CFOs need to coordinate public and private capital to bridge the ESG financing gap

Editor's note:Ana Carolina Oliveira is Head of Sustainable Finance for the Americas at ING. The views expressed in this article are solely those of the author.

The United States faces a critical crossroads on environmental, social, and governance (ESG) issues. On one hand, markets await a ruling from the U.S. Securities and Exchange Commission (SEC) on mandatory climate disclosure and expect accelerated efforts to harmonize reporting standards. On the other, ESG is becoming increasingly politicized in the U.S.

The economy continues to grapple with the lingering effects of the pandemic, inflationary pressures, and a potential banking crisis, all while guarding against recession risks. On top of this economic volatility, ESG has become highly politicized, and sustainable finance has emerged as a new item on CFO agendas. Yet, despite challenges in both traditional and sustainable markets, a survey of over 500 corporate finance professionals shows that CFOs are increasingly engaging with their companies' sustainability programs.

This survey, conducted by ING Americas, aimed to understand CFOs' priorities this year. Results show that over a third of respondents indicated that 30% to 50% of their time and energy this year will be related to sustainability. Larger companies expect to dedicate even more.

The era when CFOs focused primarily on financial figures is over. As sustainability permeates multiple aspects of corporate operations, CFOs now need to integrate climate transition into risk and cash flow forecasts, recalibrate investment plans for technological changes, and even reassess team composition—because sustainability is increasingly woven into capital structures, corporate performance metrics, and executive compensation.

A major driver of this shift is that companies are steadily aligning sustainability with business strategy, setting net-zero targets, and planning for a future where climate adaptation measures will be essential.

Deep emissions reductions and systemic economic decarbonization require not only willpower but also massive capital investment. This is where the financial sector plays a crucial role: by providing financing and advisory services to clients committed to advancing their sustainability pledges, while conducting business, lending, and investing responsibly.

Survey results show that 81% of respondents plan to increase investment in climate transition and net-zero goals, 82% indicated they are likely to invest in energy efficiency improvements, 75% plan to invest in renewable energy, and 69% plan to invest in climate adaptation measures.

Public-private financing is the inevitable choice

However, securing substantial financing is no easy task for CFOs. They need access to capital at different levels to fund everything from higher-risk technological changes for climate transition to operational improvements through energy efficiency—so both the private and public sectors should play a role.

In the private sphere, transition financing solutions that help companies reduce their carbon footprint can also foster the development of markets for low-carbon products and services. Issuers, banks, investors, and consumers who share a common environmental vision can work together to provide and promote economically viable, scalable solutions, thereby accelerating the decarbonization the world needs.

For example, sustainable finance products such as green bonds and green loans connect sustainable financing needs with the capital required for the energy transition. Recent updates to voluntary market guidelines have further strengthened the contribution of such financing to issuers' transition strategies.

Globally, the industry needs a range of sustainable finance solutions to support the diverse needs of companies in achieving their low-carbon commitments.

In the public sector, policy is undeniably a major driver in the climate transition—evident from the surge in optimism among clean energy producers following last year's Inflation Reduction Act (IRA).

The survey also shows that the IRA is a key factor behind the surge in interest among finance professionals: 96% of respondents said the IRA will influence their capital allocation plans, with just over half viewing it as a "significant" driver; 78% said they are more likely to increase investment in clean technology this year than in previous years.

U.S. policy can have global implications. The White House's new climate strategy is creating ripple effects across the U.S., unlocking private investment and spurring climate support programs in Europe. The world will undoubtedly benefit from the climate financing race, including more abundant and affordable (green) capital sources, new and harmonized sustainability disclosure standards to accurately measure progress, and the strategic promotion and export of clean technologies.

As for CFOs' top concerns in 2023, balancing the ambition of sustainability goals with access to multi-tiered capital, including green debt, in an impactful and achievable manner remains a central issue. CFOs now need to drive growth initiatives while also managing traditional financial performance and data.

Therefore, it is encouraging that, despite ongoing financial market volatility and ESG disclosure controversies, only 1% of surveyed executives plan to reduce investment in climate transition, net-zero goals, or ESG in 2023, a decline compared to calmer market periods.