Integrating climate with financials: Climate as an overlay to financial planning

Sustainability and finance teams often struggle to collaborate for several reasons: the lack of a common language to translate climate-related risks into financial impact; the market undervaluation of sustainability; and the inherent financial characteristics of climate initiatives (longer payback periods, harder-to-quantify ROIs, etc.), which are at odds with preferred business metrics and priorities.  

Embedding climate considerations into financial processes is no longer a nice-to-have. To ensure long-term competitiveness, companies can act now to align value creation and risk mitigation with both business and sustainability goals. 

This article explores five key unlocks in integrating climate with financials: 

• Adding climate as an overlay to financial planning 

• Embedding financial implications of climate into corporate budgeting  

• Evaluating decarbonization cost sharing between the company and upstream/downstream actors 

• Considering “cost of inaction” to enhance business case… 

• … while seeking “rewards of action” as the prize 

Add climate as an overlay to financial planning  

Climate considerations cannot be treated as stand-alone or parallel to financials but rather be deeply integrated in core business case elements, including strategic benefit, financial impact, operational feasibility, and risk profile (see Exhibit 1).

Such a climate overlay calls for governance and process modifications along four dimensions: 

• Whom to involve: Establish leadership accountability and foster a sustainability-focused culture with cross-functional teams from, for example, finance, sustainability, operations, and procurement. 

• What to assess: Prioritize most material sustainability issues, considering the entire product life cycle and value chain. 

• How to assess: Evaluate value and costs both internally for the business and externally for society. 

• How to decide: Adjust decision rules by adding sustainability criteria to internal rate of return (IRR) and net present value hurdles. 

A common challenge is misalignment between regular financial and climate timelines. While typical projects’ financial payback materialize within a few years, sustainability projects often take longer to deliver their full potential. An environmental services provider noted that ten-year client contracts make it hard to justify long-term climate investments where benefits extend beyond the contract term. 

Even among climate initiatives, payback timelines are not always aligned. Manufacturing companies noted that climate initiatives tied to 2025 or 2030 goals are often prioritized. Consequently, emissions reduction efforts with immediate, measurable outcomes tend to take precedence over long-term resiliency investments with delayed value.

Companies are experimenting with several approaches to tackle misaligned timelines: 

• Elevating sustainability criteria to be on par with financial criteria via tools such as internal carbon price (deep dive to follow in the next article in this series) or extended payback periods, making sustainability-driven projects more financially attractive. 

• Adjusting financial payback thresholds for projects with significant sustainability benefits. This is sometimes necessary to shift corporate mindset. For example, an industrial company discovered that employees were self-censoring climate initiatives due to a rigid focus on meeting IRR targets. Lower-level staff assumed most climate initiatives would be rejected, so they did not propose potentially successful ideas. 

• Encouraging teams to find creative solutions earlier in the project life cycle to align sustainability projects with standard financial metrics.  

Embed financial implications of climate into corporate budgeting  

To fully integrate the financial implications of climate into operations, companies can translate them into the standard corporate budget, ideally through three elements:  

• Capex: Climate-related capital expenditures and R&D, while accounting for avoided capex such as avoided capital replacement or reduced risk of damage from hardening. Amounts can be estimated using cost proposals provided by developers or vendors. 

• Opex: Climate-related operational expenditures, as well as any staffing or capabilities needed for sustainability initiatives, while accounting for potential savings (for example, resource and energy efficiencies or business growth opportunities from low-carbon transition). 

• Cost of inaction: Mounting future costs and missed opportunities due to delayed climate action. 

On the back end, integrating climate into corporate budgeting requires robust data and IT infrastructure to collect and merge hitherto disparate datasets, and generate actionable insights.  

Evaluate decarbonization cost sharing with upstream and downstream actors 

While climate-financial integration is more manageable for Scopes 1 and 2 emissions, Scope 3, which covers the broader supply chain, remains a somewhat uncharted frontier. A fragrance and beauty company is grappling with how to share financial and carbon value and costs between itself, suppliers, and customers. “Customers want greener options, but not at a premium,” a multinational conglomerate noted. 

Our discussions with companies surfaced three key considerations regarding how decarbonization costs may be split between these actors: 

• Explore a spectrum of cost-sharing options. Passing climate costs on to suppliers or customers can be a spectrum. On one end, some ambitious companies bear most of the costs of switching to sustainable inputs, or even help suppliers access and purchase renewable energy. On the other end, some companies apply pressure on suppliers to reduce costs. Each company can decide where it falls on this spectrum based on its strategy, climate ambition level, level of influence, and place in the value chain, among other factors. Additionally, companies—suppliers and buyers alike—can explore sustainable supply chain finance solutions, which help suppliers access much-needed capital as well as save on financing costs for the collective net zero transition.  

• Adapt financial models to changing conditions. Supplier decarbonization efforts and green premium feasibility are constantly evolving. Companies can develop flexible financial models and assess how different scenarios affect project returns. 

• Unlock tangible savings. Companies can proactively identify savings opportunities and work with relevant internal stakeholders to ensure that these savings are demonstrated over time. 

Consider “cost of inaction” to enhance business case 

A key takeaway that resonated strongly with companies is that quantifying the cost of inaction can create a sense of urgency and strengthen the business case for sustainability. When doing so, companies may consider climate impacts from both macro perspectives (harsher climate, carbon regulations, etc.) and company-specific cost drivers if no action were taken. 

The cost-of-inaction argument may be more persuasive for certain types of companies: 

• Companies with longer-term contracts are more likely to experience the impact of inaction within the contract period, making immediate action more urgent. 

• Companies that extensively leverage external climate financing mechanisms could find delaying action makes it increasingly difficult to secure funding from climate-conscious investors. 

Companies with clear materiality priorities can leverage the cost-of-inaction argument for the most material climate issues. For a food and beverage company, water—the most important ingredient—served as an ideal starting point, before convincing stakeholders to consider less material issues. 

Seek “rewards of action” as the prize 

While cost of inaction can be a strong argument, the prize lies in the rewards of action (see Exhibit 2). In BCG and CO2 AI’s 2024 joint carbon emissions survey report, which collected responses from nearly 2,000 companies from 16 industries across 26 countries, over 90% of surveyed companies reported financial gains from decarbonization. 25% of companies saw significant decarbonization benefits equal to or more than 7% of their revenues, for an average net benefit of $200 million a year. A key value driver was reduced operating costs, often through efficiency improvements, waste reduction, streamlined operations, or renewable energy. Additional value drivers included taxation benefits, higher valuations, increased revenues, as well as intangibles (reputation, compliance, supply chain resiliency, talent., etc.). 

We may see markets increasingly favor sustainability leaders. In the 2024 report The Cost of Inaction: A CEO Guide to Navigating Climate Risk it was found that green products can see a 4% to 70% increase in CAGR of sales growth. There is a median upside of 36% in price premiums across 35 consumer packaged goods subcategories. 

For more details on how to capture climate-based value and examples of success, please refer to  “Redesign the Value Chain and Source Strategies” on The Climate Drive. 

No-regret foundational moves 

• Identify use cases for cost of inaction. Identify two to five specific use cases of applying the cost of inaction to financial decision-making. 

• Embed climate in budgeting processes. Incorporate climate considerations into key budget areas like capex and opex, focusing on quantitative and financial metrics whenever possible. 

• Engage peers for best practices. Engage with peer companies and cross-industry colleagues to share approaches for climate-financial integration, including strategies for sharing decarbonization costs, assessing cost of climate impacts, and maximizing value. 

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