Financing a Just Transition: connecting climate change action with an inclusive economy

  • 23 September 2019
  • Blog | Green Finance | Blog


The transition to a net-zero carbon and resilient economy is set to generate huge benefits in terms of economic prosperity and human well-being, as well as preventing catastrophic climate change. A highly attractive future lies ahead, where extra investment in clean energy could save the global economy “up to $160 trillion cumulatively over the next 30 years in avoided health costs, energy subsidies and climate damages” according to the International Renewable Energy Agency (IRENA). IRENA estimates that every dollar spent on the energy transition will pay off up to seven times over in terms of wider benefits.  The latest assessment of the New Climate Economy also concluded that ambitious climate action could generate a net employment gain of 37 million jobs across the globe by 2030. 

These gains are not automatic, however. Along with ‘stranded assets’, the financial community also faces the prospect of ‘stranded workers’ and ‘stranded communities’ as the transition away from fossil fuels accelerates. Decarbonisation cannot be allowed to create a new round of ‘rust belts’ across the globe. Equally, the benefits of the transition may also not be realised. The hoped-for growth in green jobs may turn out, for example, to produce ‘gig economy’ employment conditions, with low wages, poor rights at work as well as constrained opportunities because of a lack of focus on building up the skills required (particularly among vulnerable groups of workers). 

These concerns are already coming to the surface across the world, in President Trump’s support for threatened US coal-miners and in the gilet jaunes protests against carbon pricing in France. Indeed, as the UK’s Committee on Climate Change highlighted recently “if the impact of the move to net-zero emissions on employment and cost of living is not addressed and managed, and if those most affected are not engaged in the debate, there is a significant risk that there will be resistance to change, which could lead the transition to stall.”   

This is why policymakers, trade unions, business and financial institutions (notably investors) are increasingly focused on how to deliver a just transition. Originating in the labour movement, the notion of a “just transition” was incorporated in the 2015 Paris Agreement as a way of signalling the importance of climate policies minimizing negative repercussions and maximising positive social impacts for workers and communities. At the 2018 COP24 climate conference, 53 countries (including the UK) signed the Just Transition Declaration which recognised the need to factor in the needs of workers and communities to build the public support for a rapid shift to a zero-carbon economy. 

Investors are also waking up to the need to support a just transition. More than 2,000 institutions with over $80 trillion in assets now support the Principles for Responsible Investment (PRI), with the commitment to integrate environmental, social and governance (ESG) factors across their decision-making. Climate change is certainly an environmental issue, but the transition is not: it’s a process of structural economic, social, technological and institutional change. In many ways, the just transition provides a bridge between the environmental and social pillars of the Sustainable Development Goals (SDGs), requiring a truly joined-up approach from financial institutions. 

The case for investors to act is compelling. At the strategic level, a just transition minimises the systemic risk of climate change to portfolios over the long-term. Analytically, the just transition also focuses investor attention on the materiality of human capital management and community relations to a successful transition: standard frameworks such as the reporting recommendations of the Task Force on Climate Related Disclosure (TCFD) give low priority to the skills, employee engagement, and wider ‘licence to operate’ that companies will need. It also provides a lens through which investors can identify new opportunities, particularly those with a regional focus (such as local authority pension funds and impact investors). The just transition also provides a way for investors to contribute to the achievement of societal objectives such as the Paris Agreement itself as well the Sustainable Development Goals.

In December 2018, this strategic rationale was brought together in a global investor guide to the just transition, prepared by the LSE’s Grantham Research Institute and Harvard’s Initiative on Responsible Investment, working in partnership with the PRI and the International Trade Union Confederation.  Alongside the guide, nearly 140 institutions with over $8 trillion in assets have backed an investor statement committing to take action to support the just transition.  The good news is that investors now have a set of tried and tested tools that can be applied to the just transition. Shareholder engagement can be an effective mechanism to generate both a better understanding of corporate performance on the just transition and drive improved practices (for example in the utility and renewable energy sectors). The just transition can also be applied to investment decisions across all asset classes. A new low-carbon equity index with ESG factors included has just been released by a fund in Canada, for example. Real assets such as infrastructure and property offer particular opportunities to connect with place-based priorities. Fixed income is another area for innovation, connecting green bonds with social impact. And new forms of investing through crowdfunding and community shares add to the conventional menu of options. 

In the UK, the just transition has moved from being a high-level concept in international climate negotiations to becoming a recognised priority for economy-wide action. Our estimates suggest that around one-fifth of current jobs in the UK have skills which will be impacted by the transition, either growing in demand or requiring reskilling.  The Committee on Climate Change has recommended that alongside the legislation needed to deliver a net zero economy by 2050, the UK government should also introduce a strategy “to ensure a just transition across society, with vulnerable workers and consumers protected”.  To work out what this means in detail, the Scottish government has already established a multi-stakeholder Just Transition Commission to provide advice on how the country can develop a “carbon-neutral economy that is fair for all”.

The Commission has drawn up a comprehensive work plan examining what the just transition means for a set of priority sectors (including energy, transport, buildings, industry, agriculture) as well as finance and investment. At a local level, a growing number of UK cities have passed motions declaring a climate emergency. In April 2019, for example, Leeds City Council adopted a science-based Carbon Roadmap, which highlighted that “a key challenge is to ensure that the transition is just and inclusive.”  

Over 20 leading UK-based investors have signalled their support for a just transition. One of these is the Northern Local Government Pension Scheme (LGPS), with around £46 billion in assets. The Northern LGPS’s goal is for 100% of its assets to be compatible with the net zero-emissions ambition outlined in the Paris Agreement by 2050. In addition, the scheme has committed to “actively engage with the social aspects of responding to climate change” to deliver a just transition. According to the Scheme, this commitment “fits well with our objective of seeking to ensure a regional dimension to our Responsible Investment activities.”  The wider financial sector in the UK has also started to explore what the just transition means for how banks can support households, enterprises and public authorities in delivering a net zero economy through an inclusive strategy.

Of course, these are just initial steps. Ambitious policy frameworks will be needed at the local, national and international level to deliver climate action in ways that also tackle poverty and inequality. Financial institutions will also need to develop practical toolkits for connecting the environmental and social dimensions of the transition. What is clear, however, is that financing a just transition now looks set to be the best way for investors and banks to manage the strategic risks and opportunities that flow from the shift to a net-zero and resilient global economy. 

Read more from the Sustainable Finance Report here.