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Turning climate strategy into value creation: The role for financial services on the path to net zero

May 20, 2024

A staggering 4.4% of the world’s GDP could be lost annually if we do not implement climate adaptation strategies. With implications this large, every level of society must act to mitigate the risks. However, there is a clear role to play for financial services firms to support the massive levels of investment into effective climate solutions that’s needed. 

For asset managers, insurers, and private equity firms, their role is unique–their own net-zero journeys depend on that of their portfolio companies and clients. They have to support portfolio companies in various stages of decarbonization to take urgent action to achieve their net-zero targets. 

In a conversation with Funké Adeosun, Global Transition Solutions Director, at Allianz Commercial, and Steven Bullock, Global Head of Research and Methodology, at S&P Global Sustainable1, we discussed the opportunities and obstacles this sector of the financial services industry faces in the net zero transition and how new technology, tools, and partnerships can help. Watch our conversation here, or dig into the three key takeaways below: 

1. Data-driven transition strategies 

While the vast majority of companies with a net zero target have implemented a strategy to reduce their Scope 1 and/or Scope 2 emissions, only about half have defined a strategy for Scope 3 emissions. As investors increasingly put pressure on companies to have robust, detailed, and transparent transition and decarbonization goals, it is imperative that companies make this a business priority. Accurate, reliable, and timely data is crucial for setting, executing, and monitoring strategies aimed at reducing emissions and achieving net zero goals, whether it's actioning the firm’s net zero journey or facilitating the net zero transition of clients and portfolio companies. 

Financial services firms in insurance or asset management need to ensure that their strategies, as well as those of their portfolio companies and clients, have clear targets, measurable outcomes, and the ability to consistently track progress.  Yet, most, particularly insurers, particularly insurers, lack sufficient data to underpin their net zero journeys and support clients’ and portfolio companies on theirs. This can significantly hamper their ability to assess and mitigate risks associated with climate-related investments effectively. For example, insurers struggle to quantify the potential costs and likelihood of climate-related events, hindering their ability to provide accurate pricing and coverage. 

“Data is absolutely the biggest barrier for insurers in this space” - Funké Adeosun

To combat this, financial institutions should engage with, and encourage clients to implement, relevant standards and industry groups within the net zero ecosystem such as the Science Based Targets Initiative (SBTi), the Carbon Disclosure Project (CDP), and the Voluntary Carbon Markets Integrity Initiative (VCMI) which all provide best practices and guidance for what corporate carbon credit disclosures should include. These organizations provide frameworks and guidelines for firms to build the base net-zero data strategy. 

2. Data partners for risk mitigation 

Industry standards and best practices can provide the foundation for data structure, but they’re only a start to ensuring meaningful, measurable progress on net zero. . Finding a data partner enables financial institutions to leverage specialized knowledge and data analytics to make informed decisions and manage risks associated with the net zero journey, from emissions reduction measurement to carbon credit procurement. 

Financial institutions, often positioned at the intersection of multiple industries, uniquely need to understand the regulations that impact their clients and portfolio companies across sectors – that’s no exception when it comes to net zero. Aviation serves as a prime example, with companies in the sector increasingly subjected to industry standards to expedite net zero progress. As a result, the financial firms that insure, own, or manage these companies need to understand their market dynamics and help them navigate them, requiring a broad range of knowledge and expertise to avoid risk. 

Rather than building those deep knowledge sets across industries in-house, it’s much simpler to partner with outside firms who specialize in net zero and decarbonization data and insight, like Sylvera. Engaging outside experts helps financial institutions give clients confidence in their investments and manage risks effectively, which supports the shift to net zero.

3. Leveraging climate strategy to drive value creation–and identify the untapped opportunities 

Financial institutions play a dual role in the net zero transition: as investors and as risk managers. Savvy firms understand that setting net zero targets and actively engaging in decarbonization efforts, such as retiring carbon credits, are not only responses to regulatory pressure but also strategic decisions to stay ahead in an evolving market. 

Given outside firms’ deep expertise, they’re quicker to spot trends, risks on the horizon, and help financial institutions act faster to save money, mitigate risk, generate returns – and, ultimately, drive real climate progress faster. Taking a proactive approach helps mitigate potential regulatory and financial risks associated with climate change, and positions firms and their client and portfolio companies for a smoother transition towards a net zero economy. 

For example, financial institutions can tap into carbon or transition project finance, trading, or developing new products to help others’ advance net zero goals.  Similarly, understanding and pricing carbon market risks are essential for facilitating portfolio decarbonization. Strong data partnerships with companies like Sylvera mean that firms can easily access the insights and expertise they need to stand up and execute such strategies and turn climate strategy from risk mitigation to value creation opportunity. 

“The opportunity for us is to understand risk associated within carbon markets so that we can price risk effectively and allow clients to decarbonize their portfolios. In order to do this we need to increase our own expertise internally.” - Funké Adeosun

The net-zero transition isn’t simple, it will require massive changes to firms’ operations, but doing so provides plenty of opportunities. Better data means financial institutions can not only reduce their own carbon footprint but also catalyze positive change across industries and contribute to the global transition towards a sustainable future. And, Sylvera can be a strategic partner to firms looking to make the shift. 

We provide a leading end-to-end data platform for carbon procurement and investment, unparalleled market expertise, the most trusted ratings, and superior data visibility and tools, to ensure confidence in the setting and efficient realization of carbon credit strategies, driving measurable progress towards climate goals and optimized returns on investments.

Watch the full discussion here. If you’re interested in learning more, reach out to us.
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About the author
Senior Technical Climate Consultant

Annalise Downey is a Senior Technical Climate Consultant at Sylvera, helping market participants define their carbon strategy and navigate the voluntary carbon markets. Annalise was brought in during the early days of Sylvera as a member of the ratings team, analyzing carbon projects and helping to develop project-type frameworks including REDD+ and ARR. Annalise brings experience in commercialization and new product development as co-founder of a subsea remote sensing company. She is passionate about bridging disciplines to develop data-driven and scalable solutions to tackle climate change.