How leaders can invest in a sustainable future and navigate near-term energy pressures successfully.

Net zero doesn’t have to mean zero sum. In this episode of The McKinsey Podcast, McKinsey partner Anna Moore and senior partner Humayun Tai talk to global editorial director Lucia Rahilly about the “devilish duality” leaders have faced since the outbreak of the war in Ukraine—and about how to follow through on longer-term decarbonization commitments while managing short-term energy disruptions successfully.

After, hear how investors can use their capital and influence to help reverse the impact of climate change, from Columbia professor Bruce Usher. He spoke with us about his book, Investing in the Era of Climate Change (Columbia University Press, October 2022), as part of our Author Talksseries.

The McKinsey Podcast is cohosted by Roberta Fusaro and Lucia Rahilly. This transcript has been edited for clarity and length.

The serpentine path to net zero

Lucia Rahilly: A little more than a year ago, leaders around the globe gathered at COP26 and made clear commitments to reach net-zero emissions goals. How disruptive do you expect the war in Ukraine to be, in terms of those commitments and, by extension, our collective progress toward net zero? 

Humayun Tai: The long-term direction doesn’t change: the commitment is to net zero. 

The Ukraine crisis does bring into question this “duality” we talk about: on the one hand, we’re pushing toward net zero; on the other, we ask how the system can function in terms of affordability, energy security and supply, and system resiliency, when fully pushed into renewables and other kinds of alternative energy.

Another issue would be around the macro shocks—inflation, short-term supply chain constraints—that many companies and governments are experiencing. We’re being asked, “Can you actually still progress on net zero while trying to address those issues?” 

There’s definitely a disruption right now. We knew this path moving to net zero would never be linear, that we would have setbacks and step forwards—technology, innovation, regulation, and the like. 

Anna Moore: We have to ask ourselves, can we continue to allocate capital in a way that still makes that long-term trajectory Humayun was describing a reality? We need to be sure we’re continuing to allocate capital toward decarbonization investments. The economics of green-hydrogen projects have come forward as a result of comparative investments and conventional fuels looking more expensive now. That doesn’t mean that you necessarily have capital inflows shifting. These are long-term projects, so we need to be sure that we’re actually allocating capital accordingly. 

This also highlights a broader point around trade-offs along the path to net zero. We have trade-offs between different sustainability goals—for instance, decarbonization versus water consumption. We have trade-offs, of course, with respect to job creation and job preservation. We have this near-term trade-off in the context of the Ukraine crisis. But I think it highlights a broader set of trade-offs and decisions we need to make at the company and society level about, “What does ‘good’ look like?”

Humayun Tai: The 2020s is a critical decade. Because those investments, to Anna’s point, are going to last a long time; the outcome will lead to decarbonization over the next 20 to 30 years. The longer these investments get delayed—and we do see live investments getting delayed—the harder it will be to hit the 2050 net-zero number. So when we think about long term versus short term, this is quite material. What happens now is not just about the short run; it sets the path to a long-term target for 2050.

Balancing change with practicalities

Lucia Rahilly: Let’s take up this issue of short- versus long-term trade-offs. As you said, we’ve talked about affordability as an example of the tension between short-term shocks and longer-term imperatives, when gas prices spiked as an effect of the war. How do you view the economic calculus for leaders? Does net zero really have to be “zero sum”? 

Anna Moore: In the long term, of course not. We’ve published research about the $9 trillion to $12 trillion a year we believe will be created by the 2030s in new green value pools.³ That covers everything from carbon management to sustainable materials to new energy and new-energy infrastructure, et cetera. We believe that for companies, the window of opportunity on many of these areas is time bound.

I’ll take sustainable materials as one example: we see a 50 percent to 60 percent supply–demand gap for low-carbon steel by 2025. That gap will close to about 35 percent by the 2030s and, by the end of the 2030s, close entirely because we’ll have more capacity online. So steel producers who want to scoop up that additional margin and capture that green value pool will be those who bring investments online now. 

We would say, as we advise clients typically, to invest during a downturn. That’s particularly acute right now, especially because so many investments are being delayed. That doesn’t mean that you don’t also need to keep the lights on in the core business while we go through this transition. We explore in our article what this means, practically, for CEOs. I would highlight, recognizing that there’s not going to be one successful technology pathway, for instance, that we will need to invest in maintaining and preserving the core business while also investing in the new. The article puts particular emphasis on the CEO’s role in balancing those investments.

Lucia Rahilly: The transition to net zero, as you’re saying, requires massive up-front investment in a variety of areas. Where can CEOs look to find that capital?

By Anna Moore and Humayun Tai
Source: McKinsey & Company