Different types of financing are required for banks’ stakeholders and clients, particularly in Asia where countries are so diverse.
McKinsey chatted with Eric Lim, chief sustainability officer (CSO) at UOB, about the role that banks can play in Asia’s transition to net zero. He stressed that the differences between countries in the region require individualized approaches with innovative finance solutions.
McKinsey: You’ve been CSO for about 18 months. Can you tell us about the key highlights?
Eric Lim: The last 18 months have been tremendously interesting. Build work is difficult because there’s nothing to reference. I think one of the things we’ve done well is the level of alignment we’ve created, all the way from the board to the broader management team and down to the various parts of the organization. Alignment is important for an area like sustainability because we have to work out the strategic components at the top, as well as execute the strategy and bring the whole organization along. At the early stage, we would meet people who didn’t understand what sustainability meant in their jobs. Alignment allows an organization to build trust and be able to move forward without too much internal trauma.
McKinsey: Where are your stakeholders in their transition journeys and what are the challenges there?
Eric Lim: Our clients tend to be in distinct groups in certain industries. First, there are those that already have the technologies to move towards decarbonization or net zero. Here clients come to us saying, “I’ve got a green business model I need to finance, or I’ve got a building I need to retrofit.” They tell us what they’re looking for and how we can support them.
Then there are the more challenging hard-to-abate or carbon-intensive sectors, for example oil and gas, and coal. These clients realize that the writing’s on the wall, and that they need to come up with high-quality transition pathways. They ask, “How do we do it in a way that keeps us commercially viable, but socially and environmentally responsible?”
Often this depends on whether the industry in question has the technologies available. This is where we talk about transition finance and support the technologies we need to bring to market through early-stage research and financing. Blended finance helps to scale technologies across the ecosystem. Then pure bank financing or private capital can take on the very mature technologies in companies that already know how to use them, and bring them to scale.
McKinsey: What are the challenges for a bank in achieving net zero?
Eric Lim: When we started our net zero journey, we knew it was important for us to step back and ask ourselves what we were really trying to achieve. It was clear that we wanted to have a positive impact. So we considered where we could create the largest impact. We looked at our portfolio, reviewed our industry focus areas, and prioritized those sectors. We’ve been able to cover about 60 percent of our wholesale portfolio, and a majority of our estimated financed emissions. Doing this required us to understand the entire value chain of economic activity and where our clients are situated. We could then identify some of the levers that we could rely on to bring us to decarbonization. That also gave us a sense of where there were gaps.
There is no point in a bank achieving net zero through portfolio restructuring if the real economy doesn’t get it right. It’s important to go back to the concept of transition pathways. For banks to play an effective role, we have to finance the green transition but also be able to lean into the heart of industries and sectors and help our clients transform. That said, the reputational risk lies upon the fine line between transition finance and greenwashing. Companies must put out high-quality transition plans that are properly based on science, disclosed and accepted.
McKinsey: What other enablers are critical to unlock this transition?
Eric Lim: This segues into the role of national governments and regulators. They can provide tremendous help with clear rule-setting and larger economic frameworks. We know what to do when the rules are clear and when commercial incentives are aligned to the outcomes that we’re collectively trying to achieve. When governments make national development plans as clear as possible, they allow market participants to be able to invest with confidence. And that enables capital to be unlocked.
The economic framework is also very important. I think carbon taxes will play a vital economic-leveling role in helping to shift the economies away from fossil fuels or high-carbon industries. When the larger economic frameworks are properly aligned, the new economy players will be incentivized to invest in research and to scale.
McKinsey: How does the pace at which different regions in Asia operate impact the bank’s strategy?
Eric Lim: We are a Singapore-domiciled bank with subsidiaries across Malaysia, Thailand, Indonesia, Vietnam, and with a presence in North Asia and the developed world. We’ve significantly placed the focus of our longer-term strategy on ASEAN. The region is important as its economies are going to be greatly affected by the physical effects of climate change and transition risks. However, Asia still has an abundant natural resource base, which is an advantage.
ASEAN is not a single bloc like the EU and each jurisdiction has a different economic model, so we can’t take a broad brush to the region; we have to consider each country separately. The important factor in helping each one is to have on-the-ground relationships and engagements with key stakeholders.
Energy continues to be a huge need across ASEAN. We have to crack our dependence on fossil fuels as an energy source and switch to renewables. This is easier said than done. Intermittency and storage are an issue for renewables, while fossil fuels are extremely stable and the economic models significantly cheaper. One of the areas that we’re going to have to figure out country by country is how the energy sector can be transformed to create more energy with a much lower carbon footprint for our growing needs.
This also means that environmental commitments made must incorporate energy security, as well as economic and social equity and equality. UOB believes strongly in a just transition for the region, one that supports continued economic growth and improvements in energy access across the diverse economies.
McKinsey: There are many green projects that aren’t making money yet. Are there solutions to address this?
Eric Lim: When we look at technologies that either don’t exist or don’t yet exist in a commercially-viable way, the more innovative or different vehicles of financing come into play. For technologies that do not exist (such as alternative material technologies for cement and steel), national governments play an important role—a single national government probably can’t crack this alone, but a coalition of governments could bring into play the right kind of research funding.
Then there are technologies that exist but not at scale. This is where a proper application of blended finance may be appropriate, and especially critical for the developing markets in ASEAN and Asia. When technologies are commercially available and applicable at scale, conventional financing will come in. I believe that 15 years from now, we won’t talk about green or sustainable financing as if it were a special class of financing. All financing will be green or sustainable, other than a category of non-sustainable financing that will come with higher risk rates, higher regulatory capital, higher pricing, and so on.