Green Growth: Building green businesses in Asia
ONE of the greatest levers to get to net-zero is deploying climate technologies. Businesses and governments can apply these technologies to decarbonise the fossil fuel base and build new green businesses. There are abundant opportunities for businesses that move quickly and strategically to capture the market for green business. As of August 2022, more than 15 countries and 670 companies in Asia Pacific have set (or have committed to setting) emission-reduction targets.
Our research tells us that the addressable market size (by revenue) for sustainability-related business is expected to be US$4 trillion to US$5 trillion in Asia by 2030. Green business building (GBB) holds financial incentives for early movers, and possible disincentives for those businesses that do not join the transition.
The time for action is now. Under the Network for Greening the Financial System’s (NGFS) Net Zero 2050 scenario, it is estimated that around US$9.2 trillion will need to be spent on average every year on physical assets for energy and land-use systems from 2020 to 2050. Of this US$3.1 trillion will need to be spent in Asia. Incumbent businesses are increasing their investments in greener business operations and new green business lines. In the investment space, capital deployment to green businesses is growing in both the private and public sectors. Pivoting to play an offensive value creation strategy now could be a critical move for companies wanting to become green business leaders in Asia.
Given these conditions, where should Asian businesses invest? Businesses should look at opportunities that positively impact the net zero equation and create significant new pools of value. We see four select themes of opportunity: decarbonising the fossil fuel core; participating in green material transition; leading next generation climate technologies; and leading bio-diversity and nature preservation
Decarbonising existing fossil fuel-based operations will be key in areas such as green power, electric vehicles, and sustainable fuel. For example, transportation is responsible for 15-20 per cent of total global emissions. Asia is expected to make up around 30-40 per cent of global revenue passenger per kilometre due in the aviation industry by 2050. Sustainable aviation fuel (SAF) is critical to decarbonising 70 per cent of the aviation industry. As a result, investment in key Asian SAF hubs is scaling up, and Singapore will have the world’s largest SAF output capacity by early 2023. Similar opportunities lie in the rapidly growing regional market for electric vehicles and their supply chains. Electrification of road vehicles can account for more than 75 per cent of the potential abatement for transport by 2050.
Businesses can also consider investments that leverage green material that is readily available in Asia such as green steel and alternative proteins. The steel industry accounts for 7 to 9 per cent of global CO2 emissions. To meet the 1.5C pathway, the industry will require a reduction of some 2,600 gigatons of CO2 emissions. The development of green steel is promising in Asia as around 70 per cent of today’s crude steel demand and production can be found in Asia. Meanwhile, the agricultural sector makes up around 20 per cent of global GHG emissions. The alternative protein market will likely be an important contributor to reduced emissions. Businesses can support the scalable production of alternative protein products, from supplying feedstock to finished product and accelerating the path to price parity.
Green business builders in Asia can be disruptive by spearheading the development of nascent technology to tackle climate change. Indeed, new technologies represent a critical part of the world’s decarbonisation tool kit. Given its potential as a clean energy solution in decarbonising multiple sectors, global hydrogen demand is expected to increase fivefold by 2050 and Asia-Pacific is expected to make up 50 per cent of global hydrogen demand of around US$400 billion. Due to cheap and abundant renewables, the Asia Pacific region is in a prime position to service inter- and intra-regional demand, which will enable the production of green hydrogen at the coveted, optimal price point. On the other side of the equation, carbon capture, use, and storage (CCUS) can help to decarbonise the fossil fuel base. The present use of CCUS is minimal but there is progress. Asia, with its vast CO2 storage capacity and well-established oil and gas ecosystem, could realise the full potential of CCUS.
Asia can also play to its ecological strengths by contributing to nature preservation. Asia’s rich natural resources make it a prime location for nature-based solutions (NBS). These may contribute around 30 per cent of the global net emission reductions through conservation, restoration, and land management activities. And from these NBSs, businesses can look to build carbon trading platforms and marketplaces to facilitate the carbon credit ecosystem.
Getting started
Game-changing ambition is the foundation of building a green business. Companies need to set ambitious targets, including significant market share, while building up a culture of innovation. At the same time companies should minimise their upfront capital risks by locking in offtake contracts and scaling their production capacity in stages by using a modular and replicable approach. Green products are likely to cost more because of the early stages of technology and the higher input costs. To counter this, companies should put relentless effort into securing often-fragmented supplies of raw materials and optimising cost drivers to bring end-costs down to parity. This will drive consumer willingness to pay. Green business builders should also look outside their organisations and prioritise recruiting individuals with both technical and strategic expertise, especially in sectors where talent is limited.
Green business building can be a driver of companies’ growth for decades to come. There is now abundant opportunity in several high-potential sub-sectors that need investment and innovation. Those businesses that move early can play a meaningful role in creating a sustainable future, while claiming their place in the green economy of tomorrow.
The writers are from McKinsey & Company. Vivek Lath is partner, and Ashwin Balasubramanian, associate partner. Both are based in McKinsey’s Singapore office.
