Pocket Edition / 2020 Number 2
Summaries in this edition …
The climate challenge
Climate math: What a 1.5-degree pathway would take
The other global crisis
The Five Fifty
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Read the summary
Shared risk. Shared response.
Climate
Read the summaries
Water: A human and business priority
Confronting climate risk
‘Bring the problem forward’: Larry Fink on climate risk
Taking ownership of a sustainable future
Addressing climate change in a post-pandemic world
The top-management response
Article summary
by Kimberly Henderson, Matt Rogers, Bram Smeets, and Christer Tryggestad
Decarbonizing global business at scale is achievable, but the math is daunting.
In focus
Scientists estimate that keeping global warming to 1.5 degrees Celsius above preindustrial levels would help limit the most dangerous and irreversible effects of climate change. McKinsey analyzed the amount of change that would be required in each sector of the global economy and then put it all together in three scenarios for reaching a 1.5-degree pathway.
Changes by sector
Reforming food and forestry: Changes to what we eat, how it’s farmed, and how much we waste could address 20 percent of today’s greenhouse-gas emissions, while halting deforestation could address 15 percent of CO₂ emissions.
Exhibit
Three challenging—yet possible—scenarios could limit warming.
Electrifying our lives: Electrifying the road-transportation sector and the buildings in which we live and work would help eliminate 42 percent of today’s yearly CO₂ emissions.
Adapting industrial operations: Electrifying a broad swath of industries, as part of a collection of operational adaptations, could address 33 percent of today’s annual carbon emissions.
Decarbonizing carbon and fuel: Scaling renewables to decarbonize the power system would allow the downstream users of electricity—everything from factories to fleets of electric vehicles—to live up to their own decarbonization potential and address the 80 percent of global energy demand accounted for by fossil fuels.
Ramping up carbon capture and sequestration: Deep decarbonization would also require major initiatives to either capture carbon from the point at which it is generated (such as ammonia-production facilities or thermal-power plants) or remove CO₂ from the atmosphere itself.
McKinsey built a set of scenarios intended to show the trade-offs: If one transition (such as the rise of renewables) lags, what compensating shifts (such as increased reforestation) would be necessary to get to a 1.5-degree pathway?
The three scenarios
2016
2030
14
12
10
8
6
4
2
0
–2
–4
Scenario A
Scenario B
Scenario C
Industry
Transport
Power
Buildings
Deforestation
Agriculture
CO₂ removal
The decarbonization is set by technology readiness, cost-effectiveness, and ease of implementation
Oil fuels transport for longer; reforestation and curbing deforestation abate the additional emissions
Coal and gas generate power for longer; reforestation and curbing deforestation abate the surplus CO₂
Emissions per source, GtCO₂
Wider basin health: Advocate for governments to implement sensible water policies. Lobby for water-positive policies, such as a fair market price for water. Pledge to take collective action in water-stressed basins.
•
Supply chain: Influence and incentivize suppliers, and suppliers’ suppliers, through standards that speed the shift to renewables, and by sending water-expert teams to help suppliers apply efficient water-use solutions.
Direct operations: Include water use in relevant company key performance as part of new water-measurement and -reporting practices. Identify and eliminate water leaks in operations.
By directing action through three spheres of influence—direct operations, supply chain, and wider basin health—businesses can play a leading role in mitigating water stress, all of which depend on a switch from fossil fuels to renewables.
What to do about it
Much of the world’s water supply is drawn from stressed water basins.
For companies, the risk comes in four forms:
The supply and demand of fresh water are misaligned, putting delicate environmental, social, and financial ecosystems at risk. Climate change, demographic shifts, and explosive economic growth all exacerbate existing water issues.
The challenges
Fresh water is as important to the world’s economy as oil or data. We use it in agriculture (which accounts for 70 percent of the withdrawals), industry (19 percent), and households (11 percent). But too much of our water comes from vulnerable sources.
Why it matters
Water stress increases risk for communities and businesses. Through proactive individual and collective action, businesses can combat the water crisis.
by Thomas Hundertmark, Kun Lueck, and Brent Packer
72
22
<1
49
51
Named water basins
Volume of water withdrawn annually
Arid
Stable
Stressed
100%=
410 basins
2.8 billion cubic meters
Source: World Resources Institute
A basin is considered stressed when the ratio of total annual withdrawals to total available annual supply exceeds 40 percent.
“Named” basins are the world’s most significant basins. About 1.3 billion cubic meters of water are withdrawn annually from smaller, unnamed basins.
1
% of named basins and withdrawals by stress level
Physical: The decrease in water supply could increase the cost of water-related expenses for companies.
Stakeholder: Stakeholders could exert outsize influence on businesses to nudge them toward practices that are consistent with their own sustainability and business ethos.
Reputational: Consumers are increasingly expecting companies to improve the environment, putting at risk those who are perceived as not doing so.
Regulatory: Governments could impose new regulations to address increasing water stress, which in turn could impose significant costs on companies.
Shifting to renewables would save water.
432
542
13
95
227
2018
2040
+25%
-47%
Projected business-as-usual energy mix
Switching 75% of fossil fuels to renewables
Source: International Energy Agency; James Meldrum et al., “Life water cycle use for electricity generation: A review and harmonization of literature estimates,” Environmental Research Letters, March 2013, Volume 8, Number 1; Edward Spang et al., “The water consumption of energy production: An international comparison,” Environmental Research Letters, October 2014, Volume 9, Number 10; US Energy Information Administration
Includes solar, wind, hydro, and biodiesel.
Fossil fuels and nuclear power
Renewable energy
Total water footprint for energy production globally, billion cubic meters
India: Rising heat and humidity may result in more frequent lethal heatwaves, making work far more challenging for the 75 percent of the labor force that works outdoors. By 2050, these changes could threaten the lives of between 310 million and 480 million people. By 2030, lower productivity could reduce GDP by between 2.5 and 4.5 percent.
Climate risk is a global problem with local impact. Under the current trajectory, the global average temperature is set to increase by 2.3 degrees Celsius above preindustrial levels by 2050, creating significant physical risks. We spotlight four case studies to show how physical change might create socioeconomic risks at the local level, and we examine the choices business leaders will soon have to confront.
The changing climate is poised to create a wide array of economic, business, and social risks during the next three decades. Leaders should start integrating climate risk into their decision making now.
Coastal cities: An increased risk of flooding and storm surges threaten infrastructure, including ports, low-lying train stations, and factories close to the coast. In Bristol, England, for example, a once-in-200-years flood in 2065 could cause nearly $3 billion in damages.
Supply chains: Most companies currently optimize their supply chains for efficiency rather than resilience, which may make them more vulnerable to extreme climate hazards. Interruptions of supply chains can trigger serious ancillary effects. For instance, key parts of semiconductor supply chains are located in the western Pacific. If climate change disrupts production, unprepared downstream players could see their annual revenue drop by as much as 35 percent.
Florida: An expansive coastline and low elevation make Florida vulnerable to flooding. More severe storm surges, hurricanes, and tidal flooding could damage real estate, leaving in their wake devastating multiplier effects on the wider economy.
While adapting to climate change is critical, mitigating climate change through decarbonization represents the other half of the challenge (see “Climate math: What a 1.5-degree pathway would take”).
All stakeholders must accelerate the pace and scale of adaptation to protect people and assets, build operational and infrastructure resilience, reduce hazard exposure, and rethink insurance and finance.
Companies should integrate climate risk into capital allocation, product/ service development, and supply-chain-management decisions. Governments should consider climate more systematically in urban planning.
Stakeholders should consider three responses:
The McKinsey Global Institute looked at nine distinct cases of physical climate risk, in a range of geographies and sectors, and published a 131-page report titled Climate risk and response: Physical hazards and socioeconomic impacts. The report draws from climatological analysis by the Woods Hole Research Center.
About the research
The coronavirus crisis holds profound lessons that can help us address climate change—if we make greater economic and environmental resiliency core to our planning for the recovery ahead.
by Dickon Pinner, Matt Rogers, and Hamid Samandari
The pandemic could catalyze certain forces that support climate action, such as accelerating digitalization, for example, repatriating supply chains, and pricing climate risks more coherently into markets. At the same time, however, low prices for high-carbon-emitting fuels could increase their use and further delay the transition to renewables. Governments and citizens might also struggle to integrate climate priorities with pressing economic needs in a post-pandemic recovery.
The challenge
The COVID-19 pandemic and climate change share similarities and differences. Both are physical, systemic, nonstationary, and nonlinear challenges with regressive impacts that require overcoming collective-action hurdles. But, while the pandemic presents imminent, discrete, and directly discernible dangers, the risks presented by climate change, in contrast, are gradual, cumulative, and often distributed dangers that manifest by degrees over time.
Individuals can raise awareness of the climate crisis and build on pandemic-time mindset and behavioral shifts to reduce the demands they place on the environment.
Companies can seize the moment to decarbonize by prioritizing the retirement of economically marginal, carbon-intensive assets. They can also take a systematic and through-cycle approach to building resilience—for example, by shortening their supply chains and digitizing functions and activities.
Governments can build the capability to model climate risk and to assess the economics of climate change. They can also devote to climate-change resilience and mitigation a portion of the vast resources deployed for economic recovery, and reconsider subsidy regimes that exacerbate climate change. Finally, they can reinforce national and international alignment and collaboration on sustainability.
Governments, companies, and individuals all have important roles to play.
How can business leaders answer the call to climate action? CEOs and former CEOs from Enel, Coca-Cola, and Unilever share some ideas.
The problem
Three CEOs offer lessons on the pursuit of sustainability.
by CB Bhattacharya
It’s not because we want to change things that we do it; we do it because it is the only thing we can do going forward, there is no other alternative. . . . You have to face up to the facts about why you do what you do.”
—Francesco Starace, CEO of Enel
“
On facing reality with purpose
If you have the personal commitment but aren’t willing to invest the time, money, and resources, it’s not going to happen. And if you don’t have the personal commitment, even if you invest the time, money, and resources, it won’t happen. . . . It’s the personal commitment, and then it’s turning that personal commitment—through whatever it takes—into action. That’s what has to happen.”
—John Brock, former CEO of Coca-Cola Enterprises (CCE, now Coca-Cola European Partners)
On the importance of action
—Paul Polman, former CEO of Unilever
At the end of the day, the issues that we need to solve are so big that no one can do it alone. . . . There’s a fine line between arrogance and self-confidence, between humility and humanity, when you implement programs with external collaborators.”
On working together
The physical impact of climate change will lead to a major capital reallocation, says the head of BlackRock, the world’s largest asset manager.
In an interview from February 2020, BlackRock CEO Larry Fink discusses the threats that climate change poses to the poor and vulnerable, the diverging interests of advanced and developing countries, the importance of fair policy solutions, and the value of better nonfinancial reporting.
The expert
Larry Fink is the founder, chairman, and CEO of BlackRock. Before founding the asset-management company, in 1988, Fink was a member of the Management Committee at The First Boston Corporation, where he also served as a managing director. Fink is a member of the board of trustees for the World Economic Forum.
If 5 percent or 10 percent or 20 percent of our clients are starting to ask these questions and trying to design strategies to effectuate the climate theme over a long horizon, that in itself is a capital reallocation. . . . Most investors are not going to abandon hydrocarbons, but they want a portfolio that will be more persistent in a more sustainable way. . . . [They] are going to look to us to be actively investing and searching for a better portfolio composition with higher sustainability or ESG [environmental, social, and governance] scores.”
On capital reallocation
A carbon tax is an incredibly regressive way of taxing people. . . . We need to make sure that if there is a carbon tax, all the money is going to renewables and redistribution. And there should be some type of credit back to those people who cannot afford to pay the tax. . . . This is where we need the combination of public and private working together. We should have a plan so that all that added tax would not go to fill our deficits, but would go for infrastructure spending, renewable technology, and redistribution.”
On ‘fair and just’ policy solutions
