Cindy Levy, senior partner at McKinsey & Co., talks to Global Finance about the reality of net-zero plans and true sustainable finance.
Global Finance: You coordinate McKinsey’s sustainable finance efforts and lead the company’s delegation to COP28. What should we expect from sustainable finance in 2024?
Cindy Levy: I would include four things on this list. First, capital will be mobilized in the banking system as a result of three years of work on net-zero plans. Those plans have now largely been implemented, and major global banks – European, Asian and some in the US – are moving forward.
So, will we now see big announcements about reallocation of resources, such as: “I’m taking my X billion out of cement and steel and moving it into new sectors that are more focused on green finance”? My encouraging answer is that you will start to see some of this as bridge finance becomes more of an asset class in banks.
GF: Number 2 on your list?
Levi: I’ll call it Alterra [the $30 billion investment fund established at COP28 for global climate solutions] compared to multilateral development banks. MDBs have played a critical role in climate finance so far, but it is no secret that their track record of “attracting” private capital through their climate instruments has been disappointing. So, will Alterra be scaled or replicated globally as a new way to achieve this goal?
GF: What else?
Levi: The third event is serious funding for industrial decarbonization, in a variety of directions. If you take what was announced on methane at COP28 [oil companies pledging to reach near-zero methane emissions in their operations by 2030]This represents a huge opportunity to decarbonize oil and gas and the world. This must be funded.
GF: And how will this be done?
Levi: [Some] very rich oil and gas companies can finance it and will prioritize it. But many of the nation’s oil companies, which need to invest billions to combat methane, will have to do so at the expense of budgets that compete with school systems and health care systems. Financing mechanisms are now being created to drive this decarbonization.
Power plants will be able to use transition credits to retire their coal-fired power plants early, replacing them with, for example, highly efficient clean energy alternatives. There are 5,500 power plants in Asia with an average lifespan of 14 years. If they don’t retire early, we’ve already missed out on a net zero.
GF: What is your fourth trend to watch?
Levi: My last question is carbon markets. We absolutely need highly reliable carbon markets as a global mechanism that will allow capital to flow into decarbonization processes, especially in the global south. This year is the moment of truth.
GF: What is the time frame for all of this?
Levi: Some of them are here and now. If you’re building infrastructure, it could take three to five years.
GF: Banks are now starting to move towards their own liabilities. Will they get more capital for a high-emitting cement company somewhere in Asia? Will banks facilitate this?
Levi: With Alterra, you’ll see innovation this year. Are they going to take [private equity partners] Blackrock and TPG or Brookfield where they’ve never been before? With Alterra, they can work longer, in different countries, with different technologies, because now they have the ability to reduce risks.
As for voluntary carbon markets, it’s hard to say. We have worked very hard in these markets. We’re already halfway there. We have a set of standards that go a step further in enhancing the trust and integrity of these markets. But then you have failures.
GF: Do you expect there to be more private funding for sustainable finance globally in 2024?
Levi: We view sustainable finance revenue as one of the largest growth opportunities for global banks. How does this happen? If I’m a real estate bank—a commercial real estate lender—I want to lead the modernization. If I’m a bank in the energy sector, I need to lead the renewable energy sector. And if I’m a bank in a high-emissions sector, I want to lead the decarbonization process. Given what just happened at COP28, I want to reach out to every oil and gas company and talk to them about their methane emissions.