How to put corporate capital behind climate commitments

By Grant Harrison

May 1, 2024

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. Transitioning successfully will require “systemic changes in corporate behavior, facilitated by changes in cash flows,” according to the authors of the “Corporate Climate Finance Playbook.”  

Climate Policy Initiative (CPI), an analysis and advisory nonprofit, published the playbook last year as a practical guide for how sustainability professionals can influence corporate cash flow and management, with a view to helping their business 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 told me last week 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 trademark package of incentives to support the clean energy transition. 

Corporations generally use capital to support corporate climate commitments in three main ways: 

1. Deployment — strategically allocating financial resources to specific business objectives, including expenditures on energy efficiency or purchasing carbon credits
2. Management — using financial instruments such as sustainable 401(k)s or cash management aligned with net-zero goals to decrease or avoid investments in high-emitting industries
3. 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 percent per year from 2016 to 2021, and reached a record high of $351 billion in the first half of 2023. 

More focus on cash management needed

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, tar 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-date 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 metric ton 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.

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