Getting to net-zero in Asia: No returns on a dead planet

McKinsey talked to Dr. Steve Howard, chief sustainability officer at Temasek. The conversation explored the ways in which investors can help corporates transition to green, and how investing in transitioning infrastructure can contribute to alleviating poverty. Temasek, based in Singapore, is a global investment company that places sustainability at the core of their investment process.

McKinsey: On the topic of transition finance, what do you see as some of the challenges for Asia’s transition toward net zero?

Steve Howard: We have an economy that is in transition, and a rising middle class. It’s projected that Indonesia will have the fourth-largest middle-class population in the world by 2030. Simultaneously, you have a large number of people living in poverty. The burgeoning middle class has growing energy, industrial, infrastructure, and consumer needs.

Another challenge is that we still have a fossil-fuel based economy. Six out of the top-ten coal-using countries are in Asia, led by China. In this carbon-emitting heavy economy, the transition is intense, so too the pressures on growth. In many countries, you still have state-owned utilities that progress slowly and are not open to regulation. This is not a conducive environment for investment. I’m upbeat, though, as there is a tremendous amount of innovation and business engagement on this topic and we see government starting to really lean into it as well.

McKinsey: Given these pressures, how would you frame the urgency for energy transition, and why is the mobilization of capital so critical in this space?

Steve Howard: This is a tens-of-trillions-of-dollars energy transition. Without the capital markets, there is no energy transition. A handful of countries are slow to act, but the vast majority of them are now lining up to adopt net zero as the norm. Understanding net zero means you understand climate risk. There are no returns on a dead planet.

McKinsey: What is the unlock to increase the level of understanding, and consequently, capital channeled towards green finance or transition finance?

Steve Howard: Investors should look for opportunities, put strategies in place, and get their homes in order. Then look across all the different sectors or markets they’re operating in for low- or zero-carbon opportunities. Climate, energy transition, innovation, and investment all depend on good government policy and incentives. To get to scale, we need those two things in tandem, and for governments to set long-term targets. Businesses and investors want policies and regulations to be long term, clear, practical, investable, and have legal policy frameworks; that will unlock the trillions.

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McKinsey: Returning to the link between consumer energy needs and the growing middle class: how do we address the issue of poverty when financing the transition towards net zero? Is blended finance an important dimension to the investment that’s needed in the transition, especially in Asia?

Steve Howard: This is a global challenge with two dimensions. One is using frequently policy-driven changes to move from fossil-fuel based energy to clean energy. The other is ensuring that people in impacted communities have access to training and the skills and jobs of the future, so that you’re not leaving desolated communities behind.

This is not just a transition for the middle class. We need to figure out how to lift people out of poverty and create a pathway for the hundreds of millions of people, across South Asia and Southeast Asia in particular, who do not have access to reliable, secure energy. You need blended finance to disrupt the risk. The development banks of the future need to be sitting alongside commercial capital, de-risking this unreleased capital, scaling, and planning how we can get hundreds of millions of people into the modern energy system.

McKinsey: How is Temasek approaching investing in this area?

Steve Howard: Temasek is a trend-aligned investor that identified sustainability as a trend. The two trends that have shaped my thinking the most are decarbonization and digitization. Our Agri-Food team has been focused on this, and we’ve made multiple investments into alternative-protein companies.

One of the inevitable outcomes we’ll see is a big shift to plant-based foods. The last count listed 624 global startups in that sector, compared to fifty a couple of years earlier. We were early investors into companies such as Impossible Foods, and a company called Perfect Day that can produce milk without cows. We’ve gone deep on energy and mobility, looking at critical markets.

For decarbonization, the clock is ticking. We have to decarbonize our entire portfolio fully by 2050 and must have halved emissions by 2030. We have a pool of dedicated capital and a team looking for early-stage tech risk. We look for technology that’s disruptive and has the opportunity to scale and transform all industries—advanced materials, low-carbon cement, and things like advanced geothermal technologies to tap the tremendous heat that sits beneath us.

In looking for late-venture, early-growth companies that are coming through in this space, we’ve partnered BlackRock to set up Decarbonization Partners. This collaborative platform brings BlackRock’s huge global reach, scale, and analytics capabilities together with our deep-tech and growth-equity experience.

Recently, we established GenZero, a five-billion Singapore dollar carbon investment platform company that aims to accelerate accelerate decarbonization globally. There is huge potential in nature-based solutions. About 20 to 40 percent of all the mitigation we can achieve over the next couple of decades could be from reforestation, regenerative agriculture, blue carbon, bio-charge, and other sectors.

There are many economic debates about how we calculate the social cost of carbon. We saw the sharp end of extreme weather in the last two, three years—not to mention the forest fires, floods, droughts, and heat waves that have racked the northern hemisphere in 2023, from China across Europe to America. We’re in the era of extreme weather and it’s getting worse. The social cost of carbon is there. We know carbon pricing is going to increase. We know that regulators, and others that put carbon in the voluntary market, will scale. GenZero is our strategic investment in that space.

McKinsey: Could you share some examples of how investors could support brown-sector corporates in their transition to green?

Steve Howard: Today, many carbon-intensive companies, or those with a fuel-heavy footprint, will find the transition has opportunities if you do it right. It’s also full of risk if you do it wrong. We have collaborated with Singapore Airlines and Changi Airport on how to get ready for a sustainable aviation-fuel future. The energy company, Sembcorp, has been making real progress in the shift from brown to green, and has ramped up their renewable share of assets In fact, they’ve recently announced a proposal to divest their coal assets in India, so their footprint can radically change.

It’s not just about managing an energy transition or greening your profile. It is about future-proofing the business and being a long-term investor. You need to let the companies that you’ve invested in know that you’re with them in the energy transition. And you expect the same of them: it’s a real commitment.

McKinsey: Do you have any final words or takeaways that you’d like to share with investors out there?

Steve Howard: Once you’re clear on what the future looks like, you need to align yourself wholeheartedly with it. If you have only one foot in the carbon-heavy economy, you’re tentatively in the future. Go in with all. The future is at risk, and the tailwinds for a clean economy are blowing as fast as a typhoon or hurricane.


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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