Investors Can Support Just Transition by Integrating Social Factors

New Grantham Institute report calls on asset owners to signal expectations through selection and engagement policies.

Institutional investors need to step up their support and scrutiny of the social aspects of companies’ net zero plans to ensure the transition from a carbon-based economy encompasses all stakeholders, a new report says.

Further, it insists government policies such as the UK’s recently announced Net Zero Strategy must include measures designed to achieve a just transition for displaced workers, including development of “attractive careers in the green economy with good working conditions”.

The Just Zero report was prepared for the Financing a Just Transition Alliance, a coalition of 40 banks, investors and other institutions, by the London School of Economics’ Grantham Research Institute on Climate Change and the Environment (GRI).

It says national and local government hold primary responsibility for “delivering and coordinating” a just transition, but adds that financial institutions can play a significant role by “fully integrating” its environmental and social dimensions into their policies and decision-making.

The report provides asset owners and financial institutions with advice and case study examples of practical action to support a just transition, aimed at ensuring workers, suppliers, communities and consumers benefit from the transition to a low-carbon economy.

Its five recommendations to investors and intermediaries cover strategy and leadership, engagement, capital allocation, policy dialogue, and impact measurement and reporting.

Integrated approach

Investors and lenders should integrate just transition factors into their engagement with investee firms and borrowers on net-zero plans, while also seeking out opportunities to support businesses that demonstrate commitment to “positive social impact for workers, communities and consumers” as they develop low-carbon business models. Just transition metrics should be built into appraisal and due diligence policies for investment and lending, it added.

Among its 18 case studies, the report flags a long-term engagement programme by Royal London Asset Management and the Friends Provident Foundation with UK-based energy utilities. To date, the exercise has led to SSE publishing a world-first just transition strategy by a utility, based on 20 principles for embedding fairness into decarbonisation plans,  followed by E.ON’s March 2021 just transition statement and commitments by Centrica, Scottish Power and EDF UK to publish strategies ahead of COP26.

While highlighting how just transition principles are being incorporated into the strategies of individual organisations, the report says a systematic approach is also essential. To this end, it outlines the key elements for a common set of expectations that investors and banks can apply to the businesses they own and lend, which draws on international standards and emerging best practice.

Among its recommendations for different types of investors and intermediaries, the report recommended that asset owners should “signal their just transition expectations” by specifying that mandates will be awarded to asset managers with just transition policies.

“Pension funds should consider any factor financially material to the performance of their investments, including climate change and the need for a fair and just transition,” said Doug McMurdo, Chair, Local Authority Pension Fund Forum.

“Investors, such as local authority pension funds, are already using shareholder engagement to get the companies they invest in to support a just transition to net zero, and this report shows why and how investor action needs to intensify in the year ahead,” he added.

Increased reporting on social co-benefits

The report supports regulatory action to increase the reporting of social metrics by companies, including the incorporation of just transition measures into their net zero transition plans. In the recent Roadmap to Sustainable Investment, the UK government outlined plans to make net zero transition plans mandatory as part of its new Sustainability Disclosure Requirements.

The UK’s green gilt programme, the second tranche of which was released last week, is the first sovereign green bond to report on its social co-benefits.

On the policy front, the Just Zero report backs the establishment of a UK-wide Just Transition Commission to embed issues of fairness into policy-making, and the deployment of the UK Infrastructure Bank and the British Business Bank to lead the process of financing net zero so that it delivers positive social impacts for both infrastructure projects and SMEs.

The report also calls for the development of local climate finance hubs to connect place-based demand for capital with the supply of funding from banks, investors and the public sector.

“In the UK, the just transition can best be seen as the policy glue that connects net-zero with the government’s levelling-up agenda. It’s not only the right thing to do and necessary also to build public support for bold climate action, but for financial institutions it’s also strategically smart as it will build stronger and more resilient investments,” said lead author Nick Robins, Professor in Practice – Sustainable Finance at the GRI.

The 2015 Paris Agreement highlighted the need for a just transition to a low-carbon economy, focusing in particular on the needs of potentially vulnerable employees, suppliers and customers of carbon-intensive sectors, as well as the potential to create more and better quality jobs in growing areas such as clean energy.

The GRI is hosting a three-day conference this week to highlight aspects just transition strategies. GRI Policy Fellow Brendan Curran will be a panellist at ESG Investor’s ‘Toward a Just Transition’ webinar at 09.30 BST on 28 October.

The Just Zero report will be presented at the COP26 Climate Summit in Glasgow and includes a section focusing on the international dimension of financial action, focusing on developing countries.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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