Achieving Carbon Neutrality: The Dilemma of Blended Finance vs. Commercial Profit and the role of the Insurer to help effect a Just Transition – Q2/23

In 2020, Delta Airlines made a bold claim to achieve carbon neutrality and committed to investing $1 billion towards this goal. However, three years later, Delta finds itself entangled in a class action lawsuit. The lawsuit questions the veracity of Delta’s claim to be the “first carbon-neutral airline.” This incident raises important questions about who should be held accountable for such claims and more importantly, whether offsetting carbon emissions is an adequate solution? It also prompts a broader examination of the concept of achieving carbon neutrality and its context in the corporate world.

The Trend of Achieving Carbon Neutrality

“Carbon neutrality” has become a buzzword in corporate external affairs, utilized by marketing executives to engage new stakeholders and stay competitive in the market. While the notion of carbon neutrality is vital for fighting climate change, there is concern that it is sometimes used as a greenwashing tactic, distracting from more meaningful undertakings. Companies often laud their carbon offsetting efforts without addressing their actual emissions, leading (in some quarters) to scepticism about the sincerity of offsetting achievements.

The Role of Shareholder Dividends vs. Carbon Neutrality

The prioritization of financial returns for shareholders has traditionally been a primary focus for commercial entities. However, the urgency of addressing climate change has challenged this paradigm. Critics argue that achieving carbon neutrality should take precedence over dividend targets, as the survival of the planet is more important than short-term financial gains. This raises questions about the ethical responsibility of companies and the need to align profit-oriented objectives with sustainable practices.

Profit vs. Accountability: The Commercial Ideal

The relentless drive for profit may have overshadowed the commitment to environmental and social responsibility in the commercial world. While achieving carbon neutrality is increasingly viewed as an essential goal, the competitive nature of industry has sometimes led to compromises. The pressure to demonstrate accountability and align with environmental goals can be diluted by profit-seeking motives. As a result, achieving carbon neutrality is perceived to be a marketing tool rather than a genuine commitment to sustainable practices.

Blended Finance: A Solution for Sustainable Development

In contrast to the profit-driven approach of commercial entities, the world of supranational development finance institutions and UN bodies recognizes the interdependence of three ideals: People, Prosperity, and Planet. This recognition has given rise to the concept of blended finance, which aims to combine resources and achieve the Sustainable Development Goals (SDGs) through coordinated investment behaviours. Blended finance seeks to involve both commercial and non-commercial funding sources, providing a more inclusive and holistic approach to sustainable development.

Reconciling Different Approaches

The dichotomy between the purely commercial pursuit of environmental and social governance and the blended finance model raises the question of how these different economic actors can reconcile their aims. The profit-driven approach often results in short-term greenwashing, while the blended finance model represents a systemic shift in investment behaviour towards a more equitable distribution of benefits among people, prosperity, and the planet. However, seismic challenges persist in coordinating all stakeholders and ensuring smooth deployment of blended finance solutions, as commercial sources of funding may be hesitant to forgo immediacy of returns.

The Role of the Insurance Sector in Blended Finance

While various financial market institutions are starting to embrace blended finance, the insurance sector appears to be either underrepresented or slow to recognize the opportunity it presents.

The insurance sector has a unique opportunity to contribute to blended finance initiatives. While various financial market institutions have begun to embrace blended finance, the insurance industry, with its expertise in risk management and financial products, can provide valuable insights and resources.

Blended finance solutions have proven effective in bridging the gap between commercial investment and impactful projects that benefit the most vulnerable populations. By combining international cooperation and private sector resources, blended finance mechanisms create viable opportunities for projects that would otherwise be deemed too risky or unprofitable. This catalytic effect allows for the mobilization of private financial resources while ensuring a commitment to development impact whilst also helping to shape the transition to a more equitable and sustainable future.

Just Transition and the need for Blended Finance

While there is broad theoretical agreement on the necessity of global climate action, the implementation of inclusive and just measures has often been limited by geographical or sectoral boundaries. The silos that exist between national and international initiatives, as well as between public and private efforts, hinder the replication and adoption of successful practices, stalling momentum towards scalable solutions.

Blended finance instruments directly contribute to the achievement of the Sustainable Development Goals (SDGs). Born from the initiative led by Multilateral Development Banks under the “from billions to trillions” commitment, blended finance mobilizes resources to eradicate poverty and inequality. By harnessing the potential of blended finance, the insurance sector can support the transition to a low-carbon and equitable economy while generating positive financial returns.

Achieving a just transition requires concerted efforts at both the local and international levels, encompassing finance, policy changes, and community engagement. Blended finance, with its ability to mobilize diverse resources and bridge gaps between sectors, is well-suited to support the goals of a just transition.

What role does Matrix have to play?

Matrix has developed a number of innovative insurance tools that support blended finance initiatives which in turn promote climate resilience and support the transition to a low-carbon economy.

Over the last 5 years, Matrix has actively participated in blended finance initiatives by providing ESG-focused risk management, access to financial resources, and expertise to investors and project stakeholders.

By utilizing blended finance principles and ESG risk metrics, Matrix is in a unique position to help unlock impactful projects while also helping investors diversify their investment portfolios and manage risks more effectively, in so doing accelerating the effective and sustainable deployment of capital resources.

Matrix has a role to play in influencing policy change. As an active participant in the global financial system, Matrix are active in our efforts in engaging with policymakers to advocate for improved regulatory frameworks that promote sustainable development and blended finance.

Ensuring that Matrix’s focus is driven by strategies that align with environmental and social responsibilities means that Matrix is helping to shape the transition to a more equitable and sustainable future.

Matrix are fully authorised and regulated by the Financial Conduct Authority.

” By utilizing blended finance principles and ESG risk metrics, Matrix is in a unique position to help unlock impactful projects while also helping investors diversify their investment portfolios and manage risks more effectively. “

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