Integrate climate into corporate financials

In mid-April 2024, WBCSD and BCG conducted a masterclass on the topic of Harmonizing Climate with Financials as part of a Climate Transition Roadmap masterclass series. This document summarizes the key learnings that were presented and surfaced via rich discussion among company participants under Chatham House rules.

Integrating climate considerations into corporate financials is essential for aligning with sustainability goals and market trends, enhancing long-term profitability. This strategy incorporates environmental objectives into financial frameworks and decision-making, allowing organizations to effectively assess the strategic costs and benefits of climate initiatives. By collaborating with finance and investment teams, companies can build a solid climate business case and secure the necessary funding to manage risks and seize opportunities in the green economy. Enhanced data and IT systems support this integration with clear KPIs that merge climate and financial metrics, ensuring transparency, accountability, and a unified strategy that navigates both climate opportunities and risks. [For more information on how to create a unified climate-informed business strategy, please see “Integrate Climate into Strategic Planning”]

Integrating climate considerations into financial decision-making is a strategic and dynamic process, consisting of 5 key aspects [See Figure 1].

Figure 1: Overview of 5 key aspects for harmonizing climate with financials for organizations. Aspects 1-3 involves a collaboration between investment teams to incorporate environmental factors into financial planning to develop a climate business case, capital allocation framework, and budget. Aspect 4 is subsequent identification and securing of funding for sustainability goals. In parallel to these is Aspect 5, to develop and maintain robust data management and governance frameworks to monitor and tie climate actions with financial metrics. These aspects ensure strategies stay aligned with both financial and environmental objectives, leveraging data for informed decision-making.

1. Make the business case

It is recommended that companies should start with the standard process to develop a business case, which focuses on three key dimensions: strategic, financial, and risk. Climate considerations can be layered on to develop the internal climate business case. Companies should explore the following critical questions along the three dimensions:

• Strategic: What competitive advantage can sustainability initiatives provide? Examples include potential cost savings from renewable energy, improved access to energy markets, enhanced resilience, climate and supply chain risks, and the ability to attract and retain top talent.

• Financial: What financial benefits can be realized from climate actions? Examples include direct cost reductions, revenue opportunities from mechanisms like carbon credits and green premiums, access to green financing options such as green bonds, and the potential for lucrative corporate partnerships.

• Risk: How can integrating climate considerations improve risk management? Companies should focus on preparing for physical climate impacts and transitioning to low-carbon energy solutions, enhancing the overall risk positioning.

By addressing these questions, companies can ensure that their climate business case aligns with broader corporate objectives; improve financial performance via operational efficiencies; reduce regulatory and reputational risks; and enhance brand reputation through demonstrated environmental commitment.

[Refer to Figure 2 for an illustrative overview of climate business case considerations].

Figure 2: Additional considerations are needed to make the climate business case.

2. Develop a capital allocation framework

Companies can incorporate and overlay climate considerations into existing capital allocation processes by using embedded and interconnected metrics, with the following multiple benefits:

• Simplified climate data integration using existing company structures

• Aligned financial and sustainability KPIs for coherent tracking

• Ensured consistent sustainability integration across all business units

• Optimized operational efficiencies for cost savings and market opportunities

• Centralized funding decisions for sustainability

• Enhanced transparency with stakeholders

• Developed employee skills and knowledge in climate expertise and business actions.

This unified strategy moves away from isolated efforts, fostering comprehensive and strategic climate action.

To illustrate, is an example of how climate considerations can be merged with financial KPIs for a company in the containers & packaging industry. For the company’s top three material issues, the performance of sustainability initiatives can be tracked in the following ways:

• Energy management: An initiative to improve energy efficiency can be tracked via emissions intensity and $/ton of CO2e, impacting capex; this cost can even be based on a company’s internal carbon price.

• Product design & lifecycle management: A new scheme to minimize resource use by reclaiming used packaging can be tracked by $/ton of waste reduced based on volume of packaging collected, impacting the cost of goods sold (COGS).

• Risk management: Establishing a sustainability steering committee can improve risk management policy and allocate internal funds to business units with good ESG ratings, impacting SG&A expenses.

3. Translate sustainability into budget

When properly executed, climate-integrated budgeting allows companies to align environmental goals with financial strategies, mitigate risks, seize growth opportunities, and have climate-informed strategic planning and decision-making. When integrating climate and financial KPIs, it's recommended that individual business units tailor their strategies and financial plans. Business units should develop their budgets, whether annual or ongoing, with these considerations in mind:

[See Figure 3 for an illustrative cost curve and budget with line items including climate metrics]:

• Climate-Integrated Budget: Expand budget considerations to include climate-related capital expenditures (capex) and operational expenditures (opex), and the Cost of Inaction, recognizing that delayed action on climate issues will likely result in significantly higher future costs and missed opportunities.

• Structured Climate Investments: Implement dedicated budget and line items for climate initiatives, ensuring each is supported by well-defined requirements and KPIs for ongoing tracking and impact assessment.

• Defined Sustainability Metrics: Clearly articulate sustainability objectives and establish precise KPIs, especially to link climate and financial metrics; such as carbon emissions per unit production or proportion of renewable energy utilized.

• Proactive Risk Management: Regularly assess risks to manage potential financial impacts from environmental factors. Adjust strategies based on KPI performance and changes in environmental regulations to maintain best-practice compliance.

Figure 3: An illustrative example of cost implications and KPIs to track for a climate-informed financial budget.

Note: Anecdotally, companies shared that climate initiatives often face a higher “burden of proof”. Adopting a standardized process allows for systematic evaluation of both climate and non-climate initiatives, streamlining decision-making. This method integrates climate and financial metrics, improves transparency and accountability, and simplifies the justification of climate investments within overall financial strategies.

4. Fund for sustainability

As companies align climate strategies with financial planning, exploring diverse funding mechanisms becomes crucial. This includes leveraging both internal and external financial options. Internal financing options offer the advantage of building incentive structures within the organization to fund climate action, with more control over financing since it is in the company. External financing options provide additional capital for organizations to fund ambitious projects or expand their potential climate impact; the access to grants, third-party capital, and the ability to blend different funding sources increases the potential for larger initiatives to be feasible. A strategic mix of these funding sources is often necessary for companies to achieve their various climate objectives, with each company and initiative needing the appropriate funding source (i).

Internal financing mechanisms, including (but not limited to):

• Internal Carbon Fund: Companies create a fund specifically for supporting carbon reduction projects, funded by internal charges on carbon emissions.

• Services & Leveraging of Expertise: Companies can utilize internal resources, external expertise, specialized knowledge, and advanced technologies, to efficiently allocate funding and enhance the execution of climate initiatives for maximum impact.

• Internal Carbon Price (ICP) & Cross-Departmental Funding [See ‘Usage’ for company examples and ‘Read More’ for additional resources on internal carbon price strategies]: Sets a price on carbon emissions within the company, charging departments for their emissions, and using the revenue to finance sustainability initiatives across the organization.

• Green Premiums & Customer Willingness to Pay [See ‘Usage’ for company examples]: Implements a price premium on eco-friendly products, which customers are willing to pay, funding their sustainable development and offsetting higher production costs.

• Services & Leveraging of Expertise: Companies can utilize internal resources, external expertise, specialized knowledge, and advanced technologies, to efficiently allocate funding and enhance the execution of climate initiatives for maximum impact.

• Carbon Credits [See ‘Read More’ for additional information on carbon credits for natural solutions]: Companies can generate and sell carbon credits from verified emissions reduction projects to fund further climate actions, leveraging existing environmental initiatives.

External financing mechanisms, including (but not limited to):

• Government Incentives: Companies can leverage tax credits and other governmental incentives to lower the cost of implementing green technologies and sustainability projects

• Green Financing [See ‘Read More’ for additional information on raising capital via green bonds]: Specialized financial instruments, such as green bonds, are provided by banks and financial institutions to fund projects with environmental benefits. These funding options attract environmentally conscious investors and support sustainable development initiatives.

• Corporate partnerships: Collaborations with other companies to co-fund and co-manage sustainability projects, leveraging combined resources and expertise for larger impact.

• Blended Finance (e.g., External Grants & Philanthropic Sources, PPPs): Combines capital from public, private, and philanthropic sources to fund large-scale sustainability and social impact projects, reducing risk and leveraging public and private contributions.

5. Develop enabling structures for governance and data integration

For effective integration, companies must establish robust structures by developing, subscribing to, or acquiring necessary data management and governance frameworks to support and sustain climate action. These systems are crucial for tracking progress, ensuring accountability, and making informed decisions that align with financial and environmental goals.

To fully integrate climate considerations into financial aspects of business operations, companies need to embed sustainability within their operating model through several key enabling structures:

• Talent: Recruit and develop employees with expertise in finance and sustainability to align environmental and financial goals. Provide ongoing training in green finance and sustainable practices to enhance decision-making skills.

• Process: Modify or create processes to integrate sustainability metrics into daily operations, including budgeting, investment analysis, and risk management, to improve decision-making.

• Technology: Utilize advanced technologies and data systems for managing and analyzing climate-related data, such as carbon footprint management software, energy efficiency tools, and platforms for real-time sustainability analytics.

• Governance: Implement robust governance frameworks to enforce accountability for climate goals throughout the organization, establishing clear policies, roles, and responsibilities that support the company’s sustainability vision.

• Tools: Employ tools for enhanced monitoring, reporting, and forecasting of environmental impacts, assisting in quantifying the financial effects of climate strategies and tracking progress toward sustainability goals. Explore the diverse and evolving landscape of tools available for data governance. [

  See the ‘Read More’ section for a more detailed discussion on data capabilities and supporting tools.]

By strengthening these aspects of their operations, companies can ensure that sustainability is not just an added component but a fundamental part of their financial and strategic decision-making processes, leading to more resilient and adaptable business practices.

Several companies have demonstrated successful harmonization of climate with financials.

Green Premium

• Maersk embraced green premiums as a strategy to address the environmental impact of its shipping operations. As the world’s largest shipping company, Maersk is committed to be carbon-neutral by 2050. To support this goal, they offer customers the option to use eco-friendly shipping solutions as a premium. The green premium covers costs associated with sustainable biofuels and other greener tech that significantly reduces carbon emissions compared to conventional fuels. The initiative has the dual benefit of helping Maersk be more sustainable and enables customers to lower the carbon footprint of their supply chains.

• Patagonia has deeply embedded sustainability into its business model, incorporating green premiums into its product pricing to cover the use of organic or recyclable materials, higher-quality durable materials that offer a longer product life, and fair-trade practices. Their green premiums support environmental initiatives, such as clean energy projects to reduce long-term operating costs, investments into sustainable fibers, habitat restoration, and supporting grassroots activism. Its “Worn Wear” program promotes circular economy by reselling used items and offering trade-ins, which are additional revenue streams. Their price transparency shows the cost of environmental responsibility and serves to educate customers and set a high industry standards, challenging peers and competitors to follow suit. Importantly, these investments have simultaneously bolstered their brand identity and positive climate impact.

Internal Carbon Price

• Microsoft has been a leader in corporate sustainability, in part due to using an internal carbon price since 2012. The price, which is applied across its major business units as an “internal carbon fee” for producing emissions, creates a financial incentive to reduce emissions. The revenue generated from the fee funds a variety of climate actions, including renewable energy, carbon offset purchases, and efficiency improvements. This helps to align Microsoft’s operational goals with broader sustainability commitments and encourages greener business practices overall.

• Unilever implemented an internal carbon price as part of its broader strategy to achieve net-zero emissions from their products before 2040. Unilever’s ICP is applied as an “implicit price” and is used to influence investment decisions and foster innovations in lower-carbon technologies across their manufacturing processes and supply chain. The ICP financially motivates the adoption of sustainable practices, funding of renewable energy projects, and greener product development.

See “Read More” for additional links to company examples.

Climate Impact

• Enhanced Corporate Responsibility: Companies integrating climate considerations with financials often adopt more responsible operations than their peers.

• Increased Transparency and Accountability: Tracking climate and financial KPIs promotes visibility and drives companies to meet or surpass sustainability targets.

• Economic Transformation: As sustainability becomes a staple in financial strategies, the economy shifts to favor greener products and services, reshaping industry models and influencing overall business impact on the climate.

• Effective Risk Management: Linking climate and financial factors helps companies adapt to new regulations, mitigate risks from volatile energy markets, and prepare for the impacts of climate change.

• Influence on Policy: Companies can shape public policy and industry standards, encouraging wider adoption of climate-positive practices.

Business Impact

Benefits

• Holistic Oversight: Integrates analysis and reporting for enhanced management of climate and financial risks and opportunities.

• Long-term Sustainability: Supports effective decision-making on climate actions, monitors progress, and showcases real impacts from sustainability investments, ensuring future adaptability.

• Regulatory Compliance: Maintains compliance with evolving environmental regulations, avoiding penalties and capitalizing on incentives and investor interest.

• Credibility & Investor Confidence: Enhances corporate reputation and investor trust by demonstrating a commitment to sustainability, attracting environmentally conscious customers, partners, and stakeholders.

Costs

• Tools & Data Integration: Initial costs involved in acquiring and integrating climate data collection and modeling software into current business systems.

• Risk Management: Expenses for advanced risk assessments to understand climate-related risks, with potential impacts on insurance premiums that may fluctuate based on risk analysis and mitigation efforts perceived by insurers.

• Capability Building: Investments in recruiting climate experts and developing training programs for upskilling or reskilling in climate and financial topics throughout the organization.

• Compliance & Reporting: Expenses for systems to monitor emissions and sustainability metrics for regulatory compliance, such as under TCFD guidelines.

A company of any size in any sector can integrate climate and sustainability with their financial strategies effectively, but approaches will vary. To illustrate:

• SMEs: Can improve cost-efficiency and profitability through energy-efficient practices and sustainable sourcing.

• Large Corporations: Can utilize internal carbon pricing and renewable energy investments to manage regulatory risks and enhance financial stability.

• High-Impact Industries: Can adopt clean technologies to stay ahead of market and regulatory changes, safeguarding future business viability.

• Service Industries: Can cut operational costs and increase customer loyalty by implementing green practices and digital transformations.

Key Stakeholders

Internal stakeholders

• Senior Management & Board of Directors: Direct and prioritize the integration of sustainability into the core business and financial strategies.

• Finance Team: Assess and quantify the financial impacts of climate activities, ensuring alignment with financial goals through cost-benefit analysis and integrating these findings into budgeting and reporting.

• Business Unit Managers: Implement corporate sustainability goals within their areas, enhancing the integration of climate considerations into daily business operations.

• Risk & Compliance: Monitor adherence to environmental regulations and standards to mitigate financial and reputational risks, integrating both climate and financial risks into strategic planning.

External Stakeholders

• Investors & Shareholders: Demand strong ESG performance and reporting, pushing for the integration of climate risks and opportunities into financial strategies to protect and enhance investments.

• Public/Customers: Increasingly seek transparency in sustainability practices and expect companies to set and meet clear KPIs and targets.

• Financial Institutions: Offer green financing options like green bonds or sustainability-linked loans, evaluating how companies integrate financial and climate strategies against sustainability standards.

• Suppliers & Business Partners: Drive sustainability in supply chains, offer innovative solutions, require compliance with environmental standards, and collaborate on achieving shared climate and financial objectives.

• Regulators & Government Agencies: Shape the legal and regulatory framework, influencing financial planning through emissions standards, renewable energy incentives, and carbon pricing.

• Industry Groups and Peers: Establish best practices and sustainability standards, encourage collaborative initiatives, and create competitive pressure to integrate sustainable practices into financial and operational strategies.

Implementation Tips

For an overview on guidance to design a tailored internal carbon price and implementation tips, see the article “Adopt an internal carbon price to drive decarbonization.”

Proper climate and financial data harmonization and management will support multiple needs from strategy to compliance. Key steps for building and enhancing climate and financial data capabilities include:

1. Gathering Data: Establish systems to collect accurate and relevant data across operations, including energy use and supply chain emissions.

2. Integrating and Analyzing Data: Integrate and analyze the collected data to identify improvement areas and monitor sustainability progress.

3. Leveraging Data for Decision-Making and Reporting: Use insights from data analysis to guide strategic decisions and produce comprehensive reports that meet regulatory requirements and improve stakeholder transparency.

Companies navigating the fragmented landscape of data governance tools for integrating climate with financials should understand the range of available options to tailor to their needs. Tools vary from specific use cases like Persefoni's carbon accounting to broader applications such as Novisto's ESG management and Valsight's financial planning, with enterprise-wide solutions like SAP also available. [See Figure 4 for an overview of common tools]. Depending on their IT preferences, geographic location, and initial capabilities, companies may find different tools or combinations thereof most effective. As climate capabilities mature, purchasing established tools rather than building new ones can be a practical approach.

The main types of supporting tools are:

• Enterprise Software: Comprehensive solutions that manage data across an organization (e.g., Workiva, SAP)

• Sustainability Specialists: Tools designed specifically to track and manage broader environmental impact and sustainability efforts (e.g., Sphera, Greenomy)

• Carbon Specialists: Applications focused on calculating, tracking, and managing carbon footprints and emissions. (e.g., Persefoni, Watershed)

• Product Lifecycle & Compliance: Tools that help companies ensure products meet environmental standards throughout their lifecycle (e.g., SimaPro, Ecoshain)

• Other: Tools that integrate features from the above categories, providing a holistic approach to climate data management (e.g., Novisto, Valsight)

Figure 4. Landscape of tools for data and governance.

Internal Carbon Price

• Microsoft

• Unilever

• Maersk WEF article

• WBCSD: Adopt an internal carbon price to drive decarbonization

Tools

• Workiva 

• SAP 

• Sphera

• Greenomy 

• Persefoni

• Watershed

• SimaPro 

• Ecochain 

• Novisto 

Footnotes:

(i) Note: Many companies and customers do not realize that deep decarbonization across their supply chain comes at a relatively low-cost increase to end-consumer prices—only 1-4% extra. Emissions from materials and processes can be reduced with readily available and affordable levers including, circularity, increased efficiency, and renewable power. Other levers that may have a net cost will also help towards deep decarbonization, such as low-carbon steel, low-carbon aluminum, and green hydrogen. An example is that substituting green steel for a medium-sized family car would incur a <2% cost increase; this is because steel accounts for approximately €500 out of a €30k average final sales price for a car. The real challenge is that the cost to decarbonize is unevenly distributed through the value chain, with early/upstream players often bearing the brunt of costs to make greener materials and components (e.g., green steel manufacturer versus automotive OEM). Accordingly, across the value chain, different funding options will be needed to decarbonize. In the medium term, some of these changes can yield savings. It may also be possible to get revenue from green premiums. In the long term, full net-zero decarbonization may require additional investments depending on the industry. Value chain decarbonization is an opportunity that, if overlooked and delayed, may cost increasingly more in the future. Clear climate and financial harmonization can therefore help support strategic planning to look ahead and act swiftly to make sustainable changes. [See the BCG x WEF report “Net-Zero Challenge: The supply chain opportunity” (2021) for additional information on supply chain decarbonization and financial opportunities for companies]