McKinsey talked to Helge Muenkel, chief sustainability officer of DBS Bank, about the challenges—particularly for private finance—in the transition to net zero in Southeast Asia.
McKinsey: What do you see as the top three challenges in mobilizing enough capital for the transition to net zero in Southeast Asia?
Helge Muenkel: The capital needed to address the United Nation’s Sustainability Development Goals (SDGs) is very significant. One study by the OECD indicated that we have an annual funding gap of around USD4.2 trillion dollars. When that amount is broken down into regions, Southeast Asia’s numbers are very high.
I think there are three important points to mobilizing capital here. The first one is that we need very clear policy certainty. We want to unlock capital, especially private capital, but to do so, we need to understand the direction of travel. If the private sector doesn’t believe the direction of travel, they won’t want to unlock capital.
Second, I don’t think there is necessarily a lack of capital, especially of private capital, but rather that there often are certain risks that the private sector doesn’t want to take. So how can we come up with new financing structures that slice and dice the risk in a certain way to really unlock private capital? For example, we need to be a bit smarter around blended finance and different financing structures to make private capital move at scale.
The third challenge, especially in Asia, is managing tradeoffs. Climate is only one of many sustainability challenges. We have 17 SDGs for a reason, and they cut across environmental, social, and economic matters. Sometimes tradeoffs have to be made between them. For example, it’s good for the climate if everyone drives electric vehicles, but you have to mine a lot of lithium, cobalt, and nickel for the batteries—that often brings with it potential human rights issues or issues around nature and biodiversity.
So we need to be able to manage these three things effectively—policy certainty, blended finance and risk sharing to unlock private capital, and optimizing tradeoffs.
McKinsey: What do you think are the key unlocks to addressing these?
Helge Muenkel: Let me run through a specific example that can highlight this. Let’s assume we want to finance renewable energy in Vietnam. There are two sets of risks, one within power purchase agreements (PPAs), and those outside of PPAs. Within PPAs, there are technical challenges—termination clauses, curtailment risks, arbitration, or changes of law and regulation; highly technical things. Outside of PPAs, there are other concerns: for example, it is not sufficient just to develop solar PV and wind. One also has to develop and upgrade transmission and distribution grids as well as energy storage systems. If you don’t do those, then you have a problem—among others—with intermittency.
These two sets of risks sometimes make the transition pathway really difficult to finance. So, if you can create a financing structure that addresses different types of risks and allows private capital to be more comfortable with the overall structure, then you can start to unlock capital.
Shapers of Sustainability
McKinsey: DBS Bank has just announced net-zero commitments from nine sectors across various geographies. Many of the countries, that have set nationally determined contributions (NDCs), have set different dates, and few have clear policy frameworks or plans to get there. In this context, how is DBS going to achieve the targets, and what is going to be critical to accomplish this?
Helge Muenkel: Many of DBS’s key markets do not have NDCs that are aligned with being net zero by 2050. India’s, for example, is aimed at 2070, and China’s at 2060. We believe in ecosystem building. In the end, no one can accomplish the transition alone. We need everyone to come together—government and regulators, the private sector, the finance sector, all of us embedded in the community at large. And we as a bank have a critical role to play as part of this ecosystem. We aim to be a proactive force and thought leader, empowering our clients and other parts of the ecosystem to transition. Targets can develop over time, they are not static.
Back to our approach, DBS has focused on sustainability for many years. But our recent announcement was a further acceleration in our efforts. We announced science-based decarbonization pathways for a large number of sectors and science-based interim targets for 2030. And how do we now get this out of the Board Room into the trenches? Within DBS, our focus is across four core areas.
One is that we believe it’s really important to sell the purpose and culture within the organization. We have a vision to be the best bank for a better world (and that ‘better world’ encapsulates our approach to sustainability). We have the privilege of senior management support, but we need to make sure that the right tone is coming from the top constantly and is nurtured throughout the bank.
The second area is around governance structure, which is vital for achieving our targets. As a result, we have established a board-level sustainability committee, and among others, also brought in an academic from Oxford University as a board member to bring in fresh perspectives.
The third one is around capacity building. We have 33,000 employees, all of whom can in some way be part of this journey—but we need to equip them. A lot of training and development must take place to ensure that we can conduct intelligent discussions around sustainability with our clients to nourish relationships with them.
And the fourth one is data and new analytical tools. We need to be able to digitalize data and integrate it into our systems as well as develop new analytical tools effectively to make our relationship managers’ jobs as smooth as possible—it’s not easy for a relationship manager who has done something one way for years to suddenly have to hold an informed discussion around climate change and its implications. So capacity building paired with data, and the right analytical tools are very important.
McKinsey: What role do you think the private sector plays in the transition?
Helge Muenkel: We all have a role to play in this ecosystem—governments and regulators, the private sector, the finance sector, the community at large. One entity can’t do it all.
We need to look at the ecosystem and make considerations. If, for example, you are thinking about phasing out a coal power plant, you need different people at the table. You need those who are really technical; you need financing. And then you also require government and regulator support to cater for a just transition and ensure that families that are being affected by the closure are taken care of.
The private sector can start a dialogue around this. In fact, anybody in the ecosystem can start the conversation. It doesn’t matter; we just have to start to bring people together to find solutions.
McKinsey: We’ve talked about a lot of challenges and things that need to get done, what gives you hope?
Helge Muenkel: I think it’s very promising that we’re seeing an acceleration of efforts. Around 90 percent of global GHG emissions are covered by nation states’ net zero pledges—they may have different qualities and different timelines, but it’s good progress. What makes me most hopeful, though, is the private sector. We have more than 3,000 corporates globally that have science-based decarbonization targets and plans, and we have a huge volume of financing that is seeking some form of ESG or sustainability investment focus. Society is also becoming more aware. I know the clock is ticking and that we’re not yet there, but I think these are all positive signs.
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.
