projects cannot afford that.

There also needs to be regulatory certainty in countries—clear guidelines from a government about the direction that it’s moving in. For example, why would I invest in an expensive technology solution if I know that there is no strong demand signal for it? When you are facing a trade-off, you need a compelling argument that somebody will be on the other side when you finish developing it in five to ten years.

McKinsey: What is an important unlock that you feel needs to happen for regional cooperation in the carbon-trading market? An example that comes to mind is the EU ETS (Emissions Trading System).

Mikkel Larsen: We need integration between the compliance and voluntary markets because one of them is not enough; we need both. Right now there are stumbling blocks on the liquidity side of countries in the region—either they are long supply or are long demand and only allow for the local compliance market to work.

That used to be Singapore. Now the country has allowed the use of international carbon credits and has adopted what is called a “corresponding adjustment,” which means that it can use NDCs (nationally determined contributions). Why is this so visionary and efficient? Because, under Article 6 (of the Paris Agreement), this allows money to flow between countries and not interfere with NDCs. Finance can therefore be aimed at finding the best solutions, which may not necessarily be in your own country. This is not, in any shape, reducing a country’s ambition; it is simply a route to international markets. Singapore itself can be an unlock by sharing the blueprint for its corresponding adjustment.

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.

Explore a career with us