Anne Finucane on carbon credits, nature, and the path to net zero

| Interview

McKinsey estimates that achieving net zero by 2050 will require $9.2 trillion of annual capital deployment across all sectors of the economy. From 2019 to 2022, 330 new sustainability; environmental, social, and governance (ESG); and impact funds were launched in private markets alone.1Climate investing: Continuing breakout growth through uncertain times,” McKinsey, March 13, 2023. And the Inflation Reduction Act and the Green New Deal have committed $370 billion and €1 trillion, respectively, to achieving net zero. Despite all this progress, McKinsey research shows that there’s still a significant investment gap that needs to be filled.2COP28: Climate finance,” McKinsey, December 4, 2023.

Anne Finucane has been deeply embedded in the efforts to accelerate the flow of capital to climate action. As the vice chair of Bank of America, she was responsible for the company’s ESG and climate efforts. And today she is the chair of Rubicon Carbon, a company working to accelerate carbon markets—that is, the market for carbon credits, certificates representing one metric ton of CO2 equivalent that is either prevented from being emitted into the atmosphere (emissions avoidance and reduction) or removed from the atmosphere as the result of a carbon reduction project.3How the voluntary carbon market can help address climate change,” McKinsey, December 17, 2020.

McKinsey Partner Sean Kane sat down with Finucane to talk about steps financial institutions are taking to combat climate change and protect nature and the role of carbon credits in these efforts. An edited version of their conversation follows.

McKinsey: How are major financial institutions worldwide thinking about and preparing for decarbonization?

Anne Finucane: About 400 major financial institutions have now committed to net zero, and many more have committed to decarbonization more generally. That includes several institutions in the United States, such as Bank of America, Citibank, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo.

What sets this industry apart is that to achieve net zero, all their clients must also achieve net zero. Financed emissions, or the carbon footprint of a financial institution’s investments and loans, can be significant—sometimes hundreds of times higher than the institution’s direct emissions.4 That’s why it was meaningful that all the top US banks committed at roughly the same time. Otherwise, fossil-intensive projects that some banks refused to invest in would get picked up by other banks without climate commitments. Their alignment will maximize the power of capital to accelerate the net-zero transition.

McKinsey: What’s been the impact of these commitments on how these leading financial institutions deploy capital?

Anne Finucane: While I was at Bank of America, I was also cochair of the company’s sustainable-markets committee and chair of its ESG committee. We were very careful, very conservative in the early years, thinking we could maybe commit $200 billion or $300 billion to low-carbon financing and other sustainable business activities over the next ten years. Bank of America is now financing and investing that much in one year. And I recently was speaking to executives at other leading financial institutions where those numbers are comparable.

In the early days, organizations tended to think about climate action as a philanthropic effort, but they’re now approaching it as a growth opportunity and adjusting their business operations to take advantage of new financial opportunities, developing new financial products, and winning business on the basis of their expertise. And investors and stakeholders are paying much closer attention to how companies are responding to environmental changes and the net-zero challenges. As a result, setting targets and reporting on progress toward meeting those targets has become a competitive business advantage.

McKinsey: What else is being explored, and what needs to change for capital to flow toward net-zero action at the necessary speed and scale?

Anne Finucane: Along the way, each of these institutions has gotten more innovative about financing approaches to see if we could stand up climate financing efforts that otherwise wouldn’t get done because the risks may seem too great or because the project is not obviously bankable. Current risk management approaches can quantify transition risk to a good extent but not physical risk at the investment level. This means climate risk continues to be heavily underestimated and inadequately accounted for in investment decisions, making it difficult to make the case for scalable financing solutions to the climate crisis.

This is particularly true in emerging economies where government funding can be limited and there may be either an enormous need to transition from heavy carbon-emitting energy sources such as coal or a need to establish basic energy capacity, in which case renewables could act as first-generation energy sources. We’ve tried longer timelines, less money down, blended financing—that is, using development finance and philanthropic funds to mobilize private capital. The results of these efforts varied, but we have not yet found something that could be easily reproduced. We have also observed the same constraints at the World Bank and other multilateral development banks in terms of financing decarbonization and clean energy initiatives in emerging economies. That is what initially got people thinking about exploring other options for the developing world, including new sources of funding; concessional capital that has terms that are more favorable than commercial capital; and first-loss money, whereby the fund manager absorbs any first losses. We all know we need some new tools to underwrite the future.

One tool that continues to be promising is the voluntary carbon market [VCM]. In compliance markets throughout Europe and parts of the United States, companies report on their progress against standards set by the state or country. For those that exceed the established parameters, they either pay a fee or they buy credits from another company that has excess capacity—in other words, a company that is not using all its carbon allowance. The concept of the VCM is the same: to achieve net zero, a company does everything it can to reduce emissions. It conducts an audit and reports both its results and progress in disclosures to entities such as the Task Force on Climate-Related Financial Disclosures. And then it closes the delta with carbon credits.

We have heard the criticism of carbon credits, specifically regarding the quality concerns associated with legacy credits. Others worry that companies will purchase carbon credits instead of transforming the way they work. But research has shown that the companies most likely to use carbon credits are also the ones that have demonstrated the greatest progress in their own operations, disclose more often, and are transparent in their reporting.5 Furthermore, the business community is practical above all else and innovative. The community is motivated to do the work of reducing emissions: there are incentives for action, and investments in new clean energy are outpacing those in fossil fuels.6 But the fact is that the energy transition requires a lot of capital. And particularly in emerging markets with fewer government incentives, capital is not readily available unless carbon credits are also on the table.

Not only do buyers need confidence in the new credits coming to market, but they also need confidence in the ones they currently own.

McKinsey: As the chair of Rubicon Carbon, can you share how Rubicon is trying to solve some of these challenges?

Anne Finucane: A market of this scale and utility needs to evolve rapidly to maintain trust and confidence. Not only do buyers need confidence in the new credits coming to market, but they also need confidence in the ones they currently own. Rubicon Carbon has developed an ongoing risk adjustment framework leveraging portfolio-backed carbon credits included in Rubicon Carbon Tonnes, which provide enterprise customers access to proprietary sets of both nature-based and non-nature-based carbon credits. The framework is designed to create high-integrity carbon credits and drive confidence in the VCMs by addressing current issues such as overcrediting risk, future delivery risk, and other risk factors that impact credit quality. Our mission is to deliver the highest-quality market-driven solutions that are built on a strong diversified inventory, with a quality assurance framework and transparent and robust business controls.

McKinsey: How do you expect carbon markets to evolve in the next several years?

Anne Finucane: As you know, the capital markets business is both complex and sophisticated. And there are rules to it, and people understand the rules and come to work every day using the rules. I think you’ll see the same in the years to come regarding VCMs and carbon markets in general. I also think that the use of concessionary capital; blended finance; prices on carbon; and iterations of these nature-, industrial-, and technology-based solutions will become de rigueur. They will become familiar to people and will be priced in the market, much the same as other vehicles are today.

But we have some big rocks to push over first. One is bringing trust and transparency back to the carbon credits business. In the nature-based category, the reality is, without the VCM, forests and carbon sinks may not be created or preserved. Land will likely be used for industry, which will, in turn, not only eliminate natural carbon sequestration but also further deteriorate biodiversity and natural habitats. The second is perfecting industrial solutions, including everything from decommissioning coal plants to carbon capture—in terms of capturing, transporting, and storing carbon from power and industry and leaning into nature-based carbon capture, such as restoring wetlands and implementing restorative agricultural practices.

At the end of the day, companies need to benefit from putting meaningful capital into these efforts. I have confidence that we can make it happen.

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