McKinsey advises Korean firms to embrace net-zero economy

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Time is running out for Korea's business leaders who don't have a climate strategy

By Jonathan Woetzel

Korea has joined other leading Asian countries in making a carbon neutral pledge by 2050, and the sooner business leaders develop a plan for competing and winning in a climate economy, the better.

We know from our research at the McKinsey Global Institute that climate change is already having an impact ― harming people, damaging assets, and interrupting business activity. And without adaptation and mitigation, physical climate risks will only grow.

In many ways, Asia may experience more severe socioeconomic impacts of climate change than global averages in the absence of adaptation and mitigation. Under an RCP (representative concentration pathway) 8.5 scenario, by 2050, up to 1.2 billion people globally could be living in areas with a nonzero annual probability of lethal heat waves, with the vast majority in Asia. While climate science makes extensive use of scenarios ranging from lower (RCP 2.6) to higher (RCP 8.5) CO2 concentrations, we focus on RCP 8.5 because it enables us to assess the full inherent physical risk of climate change in the absence of further decarbonization.

We expect different regions within Asia to have different exposure to climate risk, requiring different responses. We analyzed 16 countries, accounting for 95 percent of Asia's population and GDP, and combined them into four groups: Frontier Asia, Emerging Asia, Advanced Asia (Australia, Japan, New Zealand, and South Korea), and China.

We found that countries with lower levels of GDP per capita, namely Frontier Asia and Emerging Asia, are most at risk from the impacts of climate change but risks are increasing across all countries.

By 2050, under RCP 8.5, there could be an increase in 7 to 12 percentage points of share of working hours effectively lost due to rising heat and humidity in climate-exposed regions in Frontier Asia and Emerging Asia, compared to 2 to 5 percentage points for Advanced Asia and China. By 2050, Asia could account for more than 75 percent of the global capital stock that could be damaged from riverine flooding in a given year.

Our analysis finds that South Korea could be exposed to intensifying socioeconomic impacts from climate risk already by 2030 in the absence of adaptation and mitigation, particularly from biome shifts (changes to the naturally occurring community of flora and fauna inhabiting a particular region), increasing heat and humidity, and water stress. Under RCP 8.5, biome shift is projected to climb in South Korea by an average of 27 percentage points between today and 2050, as measured against a 1901―25 baseline.
The likelihood of extreme precipitation events in parts of South Korea could increase three-or fourfold by 2050. Coastal areas of South Korea could also see the likelihood of severe typhoon precipitation triple by 2040.

Against these consequences, Korea's pledge to achieve carbon-neutrality brings its own challenges and uncertainties. Coal still accounts for about 40 percent of its electricity generation today. Korea has significant decarbonization opportunities in transitioning its power sector to renewables, and decarbonizing industrial operations. But there are also risks which may need to be managed; for example, industries like automotive may need to transform their products as end-consumers shift to low-carbon goods. Emissions-intensive manufacturing sectors may need to produce products in a low-carbon way, exposing themselves to stranded asset risk and also potentially higher operational costs.

In front of a poster reading, "Before It's Too Late 2050," Korean President Moon Jae-in, center, announces during a meeting at Cheong Wa Dae on Dec. 11, 2020, that the country will produce net-zero carbon emissions by 2050. Korea Times file

So what does all this mean for Korean business leaders? While there's still a lot of uncertainty, there are steps business leaders can take today to help in the transition to a net-zero economy.

First, gather all the facts. Management and directors should understand the net-zero transition and its possible effects on their organizations.

Second, incorporate climate metrics into the business's strategy and update them frequently to keep up with fast-changing conditions. Companies that survive the transition are more likely to have integrated climate and sustainability into their business, not treat it as an afterthought. For example, a leading financial institution in Korea announced a goal to cut carbon dioxide emission by up to 25 percent by 2030 and decided to stop financing coal-fired power plants.

Third, a climate-optimized business strategy combines elements of both defense and offense, but more offense than defense. Defense?involves moves like retiring and repurposing assets with high carbon intensity to shift a company from brown to green, while building resilience against physical climate hazards.?Offense?means building new low-carbon businesses, pursuing M&A opportunities, and scaling up the use of nature-based climate solutions, such as reforestation.?A Korean conglomerate, for example, recently announced investment of $1.5 billion in a U.S. hydrogen fuel cell player to expand hydrogen economy beyond Korea.

Fourth, given the unprecedented nature of the net-zero transition,?innovation will be essential. Consider forming or joining an innovation ecosystem of peers, academic institutions, and investors. For instance, a leading Korean automotive company formed a partnership with a battery supplier to promote a virtuous cycle of resources from recycling to production. These ecosystems can operate at national, regional and local levels.?

While the net-zero economy is in the future, the time to plan for it is now. And the pressure to do so is only going to grow. Investors and capital markets are getting out in front of climate risk, they're becoming better at assessing climate risk, and some large investors are asking companies to disclose plans for how their business models will be compatible with a net-zero economy.

Ultimately, the transition to a net-zero economy will shift the competitive landscape in industries around the world. Korean industry, already global leaders in semi-conductors, electronics, ship building, and car manufacturing, can blaze a trail and set an example for the world to follow.

The writer is a director of the McKinsey Global Institute (MGI), McKinsey & Company's business and economics research arm