From Sustainable to Sustained Capital – A New Era?

From Sustainable to Sustained Capital – A New Era?

Capital investments towards sustainable and inclusive innovation could reach $130 trillion by 2027. The challenges are still aplenty, though.

The future of prosperity is set to be driven by one major agenda: sustainability, inclusion, and growth. In fact, according to a recent McKinsey report, “Ninety-three percent of CEOs say that sustainability issues are important for the future success of their business, and 54 percent expect sustainability to be embedded within the core business strategies of most companies in the next decade.”

This agenda, set to require high degrees of innovation whilst simultaneously reducing environmental impact and improving quality of life, will require major amounts of both private- and public-sector capital investments in climate-transition infrastructure and in supporting growth and economic spending. As such, McKinsey reports that the world is set to see a ‘once-in-a-lifetime’ wave of capital spending on physical assets between now and 2027. This surge of investment – amounting to roughly $130 trillion – will flood into projects to decarbonize and renew critical infrastructure.

Though this number is set to vary heavily by asset class, the average advanced industries company in North America may expect to see spending go up by almost 65% whilst the average energy and materials company in Asia may see a corresponding 57% rise. Across Europe, an average 59% increase in capital spending is expected, driven primarily by the 120% expected rise in energy and materials spending.

Challenges to adoption

As with most innovations, however, there is significant lag.

Only a few organizations today are prepared to meet the challenges of tomorrow and to deliver on the need for capital influx with the speed and efficiency required. Most of these organizations are plagued with inefficiencies in their supply chains and in outdated product delivery systems.

Additionally, McKinsey reports, “constructing and justifying the cost of a physical asset such as a manufacturing plant is much more difficult than it was decades ago, given inflation, rigorous sustainability requirements, and rapid changes in technology and regulations. Adding to the complexity, the next generation of assets needs to be “set and forget”: the high cost of building them must be offset by lower operating costs.”

It will also be worthwhile to note that the responsibility of end-to-end spending for capital-intensive projects needs to fall squarely on the shoulders of CEOs and C-suite leaders; they must engage actively on the portfolios of capital projects in order to sustainably ensure increased capital outlays for the future, especially in the potential amendments in allocation and capital financing – and for associated risks. Boards and shareholders, McKinsey opines, “will be particularly interested in the return on such a massive investment and its likelihood of success in achieving the business’s goals.”

179% of the initial budget

Usually, capital project leaders rely on practices to optimize individual investments. A nuclear power plant, an oil refinery, or a pipeline, for example. Cost overruns usually run up to almost 79% of the initial budget – an average of $1.2 billion per project – with delays running from 6 months to a year. Such overruns will not be possible for decarbonization and sustainability investments, however.

Groups of similar projects, like solar parks or wind farms, need to be delivered repeatedly and with much better investment prospects compared to the past. Renewable energy or low-carbon project facilities involve several different considerations, such as building an energy-storage capacity for backup supply power, if and when needed. “A more reliable approach is a portfolio-synergistic strategy in which planning is top-down, with the goal being to develop and deliver each project so that the overall results of the capital spending portfolio are optimized,” writes McKinsey.

Whilst implementing this strategy could prove challenging – such as requiring savvy stakeholder management, capital market expertise, use of skilled talent, supply chain obstacles, the long-term vision and goals of the project need to be kept intact and communicated clearly.

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