Chapter 10: Finance


Carbon capture and storage (CCS)

  • Carbon capture and storage
  • Private equity – Global Infrastructure Partners
  • Black Rock – do ESG investments reduce carbon?
  • How can investors account for carbon?
  • Discounting
  • Social return on investment
    • indicators of added value – Bryan Garcia of the Connecticut Green Bank
  • Carbon markets
  • Venture capital
  • Indicative answers to end-of-chapter questions

To meet the targets set in the Paris Accord, countries are going to need to capture carbon either directly from the environment or at source – for example, at power plants, cement works or steel plants. Governments and the state have a key role here in providing the necessary incentives to do so (laws, tax, etc.). The technology exists to do this. Geology is there to store the carbon once captured. What is missing is the infrastructure to get the CO2 from the source to the geology, clear approach to accessing the storage (ownership is complex and takes time to get licences), and the finance to build it.

Global storage capacity is around 10,000 trillion tonnes and it is feasible to take around 10 per cent of emissions out of the environment each year – 5-8bn tonnes CO2.

These insights come from Dr Julio Friedmann speaking on the Climate Now podcast. Friedmann spent some time in the Obama administration working on policy.

Private Equity – Global Infrastructure Partners (GIP)

Whilst Dr Julio Friedmann believes that CCS is viable, a contrary opinion comes from Salim Samaha, head of energy projects at GIP. As a financier of infrastructure, he is unconvinced about the pipework needed to transport carbon to suitable disposal sites. In fact, he advocates demolishing existing power facilities and replacing them with facilities that are less carbon intensive, as retrofitting is so expensive and the incentives are not in place.

On the incentives, he is a firm advocate of regulators flexing some muscles; for example, in using carbon pricing much more robustly (the current price is too low to affect investment decisions).

Samaha talks eloquently not only about investment decisions and how they are made, but also about what it takes in terms of stakeholder management to erect even the simplest of renewable energy facilities – in particular onshore and offshore wind turbines. He talks, too, about the importance and legitimacy of the “licence to operate”.

BlackRock – do ESG funds reduce carbon?

The advertising is everywhere, but do ethical investment funds work? In the context of climate change, does divestment in firms have an impact? Do markets self-regulate? Former BlackRock Chief Investment Officer for Sustainable Investing, Tariq Fancy, thinks not. Interviewed here on the BBC’s Today Programme on 7 September 2021, he offers an insider critique of markets and the importance of government policy to intervene in them.

How can investors account for carbon?

The book makes the case for firms and investors to take account of GHG emissions in their decisions. Firms need to work towards accounting for Scope 1, 2 and 3 emissions (self-generated, accrued from purchase of electrical energy, and from the supply chain respectively) before they are mandated to do so by legislation either in a home country or abroad. However, it is easier said than done, especially for investors who will need to account for the part of the emissions that their investment covers.

Small companies are less likely to measure their emissions than larger companies. It is just a financial and intellectual resource issue.

Partnership for Carbon Accounting Financials (PCAF) approaches

Sector averages are often used, but this can lead to double counting. On any investment, there may be a variety of actors counting the carbon: the investor, the user or even the local government. They may be using different methodologies for different purposes and so achieve different results.

Another approach is splitting the emissions by “enterprise value” – equity plus debt. The problem with this approach is that equity value is subject to change; for example, if the value of an enterprise increases due to a successful product launch, or decreases because of the failure of a product. If the enterprise takes on more debt, the share of the value to one investor decreases relative to another.

Paris Agreement Alignment2DII approach

This approach says, is a firm producing products that contribute to meeting net zero as defined by the Paris Agreement. This thinking is inherent to the book, which advocates firms adjusting product and subsidiary portfolios to ensure that the planetary boundaries are not breached (Raworth’s Doughnut Economics approach). This is very difficult for firms as changing portfolios requires a reconfiguration of resources and capabilities (chapter 3). For motor manufacturers, for example, the switch from petrol/diesel engines to electric motors is not so easy, as the core technologies are so completely different.

The portfolio temperature alignment approach

The thinking here is that all product portfolios have a temperature attached to them. For example, the current portfolio will contribute to 3-4 degrees of warming by 2100 (the scientific consensus). A firm with a net-zero target by 2050, would be in line to have a temperature score of 1.5-2 degrees of heating. A firm with a negative GHG emissions target would either be below 1.5 degrees or trade the credits for other firms to meet net-zero.

Clearly everything depends here on how the counting is done. Are all Scopes accounted for, or only two? The pioneers of this approach are researchers at McGill University, Canada (the home of Henry Minzberg), led by Julie Raynaud.

Source: The Economist, December 12, 2020


In the immediate run-up to COP26 (November 2021, Glasgow), Nicholas Stern (left), one of the most influential climate economists of his generation, is reported as saying: “economics profession had also misunderstood the basics of “discounting”, the way in which economic models value future assets and lives compared with their value today. “It means economists have grossly undervalued the lives of young people and future generations who are most at threat from the devastating impacts of climate change,” he said. “Discounting has been applied in such a way that it is effectively discrimination by date of birth.” (Guardian, 26 October 2021).

Stern’s arguments are elaborated in a published paper, A time for action on climate change and a time for change in economics

Other sources for discussion around discount rates and the Stern/Nordhaus debates can be found in this thread from Marta Victoria

Professor Steve Keen is a prolific writer in this field. Keen is a critic of neoclassical economics, but particularly such economists working on climate. At the start of my text, there was a reference to how economists applying their models essentially missed the financial crisis of 2008. In a similar vein, and related to the fact that the same economists using similar models are now making worrying projections about climate change and its impact on economic growth, Keen unpicks core assumptions, whilst pointing out that the economists themselves remain advisers to governments and their projections continue to inform policy. An example of Keen’s critical analysis can be found in an article entitled Economic failures of the IPCC process dating from January 2021.

Picture: By World Economic Forum – Flickr: Nicholas Stern – World Economic Forum Annual Meeting Davos 2009, CC BY-SA 2.0,

Social Return on Investment (SROI)

One of the challenges in advocating SROI is identifying the measures/metrics that show the added social value arising from a particular investment. Bryan Garcia is the President and CEO of the Connecticut Green Bank who, in this short clip from the Climate Now podcast, identifies a number of useful measures ranging from employment to healthcare savings arising from less air pollution.

Carbon Markets

The EU carbon market/trading system is well embedded and functions, albeit with limitations, well within the economic system that is the EU. However, Brexit, and the UK’s withdrawal from the system, has generated some problems; for example, the EU has a surplus of carbon credits. The UK systems does not, so there are shortages. This is leading to added costs for firms looking to buy carbon credits:

Venture capital

HBR’s Azeem Azhar fronts a podcast called Exponential View. I sense it was never set up to have a focus on climate, but a few editions have been significant helping me to understand finance and climate change. A recent edition features a long interview with Shayle Kann a partner in Energy Impact Partners, a fund set up to provide VC to high-impact companies that have nascent products that do one of the following things:

  • decarbonizes electricity grids
  • decarbonizes large industries (cement, steel, etc.)
  • Transportation (public transport – relatively easy and the likes of trucking/shipping/aviation – less easy. In Lonergan and Sawers language, Mini-Musks
  • Building a carbon management system – includes carbon capture and an industry that does not exist at the moment.
  • decarbonize Maslow’s hierachy of needs – in particular food/agriculture and buildings/housing

What is particularly interesting is a discussion around financial measures. The text of the book discusses whether it is possible to adapt existing measures; for example, NPV/DCF, or indeed replace with a social return on investment. This is in line with discussions on the purpose of the firm (Mayer 2018). Kann is adamant that alternative measures are not part of his fund’s portfolio of indicators. The return using existing ratios remain the key measures with the proviso that, of course, his fund is high-impact climate such that the carbon is already factored in. What he calls an upfront filter. The whole interview can be found here.

Indicative answers to end-of-chapter questions