Investors and companies are beginning to recognise importance of the social element of net zero transitions.
As policymakers, investors and companies increasingly commit to transition to net zero carbon emissions, there is growing awareness of the necessity to consider the impact on society at large. Abandoning workers and the communities to which they belong – as happened when the UK coal industry declined post-1984 – could create a backlash that threatens the success of a transition and increases risks for investors.
A just transition is “a critical enabling factor in reaching net zero greenhouse gas emissions”, according to a report from the Grantham Research Institute on Climate Change and the Environment and the ESRC Centre for Climate Change Economics and Policy at the London School of Economics and Political Science. While governments hold the primary responsibility for making a just transition happen, “investors can also play a significant role by making sure that the social dimension is fully integrated into their assessment, stewardship, capital allocation and policy activities”.
To enable investors to fulfil their role, the report suggests that clear just transition expectations of business are needed, which can then be used in investment analysis, shareholder engagement and capital allocation to deliver “real impact”. The report draws on established international standards to present a seven-point framework of expectations for business, which it says can provide a basis for investors to understand emerging practice.
In a series of cases studies, the framework is applied to analyse work to date by five European utility firms. At UK-based energy provider SSE, for example, investor engagement helped trigger the design of the first just transition strategy covering both ‘transitioning out’ of high-carbon activities and ‘transitioning into’ net-zero energy sources. At Germany’s EON, following a call to action from its investors, a structured approach to a just transition is being developed to build public approval and social acceptance.
“A just transition is rising up the agenda as people realise the transition to net zero could be derailed if it worsens existing inequalities and doesn’t deliver positive social outcomes,” says Nick Robins, Professor in Practice for Sustainable Finance at the Grantham Research Institute and Co-author of the report. “The Covid-19 pandemic and the inequalities it has exposed globally has elevated the social dimension of net zero carbon transition to a strategic level.”
Normalising a just transition
The Grantham/LSE framework focuses on strategy, workers, supply chain, communities, consumers, policy and disclosure. Among the expectations investors should have of businesses is that just transition is incorporated into remuneration, planning, risk management, scenario exercises and capital investment, acquisitions and restructuring.
Investors should ensure companies are delivering good jobs and decent work and promoting and providing reskilling, retraining, redeployment or retirement support. Suppliers should be supported, including SMEs, and investors should determine whether companies are engaging with local communities to address social risks and are supporting consumers by improving access to key goods and services. Companies should also report on transition policies and performance via mechanisms such as the Task Force on Climate-Related Financial Disclosures.
Robins says a number of initiatives are making just transition “more of an issue for investors and businesses” in the lead-up to COP26 in November. These include the Climate Action 100+ Net Zero Company Benchmark, which contains a just transition element, the World Benchmarking Alliance’s (WBA) recently-announced just transition assessment tool and a business-led group, the Council for Inclusive Capitalism, (a group of CEOs working with the Vatican), which has developed a set of guiding principles for inclusive capitalism.
Additionally, the Just Transition Mechanism is a significant element in the European Union’s Green New Deal. The Mechanism provides targeted support to help mobilise at least €65-75 billion over 2021-2027 in Europe’s most affected regions to alleviate the socio-economic impact of the transition to net zero carbon emissions.
All of these initiatives are generating an uptick of interest among institutional investors and will be “an important process of making just transition a normal part of the overall net zero carbon emissions transition”, says Robins.
Aligning with climate goals
WBA intends to launch the first of 180 of its assessments at COP 26, says Nikki Gwilliam-Beeharee, Investor Engagement Lead at WBA. A just transition, she adds, is at the heart of the UN’s Sustainable Development Goals.
The aim is to assess 450 companies in high-emitting sectors by 2023 on their contribution to a just transition. The companies’ alignment with climate goals, alongside their approach to social challenges of decarbonisation, will be assessed as part of WBA’s Climate and Energy Benchmark.
“There has been a lot of interest in our just transition assessments from investors as there is a knowledge gap in companies’ net zero transition plans,” says Gwilliam-Beeharee.
The WBA’s just transition framework focuses on six topics, including social dialogue and stakeholder engagement, planning, enabling job creation, social protection, and policy and regulation.
European investment manager ODDO BHF Asset Management is including just transition in its active ownership plans and will work closely with the WBA on the assessments, helping to coordinate the roll-out of the assessments, says Gwilliam-Beeharee. The firm, which is a member of the WBA Alliance, is also a member of Finance for Tomorrow, a collaborative green and sustainable finance initiative focused on supporting a just transition.
Investors and governments that are setting net zero carbon emissions policies realise they must get to the “nitty gritty” of how a transition is achieved, says Gwilliam-Beeharee. “The social angle is absolutely key and allows it to happen because you have the local community supporting it. If you don’t have that support, a transition could be delayed significantly.”
Decarbonisation down under
One country that has potentially serious risks from net zero transition and has not yet set net zero targets is Australia. Three regions in the country employ nearly 45% of Australia’s total coal mining, oil and gas extraction and exploration workforce, says a report from the Investor Group on Climate Change (IGCC), a collaboration of Australasian institutional investors representing more than A$2 trillion AUM. “Parts of these communities will likely be disproportionally affected by the departure from fossil fuels compared to urban centres and more diversified regional area,” it says. A coordinated response should be implemented to promote new opportunities and alleviate adverse impacts, the report adds.
The report makes 16 recommendations for “prudent investor practice in a just transition” that cover five themes: investment strategy and capital allocation, disclosure, corporate engagement, advocacy and partnerships, and impact measurement and evaluation. Actions include seeking opportunities to allocate capital towards risk-adjusted investment opportunities that support just transition outcomes; engaging with policy makers, and monitoring and evaluating companies’ activities and outcomes related to just transition risks and opportunities.
The report notes that “a proliferation” of 2050 or earlier net zero targets across Australia’s superannuation funds and asset managers is under way with Australian Super, Lendlease, Aware Super, Cbus Super, HESTA, IFM Investors and UniSuper making public commitments, among others.
Multiple stakeholders across the economic spectrum will help to drive a just transition, including capital providers, companies, government, unions and local communities, says the report. Institutional investors can collaborate with other stakeholders to mobilise capital and investments in industries and communities in transition.
The report cites the International Labour Organisation (ILO), which urges that green investments should “generate decent jobs all along the supply chain, in dynamic, high value-added sectors which stimulate the upgrading of jobs and skills, as well as job creation and improved productivity in more labour-intensive industries that offer employment opportunities on a wide scale”. Institutional investors, it recommends, should also use their shareholder influence to advocate for companies exposed to transition related risks to effectively assess, plan and deliver an equitable transition.
Economic and political costs
Achieving a just transition to a net zero carbon economy is a challenging ambition in the current socioeconomic, political and technology landscape, especially in the context of fossil fuels, says the IGCC report.
Challenges include the income differential between extractive industries and alternative employment, the potential for casualisation and de-unionisation of workers, a lack of skills transferability, and an economic and political cost. In this respect, Australia represents an interesting but not unique case study. “Although the long-term benefits of achieving a net-zero, resource efficient and inclusive economy outweigh the cost of inaction, there are economic and political costs associated with the transition. Politically, this cost is evident through federal politics where there has been intense scrutiny and stigma around climate policy over the past 15 years,” says the report.
Robins believes one of the primary challenges with a just transition at present is to move from “high-level commitments” to action that is “operational”. Convergence around common frameworks is happening and will help, he adds. “I could count on the fingers of two hands the number of companies that are taking a just transition seriously. But companies are beginning to realise that a just transition is closely linked to their licence to operate at the local level and also that a just transition will make them more attractive to investors.”