How Climate Considerations are Shifting Project Funding: 3 Lessons Learned

How climate considerations are shifting project funding: 3 lessons learned
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Janya Kelly Member Name

Climate Change & Air Quality Specialist

Rachel Wyles

Rachel Wyles Member Name

Senior Carbon Management and Climate Change Specialist

Big changes are underway in how major infrastructure projects such as electricity supply, dams, pipelines and ports get funded. Financing decisions used to focus on a project’s ability to deliver good financial results. But now, during what many are calling the “green recovery,” investors, private equity managers, bankers and governments who finance major projects are increasingly looking through the lens of climate change. As an example, in order to access Government of Canada’s Investing in Canada Infrastructure Program funding, proponents are required to conduct a Climate Lens Assessment and to demonstrate how climate change has been considered in their design and operation.

Two questions being asked of major infrastructure project proponents are: “How resilient will your project be in a changing climate?” and “What will you do to mitigate your project’s contribution to climate change?” As more and more countries are setting their goals for carbon neutrality in the coming decades, long-lived projects that are being funded now must be strategic to meet these goals. At the end of the day, both sides of the equation will need to balance.

Journey towards climate resilience

To see how this works in practice, let’s take an imaginary example of a project – a mine accessible only by a difficult road, and far from the electrical grid. We’ll call it the Green Future Mine (GFM). For years, GFM has relied on diesel generators to power its mine operations, mill and other elements including worker housing. The company’s leaders have watched as solar power has become more practical and reliable and feel that the time to switch has come.

Partly because of the climate-changing carbon that is being emitted by the generators, it is difficult to meet internal or external – regulatory – targets for carbon reduction. But GFM’s leaders are also concerned about the impacts that climate change will have on their enterprise; the increased storms expected may interrupt airborne deliveries of diesel fuel, calling for increased resilience that comes from locally generated power. More intense and prolonged dry periods may also impact their ability to operate, requiring increased amounts of reliable energy to pump water from more distant sources.

Here are three lessons we have learned from supporting projects ranging in size from converting a small, isolated community to renewable energy, on up to projects with scale similar to GFM. These lessons apply not just to an isolated mine, but to any project that seeks financing in the new climate-aware financial environment. This funding could come from an international institution such as the World Bank, or a national government (see below for some insights into one such program in Canada).

1. You do not need all the answers right away

Project proponents often feel intimidated by the amount of information needed for a funding application that factors in climate change. GFM’s managers may be able to describe the capabilities of their equipment and its cost to operate – but may be hazy on the carbon footprint for each of the hydrocarbon-burning engines on their property.

Financial sources will want to see that GFM’s leaders have a good understanding of the choices they’re making, the expected risks, and the opportunities for improvement. The good news for GFM’s leaders is that they don’t need to have it all figured out before they apply. That’s partly because the applications can typically be made with preliminary designs and partly because of the uncertainty in estimating the risks and impacts. Estimates of factors such as the cost of carbon emissions and future emission levels, future temperatures and weather patterns, even the frequency and severity of storm events, are just that, estimates.

But those figures need to be from credible and current sources, and there are many online portals providing this information. Other data sources would include specifications from equipment manufacturers, such as the power expected from the solar array the mining company is contemplating.

It’s like how your English teacher would insist that whatever view you took on the topic you’d chosen, that you state and then support your thesis, and provide references. You need to be able to clearly demonstrate how you are planning to consider climate in your project, supporting the climate mitigation with information on emissions reductions and supporting the climate resiliency with understanding how climate-related risks can be reduced with project design. A detailed assessment can be carried out later when the final project design and required supporting information is available.

Some financial sources allow project proponents to use some of the funding to cover the cost of the detailed assessment.

2. External consultants can support funding success, if used wisely

Many companies look at the requirements of the funding process and determine that it’s more work than it’s worth. Some may also not have the expertise in-house, such as climate specialists with the required accreditations and experience.

Bringing in outside expertise can help because they will have the right Qualified Persons available, along with the connections to bring in additional specialists when required. As well as having expertise in climate issues, external consultants with previous experience will know the application process. They know how to find the right information in the public domain, from equipment manufacturers and other sources. They also know how to draw out the right information from the company’s employees to build a case that supports the funding application.

It’s important to go about this the right way, viewing it as a team effort. This means that to gather information on the company’s operations, the consultants must have access to people in the company who are knowledgeable about the current operation and the project.

Senior management will need to be involved in the process. This involvement will help the consulting team get the answers needed to help produce an effective funding application, and give company leaders the depth of knowledge about the application to effectively defend it in front of the funding organization.

3. Squeeze all possible benefits from the funding application process

The funding application process has benefits that go well beyond the financing received.

Part of this benefit comes from understanding the cost of the steps being considered. Some application processes have a requirement around this – for example, calculating the cost of reducing carbon emissions, in dollars per tonne of CO2 equivalents (CO2e).

While having this number helps meet the funding process requirements, it is also a particularly powerful number to help with decision-making. In the case of GFM, the mine’s leaders might consider the cost of carbon emissions – perhaps $40 per tonne of carbon – and the cost of buying offsets — at perhaps $15 per tonne. Then, they might ask about whether their planned conversion — which has a CO2e value in the hundreds of dollars per tonne — can be justified.

Sometimes, even a high cost of initial installation can bring about other significant benefits that make it worthwhile. This includes giving the company access to investment capital and other financing from sources that want to fund projects that are a “win” for the planet. These financing sources need to know that the company has thought through the implications of climate change, such as more extreme weather that may cause floods and water shortages.

Many companies struggle with meeting the requirements of the Task Force for Climate Related Financial Disclosure (TCFD), an international body that has developed a framework to help public companies and other organizations more effectively disclose climate-related risks and opportunities. Having data from the funding application can help with TCFD compliance. It also facilitates meeting expanded requirements around Environmental, Social, and Governance (ESG), and reporting on progress towards the organization’s sustainability goals.

Other benefits come through attracting employees, particularly highly skilled young people who like being associated with a company that is taking demonstrable actions about climate change. Other stakeholders – such as members of nearby communities and government authorities – need to know that GFM is doing the right thing.

Bottom line: There is a big difference between saying “We’re installing solar power at our mine,” and “We’re installing a solar array that will reduce our carbon emissions due to power generation by XX percent, and the power will allow us to switch to electric vehicles, further reducing our carbon footprint by YY percent.”

A Canadian approach to factoring in climate change

The government of Canada is one of the entities putting numbers, targets and incentives in place to answer that question. Through the Climate Lens requirement, Canada sets hard deliverables for infrastructure projects seeking federal government funding.

Many other geographies have requirements to consider climate resilience but provide little to no guidance for how to consider climate resilience and that essentially say: “you must consider climate-change resilience. It’s up to you to figure out what that means.” Canada’s Investing in Canada Infrastructure Program is one of the few globally to take a deep dive into what it really means for projects to mitigate climate change and take resiliency measures.

About the Authors

Janya Kelly Member Name

Climate Change & Air Quality Specialist

Rachel Wyles

Rachel Wyles Member Name

Senior Carbon Management and Climate Change Specialist

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