In a recent global survey, McKinsey found that 60% of global executives regard climate change as strategically important. Yet, the survey notes, nearly one-third said their companies seldom or never considered climate change when developing overall strategy. Martin Stuchtey, a global expert on climate change, and partner with McKinsey, discusses the corporate thinking on climate change. Shirish Sankhe, Director McKinsey & Co India provided the India perspective in the discussion.

Is climate change largely a corporate social responsibility issue with corporates or has it become important in business decisions as well?

There is a complete change in the way climate change is being perceived by managements in the last 12-18 months. It is entirely out of the CSR bucket, and has truly arrived as a strategic topic. People understand climate change is about the long-term viability of their business.

We have done 160 studies over the last 12 months on climate change. Very few are for CSR and sustainability guys. Most of them are being funded straight out of the boards, and typically we talk to the head of strategy when we discuss them. It is not about making the CSR story headlines today; it’s about making your business viable in the long-term, to make your business fit for the low-carbon economy.

From your survey it is clear that a majority of companies see climate change as a strategic issue, yet, when it comes to acting on it, the percentage drops sharply...

The key reason is that many companies don’t act on it fully as they still lack the capability. They simply don’t know how climate change is going to affect their industry and what should they do to position themselves to profit from the change. From our surveys it is clear that climate change is seen equally as a threat as well as opportunity. While many see a cost involved in reducing their emissions, others see it as a great opportunity to service new markets, start developing products that are low-carbon.

Almost all of them agreed that there is a huge upside to managing this transition.We were surprised to see that almost 30% of the carbon reduction in our own cost curve actually has a negative cost — you actually profit from it! For many companies 60-70% of their emissions can be reduced at net zero cost.

What kind of global regime is needed to address the issue?

This is a major transition in the economy where, for the first time, we kind of need to decouple GDP growth from emissions growth. Historically, they have been very intimate. We need to continue to grow, but turn the emission growth into negative. And that whole transition is being driven by regulators. The importance of good regulation has never been higher. Some economies are on the verge of decoupling, but we need to ensure that the global economy decouples.

There needs to be as complete a coverage of all the carbon that is being emitted as possible between all countries and all industries. You must have universal goals. That’s also the way to bring in the developing countries because, yes, you have to give them credit that they are growing faster and that you can’t put a cap on that growth. You should do that by giving them allowances, but overall you should have one global target.

Should there be some sectoral priority in achieving reductions?

In the end that is a political decision. What we have put out is the cost per tonne for different types and sectors of carbon emission. Now one can choose. Probably, it is going to be a policy mix of some global and local measures. We estimate the market to be about $1.0-1.6 trillion by 2030, which is about the size of today’s oil market!

It’s a new commodity market that has to be developed from scratch, and that means infrastructure — you need a world carbon bank, lots and lots of certification bodies, many controls. Without that, it is going to be very difficult, and you can’t only rely on local governments coming back with their fuel economy standard or taxes on this or that.

Is the climate change issue getting the right attention in developing countries? How do you see the situation in India?

We have talked to the managements of Indian and South African companies, we talk a lot to Chinese companies. We are astonished to see how much awareness there is. In India, the excitement is in the idea that can we leapfrog and 90% of India is yet to be built — if you look at cities, plants so on. We are not locked into any legacy assets. And there is the possibility of leapfrogging both plants and technology into the next generation. So the possibilities are there. But if you ask me is somebody doing something today, I’d still say the top 5% or 10%of companies.

But if you ask what the opportunity for Indian companies is, then things become different. This whole energy efficiency area means that there is 20-30% of negative cost opportunity in almost every sector. The second opportunity is to do with the power sector. Coal is going to remain a fuel, but how do we get this whole carbon capture and storage? The technology may not be there yet, but that is a big opportunity and you will get carbon credits for it.

Then there is green urbanisation. New cities are coming up, new SEZs are coming up. Can we really start focusing on these? Renewable energy and generation have already seen a big leap. In both solar and wind, I think we can be the front runners, as is the case in bio-fuels. We feel that 10-20% of the top companies will profit from it, and position themselves completely on the cost curve. Overall, Indian companies see it more as an opportunity rather than a threat. In the next 12-18 months, you will see a big change.