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The world economy is not aligned on a below 2°C temperature increase trajectory outlined in the Paris Agreement. High carbon emitting industries, referred to as “brown” are often ostracized from sustainable finance markets. Yet by definition these industries harbor the lion’s share of potential for CO2 emission reductions, and many do not yet have substitutes (i.e. steel, aluminum, cement industries). There is a balance to be found to address green puritanism that focuses solely on green industries and confines high carbon emitting industries to the sidelines of sustainable finance. It is crucial to support these industries’ transition, while pursuing the integrity and stringent requirements that the climate emergency demands.
Drawing on this firm belief, here at Natixis we have developed a series of analysis methods and a range of financial instruments to offer our clients 360° transition support. Find out more in our report “Brown industries: the Transition Tightrope”.
Our innovative Green Weighting Factor
The Green Weighting Factor is an internal mechanism that links analytical capital allocation to the degree of climate and environmental performance of each financing. It incentivizes the origination of environmentally friendly loans by weighting on the risk weighted assets linked to the loans. Each financing deal is allocated a score from dark brown to dark green.
Five transition levers
We have designed a methodology encompassing five levers a firm can activate to reduce its emissions and align with a below 2°C global temperature increase scenario:
- Quit/exit most climate harmful activities (e.g. coal, tar sands)
- Decarbonize core activities (e.g. develop new processes, feedstock, fuel changes)
- Diversify business mix to increase green activities share (e.g. grow renewable energy capacities for an oil & gas company)
- Offset emissions that cannot be reduced (e.g. geological sequestration or forest sinks)
- Provide decarbonization solutions for other sectors (e.g. batteries, biofuels)
Incentive-based financial instruments
Environmental, social and governance (ESG) key performance indicators (KPIs) are insightful tools to inform, analyze and steer sustainable business.
Such KPIs are increasingly incorporated in credit lines and bond issuances, creating a further incentive for companies to meet their sustainability targets, while also providing banks and investors with a tool to assess the company’s performance and tangible results on actions undertaken.
Examples of KPIs:
- Carbon footprint from scope 1 to scope 3
- Governance: proportion of women among engineers and managers
- Social: frequency of accidents that lead to sick leave