In an era defined by climate change and economic uncertainty, sustainability has emerged as a beacon of hope, promising a path toward a thriving future for both businesses and society at large. This article delves into insights and initiatives by McKinsey & Company, the exclusive knowledge partner for Clean Energy Transition Asia (CETA) 2024.
Vishal Agarwal
Senior Partner at McKinsey and Co
In the lead up to the summit, we had the privilege of speaking with Vishal Agarwal, Senior Partner at McKinsey & Company, about how technology can accelerate the transition, the critical success factors for decarbonization, and how innovators of all sizes can establish businesses that address the climate crisis.
The interview is as follows:
CETA: First, could you share more details on McKinsey’s role in environmental sustainability and how the firm has helped catalyse net zero goals?
Vishal Agarwal: I’ll describe our contribution to help accelerate sustainable inclusive growth in 4 areas.
First, it’s important to establish that sustainability and energy transitions are complex challenges that require collaborative efforts across various stakeholders. The creation of broad ecosystems is required to facilitate significant change. Some examples of how we do this:
- We provided knowledge support to the establishment of the Taskforce on Scaling Voluntary Carbon Markets, also known as TSVCM, which has now evolved into the Integrity Council for the Voluntary Carbon Market or ICVCM.
- As an impact partner for COP28, we provided insights and analysis to drive ambitious action across 12 of COP28’s Presidential Action Agenda areas, including oil and gas decarbonization, health, water, climate finance, technology, and youth engagement. Notably, the Oil and Gas Decarbonization Charter (OGDC) was launched, marking a commitment to net zero emissions and near-zero upstream methane by about 50 oil and gas companies and aiming for near-zero upstream methane emissions by 2030.
- Nearer to home, we collaborated with the Monetary Authority of Singapore (MAS) to help create a new asset class known as high-integrity transition credits to mobilize financing in hard-to-abate sectors.
Historically, companies have largely focused on top- and bottom-line impact. At McKinsey, however, we emphasize the importance of measuring carbon intensity of operations as a third element of impact. We have been trying to do this at scale and have created different assets and solutions in the process. For example, we have developed a tool called SpendScape that provides a comprehensive understanding of procurement data to help greenify entire supply chains and Scope 3 emissions. In the case of Lufthansa, we are using SpendScape for exactly this purpose, ultimately helping them make progress towards their net zero goals.
Thirdly, we focus significantly on what we call “green business building” to ensure that decarbonization and sustainability efforts are seen not just as challenges, but also as opportunities for growth. And these efforts need to go hand-in-hand with energy security and growth and development.
“Our assessment shows that in Asia alone, there is a potential for new value pools in green businesses worth $3 to $5 trillion in the next decade. This includes areas such as renewables, green data centres, electrification and transportation, and green materials.”
This includes areas such as renewables, green data centres, electrification and transportation, and green materials. We helped scale one of the first and largest green steel companies in Europe. Another example of the work we are doing is in Indonesia to help create electric two-wheelers from design to launch.
Last but not least, we help financial institutions, from banks to institutional and private investors, figure out how they can unlock capital to fund sustainability and transition-driven growth. We believe it’s important to build pipelines for capital to flow, as there is a high demand for this capital, but it is not yet flowing at the required speed and volume.
CETA: In concrete terms, how exactly can technology help accelerate the transition?
Vishal Agarwal: "Without technological innovation, achieving global sustainability goals would likely be unattainable. Our analysis suggests that broadly categorized technology could facilitate the abatement, removal, and reduction of approximately 30 to 32 gigatons of CO2 equivalent by 2050. This represents about 47 percent of the total reductions needed."
Essentially, nearly half of the necessary changes will stem from new or evolving technologies, including Industry 4.0, IoT, advanced analytics, machine learning, and AI.
An important example of this is the significant role that advanced analytics can play in enhancing the efficiency of power plants. While we await the expansion of renewable energy and the decommissioning of coal plants, current technologies can significantly reduce emissions by 2‒5 percent. This represents a substantial saving. Another critical area is Scope 3 emissions. With increasing bottlenecks in supply chains, achieving transparency is virtually impossible without leveraging technology and digitalization.
In partnership with A*STAR—Singapore’s leading public sector agency for scientific and technological advancement—we recently re-envisioned the Innovation & Learning Center (ILC), a capability-building facility designed to demonstrate Industry 4.0 applications to focus on sustainability. The facility now showcases numerous sustainability-driven use cases, from gear manufacturing to the disassembly and recycling of electric vehicle batteries. We have also developed a lifetime cost analysis database and are exploring applications of AI in energy efficiency.
Technological advancements can, of course, yield benefits while having adverse impacts. For instance, emerging technologies like generative AI are expected to significantly increase power demands in the coming years due to their intensive processing requirements. In response, many major companies have already tripled their initial power demand estimates, and some have announced that they are unable to meet their 2030 sustainability targets, a shift from just a year or two ago before the rise of generative AI. Despite these challenges, it’s difficult to deny the critical role technology plays in facilitating decarbonization efforts.
CETA: What are some success factors for businesses to consider as they embark on their energy transition and decarbonization journey?
Vishal: First, companies need to understand where the business lies on the emissions curve. They can develop a comprehensive understanding of their carbon footprint and their company’s position on the abatement cost curve. In fact, for this very purpose, we have made a significant investment in our automated tool for abatement cost curve.
For most commercial and industrial (C&I) customers, gaining this clarity is crucial as it is also necessary to determine who will bear the costs of decarbonization. In some instances, this may be covered by subsidies, green premiums from customers, or internal carbon pricing. Alternatively, it may be concluded that the costs are too prohibitive without appropriate carbon pricing, which may or may not be available in a specific country. Without a clear understanding of the issues to address, the sources of emissions, or the costs associated with decarbonization, it will be challenging to develop effective strategies and measures.
The next step is to manage the supply chain. While most companies focus on Scope 1 emissions, which they directly control, Scope 2 emissions, related to power and electricity, are often overlooked.
"Many companies have yet to map their Scope 3 emissions, so it’s vital they start determining the carbon footprint of the supply chain. This will aid in incentivizing suppliers and other ecosystem players, ultimately leading to the development of optimally green supply chain practices."
Then, they should assess the possibilities regarding the power grid. Often, companies must rely on central grid power, which poses challenges if the grid is not transitioning towards green energy. Various methods, such as microgrids or some forms of captive energy supply, can be explored to attempt abatement.
Finally, companies need to focus on long-term capability building. For many, capability building is seen as a cost due to the absence of carbon pricing that would make these investments financially viable. It could be detrimental if few customers are willing to pay a green premium. The long-term goal should be to focus on developing the right capabilities to understand and accurately measure decarbonisation processes.
CETA: To wrap up, what advice would you give corporate leaders and entrepreneurs who are seeking to create and scale new businesses that address the climate crisis?
Vishal: I’m a big believer that sustainability should drive growth. McKinsey has made extensive efforts to determine what is required for growth, which sectors will expand, which will not, and ultimately, where the growth will originate. Through our analysis, we have identified over 60 growth driver sectors worldwide. As I mentioned earlier, an estimated $3-5 trillion of new opportunities will be in Asia alone. Globally, it’s an estimated $10 trillion over the next decade. So, there’s massive untapped potential, but also many challenges and obstacles of all sizes, which will require a strong entrepreneurial spirit to address and overcome.
My advice is three-fold. First, focus on addressing the major problems, such as reducing significant sources of emissions and scaling up renewable energy sources. This includes enhancing solar efficiency, reducing capital expenditures, and improving battery chemistry for storage. Adopting a portfolio approach that balances a focus on proven technologies and the scaling of emerging technologies is crucial. It is also necessary to develop cost advantages at scale, as many of these technologies may not be cost-competitive today but can become highly competitive at the right scale. Consider the cost reductions seen in solar and battery technologies over the past decades, which have decreased not by 10, 20, or 30 percent, but by 80 to 90 percent. Integrating this with building at scale can structurally reduce costs by 60 to 80 percent.
Second, adopt a “plant as a product” approach. Some of these projects will require huge investments to enable building massive plants at scale. In other words, think about how one can build the first plant at scale at cost X, the next plant at .7 X, and then the next at point .3X. Think of it as if you’re developing a modular product and really scaling. This is what we’re doing with leading climate startups.
Finally, don’t go at it alone. Take an ecosystem approach.
“It is impossible for one company or stakeholder to make a significant change alone. An ecosystem approach can involve exploring how to optimally green new supply chains, how these should be created, considering the financing ecosystem, and the right public-private partnerships.”
Equally important is the need for the right capability building, which includes both the hard skills needed to reduce costs and the right technologies, as well as heart skills that integrate businesses with sustainability from the ground up.
Vishal Agarwal is a Senior Partner at McKinsey & Company. He leads McKinsey’s sustainability practice in Asia and advises clients on energy transition, green business development, and sustainable finance. His expertise lies in guiding both public and private sectors towards achieving net zero goals, as well as developing sound strategies on decarbonization, enhancing operations, and leveraging digital solutions.
