The urgency to combat the climate crisis is escalating. As global temperatures increase, so does the pressure on companies to decarbonise. Reaching net zero is a strategic necessity for any business that hopes to remain viable in the rapidly changing economic landscape.

A key aspect of achieving climate action is finance. The global transition is estimated to need around $4 trillion of investment a year. Yet the cost of inaction is huge – damages are estimated to cost $38 trillion a year by 2050 on our current trajectory.

Financing decarbonisation requires a multifaceted approach and companies that will succeed in reaching net zero need to include finance in their decarbonisation strategy. This blog explores net-zero financing approaches, showing examples of companies that have adopted them and discusses whether the voluntary carbon market has a place in closing the net-zero funding gap.

3 mechanisms companies can employ to fund the transition

1: Carbon insetting / internal carbon pricing
Many companies, including Microsoft and Unilever, have adopted internal carbon prices. Carbon prices encourage companies to avoid emissions-heavy activities. Additionally, if an insetting policy is in place, the funds generated from the internal carbon ‘levy’ can be ring-fenced for decarbonisation activities along the company’s value chain. For example, a food and beverage company could work collaboratively with agricultural suppliers to adopt sustainable farming practices, which will result in a reduction in emissions from its own products. Explore our take on insetting here.

2: Balancing Shareholder Interests
A major challenge in financing a company’s decarbonisation is the conflict between achieving sustainability targets and meeting the expectations of shareholders. Transitioning to low-carbon operations requires companies to think about the long term. Decarbonisation will involve upfront investment that will impact short-term profits.

Companies that adopt long-term thinking often outperform their peers. One study reported that 'From 2001 to 2014, the revenue of long-term firms cumulatively grew on average 47 per cent more than the revenue of other firms, and with less volatility.' Communicating the benefits of long-term thinking will be key to getting shareholders' buy-in.

To support the move to long-term thinking Unilever dispensed with quarterly reporting.

3: Corporate Sustainability Funds
Companies can set up dedicated funds for sustainability initiatives. These funds can be for activities within the company's value chain or to support wider sustainability activities. For example, Amazon’s $2 billion Climate Pledge Fund aims to develop sustainable technologies. Beyond Value Chain Mitigation is encouraged by the Science Based Targets initiative and corporate sustainability funds are a way to promote this.

Wider funding mechanisms

Green Bonds/Sustainability-Linked Loans
Green Bonds are a project financing mechanism exclusively for projects that have positive environmental impacts. They are largely used in renewable energy projects but have also been used for energy efficiency projects. Sustainability-linked loans such as revolving credit facilities incentivise borrowers by linking interest rates to specific environmental targets.

Government incentives
Governments will be pivotal to reaching net zero. Policies such as subsidies, grants and levies will incentivise the use and development of low-carbon technologies. For example, many countries are implementing or looking to implement carbon taxes.

Public-Private Partnerships (PPPs)
The UK has a history of harnessing PPPs within the healthcare sector to support the building of medical facilities. Partnerships between the public and private sectors have the potential to facilitate funding for decarbonisation projects – like in Denmark, where climate partnerships have been established for 14 sectors – from construction to food to finance.

Is there a place for the voluntary carbon market to finance net zero?

The voluntary carbon market (VCM) allows companies to choose to purchase credits that represent the reduction or removal of greenhouse gas (GHG) emissions from the atmosphere, usually referred to as offsets. This offers flexibility, enabling businesses to invest in a variety of projects, such as reforestation, renewable energy, carbon capture and storage. Offsets can also offer co-benefits, such as supporting biodiversity conservation, community development and other UN Sustainable Development Goals.

However, it is important to note that while offsetting may offer some wider environmental benefits, it should not be a company's approach to reduction. Many companies that have relied on offsetting in their reduction strategies have faced criticism for delaying decarbonisation activities within their own value chain. Offsetting does not lead to an actual reduction in emissions associated with company operations, which is necessary to align with climate science.

The VCM is also not without issues, including a lack of consistency across projects, deficiencies in traceability leading to potential double counting, and a need for greater transparency and credibility in verifying emissions reduction claims. There have been some moves in the VCM to improve confidence in the market through initiatives such as the Voluntary Carbon Market Integrity Initiative, but there is still a long way to go.

Conclusion

Achieving net zero is a challenging but essential goal for all companies that want to thrive in the future. Companies that are serious about achieving this goal need a financial strategy that supports it. Adopting long-term thinking, balancing the needs of shareholders whilst embracing mechanisms such as insetting, and taking advantage of government policies are actions to consider.

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We have over 15 years of experience in supporting businesses on their net zero journeys, including carbon reduction plans and setting science-based targets. We've worked with SMEs through to multinationals such as Kingfisher group (B&Q. Screwfix, Tradepoint). As a charity, we’re different – we reinvest our profits to create real change.

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