The pace at which the world transitions to a lower-carbon operating model may depend as much on financial engineering as it does on electrical and industrial engineering. “The transition to net zero is one of the biggest challenges humankind has ever faced,” said Andrew McDowell, a Strategy& partner with PwC Luxembourg, in Episode 12 of our Take on Tomorrow podcast series, “Can capital help solve climate change?” McDowell continued: “Most of the physical capital stock in our economy—our buildings, our roads, our transport, our factories—are going to have to be replaced or at the very least adapted to deliver at the net-zero challenge. That’s going to involve massive investments by some estimates of about US$125 trillion dollars between now and 2050.”
But how banks decide who gets that financing, and on what terms, and how they continue to help ensure the world still has enough energy to keep the lights on and the cars running raises a challenging set of questions.
“We want to make sure that we’re helping customers transition, financing the transition, but also making sure it’s a just transition,” said podcast guest Alison Rose, CEO of NatWest Group. “If we just stopped lending to all oil and gas companies, which some people advocate we should do, there’s not all of the energy available, or all of the new technology, or all of the support to transition to a low-carbon economy. This just transition is really important.”
Of course, some tough decisions are needed, Rose noted. For example, NatWest Group has decided to only work with oil and gas companies that have a credible transition plan, aligned with the 2016 Paris Agreement on climate change. “We have reduced our exposure, and we’ve worked really hard with customers to do that,” she said.
But banks can’t go it alone. Regulatory backup is vital. “We see this as really critical,” Rose argued. “The private sector has an enormous role to play. But what we need is the policymakers to unlock the policies and collaborate in order to get the money flowing.”
The private sector has an enormous role to play. But what we need is the policymakers to unlock the policies and collaborate in order to get the money flowing.”
McDowell agreed: “Banks are private institutions, and they are not there to alone solve society’s problems. It requires strong leadership and policy direction from governments, and that, in turn, creates bankable and financeable opportunities that can deliver returns and support policy goals.”
Listen to the podcast in its entirety here.