Develop Net Zero Aligned Investment Strategy
Environmental Defense Fund
Developing a net zero aligned investment strategy is critical for your company to realize its net zero goals. Making the business case for net zero projects is easier than ever and absolutely critical.
Meeting your sustainability goals, and especially net zero targets, will likely require new capital investments. This could include more efficient buildings and processes, redesigning products to be more sustainable, electrifying fleet vehicles, and more. To effect these necessary changes, you need to embed sustainability in your company’s investment strategy. This means making the business case for sustainable expenditures.
As you consider a net zero aligned investment strategy, it is important to start with an understanding of your company’s current state. You should assess your company’s Scope 1, 2, and 3 emissions, map out where the emissions are coming from, and identify possible solutions to abate these emissions. Know which emissions will be easiest to abate and which, if any, are coming from hard to abate sectors. You can use this information as you build a business case for sustainable investment.
Make the Business Case for Net Zero
There are plenty of good reasons to follow a net zero aligned investment strategy. Reinventing your company to achieve its net zero commitments can help you reduce reputational, compliance, and climate risks. It will also make your company more resource efficient, reducing operational costs. Investing to meet your net zero targets also creates goodwill in the marketplace, attracting top talent and customers. When building a business case for a net zero investment strategy, it helps to think from a systems perspective so that you can understand and communicate the many benefits to your company and society at large.
As you make the business case for a net zero aligned investment strategy, you should determine which capital investments are necessary to achieve your company’s goals. You can compare the costs of net zero aligned investments to traditional investments and look at the results over an investment’s lifespan. Consider that many sustainable investments may have a longer lifespan than their traditional counterparts. As you make the business case, include not only the project’s financial costs and returns, but the risk reductions and intangible benefits to reputation realized by pursuing a net zero aligned strategy. You can assess the financial impact of a net zero aligned investment through a cost benefit analysis. One way to embed environmental costs in this analysis is to use your company’s internal carbon price, if you have set one (and if not, you should). Calculating specific metrics that your company uses, such as Net Present Value (NPV) or Internal Rate of Return (IRR), can also help you communicate the costs of a particular capital investment.
You should also consider the social costs and returns related to a net zero aligned investment strategy. A sustainable investment strategy can uplift communities and empower employees. Unfortunately, if poorly executed, it could also perpetuate inequalities and harm already marginalized communities. As you consider possible capital expenditures, make sure to account for the social costs and returns and recognize your company’s responsibility in realizing not only a green transition, but a just transition.
Finance a Net Zero Aligned Investment Strategy
As you think about financing opportunities for your company’s net zero aligned investment strategy, consider both internal and external funding sources. Blended financing can reduce financial costs and risks for your company, and by pursuing a sustainable investment you may unlock additional sources of funding.
Internal Financing Options
Internal financing options are those that are funded by the company’s own resources. There are a few primary ways your company may fund net zero projects using internal financing, listed below. You should talk to your company’s finance team to understand the most relevant approaches for your business.
- Capital expenditure (CapEx) budget: Many companies allocate a portion of their annual budget for capital expenditure, which can be used to fund net zero projects. This approach can be particularly effective for projects that have a quick payback period, such as energy efficiency upgrades.
- Operating expenditure (OpEx) budget: Another option is to fund net zero projects through the company’s operating expenditure budget. This approach may be more suitable for ongoing projects, such as renewable energy installations, that require ongoing maintenance and operational costs.
- Internal loans: Companies can also use internal loans to finance net zero projects. This approach involves borrowing money from the company’s own funds and paying it back over time. Internal loans can be a good option for companies that want to retain control over the financing and implementation of the project.
External Financing Options
External financing options are those that are funded by sources outside the company. There are several external financing options for net zero projects:
- Green bonds: Green bonds are a type of fixed-income security that your company can issue to finance environmentally sustainable projects. These bonds are becoming increasingly popular and can be an attractive financing option for net zero projects.
- Government incentives: There are many financing mechanisms through federal and state government that support net zero aligned projects. Government grants from the Inflation Reduction Act, Infrastructure Investment and Jobs Act, and other federal programs can help to reduce project costs. Government backed loans, tax incentives, and other financing can make net zero aligned investments the most advantageous.
- Bank loans: Your company can also access financing for net zero projects through standard bank loans. By pursuing a net zero aligned investment, you are likely to reduce risks during the bank’s due diligence, increasing the likelihood of the loan and possibly securing a better rate.
There are other creative financing arrangements that your company may be able to use to support net zero aligned investments. Access to this financing will depend on where the projects are located, what changes will occur because of these projects, and other factors.
As the importance of reducing greenhouse gas emissions continues to grow, capital availability for companies may become contingent on credible net zero targets and strategies. Companies in high-carbon industries may face an increase in the cost of capital, while those that prioritize sustainability and have credible net-zero targets and strategies may benefit from lower costs of capital and reduced operational costs. It is important for companies to consider these factors when developing their investment strategies and financing plans to ensure long-term financial stability and success.