Kieron Boyle, CEO at the UK’s Impact Investing Institute, explains how its Just Transition Criteria are being embedded in fund design.
Rather than simply avoiding financed emissions, investors are growing increasingly interested in allocating capital towards a just transition to a net zero economy. This shift is reflected in the recent finding that impact investing is set to overtake ESG integration as the most popular strategy for investors to achieve sustainability, according to BNP Paribas’ ‘ESG Global Survey 2023’.
“Investors understand how impact investing can drive both returns and mitigate risk,” says Kieron Boyle, CEO at independent non-profit Impact Investing Institute, which aims to make capital markets fairer for people and the planet.
“It’s not a question of whether we should invest for impact, but rather: how can we do it?”
To address this question, the Institute created the Just Transition Criteria, a practical tool and framework that can be used by asset owners and managers to align investments with a just transition.
The criteria were designed in collaboration with 21 institutional investors, including UK pension fund Nest and asset managers Ninety One and Schroders, which collectively control of £4 trillion (US$4.9 trillion) in assets. NGOs and social investors also contributed to the design.
Working with a wide array of stakeholders ensured that the criteria could be as practical and user-friendly as possible, says Boyle, adding that a vital aspect of the just transition is the need to work across silos. Boyle emphasises the importance of bringing together institutional capital allocators, academia, NGOs and other parties to create a comprehensive strategy that does not overlook essential issues.
The Just Transition Criteria are based on three elements of a just transition, as defined by the G7-backed Impact Taskforce: advancing climate and environmental action, improving socio-economic distribution and equity, and increasing community voice.
“The idea is that they all build on each other and are supportive of each other,” Boyle tells ESG Investor, adding that the whole idea behind the just transition is to “start where you are” and improve over time.
“That’s what we need to do as a planet. We need to be increasingly ambitious, but the most important thing is to get going – that’s how the criteria have been set up.”
According to Boyle, the first criterion broadly relates to the overall theory at the product level, the second criterion is about ensuring that no harm is done to any of the three elements, and the third criterion aims to ensure a positive aggregate contribution over time.
The Just Transition Criteria have also been designed to be consistent with existing regulatory practices, standards and frameworks, including the EU’s Sustainable Finance Disclosure Regulation (SFDR) and the UK Financial Conduct Authority’s (FCA) Sustainability Disclosure Requirements (SDR).
“Most of the asset managers that we engaged with on this work are global, so they need to have something that will work in a variety of jurisdictions,” says Boyle, adding that investors increasingly demand clarity and transparency, underscoring the importance of “intentionality” in impact funds.
Boyle says the FCA’s SDR impact label is a “step in the right direction” in that regard.
Last year, the FCA introduced its proposal for three product labels in a bid to crackdown on greenwashing: ‘sustainable focus’ (funds investing in sustainable assets), ‘sustainable improver’ (funds investing in assets undergoing a sustainable transition), and ‘sustainable impact’ (funds targeting sustainable solutions).
The UK watchdog has delayed the publication of the SDR policy statement to Q4 of this year.
“In any growing market, it’s important to find a balance between clarity so that people can have trust and confidence in their investments, and the need for space for innovation, as things continue to evolve,” says Boyle. Its crucial to describe investment opportunities in a way that sets the bar high, he says, but not so high that it becomes impossible for asset managers to set up impact funds.
In September, the European Commission published a long-anticipated consultation, which will close on 15 December, seeking feedback on the current requirements of SFDR, its interactions with other sustainable finance legislation, and potential changes to disclosure requirements for financial market participants. SFDR’s increased alignment with the FCA’s SDRs was flagged as a welcome move by experts speaking to ESG Investor.
The Institute is currently in a piloting stage where significant effort has been devoted to establishing criteria on a global scale. The pilot is aimed at assisting five asset managers to integrate the Just Transition Criteria into five actively managed funds.
Boyle says the Institute has garnered interest from approximately 60 other organisations that wish to gain a better understanding of the criteria and how it may influence their decision-making processes.
“This includes the Transition Plan Taskforce incorporating the Just Transition Criteria into their disclosure framework and implementation guidance, as well as some countries, such as South Africa, undertaking the task of adapting the criteria to create country-specific versions, which is a very positive outcome and aligns with our expectations,” says Boyle.
For the time being, the Institute is primarily focused on working closely with these five funds during the piloting stage, including the Just Climate venture fund, founded by former US Vice-President Al Gore’s Generation Investment Management. The fund, launched earlier this year, has raised US$1.5 billion to invest in climate solutions in hard-to-abate sectors like shipping and industrials.
Outside of the pilot, a number of funds have also integrated just transition considerations into their investment strategies, including investment manager Blue Orchard’s InsuResilience Fund, a micro-insurance fund focused on safeguarding the income of smallholder farmers in developing countries against the impacts of climate change.
“An essential aspect of this fund, in line with Just Transition Criteria, is its commitment to community engagement,” says Boyle, adding that it collaborates with 60 Decibels, a tech-powered impact measurement company, to regularly survey end-customers, ensuring that products are tailored to their needs and remain affordable.
Another example of a fund integrating just transition considerations is Schroeder’s Real Estate Impact Fund, which concentrates on the Global South, investing in affordable housing, high street regeneration, and employment generation in underserved areas. The fund addresses “all aspects” of the Just Transition Criteria, explains Boyle, including environmental and socio-economic considerations, as well as emphasising regular community engagement through consultations, surveys, and forums to gather feedback.
“These three examples demonstrate that just transition criteria can be integrated directly into fund design and are not merely an overlay to existing investment practices,” says Boyle, noting that while these funds vary in size and focus, they all highlight the versatility and potential impact of incorporating just transition principles.
Work is also underway to explore the feasibility of a Just Transition fund label to accompany the criteria.
“These criteria have undergone extensive testing in real-world scenarios to assess their practical applicability,” explains Boyle. “There is no substitute for learning through hands-on experience, and this piloting phase also provides us with an opportunity to gauge the interest in and the potential benefits of the label we are developing.”
Boyle notes that it is also essential to recognise that the regulatory landscape is constantly evolving.
The outcomes of regulatory developments in the UK, EU and the US, will play a significant part in determining the potential space and role for the Just Transition Criteria project, he says.
As the Institute continues to monitor these regulatory changes and gather insights from its piloting efforts, it will gain a clearer understanding of the Just Transition label’s impact and relevance.
In June, world leaders including French President Emmanual Macron, US President Joe Biden and Barbados Prime Minister Mia Mottley released an open letter that underlined the importance of a “green transition that leave no one behind”.
Mottley, who is also the author of the Bridgetown Initiative, a political agenda for reform of the global financial and development finance architecture, has complained that many finance initiatives designed to catalyse capital flows to the Global South weren’t “innovative”.
Taking on board these concerns, Boyle says there is a clear need to remove barriers to financing.
“As we approach COP28, I hope to see specific outcomes that can advance the conversation around the just transition,” he says.
Such policy shifts could include measures to facilitate and incentivise investments in sustainable and equitable solutions, promote greater collaboration between governments, financial institutions, and civil society, and ensure that the principles of the just transition are integrated into international climate agreements, he says.
A specific area of concern, which the Institute would like to see addressed at COP28, is how investors and catalytic capital providers can integrate a just transition perspective when investing in emerging and frontier markets. The Institute plans to launch a report on this topic in the coming weeks, says Boyle.
In this context, he says, three clear goals are needed for catalytic capital providers, including multilateral development banks, development finance institutions, and large global capital allocators.
First, mobilising capital for climate action requires a focus on creating opportunities for people and communities to thrive in the transformed economy – “this mindset shift is crucial”, says Boyle. Second, once catalytic capital investments are initiated, ongoing support is necessary to help communities become commercially viable, and third, a strengthening of local structures and networks is vital to ensure long-term sustainability.
“Ultimately, the goal is to accelerate the adoption of just transition frameworks across the investment universe and address the pressing challenges related to climate change and social equity.”