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Inflection Point Alert!

Jonathan Shopley | 07 October 2016 |

We may look back on the first week of October 2016 as THE inflection point – marking a significant acceleration towards a global economy that secures a stable climate, works off clean energy, and protects and enhances the natural ecosystems that provision our well-being and wealth-creation.

There are two major policy milestones that mark the inflection point.

We just got land and air cover

On the 5th October, the conditions for entry into force of the Paris Climate Agreement were met. Member countries of the European Union, the EU itself, plus Malta, Nepal, Bolivia, followed by Rwanda a day later, joined heavy emitters China and the US and many other smaller early movers to take the number of signed-up parties to the Agreement to 75, together representing 60% of global emissions. This is well over the trigger of 55 parties representing at least 55% of the total global greenhouse gas emissions. That means the Paris Agreement will go live on the 4th November, and the next Climate Summit in Marrakesh starting on the 7th November will begin the work to implement the Agreement in 2021. Few expected this milestone much before 2018.

The Paris Agreement covers national and terrestrial emissions. Aviation and Maritime sectors are outside its direct jurisdiction. So, another momentous milestone was reached yesterday when UN agency The International Civil Aviation Organisation (ICAO) struck an agreement, after many years of fractious debate, to control greenhouse gas emissions from passenger and cargo flights. Together, those emissions account for around 1.5% of global emissions, but could grow to over 20% of global emissions by mid-century. The sector has committed to carbon neutral growth after 2020, using carbon offsets to compensate for any increases in emissions above the 2020 baseline. This will give the sector time to develop commercially viable, non-fossil fuel alternatives by mid-century.

The next Industrial Revolution is on the runway

These policy breakthroughs will accelerate the technology evolution that is at the heart of global transformation. Until now, low carbon energy alternatives have edged forward step-by-step. They have come a long way too, and in the last couple of years, more mature renewables technologies such as wind and solar have reached price-parity with well-entrenched, and sometimes still subsidised, fossil fuels. Policy certainty gives increased muscle to alternatives in their quest to displace deeply embedded incumbents.

In 2015, around 90% of new electricity generation was produced by renewable energy, of which wind alone accounted for half. Less coal was used in electricity generation. While this signals another inflection point in the making, there is a lot yet to be done with renewable energy currently making up less than 10% of all energy consumption on a global basis.

Is this about pricing or investing?

Paris and ICAO breakthroughs came after much of the complexity of climate change was distilled into a simple concept that almost all parties to the problem could identify with – “putting a price on carbon” to ensure markets can price the environmental costs of greenhouse gas emissions. Prior to the Paris Climate Summit, many leading and influential corporates, NGOs, the World Bank, and The UN Framework Convention for Climate Change (UNFCCC) and many others formed coalitions that rallied behind a call for carbon pricing.

After Canada confirmed its support for the Paris Agreement, premier Justin Trudeau announced that carbon pricing will be key to achieving its Nationally Determined Contribution (greenhouse gas reduction target) – leaving it to Canadian provinces to decide whether that will be through a carbon tax or through cap and trade and offsetting programmes. Examples of both exist across the Canadian provinces.

All countries will be looking at how to deliver emission reductions at lowest cost and with greatest environmental impact, and we can expect the debate to rage on about the optimal way to price carbon. Generalising dangerously, carbon pricing is about stopping emissions by making emitters pay for them. While this government policy may be required in order to meet the targets, there is more incentive for business to take action if they can see an investment opportunity into new low/no carbon opportunities.

From intent to action

The degree to which the Paris and ICAO Agreements slingshot us onto a new low carbon trajectory depends crucially upon business’s response. Will business see this as an added cost, or an opportunity for growth in a more sustainable economy? The proportion of businesses aligned with the latter view has been growing strongly. This is evidenced by the number of pledges made by companies committing them to carbon pricing, science based targets, 100% renewable energy, 100% electric vehicles, zero deforestation, water catchment protection, payment of ecosystem service, and numerous others.

Climate leadership in the corporate sector is changing: shifting climate action from a compliance or corporate responsibility response to core business functions that are concerned about managing risk and opportunity and realise the critical reputational benefits of delivering action.

Exemplar strategies focus on:

  • Decarbonising consumed energy by targeting 100% renewable sources;
  • Reducing emissions from other emissions through investments in internal efficiency measures that reduce cost; and
  • When those investments are too high to remain competitive, investments in projects (such as carbon mitigation projects) that compensate for emissions and also make a positive impact on the social, economic and environmental areas that support the growth and sustainability of the company.

This approach, which has at its core market-based carbon pricing, gives a high degree of flexibility in finding cost effective solutions. It ensures that the price (of carbon) paid by a company goes to solutions as investments in projects that make a direct contribution to reducing emissions. While taxes also provide a clear price on carbon, they do not always fund the required solutions.

Climate is still an urgent problem that needs action now

So, this is all good news for businesses that have been calling for clarity, predictability, and more secure opportunities to invest in a sustainable future. However, the pace of policy development has been rather slow in the past. The flawed Kyoto Protocol was extended by eight years to make time for governments to come up with the Paris Agreement. Now that it’s in place, it will take another four years before it is implemented.

However, the direction of travel is clear and business action on climate change will no longer be an act of wishful thinking, optional corporate responsibility, or indeed philanthropy. It’s business at its exciting best – risk management, future-proofing, innovation and investment in growth and sustained competitiveness. This is an inflection point that is solid enough to support real and meaningful change.