Before your next refinancing, funding round or major capital decision, one question is worth asking: will the people who fund us support the sustainability strategy we are about to approve?
Here is how I answer it, in six steps, followed by a worked example.
The six step Capital Stack review
- Map. List every provider of capital by layer (public, institutional, private) and by instrument: loans, bonds, shares and guarantees.
- Weight. Mark the essential providers, using share, timing and substitutability.
- Record. For each essential provider, note its floor and ceiling today, and what you expect them to be in three years.
- Draw. Find the binding floor (the highest floor) and the binding ceiling (the lowest ceiling). The space between them is your acceptance zone.
- Test. Does the proposed strategy fall below the zone, inside it or above it?
- Respond. Pace the strategy, widen the zone or reshape the stack, and tie each step to the financing calendar.
Express floors and ceilings in the same terms as the strategy, such as the committed annual cut in emissions and the capital spending it requires. Avoid scores. A CFO should be able to state the zone in one sentence.
Worked example: a European building materials company
Company L is a composite listed European building materials manufacturer with revenue of about €2 billion. Its sustainability team proposes cutting emissions by 8% a year. That needs about €600 million of capital spending over three years, mostly on a new kiln with much lower emissions.
The review finds three essential providers:
- The bank syndicate. Its sustainability linked facility, due for renewal in 14 months, requires a 4% annual cut. It also caps net debt at three times EBITDA, which spending beyond about 7% a year would breach.
- A long term pension fund, the largest shareholder. It votes against directors in high emitting sectors that lack a credible transition plan, which implies at least 4.5% a year.
- Shareholders focused on returns, about 45% of the register, including an activist with a new 4% stake. They would resist any plan that took return on capital below 10%, which corresponds to roughly 5.5% a year.
Green bondholders matter too, but not until their bonds mature in 2029.
So today the zone runs from 4.5% to 5.5% a year. At 8%, return on capital would fall to about 8.5% and debt would sit near its cap, which is an open invitation to an activist campaign. At 4%, the banks would be satisfied but the pension fund would not, putting the next annual meeting vote at risk.
Three ways to respond
Pace the strategy. Set ambition inside the zone and schedule increases for when the zone is expected to move. Pacing is not retreat. A strategy that stays inside the zone keeps the capital it needs to continue, while one that breaks the ceiling may be reversed entirely.
Widen the zone. Company L brought in a public development bank loan covering €150 million of the kiln at a concessional rate. That kept return on capital above 10% at about 6.5% a year, which raised the shareholders’ ceiling. Evidence widens the zone too. Showing, in money, that sustainability investments cut costs and risks gives investors who want returns less reason to resist.
Reshape the stack. Over time, leaders can change who funds the firm. In 2022, Patagonia’s founding family transferred ownership to a trust and a nonprofit rather than selling or going public, which the founder said would have brought pressure for short term gains. Few firms can go that far, but patient capital from development banks, strategic investors or long term owners works the same way on a smaller scale.
Company L committed to 6% a year. It set a review in Year 3, once the kiln’s performance is known and the renewed bank facility is in place, of whether to move to 8%. It also committed to report the kiln’s results in money, so the evidence for the next step would be in front of the shareholders whose ceiling it needed to raise.
When to run the review
Run it before any refinancing, funding round, annual meeting season or major capital decision, because those are the moments when the conditions of capital are reset. Discovering your ceiling during an activist campaign, or your floor at a loan renewal, is the expensive way to learn it.