“It’s heartening that the conversation we are having now is not ‘do we transition,’” says Mekala Krishnan, “but ‘how do we do itand do it well?’”
Mekala is a McKinsey partner who led the work on our new report, The net-zero transition: What it would cost, what it could bring, that focuses on the economic and societal changes needed to limit the planet to 1.5°C degrees of average warming. It analyzes the implications for demand, capital spending, costs, and the impact on jobs in the sectors that produce 85 percent of overall emissions. It also looks at what this will mean for 69 countries, in some cases down to the county level.
“Often when we discuss the net-zero transition, we focus on the end-state,” says Mekala. “But this report offers an unconventional lens: we take a close look at the sheer magnitude of the changes along the way of this massive undertaking to help leaders prepare for and understand what to expect.”
We spoke with Mekala and two members of the research team: Danielle Imperato, an engagement manager, and Ryan Barrett, a climate risk specialist, to learn more.
First, how did you come to work on sustainability at McKinsey?
Danielle: I’ve been focusing on energy transition and decarbonization here for about three years. Working on reports like this one and the net-zero Europe report has been an energizing and invaluable complement to client work.
Ryan: I’ve long had a personal interest in sustainability topics. Early in my career, I had the opportunity to highlight the connections between climate change, finance, and the economy at a financial institution, where I created scenarios for transitioning to a net-zero economy. It was good preparation for my work on this report years later.
Mekala: I knew I wanted to work on the most important, complex, and systemic problems that affect the most people around the world—and to help create a better world for our next generation. I led the work on our physical climate risk report in January 2020, which laid out the imperative for the net-zero transition—which is the focus of this new report.
What changes should leaders expect in a full-scale net-zero transition?
Mekala: First, a net-zero transition will be universal, affecting every country and sector.
It will be significant. We model a particular net-zero scenario from the Network for Greening the Financial System, a consortium of central banks. In this scenario, $9.2 trillion will need to be spent per year over the next 30 years on physical assets, such as renewable power and infrastructure for electric vehicles. That’s a $3.5 trillion increase from what we’re spending today.
The transition will also be front-loaded, in that we need to take action and deploy capital now for benefits down the road.
If the transition is delayed or disorderly, it will come with a lot of risk... But if it is managed well, it brings opportunity for everyone.
Perhaps most importantly, it will unevenly affect countries, sectors, and communities—this is the heart of the climate challenge. Developing countries such as Bangladesh, India, and Kenya, and those with large fossil fuel resources such as Qatar, Russia, and Saudi Arabia, will be among those where the most significant economic shifts could be needed; as well as sectors such as power, mobility, and heavy industry.
Finally, if the transition is delayed or disorderly, it will come with a lot of risk, such as energy supply shortages, stranded infrastructure assets, price increases, and worker dislocation. But if it is managed well, it brings opportunity for everyone; this is what we all have to work towards.
What about jobs?
Ryan: We estimate that 185 million jobs would be lost by 2050 while 200 million direct and indirect jobs will be gained. But it’s important to put these numbers in context; they are relatively smaller compared to what we would estimate for shifts driven by automation, the future of work, and other macroeconomic forces. As Mekala pointed out, this shift will be uneven—the losses and gains will be concentrated in specific sectors and geographies, which is a challenge that has to be managed well.
Managing the transition well will take good leadership. How will the net-zero transition shape corporate agendas?
Danielle: From a day-to-day standpoint, we will see sustainability become ingrained in every part of a company’s agenda. Whether it’s a defining strategy for new and existing products; managing supply chains; or assessing risk and making capital allocations, climate will become a deciding factor.
Businesses will have to hire new types of talent to manage environmental requirements and develop new means for reporting progress to all of their stakeholders. Every colleague will be affected, from the leaders setting the agenda to the front-line workers creating and selling the products or services.
How might our lives as consumers change?
Ryan: At the moment, consumers suffer from a lack of choice—it’s hard to find sustainable goods at affordable prices. Over the next five years, I expect it’ll become easier to make the choice to lower emissions in your day-to-day life, whether it’s about which car you buy, how you heat and cool your house, which household items you use, or other consumer choices.
Finally, what will it take to ensure this transition happens in an inclusive way?
Mekala: As someone who comes from India, which will likely be disproportionately exposed to the physical and economic risks of climate change and the net-zero transition, I think it is extremely important to keep in mind.
For this transition to be inclusive, leaders will need to create incentives that account for the inherent unevenness of the problem. This has to be a shared problem, otherwise there will be winners and losers. I hope this report contributes to a transition that is equitable to everyone globally.