Funding Net Zero Projects: New Approaches to Access Capital

May 17, 2023

As climate change deadlines draw near, companies are rethinking their access to capital to support their net zero transformations.

Key takeaways:

1. Organizations need to understand the interrelated risks that may accompany net zero transformations in order to minimize impact and protect their investments.
2. Stakeholders outside the private sector may provide critical capital to support net zero goals.
3. Long-term investment strategies, balanced against strong short-term financial performance, can support net zero initiatives while producing strong returns.

Overview

Temperatures are rising around the world, and businesses and governments are setting goals with the aim of slowing global warming. Building on the Paris Agreement and findings by the UN’s Intergovernmental Panel on Climate Change, countries are recognizing the importance and urgency of seeking to limit global temperature increases to 1.5 degrees Celsius by 2030. Achieving this goal requires planning — as well as new sources of capital to fund the transition to net zero greenhouse gas emissions.

“Some hard-to-abate industries are finding it more difficult to access capital efficiently,” says Richard Dudley, global head of climate strategy at Aon. “We have seen some participants across the reinsurance industry begin to withdraw capital from certain industries. Our view is that we should be supporting those businesses to transition and maintain access to capital while they’re in that process. If our industry withdraws, we will lose the opportunity to have impact in driving transition towards a low carbon economy.”

In addition to understanding how to access capital for net zero transformations, companies and investors are also learning about some of the new risks and potential volatility that may accompany the move to net zero. According to Dudley, building this awareness early — including discussions of insurance risk transfer — can only help. “I think the biggest opportunity we have as a risk industry is to elevate the discussion about risk transfer products to the tables where investment decisions are being made, at the time those investment decisions are being made,” Dudley notes. “We need to be better at articulating quantitatively the value our products bring to de-risking investments.”

In Depth

Dudley explains that net zero emissions doesn’t mean zero carbon emissions, but rather a state of equilibrium. “The whole concept of net zero is like when you run a bath,” he says. “If you take the plug out and run the taps, net zero would be like when the water level stays the same. What’s going out and what’s coming in at the same time are balanced.”

Though many people may associate greenhouse gas emissions with specific industries such as energy, agriculture and manufacturing, all businesses can take steps toward net zero. “It actually impacts every industry,” Dudley says. “Every industry needs to go through change — technology changes, changes in processes, supply chains and changes in habits.”

Understanding Risk and Financial Impact

To effectively identify opportunities to fund and advance their net zero commitments, organizations should develop a thorough understanding of related risks and the interconnected nature of climate change readiness. Natural disasters and climate events, geopolitical volatility and the financial cost of changing business operations can all create risks on the path to net zero. De-risking this process may include climate risk modeling, investing in low-carbon technology, reducing volatility associated with transition of business models and exploring new insurance solutions, as well as tailoring existing solutions to business needs.

Dudley explains that some companies are hesitant to move toward net zero because they are concerned that their financial performance may be negatively impacted in the process. That hesitancy, paired with uncertainty about the unknown and unproven when investing in new technology, new global business locations or with new financial partners — can further curtail net zero progress. “There’s risk associated with all those things, and the risk makes it less likely that people invest quickly enough into the low carbon economy,” Dudley says.

To boost confidence in net zero investment, Dudley says the insurance industry can advise clients of the risks of actions like buying carbon credits and establishing operations in politically or environmentally vulnerable areas. Insurance against political risk or comprehensive nonpayment coverage can also motivate net zero transformations in otherwise uncertain circumstances. “It’s not just a downside protection for assets or liabilities,” Dudley explains. “We’re enabling trade, and we’re enabling investment — our role is to enable growth.”

New Opportunities and the Public Sector

Achieving net zero goals will require public-private collaboration, and accessing funding from public sources can accelerate progress toward decarbonization. “Achieving the scale of investment needed has to be a collaboration between the public sector and the private sector and, in some cases, the humanitarian sector as well,” Dudley says.

For example, some regions may lack resources to build green technology without support from government stakeholders, and other areas may need additional infrastructure investments when adopting new clean energy sources.

In instances like these, some businesses may be reluctant to fund energy transition in areas where they see a risk in being able to recoup their investment. If governments incentivize these developments or help to reduce their costs, they provide the support necessary to enable clean technologies and sustainable solutions. “I think the bottom line is nobody can do that on their own,” Dudley says. “Private investment capital, public sector balance sheets and the (re)insurance industry need to work together”.

Strategies as Net Zero Deadlines Approach

With the target year of 2030 drawing closer, companies are grappling with how to balance the need for strong short-term performance against longer-term net zero investment commitments. “The horizons we are working with here — whether that’s 2030 emissions or 2050 for achieving net zero across the globe — those are really long timeframes when you’re a publicly listed company that has to report on a quarterly basis,” Dudley says.

Though Dudley notes that short-term results are important for investors, many believe a long-range approach to net zero transformation may be more effective and generate better returns. “A lot of longer-term investment horizons are beginning to emerge, but I think it’s really hard to do that at true scale unless people can produce acceptable investment returns in the short term,” says Dudley. “That is where we should play a role, because we should be able to de-risk that new investment in a way that means they can do more of it while still producing results. If we in the risk industry can really grasp that, I think it’s very exciting.”

To find out more about Aon’s insights for rethinking access to capital, click here.

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