I thought I might kick off by sharing a few reflections on how far COP26 helped us move towards a net-zero economy, and what some of the implications to business are. These remarks are really formed by four different sets of insights.
In the year running up to COP, we helped create the fact base on two of the major themes that were discussed in Glasgow: firstly, around mobilizing capital for the Glasgow Financial Alliance for Net Zero group; and secondly, we worked with high-level UN climate champions to really put a fact base together around resilience.
Thirdly, in the run-up to COP, we created partnerships with people like the Mission Possible Partnership and the World Business Council for Sustainable Development to better understand some of the most difficult parts of the problem—those hard to abate sectors—and we tried to lay out what some of the pathways might look like there.
Lastly, we convened a major program of events in Glasgow. More than 1,000 field leaders from around the world joined our program in person, more than 10,000 watched it and interacted with us live on McKinsey.com, and more than 100,000 engaged with the content on social media.
We built all of those perspectives into the view that we have now. Over the two months since COP, I’ve spoken to around 1,500 leaders around the world sharing these perspectives; gathering their input and refining our points of view as we go.
The net-zero transition
The transition to a net-zero economy is certain to be complicated, messy, and hard. Anyone who looks at the outcomes of COP26 will see there is still a huge amount that needs to get done, but our overall view is that COP26 was a more important step forward than is visible in much of the media and activist response.
That step forward sets a clear challenge for business, which is how to create strategic resilience in an era of certain volatility. I’d like to just pick into both of those assertions in a little bit more detail—firstly, on why we think COP26 was a more important step forward than many think.
Much of the commentary around COP26 has focused on adding up the temperature implications of the many thousands of different commitments that were made there. You can see ranges of estimates from 1.8°C to 2.1°C, 2.4°C, 2.7°C temperatures.
In fact, you see almost every temperature except the 1.5°C we were hoping to keep in reach. The global temperature trajectory clearly matters, but we think it’s far too simplistic a way of thinking about the impact that COP26 had.
We think COP26 was an important milestone because really, the debate has now shifted from whether we need to make this transition, to how we need to do it. And capital is starting to form to press the pace. So, the capital markets are now integrated in a way that they weren’t before COP.
We think that is going to build momentum quickly from hereon in, and the clarity of that demand signal is what sets up this fundamental challenge for business. If I think about how to simplify the message from COP, rather than think about the thousands of different announcements, I’ll point to five things we think really mattered.
First is the breadth and comprehensiveness of net-zero pledges now: more than 90 percent of global emissions—with India and Nigeria being the two largest countries to step up during COP26—and more than 5,000 companies have now signed up to the race to net-zero.
Secondly, the movement on coal. Of course, there’s been plenty of debate about coal and what happened in the last few days of COP, with most people thinking that the watering down of the pledge around coal was a bad thing. I choose to see what was agreed on coal as a first and a clear step toward an eventual post-coal economy.
Thirdly, the US-China bilateral was really important because it spoke to action this decade, recognizing the urgency with which we need to move, and because it identified technologies that the US and China would work on together to scale—things like carbon capture and storage.
The fourth thing that we thought was important was that you will have seen a series of agreements that moved beyond carbon, tackling methane, deforestation, electric vehicle adoption, and so on, with groups of 50, 70, 100+ countries agreeing to work in these areas. This sets the foundation for the next generation of the agenda.
Then the fifth thing we thought mattered was the extra prominence that resilience against climate hazards was given in the narrative. We think that has been overlooked in the past but is now starting to get the cut-through that is important. Even if global emissions stop tomorrow, we know, as the Intergovernmental Panel on Climate Change said last August, that the inertia in the earth’s systems will mean that temperatures will continue to increase. So, resilience is an important issue that received more prominence in COP.
All of those things were supported by the mobilization of capital in greater quantities than we’ve seen before. Now, there is a paradox around capital because, on the one hand, capital mobilization is likely to be inflationary. There is, in a way, too much capital for the amount of supply that is available.
On the other hand, recently published McKinsey research has shown that the amount of capital that’s been raised is less than is needed by quite a significant amount. We believe that around $9.2 trillion of capital every year will be needed over the next 30 years to deliver an orderly transition to a net-zero economy. So, there is a short- and long-term paradox about capital, but nevertheless, COP showed that we could really start to mobilize more than we have in the past.
Net-zero is becoming an organizing principle for business. Now, organizations need to turn their pledges into plans and to demonstrate some form of credible traction against those plans. The need for this capital to find a home, we believe, will create an environment of certain volatility.
Firstly, because demand for green materials will exceed our ability to supply. Secondly, because we live in a more fractious world and regrettably, the flash points in that fractious world also overlap with the parts of the world that are often exposed to climate hazards. So, we’re going to see political and governmental pressure brought to bear.
Thirdly, because customer habits and regulations are going to change in different ways, in different speeds around the world. So, it is certain to be a volatile mix.
How companies can prepare for the transition to a net-zero economy
We think that gives four main things for business to be thinking about to thrive or to create strategic resilience in this era of certain volatility. The first is that as organizations seek to turn pledges into credible plans, the importance of a change narrative is greater than ever before. Companies will need to articulate a north star for their organizations that can sustain the confidence of investors and colleagues, even while there are bumps along the way.
Secondly, we think there’s an opportunity to reinvent finance. In a world of raw material volatility and supply chain fragility, we think finance is the place that can think about hedging of raw completed prices, futures contracts, and how companies can get supply of green materials when their competitors can’t. Essentially, more sophisticated ways of thinking about scenario planning so you can allocate your capital in a thoughtful way. And finally, perhaps building greater circularity into business models to act as a buffer against raw material price exposure.
The third thing we think is important for organizations is to think about how to use the sustainability imperative to complete the digitization of their organizations. If you don’t know how to begin on a sustainability journey, one of the places to look is the adoption of digital techniques—analytics, automation, AI, the things that have been proven at scale, but not yet fully adopted—from the last decade.
We also think the technology that will scale in the coming decade will allow us to account for carbon in supply chains, the scope three carbon emissions, and will give much greater transparency about supply chain performance. This will be the catalyst for the next era of supply chain productivity improvement.
Finally, we think that organizations should think about how to build their physical resilience to climate hazards. When we were doing our work with the race to resilience, we were shocked at how few executives were able to articulate how fragile their assets and supply chains are to climate hazards, how that will change, and how that differs to their competition.
So, that’s a very quick view of our reflections on COP26; an important step forward because it sets the demand signal. But we’re not naive—we recognize there’s a huge amount that needs to be done, both to increase the pledges and to put substance behind the pledges that have been made. But the demand signal now sets an environment for business, and an environment that has a challenge, which is how to create strategic resilience in an era of certain volatility.
This content was originally published here.