Each annual edition focuses on strategies we believe to be critical to the strength of global capital markets and the financial futures of those who rely on them. Through the collective efforts of our members, this edition presents a carefully curated collection of real-world examples that illustrate how organizations across sectors are thinking about externalities.
Externalities refer to the unintended side effects of a business activity that affects third parties who are not directly involved, such as various stakeholders, broader society, or, most notably in the present context, the environment. These effects can be either positive (e.g., innovation spillover from R&D) or negative (e.g., environmental pollution). Regardless, companies grapple with how to incorporate externalities into their capital allocation decision-making and investors can struggle with pricing these externalities because their potential financial impact is not captured in traditional financial metrics.
Therein lies the disconnect when it comes to sustainability. The chief example of a negative externality is, by far, carbon emissions. As large parts of the global economy impose carbon pricing, continued emissions will come at a real cost—to the companies themselves and to investors.
The following case studies provide insight into how leading companies and investors around the world are putting a price on emissions, and how that decision is impacting their broader long-term strategies.
We hope that this showcase serves not only as a source of inspiration but also as a catalyst for action. We encourage readers to engage with the insights presented, reflect on their implications, and adopt models of long-term decision-making that resonate with their own organizational goals.
Real-world Examples of Carbon Pricing as a Long-term Value Driver
The Role of Aon in Risk Management and the Climate Transition
Aon exists to shape decisions for the better—to protect and enrich the lives of people around the world. We provide our clients with advice and solutions that give them the clarity and confidence to make better decisions to protect and grow their business.
One of the most significant uncertainties facing businesses today is the effects of extreme weather and climate risk trends on businesses—in terms of increased physical risk, and the financial implications of the global transition to a low-carbon economy.
In 2024, the world endured $368B in global economic losses, of which only 40 percent was insured. This significantly compromises the ability of communities to rebuild and adapt for the future. This is known as the “protection gap” and it must be closed.
To address climate risk—and our new normal of extreme weather events—Aon is investing in data, analytics and next-generation forecasting models to deliver actionable insights.
Driven by our commitment to help businesses and society make better decisions to protect their people and property, our teams of modelers, data and analytics experts and re/insurance advisors are using these insights to develop and deliver solutions.
Aon’s Climate Risk Advisory Team
Aon’s Climate Risk Advisory Team helps clients make better decisions on their climate-related financial risks, access capital and unlock growth. This is accomplished through advanced analytics, modeling of both physical and transition risks and tailored consulting services. By leveraging its expertise, Aon provides practical solutions to create sustainable and resilient organizations that will stand the test of time.
Addressing Climate Risk for Large Businesses
Large corporations, particularly those in hard to abate sectors, face significant obstacles within their transition and risk mitigation plans. These obstacles can be addressed by leveraging the financial system and gearing it towards solutions that capture the opportunity the climate transition creates. This comes down to the basics of insurance, but a few challenges arise:
- Insurance is often considered only as an afterthought in transition projects, especially relative to project design, selection and financing decisions.
- Insurance coverage is sometimes mismatched to the longer-term needs of the transition, as renewals and policy for many risks still operate on an annual cycle.
- Insurers tend to be product-led rather than solution-oriented in their approach to facilitating the transition and can limit the development of innovative risk transfer solutions that transitional projects typically require.
How Aon Supports Businesses
Aon helps businesses address these challenges through strategic risk management, carbon offset insurance broking and other insurance-based solutions that reduce volatility and enhance financial stability. Our approach includes:
- Encouraging businesses to integrate insurance considerations at the inception of transition projects, as part of the capital allocation decision-making process itself.
- Assisting businesses in articulating their transition plans early to ensure sufficient risk capital is available, especially projects that have dependencies on the regulatory environment.
- Realigning insurance time horizons from an annual renewal cycle to a multi-year, multi-stakeholder partnership model that incentivizes innovation and patient capital. Doing so helps provide businesses with revenue and operational cost stability, freeing up capital flows to propel investment in new technologies otherwise not investable at scale.
Coffee Growers in Colombia
Challenges
Smallholder farmers often struggle to access reliable or affordable insurance due to a lack of market infrastructure supporting farms of their nature. Coffee growers in Colombia, for instance, face severe physical climate risks, including droughts and flooding, which threaten their yields and financial stability. This volatility creates additional challenges:
- Pricing unpredictability and supply shortages for coffee buyers.
- Risk of farmers switching to more resilient crops.
- Risk of farmers resorting to clearing land for cattle grazing, leading to loss of biodiversity and deforestation.
How Aon Supports Businesses
Aon’s strategy focuses on guiding coffee growers toward regenerative agriculture and providing insurance solutions that benefit farmers, buyers and consumers, including:
- Developing insurance payouts to stabilize supply chains and encourage farmers to continue coffee cultivation, resulting in enhanced market resilience and reduced supply disruptions.
- Supporting the creation of carbon credits through regenerative agricultural practices, allowing farmers to conserve land and potentially generate additional revenue streams.
- Providing insurance coverage for damages from drought, floods, crop disease and fire, as well as revenue losses for both growers and buyers.
Aon is expanding this model to other vulnerable agriculture markets and supply chains to ensure long-term reliability. These practices not only stabilize supply chains against climate-related risks and vulnerabilities but help create industry standards and best-practices to contribute to widespread supply chain reform and security.
Conclusion
The insurance industry is a critical enabler of the climate transition. By leveraging advanced analytics, subject-matter expertise and industry-specific insights, Aon plays a key role in mitigating climate-related uncertainties and facilitating the global shift to a low-carbon future, benefiting multiple stakeholders:
- The insured (businesses): Reduced volatility and greater financial certainty in their operations and revenue streams.
- The insurer: Financial performance through innovative risk solutions.
- The broader stakeholder (environment and society): Enhanced sustainability efforts and a more structured transition toward a low-carbon economy.
As climate risks continue to evolve, Aon’s role in helping organizations strengthen resiliency will remain essential in shaping a sustainable future for businesses and society.
Understanding Carbon Pricing and its Role in Real Estate Investment: The Case of Hines
Carbon pricing has become a critical consideration in real estate investment, significantly influencing decision-making and long-term planning. For Hines, a global real estate investment manager and leader in sustainability, carbon pricing offers both a strategic opportunity and a complex challenge. This case study explores the implications of carbon pricing on real estate investment, focusing on two major challenges: the cost of decarbonizing assets and market disparities in carbon pricing.
Key Challenge #1: The Cost of CapEx to Decarbonize an Asset
One of the primary challenges in integrating carbon pricing into investment decisions is figuring out the cost of decarbonizing physical assets like buildings. Real estate construction and operation involve carbon-intensive processes, including material sourcing, heating and cooling, ventilation, and lighting. The cost of reducing emissions can vary significantly depending on a building’s age, location, and existing systems. Complicating matters further, the future cost and availability of low-carbon energy, which is expected to replace on-site combustion of fossil fuels, is difficult to forecast.
Key Challenge #2: Market Disparities
Another significant challenge is the disparity in market maturity and regulatory frameworks. For instance, in the U.S., New York City imposes a clear carbon price of $268 per ton above a certain threshold, while other jurisdictions lack such regulations. Globally, carbon pricing varies widely, and real estate markets are dynamic over the long term: in mature markets, Hines can accelerate its carbon reduction targets, whereas less developed markets require nuanced, sub-market-level strategies. As such, it can be both difficult and impractical to apply a universal carbon price across a global portfolio due to significant price spreads, and even harder to communicate carbon pricing strategies to investment professionals and other stakeholders.
Conflicting time horizons present another related challenge. Hines has set a clear operational carbon target with an interim goal to reduce emissions by 42 percent by 2030[1], but faces more challenging decisions on whether or not to adopt a universal carbon price. The decision is complicated by competitive pressures and long-term uncertainties – such as the potential of green premiums or brown discounts upon exit – which may not factor in until years later.
To navigate these challenges, Hines has employed a combination of internal models, frameworks, and engagement strategies.
Internal modeling to assess the cost of decarbonization
Hines believes that how you use a carbon price is a more important conversation than what the carbon price actually is. Through its internal models, Hines has used different carbon prices to account for the cost of carbon in different markets and different parts of the supply chain.
In conjunction with Hines’ pursuit of SBTi certification, the firm utilizes the Carbon Risk Real Estate Monitor (CRREM)[2] tool to assess transition risks, align its portfolio with global decarbonization pathways, identify potential stranded assets, and quantify the financial impact of carbon reduction efforts through science-based decarbonization curves. Hines has developed a Carbon Impact Assessment Tool to gather the data needed to support this process. By incorporating CRREM into its investment strategy, Hines can proactively address regulatory risks, optimize capital expenditures for decarbonization, and ensure its assets remain competitive in a low-carbon economy. This data-driven approach enables the firm to make informed decisions that aim to balance sustainability goals with financial performance.
In addition, deal teams are tasked with proposing decarbonization capital expenditure (capex) projects and to include these costs in underwriting for new acquisitions— essentially estimating the cost of achieving the desired decarbonization curve. This approach simplifies the explanation of an abstracted carbon price and makes the process more accessible to stakeholders.
Collaboration and Framework Development
To navigate disparities in carbon pricing and regulation, Hines has established a framework to integrate sustainability-related considerations into investment decision-making. This proprietary model helps assess sustainability risks and opportunities by evaluating factors such as regulatory stringency, tenant and investor expectations, and market maturity across a patchwork quilt-like environment in carbon pricing regulations.
By embedding this framework into its capital allocation strategies, Hines seeks to ensure that its investments align with long-term sustainability goals while maintaining financial resilience. This structured approach enables the firm to optimize decarbonization efforts at the property and portfolio level, mitigate regulatory uncertainty, and enhance the long-term value of its real estate portfolio.
Beyond its internal framework, Hines plays a leadership role in advancing market-wide consistency. In Europe, where carbon regulation is more mature, the firm has actively sponsored industry-wide alignment through initiatives like the Urban Land Institute’s C Change program. By advocating for standardized transition risk guidelines for underwriting and transactions, Hines is helping to create a more uniform approach to carbon considerations, even though regulation may vary in other jurisdictions.
Engaging Institutional Investors
The lack of regulatory consistency across regions also poses challenges for institutional investors assessing carbon strategies, particularly in jurisdictions with uncertain policy outlooks. Hines addresses this by proactively engaging investors and demonstrating how its sustainability strategy mitigates risk across diverse regulatory environments.
Institutional investors—including pension funds and sovereign wealth funds—value Hines’ structured framework for managing climate-related risks. By framing sustainability within different investment strategies and time horizons, Hines provides clarity on both risks and opportunities associated with decarbonizing real-estate assets, reinforcing investor confidence in the long-term resilience of its portfolio.
Practically, this translates to engaging in constructive dialogues with deal teams, ensuring that strategies align with market-specific conditions. Hines prioritizes framing questions from an investor’s perspective, such as: “What is the sustainable investment thesis?” and “How might the asset’s value change over the hold period as a result of sustainability factors?” By focusing on tangible metrics like retrofit costs and tenant demand, Hines’ strategy resonates more effectively with investment teams than abstract discussions about carbon pricing.
Conclusion
Hines’ sophisticated approach to carbon pricing and sustainability reflects a deep understanding of market dynamics and stakeholder needs. By combining science-based tools, market-specific strategies, and collaborative initiatives, the company is well-positioned to lead in sustainable real estate investment. As global markets continue to evolve, Hines’ commitment to aligning carbon pricing with investment strategies serves as a model for integrating sustainability into real estate portfolios.
Votorantim Cimentos: Decarbonizing Cement Production through Carbon Pricing
Cement production is highly energy-intensive and ubiquitous with infrastructure development. As Global Cement asserts, “There’s enough cement used every week to build a city the size of Paris.” Despite this, cement production remains accountable for a significant share of global CO₂ emissions.
As one of the largest cement producers in the world, Votorantim Cimentos is the flagship asset within Votorantim’s portfolio. The company tackles this challenge by integrating carbon pricing into its investment strategy, ensuring long-term competitiveness while progressing toward ambitious decarbonization targets. Operating worldwide in 11 countries, they face diverse regulatory landscapes and market conditions in their journey to navigate the global transition to a low-carbon economy.
By leveraging internal carbon pricing (ICP)—including shadow pricing and sensitivity analyses—the company is proactively aligning investment decisions with anticipated regulatory shifts and technological advancements. This approach allows Votorantim Cimentos to remain competitive while preparing for a future where carbon costs are fully embedded in business operations.
Changing Regulatory Landscape Across Regions: Both a Blessing and a Curse
As a multinational company, Votorantim Cimentos manages a variety of regulatory scenarios. In the European Union (EU), Votorantim Cimentos operates under the EU Emissions Trading System (EU ETS), where the current carbon price is approximately €80 per ton. This system has a direct impact on operations, influencing investment decisions and strategic planning.
Conversely, regions like Brazil recently passed legislation for carbon pricing and are in the early stages of implementing such mechanisms. While the real impacts are not expected for another four to five years, Votorantim Cimentos nonetheless employs a shadow price of $100 per ton of CO2 for all CapEx costs in investment decisions.
While it can be initially challenging to (hypothetically) impose an additional cost to investments and project selection in such a competitive industry, Votorantim Cimentos believes that doing so will help them get ahead of the curve on carbon pricing. Eventually, more consistent carbon regulations will level the playing field and reward efficient producers who have already planned for the long term. In the end, companies most efficient at managing carbon will be the most competitive.
Integrating Carbon Costs into Financial Strategy
Despite operating in regions with varying regulations, Votorantim Cimentos has embedded carbon considerations into its cash flow analyses and strategic planning processes. Exercises such as sensitivity analyses and scenario planning help leadership evaluate the potential impact of carbon costs and prioritize decarbonization initiatives.
This approach includes utilizing a marginal abatement cost curve (MACC) to evaluate the feasibility and profitability of investment projects under hypothetical carbon cost scenarios. These exercises help Votorantim Cimentos’ leadership visualize the impact to decarbonize an additional ton of emissions at different price points (e.g. $10/ton, $20/ton…to well-beyond $100/ton). This can then help the company calculate breakeven prices for projects and what form of decarbonization is needed become financially viable—ranging from lower-cost efficiency measures to more expensive carbon sequestration options. By quantifying the cost-effectiveness of different emissions reduction strategies, Votorantim Cimentos can identify the most efficient pathways to help align investment decisions with long-term decarbonization goals.
Decarbonization Strategies and Challenges
In addition to ICP, Votorantim Cimentos also has set approved Science-Based Targets (SBTi) for 2030 with a pipeline of initiatives aimed at achieving carbon neutrality by 2050.
Through careful project selection and lower-carbon additives, Votorantim Cimentos is currently on track to meet interim SBTi goals by 2030. In countries where carbon pricing is integrated into financial planning, projects that reduce emissions, such as biomass energy, alternative fuels, and innovative cement materials, are prioritized.
The additional use of fly ash—a byproduct of thermal power plants—has proven effective in lowering emissions, and as thermal power generation declines, alternative materials like calcined clay are being explored to ensure sustainable production.
While carbon pricing increases production costs, its impact on end products, such as housing, is relatively modest. Doubling the price of cement, for instance, would increase the cost of a house by less than 10 percent. This relatively small cost increase highlights the feasibility of passing carbon costs through to consumers, creating a financial incentive for emissions reductions.
Looking beyond 2030 however, stricter decarbonization standards and policy changes may add a new layer of complexity. As the EU phases out free allowances under the Carbon Border Adjustment Mechanism (CBAM) by 2031, companies will bear the full cost of cement emissions and transportation, intensifying the demand for innovative decarbonization solutions. Votorantim Cimentos is using this as an opportunity to capitalize on its early investments in low-carbon solutions and position itself as a leader in sustainable cement production.
The company has invested significantly in decarbonization technologies, including fuel substitution and carbon capture, utilization, and storage (CCUS). These technologies are still in the early stages and face challenges related to cost and practicality. However, as they mature, their long-term success will be essential for improving cost-effectiveness and helping the company achieve its 2050 net-zero goal.
Conclusion
Votorantim Cimentos’ proactive approach to carbon pricing and decarbonization underscores its commitment to sustainability and operational resilience. By leveraging ICP, embracing innovative materials, and investing in advanced technologies, the company is positioning itself as a leader in the global cement industry’s transition to a low-carbon future. Rome wasn’t built in a day, and neither will the transformation of the cement industry. But through sustained investment, strategic adaptation, and a commitment to innovation, Votorantim Cimentos is laying the foundation for a more sustainable future. Ensuring that this essential material is produced sustainably is both a challenge and an opportunity that Votorantim Cimentos is prepared to meet.
Looking Ahead
Planning for the future is not merely an option; it is a necessity. The work of our members and the broader community reinforces an essential truth: directing capital toward the long term is fundamental to fostering a resilient and thriving economy that serves all stakeholders. The 2025 edition of the FCLTGlobal Blue Book marks another milestone in the journey toward making long-term thinking the standard rather than the exception. Our deepest gratitude goes to all who have contributed to this project; your insights, efforts, and vision have been invaluable in bringing this work to life. Together, we are shaping a future where sustainable, long-term decision-making drives progress for generations to come.
