Investing in a just transition: a framework for investors is our latest climate research paper that shows why a ‘just transition’ matters. It highlights actions that companies, governments and investors need to take to make it happen. This is timely as these stakeholders gather at COP28 in Dubai to discuss progress on climate action. Understanding the social issues linked to the transition to net zero is critical.
We offer a four-step framework that investors can use when considering the social impact of their green investments – at the corporate, sovereign and asset level – to manage the risks and opportunities. We also provide recommendations to ensure that those most affected by the global shift to low-carbon energy – workers, suppliers, local communities and consumers – are treated fairly.
What is a ‘just transition’?
A just transition is one in which the global shift towards a carbon net-zero economy happens in a way that isn’t detrimental to certain stakeholders within society.
If, for example, a company needs land to build a solar park – a collection of solar-power plants – a just transition is characterised by consultation and agreement with local communities, as well as attempts to share the economic benefits with local people.
Firms must clearly assess the impact their transition plans have on people and actively seek the views of affected stakeholders in their decision making.
Who is affected and why?
In this report, we highlight four impacted groups identified by London University’s Grantham Institute: workers, communities, suppliers and consumers.
Workers are affected, especially those in industries such as carmakers and oil and gas, that are expected to experience shifts in skills requirements and job losses. There will, of course, also be jobs created during the energy transition and the net global effect is expected to be positive.
Communities are affected because local people’s livelihoods may be disrupted by the construction of new energy infrastructure or the mining of minerals critical to many renewable technologies. They must give ‘free, prior and informed’ consent to any agreement that affects them.
Suppliers are affected as human-rights risks are often hidden in supply chains and businesses need to undertake the necessary due diligence checks. This is required by existing and upcoming regulations. For example, Europe’s new Corporate Sustainability Due Diligence Directive will enforce supplier checks for the region’s firms.
Consumers are also involved because there’s no point creating new ‘clean’ forms of energy when people can’t access them because they can’t afford to. Energy security to support livelihoods must remain a primary concern.
What’s the role of government?
Companies and investors cannot drive a just transition alone given the large-scale disruption that’s required. Governments have a leading role to play in providing the policy landscape and finance to drive climate action and ensure appropriate social protections.
Policymakers have oversight of the entire economy, and they control many of the tools that can support a just transition – fiscal measures, subsidies, trade agreements, infrastructure, regulation, education and social security. But so far, they have dragged their feet. Out of the 170 countries that updated their carbon net-zero goals as of October 2022, only 65 (some 38%) referenced the just transition.
That said, some policymakers have implemented support schemes. In the European Union, for example, the Just Transition Mechanism (JTM) provides support to regions most affected and is intended to benefit people and companies in member states.
In addition to policy, governments can use sovereign bonds to raise finance. We have seen an increase in sovereign labelled bonds issuance in recent years which provides countries with an opportunity to support the just transition.
How is this relevant for investors?
The risks of an ‘unjust’ transition are considerable – from protests destabilising entire regions, to reputational damage, higher costs due to fines, or employee issues and dwindling demand.
If investors ignore these issues within their portfolios, they risk suffering significant reputational damage and ultimately financial risk.
That said, there are also opportunities. From a green technology perspective, we’re expecting the renewable energy sector to expand at a rapid pace in the coming decades.
From a social perspective, if managed properly, a just transition could lift many people out of poverty and reduce inequalities (including gender, racial, and income inequalities) by creating decent employment and educational opportunities for those who need it most. Reduced inequality is beneficial for the long-term growth of economies.
Investors can also take advantage of the different ways in which to invest in a just transition, including via sovereign bonds. These are only a few of the opportunities a just transition can bring.
What can investors do?
Investors can use a four-step framework to embed just transition considerations into their activities:
- Investment research integration. This allows investors to identify the just transition risks and opportunities that may have financial implications for an investment. We suggest using the Climate Action 100+ Net Zero Benchmark Just Transition indicator as one way to identify just transition leaders and laggards at corporate level. Equally, the newly-released Transition Pathway Initiative ASCOR methodology considers a just transition indicator for sovereigns – one of many available country-level tools that consider environmental and social factors.
- Corporate Engagement. Speaking to companies on how they’re managing just transition risks allows important stakeholders to discuss the relevant social issues. In the report, we’ve compiled a list of questions that can be used as a starting point for these discussions. A useful resource to complement this are the just transition criteria from the World Benchmarking Alliance.
- Capital allocation and Product alignment. Allocating capital to assets that enhance the just transition, from infrastructure to equities and sovereign bonds. In addition, investors can enhance sustainability-focused portfolios to meet just transition criteria. The Impact Investment Institute’s Just Transition Criteria is a useful resource that contains key performance indicators to measure alignment across different elements of a just transition.
- Policy advocacy and sovereign engagement. Investors can engage with policy makers to help strengthen the policy foundations for a just transition and encourage a just transition strategy to be an essential component of a country’s Nationally Determined Contributions (NDCs) – its net-zero commitments – to the Paris Agreement.
A just transition is important for investors, and society as a whole, because an ‘unjust’ transition comes with considerable reputational, systemic and financial risks.
Investors can follow the practical steps we’ve identified to ensure that just transition issues are properly accounted for in their decision-making process.
Importantly, policymakers need to step up and provide the right regulatory foundations and mechanisms for enabling a just transition.
Turning theory into practice should be a priority at COP28.