Payoffs to any climate investments often follow a “J-curve,” leaving investors and companies a decision to pay now or pay later. And as a result of several persistent barriers to adoption, such as short-term performance pressures, misaligned time horizons, and inconsistent internal metrics, many are indeed choosing a “wait and see” approach.
Despite these challenges, forward-looking investors and companies are not waiting. Incorporating the future cost of carbon and other climate externalities into today’s capital allocation decisions is becoming a hallmark of competitive strategy. Just as with any financial input, the cost of carbon can be used to evaluate risk, guide opportunity, and future-proof portfolios.
This report examines how the cost of emissions is affecting long-term capital allocation decision making from two key perspectives. Firstly, from the portfolio perspective of asset owners such as pension funds, sovereign wealth funds, and insurance companies. Secondly, from the perspective of companies operating in global industries, in both public and private markets, where key business investing decisions such as capital projects, research and development, and strategy increasingly rely on a long-term vision of the cost of carbon and how that could affect investments made today.
A resounding link between the two perspectives is that institutions that are ahead of the curve are treating the cost of carbon like a financial input – it’s part of the formula that factors into the price of an asset, or the potential return for business investment.
This report offers practical guidance for doing exactly that. Drawing on insights from leading investors and companies, it outlines the tools and approaches that make climate costs more actionable—from Net of Carbon EBITDA and carbon beta to marginal abatement cost curves, shadow pricing and sensitivity analysis.
By embedding future climate costs into financial models, stress-testing investments under different scenarios, and developing internal views on carbon pricing, decision-makers can build long-term resilience while enhancing risk-adjusted returns. This paper is designed to help investors and companies alike move from theory to practice—and stay ahead of the curve.
Ahead of the Curve: Factoring the Cost of Carbon Into Long-Term Decision-Making
