Whilst they embark on reduction strategies towards a net zero goal, leading businesses are financing climate action to increase their positive impact and close the emissions gap. This includes acquiring and retiring carbon offset credits to achieve climate neutral status, and aligning with sustainable investment principles.

Engaging in climate action finance brings fundamental benefits to the business and to communities around the world. Doing so meets growing stakeholder expectations, creates a competitive advantage and reduces exposure to risk - both physical and reputational. It also directs capital and know-how to regions with limited means to decarbonise.

This article - exploring Step 4 of the South Pole Climate Journey – guides you through the large variety of carbon offset options and explores a range of growing investment opportunities. Following our how-to guide will ensure your capital maximises the direct benefits to your business and the planet.

The short-term drivers of durable climate leadership

Business climate leadership is motivated by two mutually reinforcing forces. There is the pull of competitive advantage, which drives the creation of innovative products and services to enhance reputation and investments in more efficient and advanced processes.

Simultaneously, the imperative to mitigate risk shines a spotlight on high carbon emissions in production and processes, supply chains vulnerable to physical climate impacts and misaligned governance and decision-making. Taken together, these factors push for a long-term strategy that includes immediate climate action.

Ensuring that investments are sustainable is a critical component of climate leadership. As explored in the last article, the virtuous cycle of ESG scores, disclosures and tangible change is how progress is judged by investors and regulators, customers and employees. Using finance for action now has far greater value than commitments to a distant green future.

Climate finance comes in different guises

Financing climate action supercharges emission mitigation efforts. The most popular large-scale approach is carbon offsetting, through the purchase and retirement of carbon credits. Although the approach had its detractors in the early years, common standards and verification systems ensure that offsetting today is well-established, rigorous and transparent to scrutiny. There are two common categories of carbon offset projects: to avoid and remove carbon emissions.

Avoidance credits are generated in two main ways. First, clean technology projects avoid the burning of fossil fuels and a carbon saving is generated. Examples include wind, solar and hydropower. Alternatively, when forests or land are protected, emissions from biomass burning or the decomposition of vegetation and soil are prevented. The most common project type in this category is known as REDD (which stands for Reduced Emissions from Deforestation or (forest) Degradation).

Removals credits are usually achieved when carbon is sequestered through afforestation or land management practices are improved, such as soil enhancement or peatland restoration. The potential of this project type is limited by the ability to secure land for the long term, and by the competition from high paying agriculture and development.

Apart from Nature-Based Solutions (NBS), investment is growing in carbon removal and storage technologies. This includes capturing industrial emissions (CCS), 'scrubbing' carbon dioxide directly from the atmosphere (DAC) or having carbon dioxide absorbed into biomass and stored after extracting the energy (BECCS).

Often, climate financiers select projects that can show social 'co-benefits', such as those contributing to the Sustainable Development Goals. For example, nature-based projects usually support biodiversity and ecosystems, and agroforestry provides food, livelihoods and health to communities. Technology projects can create green jobs and support growth of the low carbon economy. These additional benefits contribute to the quantifiable indicators of climate finance.

Impact Funds and Green Bonds

Increasingly, companies, governments and philanthropies are looking for ways to finance climate action at a greater scale, individually or collectively, in a blended finance fund. These impact funds collect monies that are then invested in targeted projects and companies that generate environmental and social impacts.

Impact Funds and Green Bonds

One example is the Jaguar Connection Fund, set up by ISA, the largest energy transmission company in Latin America, together withSouth Pole. The fund aims to protect natural habitats in its operating countries including Colombia, Peru and Brazil, and provide the welfare of local communities.

Other 'evergreen' funds are structured to create a virtuous cycle, by offering soft loans to suitable green businesses and causes, with 'revolving' repayments reloaned to others.

Impact funds are often structured as not-for-profit, but nevertheless provide commercial benefits. For example, they may be designed to benefit community groups associated with the company, such as smallholder farmers working in their supply chains. In some cases, carbon credits are also generated and provide a revenue stream.

Conversely, some businesses are turning to green bonds to raise inbound finance for 'clean' infrastructure or technology, such as the €1 bn issue earlier this year by BASF, one of the world's largest chemical companies. Fashionhouse and creator of the legendary tartan design, Burberry, also recently announced a (value undisclosed) bond raise, heralding it as a first in the luxury fashion industry.

According to a recent article in the Financial Times, Moody's have stated that green bonds have risen from 2.8% of the total market in the first quarter, to 4% currently. This investment mechanism is set to grow fast, as it underpins the 'green deals' being created by governments worldwide. For example, Germany has recently issued a €6bn sovereign green bond, and the European Commission is exploring whether to issue green bonds to help finance its post COVID-19 stimulus package of €750bn, called Next Generation EU. These bonds are attractive to investors for their resilience, climate transparency and credibility.

Who is taking action?

The number of businesses using carbon finance is growing fast. A recent study by The Data-Driven EnviroLab and the NewClimate Institute shows that net zero commitments have risen to 1500, from 500 at the end of 2019. In the past 12 months, we have seen commitments and climate finance activity from businesses as varied as Microsoft (commitment to lifetime net zero), Thysenkrupp steelmakers (commitment to net zero in 2050), BP (net zero by 2050) and Unilever (net zero products by 2039).

In its 12th annual review, Forest Trends identified voluntary carbon markets operating at a seven year high in 2018, with over 50% growth since 2016. Most of this expansion was attributed to a rise in the use of nature-based solutions, which have experienced over 250% growth in that period. German bank Barenberg predicts the global carbon offset market will continue to grow at its rapid current rate over the next five years. This could step up significantly if large buyers continue to take positions in the market. Notably, Shell has committed to invest $300 million in nature-based offsets from mid-2019 to mid-2022, and in 2019 EasyJet committed to offset all 7.5m tonnes of CO2 emitted by its jet fuel for the year - a single trade which was equivalent to nearly 8% of the global annual voluntary offset market.

New, fast growth businesses are also financing climate action. Food delivery company, Delivery Hero, has expanded dramatically through the COVID-19 crisis, and is offsetting its delivery and operational emissions.

Within this broader picture, there are a number of interesting developments. Businesses continue to search for projects which align with their brand and geography, in particular their operations and supply chains. This includes supporting projects with a certain profile or that help poor communities. For example, the bottled water brand, Volvic chose to buy carbon credits from South Pole that came from 'volcanic' countries, like the DRC, to mirror the image of a Volcano on its mineral water.

Others are creating their own projects. Signify, the lighting manufacturer, has supported the creation of solar and biomass-powered mini electricity grids in India to provide electricity access to rural communities. The Signify Foundation also distributed efficient lighting devices to these communities, helping to transform lives and reduce emissions.

National initiatives are driving the agenda too. The Swiss Government is funding the development of Swiss projects, including agriculture, mobility, waste and biomass. With a vastly increased ambition level from the current phase, they plan to generate credits amounting to millions of tonnes of CO2 per year, over the period 2022-2030.

South Pole Penguin

South Pole's five step guide to climate finance

  1. Create a stretching carbon reduction trajectory, preferably against a 1.5º science based target
  2. Balance 100% of your unavoidable emissions with avoidance and removal credits
  3. Orientate your credit and impact funds to strengthen your supply chain resilience
  4. Prioritise climate finance which creates co-benefits, such as biodiversity, gender balance, community livelihoods and green jobs
  5. Create or join an impact fund to multiply the reach of your finance and meet your sustainability and resilience goals

The future

The use of climate finance to meet net zero goals and burnish sustainability credentials will continue to accelerate fast in this decade of climate action. This includes the use of credible nature-based carbon offsets and green bonds.

In the last month alone, Google has announced it will offset its legacy emissions with immediate effect, and use its technology savvy and partnerships, such as AI and smart grids, to drive down emissions in the supply chain and simultaneously capitalise on the clean energy boom to help decarbonise the economy. Its parent company, Alphabet, has recently launched a $5.75bn sustainability bond, believed to be the largest so far by any company.

It's not fanciful to see climate change as the new battleground for competitive advantage for the world's biggest companies. For this we should be grateful. If we sum up all the pledges by national governments under the Paris Agreement, we are far away from the decarbonisation pathway required to keep global warming within 2°C - not to mention the preferred 1.5° ceiling. It is inevitable that pressure from stakeholders will increase, meaning those businesses, investors, cities and national governments who take action now will continue to flourish.

In our next article we will explore how to maximise this advantage - through climate advocacy, disclosure and communication of success.

South Pole offers support along the entire Climate Journey to help tailor solutions for companies to reduce emissions within their boundaries, but also finance global avoidance and removal activities, either through certified carbon credits or investments through impact funds. We help empower frontrunners to take results-based climate action, today.