Decarbonization ambition is escalating quickly, but are financing models keeping up? Many organizations struggle to fund large-scale decarbonization efforts due to strict payback periods, limited internal capital and narrow investment criteria. To unlock the speed and scale of change that Net Zero targets require, CFOs will need to reimagine capital allocation models to better account for the true value of decarbonization.
Meeting decarbonization goals requires funding longer-term strategies that often fall outside of traditional investment criteria. Instead, organizations focus on the low cost, quick payback projects. While these projects may provide incremental progress, high-impact sustainability projects requiring sizeable upfront capital expenses get stuck in limbo. To meet longer term decarbonization goals, leaders will need to go beyond the low-hanging fruit. CFOs must reimagine capital allocation models, restructuring investment criteria, building programmatic approaches to project finance and establishing third-party partnerships to deploy capital faster and reduce risk.
The sticker shock of climate mitigation investments can put those initiatives on the backburner—even at companies with corporate sustainability goals. But recent corporate pledges on Net Zero challenge the inertia of the status quo. CFOs need flexible business models and innovative financial tools to move the organization toward science-based climate change targets. Luckily, today's companies have options at their disposal that can break down financial barriers and accelerate their Net Zero roadmap.
An organization's road to decarbonization may begin with smaller efforts like routine energy efficiency improvements. It is easy to feel emboldened by early successes and feel confident that Net Zero carbon goals are on track at these early stages. But when it comes to implementing substantive change – be it redesigning critical processes or replacing significant assets – the real costs and challenges become apparent.
Restructuring investment criteria, programmatic approaches to project finance and third-party partnerships to manage non-core assets are critical levers to program success.
Assign oversight and accountability for delivering a Science-Based Target (SBT) and a Net Zero commitment through the entire organization, including at the highest levels of leadership. Put in place frameworks to support decision-making that enables meeting long-term Net Zero ambitions.
It is critical for companies looking to achieve ambitious carbon reduction goals to break down departmental silos; Finance teams must be leadership partners with sustainability and operational teams, rethinking traditional financing criteria to enable the long-term investments required.
Even with a more holistic set of investment criteria, some projects may still not meet internal hurdles. If projects are evaluated individually with a strict payback threshold, those with a higher payback period – but greater decarbonization potential – will be left unfunded.
64% of successful companies used programmatic or portfolio approaches to finance projects at scale, compared to only 6% of unsuccessful companies.
Source: ENGIE Impact Executive Survey
Internal capital is often insufficient for scaling decarbonization projects to the extent needed. This leads to underinvestment in high-impact strategies in favor and smaller projects with lighter decarbonization outcomes. Ultimately, the greatest returns both in terms of carbon reductions, operational risk mitigation, and financial management often require external financing or partnerships to unlock capital more quickly and de-risk investments.
In working with a large manufacturing client, we evaluated the impact of three different financing models. Findings revealed that integrated service agreement delivers 4x cost-saving and 5x the carbon reduction compared to traditional models.
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As more and more companies have their sights set on Net Zero strategies, they need financial mechanisms that unlock significant decarbonization, but limit their exposure to risks. Today, thanks to pioneers in the industry, technology exists to take carbon-heavy processes and turn them green. We have the solutions to unlock Net Zero, now it’s time to fund them.
Organizations need to look beyond traditional internal funding models. By making this shift in three well-defined steps, you can accelerate progress to goals, minimize risk and get the most out of your decarbonization investments.
A switch to strategic financing can reduce risk, capture value and accelerate deep decarbonization on the race to zero.