Global Infrastructure Initiative Series

Anna-Marie:
Welcome to the latest edition of the Business Agenda podcast. I'm Anna-Marie Slot, Global Sustainability and ESG Partner here at Ashurst. This is the first episode in a new series we're launching based out of our partnership with McKinsey & Company in their global infrastructure initiative.

The GII Summit took place in Tokyo in October 2022 with senior stakeholders from around the globe meeting to discuss creating the pathway to sustainable infrastructure. I'm delighted to be joined today by Kevin Klowden, who is the Chief Global Strategist at the Milken Institute. Kevin, thank you so much for joining me. Could you share with our listeners a little bit about yourself and your background?

Kevin:
I am more than happy to do so and, Anna-Marie, it's wonderful to see you again virtually to talk with you. And for everyone here, just to let you know, my name is, as noted, Kevin Klowden, and I have been with the Milken Institute, which is a nonpartisan non-profit economic think tank based in Los Angeles, but with offices around the world, including in Washington, D.C., New York and Miami, but also London, Abu Dhabi, and Singapore. And I've been with the institute for, well, more than a decade, and have served in a number of roles, including as the executive director for Centre for Regional Economics. And one of my chief areas has always been sustainable economic development, not just in the United States, but in different regions around the world. And before I worked for the Milken Institute, a number of years ago, I was actually a Professor of Geography at Santa Monica College in Los Angeles, where I used to teach classes on physical and cultural geography.

Anna-Marie:
Fascinating background, Kevin. You and I met at the McKinsey Global Infrastructure Initiative Conference this year in Japan where the theme was around creating a pathway to sustainable infrastructure. Really interesting group of people, obviously, I thought so, since we've asked you here onto the podcast. What were your key takeaways? I think there were a lot of things talked about there at that conference, but the key takeaways from your side?

Kevin:
Well, the biggest takeaway I really had is that there are different gaps in different parts of the world in terms of needing to get to the levels in objective sustainability, both that we see coming out of the world, the UN and various others, the larger countries, and then the smaller countries, and how do you execute? And one of the things that came up a great deal is getting to that path of being able to actually not only fund projects, have the money, but to have the resources, to have the execution plans, and to have the people to actually execute and build that infrastructure. And, in fact, one of the reasons I was there and I was speaking on, was on the people side, talking about the fundamental gaps in having skilled individuals in different parts of the world, particularly the developing world where they haven't had the history of investing in infrastructure projects to the same degree and having the local skilled workforce to be able to complete them.

Anna-Marie:
Yeah, it always comes down to execution. You start with these big fantastic plans, but at the end of the day, it's really all about execution, which interestingly enough brings me to the next thing I wanted to talk with you about. I went from that conference back to Egypt and Ubered to COP 27, which was a fascinating COP, obviously build as the Africa COP, but also as the implementation COP. And so this was the opportunity to take what people have been talking about and actually put it into action.

So my takeaways there from COP were a lot of conversations about loss and damage, a lot of conversations about blended finance. To your point, how do you actually get the money to where it needs to be, and how do you get those projects moving? Fair bit about innovation and what's already been done, but also how do you scale that? How do you roll that out? And then obviously the relationship between the Global North and the Global South and that difference that you were just mentioning in the conference at McKinsey came out as well in COP. Looking at it, what do you think about what came out of that collection of humans?

Kevin:
I think what came out was that the very optimistic, buoyant feelings of COP 26, which were very much broad statements following up on the mentality and feelings of the Paris Accord, hit the execution problems. You talk about the issue of the North-South divide, I think that that's incredibly important. I think that was really at play at COP 27. I think that the biggest single agreement out of it was in fact based around funding from North, essentially funding the South. And that's a huge part of the reality is that we have a legacy situation where the great industrial powers, and that means not only the historic, shall we say, contributors to global warming and climate change, the US and Western Central Europe, but also obviously Russia, China, who's doing it now, India, who is an increasing contributor and so on. And contrasting that with where the impacts are greatest.

I mean, the irony is that India very clearly, along with Pakistan and Bangladesh are going to be feeling it very strongly. But impacts in Africa, impacts in the Middle East, impacts in Southeast Asia and the Pacific, impacts in Latin America, they're everywhere. And being able to actually address not just the obvious issue of controlling emissions and figuring out how to do that on the creation side, essentially the side where we manufacture most everything, we design new vehicles, we look for sustainable solutions, but in the huge chunk of the world where they're being affected now and how do you deal with the effects that are happening, but also how do you make it economically viable for them to implement solutions? And it's interesting talking about that, is that I wasn't actually at COP, I was nearby in Abu Dhabi because of the fact that the Milken Institute was hosting our Mid East and North Africa Summit, which included some people who went to COP 27 for a few days in Sharm el-Sheikh and then did the short trip over to Abu Dhabi.

But my main focus while I was there, what I talked on and engaged with people on was on sustainable cities. And, in fact, the big theme that kept coming up on that was how do we afford it and how do we find a way to execute it? Even the developed world, where you look at the impact of the pandemic, we made a whole big story about emissions were down in 2020, that there is this massive drop and how lovely it was. Well-

Anna-Marie:
Yes.

Kevin:
Yeah, and that didn't last. In part, it didn't last because we all wanted our stuff that we put aside during the pandemic and the manufacturing and everything, and transporting all these goods as we caught up is to put everything back out there. But the other thing that really significantly came when we talked about sustainable cities, is that there is a real negative impact in people going from locations that were essentially, in theory, more sustainable with mass transit, with concentration of resources and people then being able to find solutions there to the fact that they've moved out. You've had a flight from these centres that you've had, and the lack of numbers that makes mass transit sustainable and fundable, the lack of travellers and people who are going on trains, who are going on various, more effective mass solutions.

So the question is, in looking at these sustainable options how do you attract people back into these sustainable locations in the future, and how do you pay for them? And urbanisation in these challenges of sustainable cities is something that's everywhere. I mean, you look at where some of the largest metropolises in the 21st century are, whether it's Jakarta, who's actively sinking into the ocean, Lagos, Nigeria, who also has a real threat in that regard. Some of the major cities in the world even say São Paulo, which is a well-developed, thriving metropolis, has come close to running out of water. How do you deal with that? How do you manage that? How do you implement solutions for that in a way that both you can pay for and get the resources for and get the people for and make it last? And all of those came up, and I think that ultimately COP 27 in many ways, both in terms of the good things that came out and the walls that people hit, is that these are not easy solutions and they're not global. Ultimately they're somewhat local with a global impact.

Anna-Marie:
Yeah. Global impact, local solution. And I think the other thing that came out was the momentum around the net zero pledges is fantastic, but as you say, it's not just emissions, right? It's water, it's access to livelihood, it's how do you live? It is so many things that are interconnected, and I think when you get into the weeds and you realise that, that's when everyone goes, "Oh yeah, actually there's a lot that we need to look at simultaneously." So there's not just one number. It's not like, "Oh, let's just track our emissions and then it will solve everything." Because you have to build a livable city that people want to be in, in or order to maximise the resources.

It's a really fascinating discussion, but not very good for soundbites. Not very good for one-line pledges that you put on your website, but really much more about the behind the scenes. You even saw it at COP. There's an extra day and a half essentially of negotiations at the end just as people... That was the really unglamorous... That's the COP that doesn't get onto the pictures in the paper. Those are people like lawyers, diplomats sitting in rooms, sitting over a piece of paper writing, "Are we going to say and, are we going to say or here?" And then having a eight-hour negotiation over that. But I think that's real delivery on what has to happen.

I guess coming to that point, you look across the globe obviously, and you're looking at lots of trends around trade, around what's happening in the world, how do you make sustainable development? What do you think would be a real game changer? People talk about lots of different things. Private businesses, "Oh well, we need guideposts from government, we need commitments from government." Government says, "We need private actors in the room, we need private business moving on this." What do you think would be a real game changer?

Kevin:
Well, the biggest game changer, unfortunately, in every way, shape and form always revolves around money. I wish it didn't. I wish it was all about seeing this impetus in this looming crises, let alone the ones that are there now. But right now, I think, I'd say the biggest game changer is how we think about pricing, global warming, how we assess it and the impact therein. Because everything we tend to do, how we view things is all about pricing the now. We all look at it. We talk about pricing out a project, how much is it going to cost to start it? How much is it going to cost to execute it? We don't ever measure, we don't price, except in very limited sectors of the economy, how is a collapse, a problem in a location, not just the developed world...

I mean, as much as people might talk about in New York City needing a seawall and at some point needing to pay for that, but how about what happens if crops fail in a large chunk of the world? If you don't have the resources or a plan in place for execution or dealing with this eventuality, what is it going to do to food prices? What is it going to do to resource prices? What is it going to do to the fundamental cost of manufacturing and maintaining people's standards of living? And that forward pricing, which is something that you hear words about it, but you don't actually get many politicians, very many business leaders who really want to commit to that kind of assessment and that understanding.

One of the few places I've actually run into where people have regularly talked about that is the US Military, where the military views it from a strategic consideration issue. Where are they likely to have conflicts? What are their costs going to be for deployment? Where are our bases going to be threatened or impacted? They view it as a real part of their threat assessment going forward years or decades, and it's part of their process. And then they get pushback from politicians claiming that they're woke or environmentalists. Like, no, they're actively trying to assess real threats. And what we're seeing right now in the South Florida insurance market where you had the one condo collapse and then everybody's looking at it and saying, "Can I insure my condo when the insurance comes up for renewal? Can I get catastrophic insurance?"

That assessment is where we're starting to see it. We're starting to see it in insurance, we're starting to see it in different ways, but ultimately, I think what really needs to change everybody's viewpoint is to start pricing out, not going after the oil companies and charging them for their global damage that they've done to the world or anything like that. But instead looking forward and saying, "How do we realistically price things out more than six months in advance? How do we look at this and say, this is going to save us money if we make this investment now and it's going to save us billions or trillions of dollars," which are mind boggling sums. When you hear people talk about potential impact globally in the quadrillions of dollars, that's beyond anybody's ability to grasp.

But we need to look at this and price things out, not just from a government side, but from a private side. And we need to look at it and recognise that this is fundamentally something that is a change in our mentality and not just look at it and saying, "Species are going away," not just that our ability to have snow in the winter goes away, but to genuinely say, "These are the costs we're facing and we are going to be facing them sooner than we think."

Anna-Marie:
Yeah. No, really interesting points. I would agree with that. It's hard to say in a sentence, but insurance is really interesting in this regard because the insurance companies are really at the front end of that. Their whole business model is about how often do these catastrophic events happen and then how am I making my investments to pay them off? And so they sit both in the finance world and in the risk world in a way that not a lot of other companies are as far along as they are. So that's a really interesting one always.

Excellent point you make about trying to get people to conceptualise things that are just not on their agenda at all. We're seeing that, boards starting to put things on their agenda. I think the TCFT, it's mandatory now in four countries over different types of companies, but I think that process is really enlightening for companies who have gone through it because you have to sit down with these scenario analyses and say, "Okay, where am I most exposed to climate risk? Then what does it look like on a three degree world? What does that actually look like in the short, the medium, and the long term?" Maybe the long term is not as long as some people might like, but I think really gets people started on that path about thinking about that in a very different way. All great points there.

One takeaway for our listeners. We have folks listening in. Anything they can take back into their offices tomorrow and say, "Okay, well, let's talk about this at the business level."

Kevin:
Well, the first thing is to be, not too trite, but be aware of what you don't know. A lot of what we get is these big picture, newsworthy, quotable items, but the reality in terms of execution, the reality in terms of looking at where heat impacts are going to be and how is that going to affect your business and your vulnerabilities, where is flooding going to be, not just the sea level rising, but just where are you likely to be hit by storm surges? Where are you likely to hit because the infrastructure isn't able to cope? And be aware of that and recognise that this is going to be an impact on you sooner rather than later, and being able to plan out and adapt. This is not always about just simply pick up your stakes and move right now. This is not about just give up on your project.

This is about being ready and being adaptable and understanding the different kinds of factors that are going to affect you and your business. And that a certain amount of it means looking out for different reports, looking out for different assessments, absolutely talking to insurance companies, but also looking for data sources or looking for a provider or somebody who can help you out with that and recognise that this is a business that is going to wind up becoming incredibly important now and the future. Not just going through these assessment processes, but genuinely looking and finding and recognising these sources, finding the ways to actually be able to understand what your company needs and that it's not just a matter of right now, but it's a matter of planning. And we live in a world where stock markets and various other things are all about quarterly reports, and we're going to have to go and look at guidance and say, "It's time to go back to looking three, five years down the road." Even that will make a difference.

Anna-Marie:
Yeah. No, definitely. Super. Well, thank you so much, Kevin. I think fantastic points to share with our listeners and I really appreciate your time and coming onto the podcast series. Thanks.

Kevin:
My pleasure, and I look forward to hearing it. I look forward to the others in the series.

Anna-Marie:
Thanks so much for listening, and thanks again to Kevin for your time, your thoughts and your insight. To read the report compiled by McKinsey & Company, which shares the best ideas from the discussions that emerged from the GII Summit, please visit mckinsey.com. Make sure you don't miss any of our future episodes by subscribing via Apple Podcasts, Spotify, or wherever you listen to your podcasts. While you're there, you can also listen to our other episodes and leave a rating or a review. In the meantime, thanks again for listening and goodbye for now.