Who Pays for Supplier Decarbonisation? Funding Energy-Efficiency Projects in Asia

In most supplier decarbonisation programmes in Asia, nobody pays for everything. The supplier usually funds projects that pay back quickly because it keeps the energy savings. Third parties — energy service companies, banks and development finance institutions — can fund projects with steady, measurable savings. The buying company tends to step in only where a project clears neither the supplier’s payback threshold nor a lender’s credit test, yet matters for the buyer’s Scope 3 target. The practical job is to sort each project into the right funding route, rather than arguing about who should pay in principle.

This guide sets out the funding options open to manufacturers and brands sourcing from China, Hong Kong, Taiwan and the wider region, how to choose between them, and the contract and data terms that decide whether a buyer’s money actually shows up as a Scope 3 reduction.

Why funding is the sticking point

Energy efficiency is rarely held back by a lack of technology. It is held back by who carries the cost and who gets the benefit. A supplier that replaces compressors or installs variable-speed drives pays the upfront cost and keeps the lower power bill. The buyer gets a lower emissions figure for purchased goods and services, but only if its accounting can see the change. That split incentive shows up in three ways:

• Short payback thresholds. Many factories, particularly smaller ones, only approve projects that pay back quickly, and the bar rises when order volumes are uncertain.
• Short contracts. A supplier on annual purchase orders has little reason to invest for a customer that may switch sourcing next season.
• Many customers. A supplier serving ten brands may ask why one of them should fund a project that improves the emissions figure it reports to all ten.

The pressure to fix this is growing. CDP found that disclosed supply chain emissions were on average 26 times higher than companies’ operational emissions, yet only around four in ten companies were engaging suppliers on climate 1. The IEA reports that industrial energy intensity has improved by less than 0.5% a year since 2019, down from about 2% a year in the previous decade, while overall efficiency investment neared US$800 billion in 2025 2. The capital exists; getting it into factory upgrades is the harder part.

The main funding routes

Route	Who provides the money	Best suited to	Main limitation
Supplier self-funding	Supplier’s own capital or ordinary bank credit	Quick-payback measures: compressed air leaks, lighting, controls, motor upgrades	Stalls on longer-payback or uncertain projects
Energy performance contracting	Energy service company (ESCO), repaid from verified savings	Projects with measurable, stable savings	Transaction costs; needs a reliable baseline
Green and transition loans	Commercial banks, sometimes backed by public schemes	Larger capital projects at creditworthy suppliers	Smaller suppliers may not meet credit criteria
Sustainability-linked supply chain finance	Banks or DFIs, priced off the buyer’s credit	Rewarding suppliers that hit agreed targets	Improves working capital; does not fund capex directly
Buyer co-investment or grants	The buying company	Strategic projects that no one else will finance	Buyer’s money at risk; accounting and fairness questions
Pooled or buyer-led funds	A buyer or group of buyers with investment partners	Renewable capacity and larger portfolios	Complex to set up; better for large programmes

Energy performance contracting

Energy performance contracting lets a supplier upgrade equipment with little or no upfront capital: an ESCO designs and finances the project and is repaid from the verified savings. China has one of the world’s deepest markets for this. The IEA estimates that China’s ESCO market grew from about US$5.9 billion in the early 2010s to more than US$22 billion in 2024, supported by formal policy backing, although high transaction costs and contract complexity still limit smaller projects 3. For a buyer, the useful role is often introducer and aggregator: bundling several suppliers’ projects so an ESCO sees a portfolio worth pricing.

Bank lending and public support

Commercial banks in the region increasingly offer green loans for efficiency and on-site renewables. In mainland China, the People’s Bank of China’s Carbon Emission Reduction Facility gives participating banks low-cost central bank funding for eligible low-carbon lending and has been extended to at least 2027, although most of the lending so far has gone to clean energy rather than industrial retrofits 4. Suppliers should ask their existing banks what green products they can access before assuming a buyer must pay.

Sustainability-linked supply chain finance

Here the buyer’s credit rating does the work. A bank or development finance institution buys a supplier’s approved invoices at a discount, and the discount improves when the supplier meets agreed environmental and social targets. IFC’s Global Trade Supplier Finance programme works this way and reported that 84% of its FY2026 disbursements went through sustainability-linked facilities 5. This is a reward, not a capital budget: it lowers the supplier’s financing cost and gives it a reason to act, but the project itself still needs funding from somewhere.

Buyer co-investment and pooled funds

Direct buyer funding makes sense for projects that are strategically important but fail every other test, such as heat electrification at a critical single-source supplier. Some large buyers have gone further and pooled capital. Apple’s China Clean Energy Fund, set up in 2018 with suppliers operating in China, has invested in more than 1 gigawatt of wind and solar projects across 14 provinces 6. Few companies have that purchasing weight, but the principle carries over: when buyers share a supply base, pooling reduces the free-rider problem.

Matching projects to funding

A simple way to decide is to classify each opportunity from the supplier energy audit by its economics:

1. No-cost and low-cost operational fixes (leak repair, set-point changes, scheduling). The supplier pays; the buyer’s contribution is technical support and data requests.
2. Efficiency projects with clear savings (motors, variable-speed drives, heat recovery, efficient compressors). Supplier self-funding, bank loans or energy performance contracts. The buyer can help by extending order commitments so the payback is less risky.
3. Longer-payback or strategic projects (heat pumps, process redesign, fuel switching). Blended funding: supplier plus bank plus a buyer contribution sized to the gap, ideally shared with other buyers.
4. Renewable electricity. On-site solar is often financed by third parties under lease or power purchase structures; off-site procurement depends on local market rules.

The IEA’s own priorities for industrial efficiency — better motor systems, heat pumps for low-temperature heat up to 200°C and material efficiency — line up well with categories 2 and 3 7.

Before committing money, check that the project would not have happened anyway. Funding a retrofit that the supplier had already budgeted is a poor use of a Scope 3 budget.

Make sure the reduction reaches your inventory

A buyer that funds a supplier project and then keeps calculating that supplier’s emissions with spend-based averages will see no change in its reported Scope 3. The reduction only appears when the inventory uses supplier-specific data, as the GHG Protocol Scope 3 Standard allows 8.

Standards are moving in the same direction. The GHG Protocol’s March 2026 progress update on its Scope 3 revision proposes, among other things, restricting the use of a supplier’s company-wide emissions allocated by revenue share except where the supplier’s output is homogeneous, and requiring disclosure of how much of the inventory rests on specific versus average data. These are proposals still subject to public consultation, not adopted rules 9. Separately, the SBTi published Version 2.0 of its Corporate Net-Zero Standard on 11 June 2026; it becomes mandatory for new target submissions after 31 January 2028 10. Our guide to SBTi Net-Zero Standard V2 covers the Scope 3 changes in detail.

In practice this means product- or site-level data: metered energy before and after the project, production volumes, and an allocation method both parties agree on. Our supplier carbon assessment checklist sets out the minimum dataset.

Contract terms that protect both sides

Whichever route you choose, write the terms down before money moves:

• Baseline and measurement. Agree the baseline period, metering, normalisation for production volume and who verifies savings.
• Data rights. The supplier provides product-level emissions data at an agreed frequency; the buyer agrees how it will be used and kept confidential.
• Claims. Other customers of the same supplier will see the lower emissions too. Decide up front that this is acceptable, and avoid any exclusive claim over the reduction.
• Volume or tenure commitments. A multi-year sourcing commitment is often worth more to a supplier than a grant, and costs the buyer less cash.
• Repayment or clawback. For co-investment, set out what happens if the relationship ends early or the equipment is not used as agreed.
• Collaboration with other buyers. Pooled funding among competitors should be reviewed for competition-law risk, and kept to sustainability information rather than prices or volumes.

A practical sequence

1. Rank suppliers by their share of your Scope 3 emissions and by how dependent they are on your orders.
2. Commission or co-fund energy audits at the top tier; the audit is often the cheapest intervention you can make.
3. Classify each audit finding into the four categories above and map it to a funding route.
4. Introduce suppliers to ESCOs and lenders before offering your own money.
5. Reserve buyer funding for the gap on strategic projects, and pair it with longer contracts and data terms.
6. Track verified savings and update supplier-specific emission factors in your inventory.

Our 90-day supplier decarbonisation pilot and supplier decarbonisation programme in China guides show how to sequence the work; for the wider context, see supply chain decarbonisation in Asia.

The bottom line

Offering grants first risks funding projects suppliers would have paid for anyway; never contributing risks seeing only quick fixes. The workable middle is to let suppliers and third-party finance cover what pays for itself, use supply chain finance and contract terms to reward progress, and put buyer capital only into the projects that matter most and would otherwise not happen. If you are working out that split for a supplier base in China or elsewhere in Asia, talk to our team.

Sources

1. CDP — “Corporates’ supply chain scope 3 emissions are 26 times higher than their operational emissions”, 25 June 2024. cdp.net
2. International Energy Agency — Energy Efficiency 2025: Executive summary, November 2025. iea.org
3. International Energy Agency — “Why the growth of energy service companies is uneven globally”, 13 March 2026. iea.org
4. Green Central Banking — “China’s central bank extends green lending scheme until 2027”, 22 August 2024. greencentralbanking.com
5. International Finance Corporation — Global Trade Supplier Finance (programme page, accessed September 2026). ifc.org
6. Apple Newsroom — “Apple ramps up investment in clean energy and water around the world”, April 2024. apple.com
7. International Energy Agency — Energy Efficiency 2025: Industry, November 2025. iea.org
8. GHG Protocol — Corporate Value Chain (Scope 3) Standard. ghgprotocol.org
9. GHG Protocol — Scope 3 Standard Revisions: Phase 1 Progress Update, 31 March 2026. ghgprotocol.org
10. Science Based Targets initiative — “The SBTi releases Corporate Net-Zero Standard V2.0 to accelerate corporate climate action”, 11 June 2026. sciencebasedtargets.org