Corporate Strategy Advisory

As part of their due diligence on a client’s transition readiness, banks can assess a client’s proposed production plans for new, green commodities to then provide high-value advisory services. Those advisory services could optimize client engagement and prepare banks’ front officers to pitch deals including use-of-proceeds financings and/or acquisitions.

As part of its net-zero transition plan, a global chemicals company ($1+ billion market cap) was preparing to expand into sustainable aviation fuels (SAF) in the United States. The company engaged a technical advisor in 2023 to validate its US SAF strategy. SAF was a new business for the company, which had a strong history in industrial gases. The advisor joined at the pre-Front End Engineering Design (FEED) stage (i.e., while the client was still weighing potential production technologies, sites, etc.).

There are four main ways to make SAF, of which three rely on biomass feedstocks: 1) Hydrotreated esters and fatty acids (HEFA), 2) Alcohol-to-jet, and 3) Fischer-Tropsch. The fourth way converts power-to-liquids to make “e-SAF.” The client had initially explored two production plans: sourcing “blue” hydrogen to produce e-SAF as well as soybean oil to produce HEFA SAF. US federal policy incentives from the Inflation Reduction Act provided critical new production subsidies for most forms of SAF, including 45V for clean hydrogen and 45Z for SAF itself. Each production plan entailed a complex set of variables including feedstock availability, policy support, and carbon intensity. While the client was clear it wanted to enter the SAF business as part of its transition plan, the optimal strategy was less clear.

Banks may encounter similar situations with large, high-emitting industrial companies that have transition plans predicated on new technologies and/or markets — especially those that entail complex external dependencies (e.g., scarce feedstock, contentious new subsidies).

The advisor assessed the client’s proposed production plans and compared the carbon intensities of proposed SAF products to voluntary SAF buyers’ procurement standards. Using publicly available data tools, the advisor found that potential methane leakage rates for the client’s proposed blue hydrogen approach were likely too high for many SAF buyers’ procurement standards. Airlines, for example, generally want a minimum 60% carbon intensity reduction in SAF relative to Jet A (i.e., kerosene-based conventional jet fuel); many SAF buyers — especially in the EU — seek 85%. Methane leakages could increase the e-SAF’s carbon intensity, thereby screening out certain offtakers and lowering revenues for the company.

Similarly for HEFA, the advisor showed that crop-based residues from soybeans can damage the environmental profile of the final SAF product and hinder its chances of selling to many customers. To credibly pursue HEFA, the client would need to find locations nearer to other, stable, lower-carbon feedstock supplies, such as canola oil, animal fats (e.g., tallow), and other waste oils and greases.

“There’s no point spending all that capex to be ‘51% SAF’ because SAF buyers will not be willing to pay for something that is just ‘SAF on paper’,” says a project manager from the advisory firm. “There are other SAF options that achieve lower carbon intensities for half the capex.”

The client assessment also showed that, although there were federal subsidies, it would be difficult to match feedstock requirements with the chosen production technology in the region where the client was originally planning its e-SAF facilities. The client’s main facility in the United States was in a region with a regulated electric utility that had planned for only sparse growth in renewables, putting any power-to-liquids projects at risk.

Meanwhile, local access to waste cooking oil as a feedstock for HEFA-based production was also limited since most of it was already accounted for. Project finance bankers have flagged that feedstock contracts for HEFA SAF projects must be strong, especially since feedstock is traditionally limited and weak feedstock contracts (e.g., short tenor and/or relatively low penalties for suppliers who break the contract) mean suppliers could easily switch to other, higher-paying customers and leave the original project stranded.

Banks may encounter similar complications after conducting their own due diligence on a client. Client transition assessments can be resource-intensive and, given bankers’ time constraints, bankers could first reference readily available third-party information before investing in proprietary data and/or consultants. Leading banks are also developing in-house climate and decarbonization advisors to serve the firm. If a bank is well-versed in sectoral decarbonization strategies, it could have played the role of the advisor in this SAF case, identifying offtake and feedstock risks in the client’s proposed SAF production plans during its standard planning phase.

The client concluded that blue hydrogen-based e-SAF and soybean HEFA were not the most profitable strategies on a risk-adjusted basis. By taking a data-driven approach, the advisor showed the client less risky approaches to both e-SAF and HEFA SAF. For e-SAF, it would be more prudent to site the facility near sources of biogenic CO₂ and ample renewables so that it could use green hydrogen. This would have a lower likely carbon intensity and be more likely to sell in voluntary SAF markets.

The client has since changed its corporate strategy, moving away from blue hydrogen to initially prioritize HEFA because it has a stronger execution track record on similar biofuels. If a bank played the role of the advisor, the bank could help the client reconcile its products’ projected emissions factors with customers’ willingness to pay for SAF of similar carbon intensities. Transition-savvy banks can flag the risks of different approaches to their clients. This kind of advisory service can prepare banks to credibly extend transition financing to the client today and in the long term.

• Engage clients as early as possible. Pre-FEED is especially useful since it’s easier for the client to pivot to a less risky technology/feedstock.

• Develop internal expertise on decarbonization technologies and first-of-a-kind deal structuring to mitigate risks.

• Ground the client in end-use markets for green commodities. SAF was a new business for this chemical company and discussions on voluntary demand were especially valuable. Global investment banks, for example, are uniquely positioned to advise clients on end-to-end strategy by linking final buyers’ preferences back to technology/feedstock decisions.