Logistics Provider Advances Decarbonization with Unconventional Financing

Challenge

A global logistics provider with 140 ports around the world wanted to quickly advance their value proposition for customers looking to reduce supply chain emissions. It set ambitious emissions reduction goals of 40 to 50% by 2030. When calculating anticipated growth, the target pace in emissions reductions was an aggressive 10% each year.

To achieve such ambitious goals, the logistics provider needed to prioritize emissions reduction measures with high capital requirements and high emissions reductions. However, many of these investments have a five- to 15-year payback period, and others have no return on investment at all. Structuring the financing to pursue these measures immediately seemed impossible. For example, one high impact measure with an extended payback period was replacing equipment at all 140 ports. However, the vast investment was too cost-prohibitive to pursue right away. To meet its goals and remain financially solvent, the company would have to rethink its operations and how it financed major sustainability investments.

Solution

To determine the best financial path forward, the global logistics company partnered with Guidehouse. The first thing it learned was the instinct to pursue low hanging fruit isn’t wrong—but it’s just one part of the financial picture. Measures with low capital requirements can be pursued immediately and kept on the corporation’s balance sheet. These can include behavioral measures that create operational efficiencies. The financing can be orchestrated by centralized activities such as asset management. One way to approach this on-balance-sheet financing is through a green revolving fund. As the funded portfolio of projects and programs generates savings from reduced energy costs, the savings go back into the green revolving fund. Another approach is through green bonds. This is an increasingly popular option, as the green bond market has grown from near zero in 2012 to more than $282 billion in 2020.1 Some companies are even issuing “SDG-linked” bonds, which are connected to the United Nations’ Sustainable Development Goals.

Dealing with the measures for high capital requirements is where the logistics company needed to get innovative and agile. Specifically, it needed to find a way to get more energy-efficient equipment into all 140 ports as quickly as possible. In collaboration with Guidehouse, the corporation explored off-balance-sheet financing options for these major investments. Generally, such options fall into three categories: 

Energy Savings Agreement — With an ESA, a third party funds 100% of the project cost. Subsequent repayment is based on the realized energy savings. The third party takes the titles to the energy efficient equipment and pays for maintenance costs until the repayment is complete.

Leasing Platform — Through this approach, corporations rent energy efficient equipment, which can include vehicles, HVAC equipment, and lighting, among other items, without purchasing it outright. The rental payments are treated as an operating expense and are tax deductible. At the end of the lease, customers can extend the lease, or purchase or return the equipment. 

Special Purpose Vehicles — Companies can set up a separate entity, or SPV, to finance the equipment as an off-balance sheet investment. Local SPVs guarantee business continuity.

Impact

The global logistics company opted for the SPV route. It created an entity that would bundle the equipment needs of all 140 ports and purchase more efficient, better-performing equipment. The new entity then leases the equipment to each port, so the investment stays off the logistics company’s balance sheet. While this approach might be more intuitive for an enterprise wanting to finance vehicle equipment, as in this particular case, it’s also worth noting that this approach can be viable for, as an example, a food and beverage company looking to finance more efficient, even potentially pro-circularity operations equipment, such as smart manufacturing technology. These off-balance-sheet solutions are ideal for financing high impact measures with high capital requirements because the anticipated ROI mitigates the risk. These measures result in cost savings from day one, making the funds for debt or lease payments immediately available.