Why are investors contributing to the ‘just transition’ and how can they do so?
Investors are increasingly taking action to respond to climate change risks and opportunities…
This is happening globally through shareholder engagement, capital reallocation and policy dialogue, efforts that form part of the wider adoption of responsible investment practices by over US$70 trillion of assets under management, integrating environmental, social and governance (ESG) factors into core operations.
…but most investor strategies on climate change have yet to incorporate a robust social dimension
The positive and negative implications for workers and communities posed by the shift to a zerocarbon economy are not yet being addressed. This is the agenda of the ‘just transition’, which offers investors a range of opportunities for implementing a comprehensive approach to climate action in tune with the overarching objective of sustainable development. By including the just transition in their climate strategies, investors can not only tackle the challenge of ‘stranded assets’ but also of ‘stranded workers’ and ‘stranded communities’. Such action looks set to be a critical part of the way in which investors can help to accelerate the transition to a zero-carbon economy and thereby support the development of a more efficient, effective and sustainable global financial system.
The transition to a zero-carbon economy needs careful management
The shift from a high-carbon to a zero-carbon economy and to one that is also resilient to the physical impacts of climate change will clearly have far-reaching implications for growth, employment and investment. Governed well, this shift will deliver significant economic, environmental and social gains (for example, in terms of health). At a macro level, the benefits will far outweigh the costs. But there will still be significant transitional implications for key sectors, regions and countries. The task is to manage this process so that the transition is not just environmentally effective and economically efficient, but also socially inclusive. Importantly, the imperative of delivering this just transition was included in the 2015 Paris Agreement on Climate Change.
There is a growing body of policy and market experience on the ramifications of the just transition
Highlights from across the world include:
- The International Labour Organization has issued a set of guidelines for a just transition to environmentally sustainable economies and societies.
- The secretariat of the UN Framework Convention on Climate Change has examined the quantitative and qualitative implications of the just transition across key sectors.
- The International Trade Union Confederation has established a dedicated Just Transition Centre. Across the world, labour unions are also advocating for a just transition.
- Business coalitions such as the B-Team, along with individual firms, are identifying how to develop the social dimension of climate action.
- A range of regional and national governments are putting in place strategic initiatives to manage the just transition, and are introducing national roadmaps for sustainable finance.
- Grassroots organisations are pioneering new forms of investment at the intersection of social justice, community development and environmental sustainability.
- A small but growing number of investors have recognised the need to integrate the social dimension into their climate strategies and examine their contribution to the just transition.
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A just transition: integrating the social dimension into climate strategies
The just transition is a multi-dimensional challenge
There is, however, a lack of robust analytics and guidance to enable investors as a group to play an effective role. This is a gap that the Investing in a Just Transition project aims to fill. Our initial survey of the landscape has enabled us to identify 10 strategic dimensions of the just transition that could help frame the investor response.
The just transition: ten dimensions for investors to consider:
- The just transition is about managing both the positive and negative social and employment implications
- The just transition is global in scope, affecting developed and developing countries
- The just transition is a whole-economy issue, covering all sectors, far beyond energy
- The just transition connects climate change with the Sustainable Development Goals
- The just transition is part of the future of work in an increasingly digital economy
- The just transition covers the social and the spatial, highlight the importance of place
- The just transition needs to be understood along global value chains
- The just transition is about both process (‘how’) and performance (‘what’)
- The just transition is part of a growing focus on unequal financial and economic systems
- The just transition will need to be delivered in a time of political disruption and upheaval
To date, investors have not been actively involved in the growing number of just transition initiatives. Likewise, the social dimension has so far been missing from most investor strategies to tackle the threat of climate change. The low profile given to the workplace and community elements of climate change in the reporting recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD) is illustrative in this regard. Fortunately, there is clear room for manoeuvre. Investors have developed growing experience with managing the social dimension of responsible investment which can now be applied to responding to the environmental drivers of climate change.
There is a clear rationale for action on the just transition because it:
- Integrates the environmental and social pillars of responsible investment, linking climate action with the material importance of human resource management, for example.
- Aligns investor practice with international goals and standards, notably around human rights, labour standards and the Sustainable Development Goals.
- Provides a lens through which new investment opportunities can be identified, notably in place-based real assets such as infrastructure, real estate, private equity, bonds, impact investments and community assets.
- Responds to growing beneficiary preferences for responsible investment as well as specific interests in supporting a just transition by savers in affected sectors and regions.
- Enhances understanding of systemic risks by connecting the climate change and inequality agenda, highlighting potential barriers to the transition and ways of promoting acceleration.
- Offers a platform for collaboration between investors and other stakeholders, particularly to develop blended finance strategies.
Investors have a number of options to contribute to the just transition
Taken together, these reasons provide a compelling case for investor action. Building on this, we suggest four main ways in which investors could take action to promote the just transition, which all build on established practices:
- Include just transition principles in a statement of investment beliefs
- Incorporate just transition principles within climate policy statements
- Making just transition a part of investor scenario exercises on climate change
- Integrate just transition into human resource management processes internally
- Embed just transition principles into consultant and manager searches externally
- Communicate action on the just transition with clients, savers and beneficiaries
- Broaden the scope of climate engagement to include the social dimension, using the TCFD framework: strategy (including scenarios), risk management, governance and metrics
- Carry out initial social and employment assessments of climate-exposed assets, covering key just transition issues such as worker engagement, skills development, occupational health and safety, social protection (including healthcare and pensions), labour standards (including freedom of association, collective bargaining), social dialogue, supply chain and community relations
Place just transition principles within both core and thematic approaches within:
- Fixed income (including green and social bonds)Public equity (including large and small caps)
- Private equity/venture capital (including impact investing)
- Real assets (including infrastructure, property, land and forestry)
- Cash (including commercial banks and community development finance institutions)
- Involve investors in international policy discussions relevant to delivering the just transition (e.g. ILO, UNFCCC, G20)
- Encourage development finance institutions to develop strategies for the just transition
- Support the inclusion of the just transition – and how to finance it – in national climate plans
- Channel proceeds of public green bonds to just transition activities
- Focus on the just transition within national roadmaps for green and sustainable finance
- Develop regional strategies to attract investors into place-led green assets
Based on this initial review, we are seeking feedback on three key topics:
How can the case for investor action on the just transition be deepened?
What are the strategic challenges of the just transition for investors and for the stakeholders who engage them?
What motives for engaging on the just transition resonate with different kinds of investors?
How can we best identify the most useful roles that investors are suited to play in the just transition? What concerns should we address about investor roles and contributions?
What are the key barriers to investors contributing to the just transition?
How might the investor contribution towards the just transition be measured?
How can investor guidance on the just transition be most useful and effective?
- What existing investor policies and practices support the just transition?
- What existing frameworks and tools from responsible investment, climate action and elsewhere can investors adapt and deploy for the just transition?
- What new tools need to be developed to facilitate investor action?
- What are the key mechanisms – policy and otherwise – that can structure investor participation in the just transition?
How can investors become part of cross-sector collaborations on the just transition?
- Who are the key stakeholders that investors should engage on the just transition?
- How can dialogue between investors, workers, communities and governments be developed productively?
- Where are there place-based opportunities for cross-sector collaboration in which investors can play the most useful roles?
- Where are there innovations in collective ownership, investment goals and vehicles, or collaborative engagement that can pilot new models for achieving the just transition?
- What policy reforms could better enable investors to contribute to a just transition?
Download the full report
A just transition: integrating the social dimension into climate strategies
Produced in collaboration with
Grantham Research Institute, London School of Economics
Harvard Kennedy School