Setting net-zero targets has moved higher on many Asian corporate agendas.
A warming planet is increasing the risks for their businesses, which could include supply chain disruption, damage to infrastructure, rising labour costs and irregular natural resources flows, the Intergovernmental Panel on Climate Change (IPCC) has pointed out.
At the same time, more consumers are demanding that companies operate their businesses more sustainably, which will help the world avoid adverse and unpredictable climate catastrophes.
Going net zero for companies means their business operations and activities across the value chain must create no incremental greenhouse gases.
A recent report by McKinsey & Company on the net-zero transition, which highlights the energy and land-use sectors, points out that a truly universal transition can be achieved only if all systems that contribute to emissions are decarbonised. Importantly, all economic sectors and countries would need to participate.
"Our report found that the scale of the transformation would be significant," said Ed Lock, a partner and leader of McKinsey's transformation work in Southeast Asia.
Capital spending on physical assets for energy and land-use systems in the net-zero transition between 2021 and 2050 would amount to about US$275 trillion, or $9.2 trillion per year on average, an annual increase of as much as $3.5 trillion from today, Mr Lock pointed out.
"In comparative terms, that $3.5-trillion amount is approximately equivalent to half of global corporate profits, one-quarter of total tax revenue, and 7% of household spending in 2020," he said.
McKinsey's research draws on work done by the Network for Greening the Financial System, a worldwide group of 83 central banks and financial regulators. Its net-zero 2050 scenario shows that developing economies and those with large fossil-fuel sectors would generally need to invest more in decarbonisation and low-carbon growth when compared to developed economies.
"With Asean working towards net-zero ambitions, investments in the transition will likely be important growth drivers for the region and lead to the rise of new opportunities, including low-emission technologies, processes, products, support services and supply chains," said Mr Lock.
"In preparing for the transition, companies, especially those in high-emission sectors, will need to consider developing the right decarbonisation and offsetting plans, adjusting their business models to fit the evolving net-zero context, integrating climate considerations into decision-making across their organisation, and collaborating across stakeholder ecosystems."
ACT NOW
A recent survey of corporate attitudes by Deloitte Global found that climate change was now squarely on the agenda of 97% of senior leaders, who said their companies had already been negatively affected to varying degrees. The impact was being seen, for example, in disruption of business models and supply networks.
In addition, 81% of the respondents said they had been personally affected by a climate event, including extreme heat, worsening storms and wildfires. The conclusions were based on interviews with 2,083 C-level executives from 21 countries, including China, Japan and India.
Deloitte said 88% of the respondents said they were optimistic that the world can limit the worst impacts on the planet with immediate action. The survey concluded that the surge of climate concern, and also optimism, among business leaders demonstrates that they are increasingly aware of the need to act now.
Actions are being observed in many influential companies in conventional businesses across Asia, especially when net-zero goals dominated the conversation throughout 2021 and during COP26, the United Nations climate talks held last November in Glasgow.
Last year, China Petroleum & Chemical Corporation (Sinopec), Asia's largest oil refiner, committed to carbon neutrality by 2050. The state-owned company's decarbonisation strategy relies largely on hydrogen energy, an alternative to fossil fuels and a promising tool for tackling climate change. It plans to focus on fossil fuel-based hydrogen production in the next five years while also starting to use hydrogen produced from solar and wind power.
Japan-based Nippon Steel Corporation, one of the world's largest steel producers, released its carbon-neutral vision 2050 with plans to expand the use of hydrogen in steelmaking and carbon capture and storage -- which can reduce carbon emissions by up to 80% compared with conventional methods.
As of May last year, nearly 40% of the 225 companies on Japan's Nikkei exchange had set net-zero goals.
On the other hand, SCG, one of Thailand's largest industrial conglomerates and Asean's biggest producers of cement and building materials, has pledged to achieve net zero by 2050 through a number of measures, including enhancing energy efficiency and increasing the share of biomass and renewables in the cement production process.
At the end of 2021, the share of renewable energy used in cement production reached 30% of the total, SGG reported.
The company has also developed a hydraulic cement formula that can reduce 600,000 tonnes of carbon dioxide per year in the manufacturing process. As well, it has been investing in research and development of climate-friendly technologies, while also scouting and acquiring new technologies from startups.
"Achieving a net-zero target requires extensive technology development. We also need to engage our staff by building their technology capacity, making them adopt technology quickly and feel positive towards changes," said Chana Poomee, vice-president of the cement and green solutions business at SCG.
"However, technology is not the only thing that matters. It's also important to transfer the technology to our plants in other [developing] countries which may not have capacity and facilities ready [for adopting technology]," he pointed out.
UNEVEN TRANSITION
Gulf Energy Development Plc, Thailand's largest private power producer with projected capacity of over 7.6 Gigawatts by 2027, also made a big pledge last year, saying it was restructuring to pursue more opportunities in renewable energy. However, it will still need to rely on gas, which is considered the cleanest fossil fuel, to fuel power projects during the transition to ensure energy security and provide affordable electricity to all.
"With the shift in the global trend from using fossil fuels to clean energy and the global commitment to reduce greenhouse gas emissions, many countries have had to include more renewable energy in their long-term power development plans to meet the net zero target," said Yupapin Wangviwat, Gulf's chief financial officer.
"This provides more opportunities worldwide for Gulf to develop greenfield projects and potentially acquire renewable projects, including hydropower projects in Laos and solar and wind projects in Thailand and overseas [including in Europe, the US and the UK].
"For the energy sector, new technology, and additional investment in developing such technology, will be essential in supporting the shift to renewable energy as currently, the available technology cannot sufficiently meet the energy demands of highly populated and industry-heavy countries," Ms Yupapin acknowledged.
Access to technologies, as well as availability of capital and capacity to obtain these technologies, mean that the pace of the net-zero transition varies across countries. Many Asian developing countries with limited resources are likely to pursue a gradual transition path instead of a high-speed one.
A report issued last year by the International Energy Agency (IEA) points out that only one-fifth of global investment in clean energy and one-tenth of global financial wealth is directed to emerging and developing economies, which currently account for two-thirds of the world's population.
"Annual investments across all parts of the energy sector in emerging and developing markets have fallen by around 20% since 2016, and they face debt and equity costs that are up to seven times higher than in the United States or Europe," the IEA report states.
As part of the 2015 Paris climate agreement, developed countries promised to provide $100 billion in annual assistance until 2020 to help developing nations adapt and mitigate the impact of climate change.
But a report by an independent expert group on climate finance shows that this target was out of reach, and only a fraction of wealthy nations' pledges have materialised so far.
The Covid-19 pandemic, of course, has made the challenge that much greater. Many developing economies are now experiencing debt distress or high risk of debt distress after more than two years of extraordinary fiscal and monetary measures to keep their economies afloat during the pandemic. This will put more pressure on climate initiatives around the world.
According to the Zeronomics report by Standard Chartered, the transition finance gap is the largest obstacle to achieving net zero by 2050, with surveyed businesses (67%) and investors (85%) saying that a lack of capital is the biggest barrier to a corporate net-zero transition.
Its survey of executives in Asean finds that the lack of support from their organisations' investors presents the biggest barrier to their net-zero transition.
CREATIVE FINANCING
Standard Chartered, a multinational banking and financial services company known for its climate initiatives, has committed to mobilising $300 billion in green and transition finance and accelerating solutions to support a just transition in Asia and across its markets globally.
The bank has introduced sustainability-linked loans, in which pricing is tied to the performance of predetermined indicators, allowing clients to reduce greenhouse gas emissions and enjoy pricing incentives, said Tracy Wong Harris, head of sustainable finance in Asia with Standard Chartered.
"Indeed, Asia has made good progress on its net-zero agenda. But this progress is being hampered by a lack of finance," she told Asia Focus.
"Asian business leaders tell us that greater access to finance, stronger external incentives (such as favourable tax treatment) and increased operational efficiency and cost savings from sustainable practices are among the areas that would support their corporate net-zero transition."
Under these circumstances, financial institutions are the key players in filling the financial gap while providing their clients with incentives to make a green transition, Ms Harris noted.
In November last year, the bank's Taiwan, Hong Kong and Singapore branches jointly signed the largest sustainability-linked loan to date, providing a credit facility of $2 billion to Taiwan Semiconductor Manufacturing Co (TSMC), the world's biggest contract chipmaker.
This year, Standard Chartered entered into an environmental, social and governance or ESG-linked derivative transaction worth $60 million with Malaysia's Etika Group of Companies, marking the first such transaction executed by a consumer goods corporation in the country.
The bank also plans to develop a framework for introducing high-quality carbon credits with companies for which fully decarbonised technologies do not yet exist, such as those in the construction and shipping industries.
"Supporting the efficient movement of capital and technology to reduce carbon emissions as fast as possible, without slowing development, is key," said Ms Harris. "To complement current renewable energy solutions and corporate net-zero solutions, an effective carbon credits market focused on quality, integrity and transparency is important."
Though capital allocation by financial institutions is vital in resolving the disparity in transitions across companies and sectors, many other approaches need to be addressed by different players to ensure everyone can take part in the mission.
Mr Lock from McKinsey said governments and multilateral institutions will have crucial roles in managing uneven effects with options, including reassessing exposure to risks and opportunities, developing national decarbonisation plans and net-zero strategies, and collaborating across sectors to gain input, build capacity and drive collective action.
"Current and emerging technologies could also be considered to address uneven transition challenges," he said. "Examples include enhancing industrial and agricultural processes; increasing energy efficiency; utilising the circular economy; producing low-emissions goods; deploying carbon capture, utilisation, and storage technology; and enhancing sinks of both long-lived and short-lived greenhouse gases.
"Stakeholders across sectors will need to act with unity and work towards equitable, long-term outcomes to address the uneven nature of the transition."
