Key combination for corporates targeting successful sustainability breakthroughs

While transformational change has traditionally been hindered due to funding restrictions and expensive innovation projects, a new approach can now be pursued with the post-pandemic era approaching.

Through the convergence of technology, capital, and scale-up capabilities, industry incumbents can translate their sustainability visions to reality – ushering in a new chapter of green finance practicality.

Although this scenario may have seemed improbable not long ago, several trends have simultaneously transpired to lay the foundations for green financing breakthroughs.

Governments are engaging in heightened regulatory activity to build resilient economies and investors are prepared to pursue higher-risk green initiatives. Industrial companies are also introducing corporates to potential green technologies, while collaboration activities are broadening ecosystems via new players, partners, and opportunities.

Crucially, this applies to the Middle East, where the required framework and levers for green finance can benefit the wider corporate community and region exponentially. Green financing for sustainability projects increased by 38 percent to reach $6.4 billion in H1 2021 alone, while green finance is projected to create $2 trillion in economic growth and over one million new jobs by 2030.

These statistics certainly highlight the potential accompanying the green finance segment – and there are various innovative green asset and technology financing options available for interested parties to explore. Besides investment funds, project financing, and debt or equity investments, experts and commercial banks can facilitate technology deployments and green project acceleration through several green funding areas.

As corporates strive to achieve transformational change by acquiring capital, harnessing technology, and successful scaling their capabilities, they can do so backed by the following:

• Sustainable bonds: Climate bonds are viable for mature investors seeking to introduce climate change solutions and projects, increasing available funding for green initiatives while providing positive sustainability benefits. Blue loans can also raise finance for projects within the blue economy, while ESG-linked finance is available and not linked to specific use cases.
• Asset recycling platforms: As demonstrated courses of action from capital-intensive clean infrastructure, there are multiple asset recycling platform choices for corporates. Capital recycling designates funds toward greener projects, ‘farm down’ entails equity stakes being sold progressively, yield companies produce cash flow and returns through long-term contracts, and special purpose acquisition companies (SPACs) raise funding for capital-intensive startups – including $80bn in 2020.
• Technology financing: Corporates exploring development expenditure (DEVEX) financing can utilise several sources depending on project technology readiness levels (TRLs). These include public funds for early investment and support, government-backed venture funds to complement private venture capital, and SPACs for sizeable technology funding.
• Asset management: As Shariah investing emerged a decade ago as a desirable asset class, green financing is increasingly attractive capital with promising returns due the the profound change in economic make up, such as electric vehicles promising to overtake carbon fueled cars.

Admittedly, green financing options are bound by demands, aspirations, and conditions per each individual corporate, with eventualities dependent on specific factors. That being said, every corporate seeking sustainability finance can do so having taken note of similar instances in other sectors. In line with this, there are four actions one can take to help drive success:

Create a sustainable ecosystem

With an array of green technology ecosystems continuously welcoming partners specialising in different industries and technologies, corporates should prioritise developing and forming a sustainable ecosystem. This ecosystem should comprise technology, scale, and capital, which will be central to investment objectives coming to fruition.

While large companies already tend to be involved in multiple ecosystems, realising aspirations and achieving maximum value for many others hinges on proactive action in this direction.

Establish a comprehensive business model

No matter their readiness level, all corporates should pursue projects knowing that their assets or technologies becoming commodities starts and ends with a robust business model. Particularly during early development phases, models often have discrepancies in terms of clarity and direction. Therefore, corporates should define the value they are striving to build, identify the most prudent way to create cash flow, and decide where ownership and control will rest.

Deliver on priorities and objectives strategically

For businesses, executing every element of their business model requires a strategic approach. Whether this is done internally, via an external collaborator, or combining the two, successfully meeting targets and progressing requires a strategic roadmap that includes stakeholder alignment and ambition-timeframe balance.

Adapt the corporate governance model

From board to ethical investing, the corporate world is rethinking the way it creates value and governs itself. New oversight committees are formed in global complex companies to ensure consistency across multiple business lines and geographies – and this is something corporates should also pursue.

Backed by the most suitable innovative financing option, corporates have an opportunity to embrace the support available to them and make continuous strides towards sustainable growth breakthroughs.

The above steps will guide companies on their innovation journeys, with technology, capital, and scale-up capabilities simultaneously driving project success and green growth.

Philippe DeBacker, managing partner, global practice leader Financial Services, at Arthur D. Little.