At a Glance:
- According to CDP, companies are seeing more business opportunities related to shifting products and services, entering new markets, and building climate resilience, with the world’s leading companies now identifying nearly $5 trillion in potential gains.
- As the demand for climate finance grows, businesses are accelerating their transition to sustainability.
- Despite banks’ critical role in climate finance, businesses face challenges accessing funds, and this article explores how businesses can navigate the banking system to access climate finance and leverage these opportunities for sustainable growth.
Companies are increasingly recognising the financial opportunities that come with addressing climate change. Recent data from CDP reveals a striking insight: companies are identifying unprecedented opportunities in tackling climate change, with leading corporations recognising potential gains of nearly $5 trillion. This staggering figure underscores not just the scale of the climate challenge, but the tremendous business opportunities it presents especially in the likes of shifting products and services, attracting new markets, and building climate resilience.
Despite the rising demand for climate finance as companies accelerate their transition to sustainability, many businesses face significant challenges in accessing these funds through traditional banking channels. While banks serve as critical intermediaries in providing climate finance, the path to securing such funding often proves complex and challenging for many organisations.
In the sections below, this article will explore ways businesses can improve their chances of securing climate finance, including developing assessment tools and using banking instruments for sustainable initiatives.
What Is Climate Finance?
Climate finance encompasses financial resources that support climate action, including investments for transitioning to a low-carbon economy and building climate resilience. These funds flow through various channels – public and private, national and international – taking different forms such as green bonds, green loans and transition finance instruments to fund both emissions reduction and climate adaptation projects.
Why Businesses Need It?
Finance is crucial to efforts to tackle climate change, with an estimated USD200 trillion of investment needed for the world to reach net zero emissions by 2050, according to Bloomberg.
Climate finance is important for businesses because:
- It allows companies to invest in reducing emissions and enhancing greenhouse gas sinks.
- It presents opportunities for revenue and growth by shifting products and services, attracting new markets, and building climate resilience.
- Companies that act on climate change see financial benefits, with 70% reporting higher-than-expected returns on climate initiatives.
- As banks focus their funding on companies that meet ESG standards, clients that don’t may have to adapt or pay more for funding. Bank loans will come with ESG covenants and emissions targets
- It helps in mitigating risks associated with climate change impacts on operations and supply chains
Banking on Green: Overcoming Climate Finance Hurdles for Business
For business leaders to effectively harness climate finance, they must overcome several hurdles, and banks are well-positioned to assist in this process:
Expanding climate finance beyond traditional lending:
There is an insufficient capital to fund sustainable initiatives effectively, because developing economies often struggle to access capital for green projects due to limited investment opportunities and high-risk perceptions among investors.
Banks are broadening their climate finance offerings by integrating ESG standards into leveraged finance, trade finance, and treasury management. They also leverage blended finance models, using public capital to attract private investment in developing countries, and are actively involved in initiatives like the Just Energy Transition Partnerships through alliances such as the Glasgow Financial Alliance for Net Zero (GFANZ).
Banks also issue green bonds to finance projects related to energy efficiency, pollution prevention, water management, and green buildings. For example, since 2006, the market for green, social, sustainability and transition (GSS+) bonds has grown to $4.7tn. Green bonds have been the largest contributor, surpassing $3tn. In Q1 of 2024, $272.7bn of GSS+ bonds were added.
Collaborating with clients and partners to drive ESG compliance and climate resilience:
Many corporations struggle to meet the stringent criteria set by banks for climate finance. The due diligence process, including ESG standards, risk assessments and detailed project proposals, can be overwhelming. Companies must also navigate an evolving regulatory environment, with frameworks such as the EU’s Green Taxonomy and the UK’s Sustainability Disclosure Requirements (SDR) requiring detailed ESG data and alignment with sustainable finance principles.
Banks play a crucial role in helping clients decarbonise by offering finance tied to compliance with ESG standards and achieving emission goals. They support clients in:
- Shaping their ESG positions while collaborating with governments, development institutions, and other investors to expand climate finance partnerships.
- Emphasise the need for capacity development within institutions.
- Push for regulatory and policy reforms to accelerate climate finance for greater climate resilience.
Driving clean energy and emissions reduction through innovative financing:
One challenge faced by companies, namely measuring emissions, can be tackled by banks offering innovative financing for emissions reduction. Limited data availability, especially regarding suppliers’ emissions, can hinder accurate measurement. Defining the scope of emissions and including all relevant sources, particularly indirect emissions (Scope 3), is also a challenge due to complexities in the value chain.
In response to these challenges, banks are linking financing terms to environmental performance. This incentivises companies to improve their environmental performance and invest in better emissions measurement systems.
Banks offer advisory services to help companies manage climate risks and transition to sustainable operations, including renewable energy strategies, decarbonisation opportunities and guidance on emissions measurement and reporting frameworks.
At Renoir ESG, we understand the growing demand for climate finance and the challenges businesses face in accessing it. Our expertise helps bridge the gap between businesses and banks, offering tailored advisory services that simplify financing requirements, mitigate risk, and uncover growth opportunities through sustainable projects.
Transform your climate goals into financial opportunities.
