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Why achieving net-zero isn’t possible using traditional financing models

Why achieving net-zero isn’t possible using traditional financing models 1

By Jeff Waller, Head of Sustainable Finance at ENGIE Impact

As decarbonisation efforts accelerate, traditional financing models are falling short when it comes to aligning organisations with their sustainability goals. Current capital allocation models leave many organisations struggling to find the necessary funds for their large-scale decarbonisation strategies. Narrow investment criteria, limited internal budgets and strict payback periods prevent organisations from unlocking the scale and speed of change required by net-zero targets. The solution? Organisations need to reimagine their capital allocation models. Particularly with the magnitude of today’s ambitions, organisations must re-evaluate their financing structures to mobilise capital faster and identify new ways to share both risk and reward.

From ambition to action using innovative financing models

Early-stage efforts on the road to decarbonisation can cause CFOs to feel emboldened by small successes. However, there’s a limit to how much difference switching to LED bulbs can make. To implement substantive changes, critical processes need to be redesigned and significant assets need to be replaced – and that’s where the true extent of the financial challenge becomes evident.

Three steps to bridge the gap to net zero with sustainable finance

  1. Adopt a sustainability mindset when making financial decisions

Accountability to deliver a science-based target must be assigned through the whole organisation. From groundworkers to c-level leaders, a collective sustainability mindset must be embedded in each function and decision. Departmental silos must be relaxed so that leaders from each function have the appropriate incentives to work together to achieve ambitious carbon reduction goals.

CFOs should take an active role in the net-zero strategy setting and execution, working alongside operational and sustainability leaders. For example, CFOs can take the lead in implementing frameworks, such as an internal price of carbon, to ensure that decision making is consistent with the company’s net-zero commitments. Finance leaders can also broaden their approach to capital planning by investing in robust future scenario modelling tools that rely on methodologies consistent with global climate goals.

  1. Sustainability investment plans as a portfolio

Using a portfolio lens to evaluate which decarbonisation projects to fund can improve the economics of the transaction. According to ENGIE Impact’s Corporate Sustainability study, 64% of successful companies used programmatic or portfolio approaches to finance projects at scale, compared to only 6% of unsuccessful companies.

Blending multiple projects into one portfolio achieves economies of scale, uncovers synergies in decarbonisation outcomes, and renders the blended effort more attractive overall. Even if some individual projects don’t meet investment criteria (such as minimum payback periods) on a standalone basis, they can be blended with projects that do meet internal hurdles to unlock funding. Businesses must balance long-term high-risk bets with short-term, low-risk decarbonisation levers. Creating a portfolio with a balanced set of benefits and risks can help organisations overcome the limitations of traditional financing models. This holistic solution creates a clearer path to sustainable business, increasing both resilience and profitable, measurable growth.

  1. Accelerate decarbonisation with energy-as-a-service (EaaS) models and third-party financing

Smaller projects with limited decarbonisation outcomes are often favoured over high-impact strategies, as corporate capex budgets are typically insufficient for the scale of decarbonisation projects needed to make a substantial difference. As a result, these higher-impact projects often require external funding.

There are many third-party financing options, such as green loans, that have been specifically created for sustainability projects. Whilst the prospect of debt may not be feasible for all organisations, these external options often come at a lower cost to deploying internal capital, whilst also ensuring corporate finance activities are aligned with sustainability goals. Another strategy is an Energy as a Service agreement which shifts responsibility for asset procurement, installation, performance, and financing from the organisation to an external, specialised provider. EaaS contracts can be tailored to an individual company’s needs to maximise both long-term savings and carbon reduction, while limiting a company’s capital expenditure and operational risk.

Accelerate progress and reduce risk with sustainable finance models 

As more companies set strategies to join the race to net-zero, those who are set to be the most successful are adopting financing strategies that minimise risk but maximise decarbonisation. Technology exists to do the heavy lifting of taking carbon-heavy processes and making them green. With all the right tools available, it’s time for organisations to invest accordingly.

Traditional funding models no longer make the cut as the world turns greener. Organisations need to look to more innovative, sustainable strategies that provide long-term benefits. Using the three steps outlined above, organisations can make meaningful strides towards a net-zero future.

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