The Future is Sustainable Finance

2020 saw a flurry of announcements from companies across the world, pledging ambitious, and often aggressive, carbon targets. From Microsoft’s carbon negative goal to BlackRock’s pledge to stop investing in companies with high sustainability-related risks, organisations are becoming increasingly accountable for their actions when it comes to the environment and climate change.

A recent study into the sustainability attitudes and actions of senior executives found that 75% of executives believe sustainability will provide a competitive advantage in the future, yet only 30% believe they are successful today. Of course, setting and publicising goals is only the first step. To become a true leader in sustainability transformation, it must be embedded in every part of the business, especially the finance department.

Only one in 25 (4%) of Chief Financial Officers currently have responsibility for developing and monitoring corporate sustainability goals, according to ENGIE Impact’s study. Instead, executives pointed to Chief Sustainability Officers (26%) and Chief Operation Officers (25%) as bearers of that responsibility. This finding points to a missed opportunity to ensure that the strategy, funding, and execution of sustainability projects are optimised to meet an organisation’s goals. Given that capital and investment is critical to the success of corporate sustainability initiatives, as underscored by finance authorities such as the Bank of England, the question for CFOs and their teams is “How can we position finance as a lever to make sustainability happen?”.

Accelerating decarbonisation: integrating sustainable finance

As demand for more sustainable action from organisations rises, so does the need for capital. With their oversight of an organisation’s budgets and investments, CFOs and finance departments should be firmly in the driving seat of the sustainability transformation journey. Finance teams need to think beyond their traditional investment approaches if they are to succeed and help the organisation meet its carbon goals.

For example, corporate capital expense budgets often have strict payback periods (typically two years or less). As a result, companies defer sustainability projects, such as carbon mitigation strategies that don’t offer direct operational benefits or quick paybacks, which only serves to increase the long-term costs of meeting carbon reduction goals. Subject to these constraints, sustainability and operation teams focus instead on quick payback projects that don’t necessarily have a significant sustainability impact. With many companies pledging to meet carbon reduction goals by 2030 or sooner, they can’t afford to delay more transformational projects.

The benefits of portfolio financing 

In our survey, only 6% of all C-suite respondents revealed their companies had significantly adopted third-party financing to meet ambitious carbon goals, presenting a potential sticking point for finance teams when it comes to addressing sustainability.

In a general business context, third-party relationships are often used to boost capacity for projects and provide additional expertise. In a finance and sustainability context, third-party financing also allows companies to smooth out the costs of sustainability projects. Unlike the payback constraints of internal financing, external financing benefits from longer tenors, enabling finance teams to accommodate a range of projects, as those with quicker payback periods balance those with longer paybacks. In this way, they can optimise for the portfolio of projects that deliver deeper and more cost-effective carbon levels than if they were financed separately. This approach is a popular one - according to our survey, 64% of companies that are successful in sustainability transformation used the portfolio approach to finance projects at scale.

Still, third-party financing is not a solution that is likely to scale with a company’s increasing sustainability ambitions. Although it allows for companies to take on more projects than with internal financing, executing a large portfolio of projects can prove challenging (both technically and from a financial structuring perspective), and companies may be wary of increasing their debt load for projects that they and their investors do not deem core to their business.

The Energy-as-a-Service approach

For finance teams to truly maximise sustainability outcomes within their organisation, one of the most robust financing models is Energy-as-a-Service (EaaS). Unlike internal and third-party financing, the EaaS model allows a company to shift responsibility for its energy assets to a third-party. Responsibility for the design, implementation, financing, maintenance, and performance of the target portfolio of projects is externalised and transferred to EaaS providers, with the goal of ensuring that its customers’ expected energy targets are achieved.

EaaS contracts tend to be longer than third-party financing, especially when more capital-intensive projects, like on-site renewable energy generation, are involved. But this longer contract term also means that, if scoped correctly, an organisation can generate enough savings (from lower energy costs and more efficiencies) to cover the contractual EaaS payments.

Another advantage for companies is that there is also less risk involved with EaaS approaches―both in terms of reputation and pressure to meet goals―since the performance risk also shifts to the EaaS providers. Rather than financing the investment in particular energy assets, a company’s payments are tied to particular energy outcomes being delivered (e.g., units of renewable energy generated, or certain levels of efficiency attained).

The opportunity to step up 

Achieving the important carbon goals and sustainability targets that companies have established will require tightly coordinated and well-resourced internal efforts. CFOs and other finance leaders are key players in this undertaking; they have an opportunity to partner with sustainability and operational teams to drive sustainability strategies and projects forward by applying the financing approaches that best match their organisation’s ambitions. Indeed, internal capex financing may not be a viable, long-term investment option for many ambitious sustainability projects due to the risk of not being able to meet carbon goals.

Instead, companies and finance departments must invest with a portfolio lens, balancing the financial benefit of short-term payback projects with the deep carbon reductions of more intensive projects. As companies adopt more significant sustainability targets, EaaS contracts will become an increasingly attractive way to achieve their goals while managing risk and externalising financing. By rethinking finance approaches to be more innovative and in line with future demands, finance departments can ensure that their company stays on track to achieve its sustainability goals.