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.
What is the role of sustainable finance in the race to zero?
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.
Turn climate ambition into climate action with innovative financing models
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.
Bridge the gap to Net Zero with sustainable finance in three steps
Restructuring investment criteria, programmatic approaches to project finance and third-party partnerships to manage non-core assets are critical levers to program success.
Step 1: Bring a sustainability mindset to all financial decisions
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.
Build governance structures that align finance with sustainability objectives CFOs must have a seat at the table during Net Zero strategy setting and execution plan. Finance must share accountability for the organization's sustainability transformation to both address stakeholder demands and mitigate near- and long-term risks.
Broaden investment criteria Today, there is growing focus on updating investment criteria to better account for the full picture of climate risks and opportunities. Several frameworks have emerged that support more effective risk accounting, which provide much needed corporate guidance to quantify the full range of values that are gained from investments in sustainability-related projects. Revising investment criteria to account for the risk of a carbon price, physical threats to operations or pressure imposed by investors will significantly change the business case for transformation.
Introduce internal carbon valuation measures Embed a consistent measure across the organization to ensure that all decisions take the cost of carbon into account.
Step 2: Plan sustainability investments as a portfolio
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.
To build a future proof portfolio
Invest programmatically When evaluating what decarbonization projects to fund, taking a portfolio lens can improve the economics of the transition. Organizations can often find economies of scale by blending multiple projects, uncovering synergies in implementation or decarbonization outcomes that make these projects more attractive. Furthermore, organizations can blend projects with short and long payback periods, to unlock funding for projects that may not otherwise meet investment criteria on a standalone basis. Lastly, organizations can consider expanding the payback period of the projects (e.g., 5 years+).
Define appetite for risk and create a balanced portfolio By embracing a holistic solution that pools together a diverse set of risks and benefits from climate, organizations can overcome obstacles posed by traditional financing models while creating a clear path to purpose-led, sustainable business to bolster resilience and drive profitable and measurable growth. Solutions entail the right balance of long-term, high-risk bets in evolving technologies and short term, lower risk decarbonization levers.
Calculate the least-cost pathways to achieve full potential Investing in robust modeling of future scenarios to better inform capital planning positions organizations to best seize opportunities as markets shift. Companies can leverage tools and methodologies, such as the Paris Agreement Capital Transition Assessment (PACTA) to measure financial portfolios’ alignment against several climate scenarios consistent with the Paris Agreement.
Impact Insight
64% of successful companies used programmatic or portfolio approaches to finance projects at scale, compared to only 6% of unsuccessful companies.
Step 3: Decarbonize faster with third-party financing and Energy-as-a-Service (EaaS) models
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.
To execute on the scale of today's ambition, companies will need to rethink traditional financing structures, quickly mobilize capital and identify new ways to share risk and reward.
Jeff Waller, Senior Director, Head of Financing Solutions
To secure financing and implement innovative EaaS Models
Tap external financing sources There are a variety of reasons why internal funds may not be the best path forward. Luckily, there are a range of third-party financing options created specifically for sustainability projects, such as green loans or sustainability-linked loans. These instruments may offer companies a lower-cost alternative to deploying internal capital while aligning their corporate finance activities with their sustainability goals. However, risk-averse organizations may still be hesitant to assume excessive debt, which can limit the total available capital.
Embrace Innovative Integrated Service Models Tackling ambitious sustainability projects requires capital. Even if the business case for these projects is solid, relying solely on internal funds can slow progress. Energy-as-a-Service (EaaS) agreements present a compelling alternative by externalizing financing and risk. EaaS agreements shift responsibility for the management of their sustainable project portfolio to a specialized provider via a long-term contract. This allows for a wider pool of projects while limiting operational and capital expenses in areas the business doesn't operate in or doesn’t understand well. Without the limitation of payback periods and debt limits, the biggest and most impactful projects don't run the risk of getting sidelined. In this scenario, both carbon reduction and long-term savings are maximized. This approach is often tailored to meet the unique needs of each company.
Leveraging clean technologies effectively falls outside of the core competency of business. New As-a-Service financing models provide opportunities for businesses with complex operations, or businesses with competing capital needs, to partner with specialists in these technologies, who can finance and guarantee performance of these capital-intensive assets.
Nicolas Lefevre-Marton, Managing Director, Sustainability Solutions - EMEA
Impact Insight
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.
Integrated Service Agreements Deliver 4x The Cost Savings And 5x The Carbon Reduction Compared To Traditional Service Models
Sustainable finance models unlock accelerated progress and reduce risk
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.
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