The number of companies with science-based emissions reduction goals grew 500% since 2018, but corporate finance supporting those goals is only increasing 5% annually.
But now, investors are making it clear to companies: It’s time for them to put their capital behind their climate commitments.
More are looking for evidence in corporate climate transition plans, which outline steps a company is taking to reach net zero, including how it’s managing capital. A successful transition will require “systemic changes in corporate behaviour, facilitated by changes in cash flows,” according to the authors of the Corporate Climate Finance Playbook.
The Climate Policy Initiative (CPI), an analysis and advisory non-profit, published the playbook last year as a practical guide for sustainability professionals to influence corporate cash flow and management, with a view to helping their businesses reduce emissions and reach their climate goals.
Collaborating with finance leaders overseeing capital management decisions is crucial in that process, to weigh objectives and gain buy-in, sustainability professionals said during a SF Climate Week event. “I had no idea who our tax people were really until the Inflation Reduction Act compelled me to find them and reach out,” said one sustainability director, referring to President Joe Biden’s signature package of incentives to support the clean energy transition.
Corporations generally use capital to support their climate commitments in three main ways:
• Deployment: Strategically allocating financial resources to specific business objectives, including expenditures on energy efficiency or purchasing carbon credits;
• Management: Using financial instruments such as sustainable 401(k)s (in the U.S.) or cash management aligned with net-zero goals to decrease or avoid investments in high-emitting industries;
• External funding: Using green bonds, sustainability-linked loans, and other debt to fund emissions reductions or ESG goals for a business, project or team.
All three are crucial, but the practice of using green bonds and sustainability-linked loans and bonds has dominated the corporate climate finance conversation. The green bond market, for example, saw average growth of about 90% per year from 2016 to 2021, and reached a record high of US$351 billion in the first half of 2023.
More Focus on Cash Management
Far fewer companies use capital management to support climate initiatives, according to the CPI analysis. That must change if companies hope to reach their climate targets, and the playbook suggests a number of strategies, along with examples.
• Cash and liquidity management aligned with net zero: Managing company assets with banks committed to lower emissions or that are shifting investments in energy away from fossil fuels and toward clean energy. Patagonia is pursuing a low-carbon cash management strategy by only working with banks that no longer finance coal, oil sands, and Arctic oil and gas exploration. The company requires financial partners to publish sustainability goals and renewable energy lending commitments.
• Net zero-aligned marketable securities: Investing a company’s money in stocks, bonds, and funds that screen out high-emissions industries and investments. That might include funds that track a Paris-aligned index, which reduces exposure to major physical and transition risks. It could also involve increasing a portfolio weighting toward companies with credible carbon reduction targets.
401(k) plans and pensions that consider climate and ESG factors: Offering employee investment options including 401(k)s and pensions screened for their potential impact on climate change or other ESG metrics. Deloitte introduced a default option for its 35,000 pension plan members that evaluates investments based on ESG criteria. Carbon Collective recently introduced what it bills as the first fossil fuel-free target- ate fund series for retirement plans. Target date funds are structured to maximize an investor’s returns by a specific date, most often targeting a future retirement date.
• Internal carbon pricing: Charging business divisions an internal “price” related to the greenhouse gas emissions they produce allows companies to raise funds for reduction measures, and it motivates teams across an organization to look for ways to reduce emissions. Autodesk applies an internal carbon price of $20 per tonne on its Scope 1, 2, and 3 emissions. Proceeds from the fee are invested in renewable energy projects and certified carbon offsets and removal credits. This type of pricing embeds emissions accountability into financial decision-making across the company.
By activating strategies such as these, companies can play a role in bridging the climate finance divide—estimated at $8 to $9 trillion annually.
This post originally appeared on GreenBiz and was then republished by Climate & Capital Media. Republished (again) by permission.
