Investee companies’ climate strategies can no longer be viewed solely through an environmental lens, says new report.
Investors can help companies to plan their just transition to a net-zero economy, but they must benchmark progress against a clear framework to inform analysis, engagement and capital allocation effectively.
Both the rationale and the tools for steering investee companies through business-model transformation in response to climate change are provided in a new report by 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.
Governments bear primary responsibility for ensuring social cohesion as economies adjust to and mitigate the effects of climate change, says the report. But institutional investors have strong motivations to ensure both their own transition strategies and those of their investee firms take full account of social and governance factors, as well as environmental ones.
Investors’ obligations to support a just transition stem largely from existing commitments to human rights and labour standards such as the UN’s Guiding Principles on Business and Human Rights and the Organisation for Economic Co-operation and Development’s Guidelines for Multinational Enterprises.
But failure to support the rights and interests of employees and other stakeholders during the transition to a low-carbon economy increases the possibility of systemic economic, financial and political risks, which could delay progress or increase costs, ultimately threatening portfolio returns. Further, the report adds that active support for firms’ just transitions can help investors to contribute to UN Sustainable Development Goals, while also delivering on positive social and environmental impact.
The report, titled ‘From the Grand to the Granular’, offers a seven-point guide for investors to assess the just transition of the companies in their portfolios, which draws on existing international policy frameworks as well as social partner and stakeholder approaches.
The proposed framework focuses on the impacts of transition plans on four core stakeholder categories: workers, suppliers, communities and consumers. It also sets expectations relating to strategy, policy and partnerships, and transparency and disclosure. The report suggests disclosing on just transition policies and performance could be achieved via Task Force on Climate-related Financial Disclosures (TCFD) reporting.
“A commonly agreed framework defining what can reasonably be expected from businesses will enable investors to incorporate the just transition into routine assessment of company performance,” the report said. “Clear guidelines will also help businesses to report on their just transition initiatives and impacts.”
The report includes five case studies drawn from firms that have already started implementing just transition strategies, all of which operate in the European utilities sector.
“As investors, we recognise that we have a supporting role to play in ensuring that social dimensions are fully integrated into the climate strategies of the companies in which we invest,” said Naïm Abou-Jaoudé, Chief Executive of asset manager Candriam, which funded the report as part of a three-year partnership with the Grantham Research Institute.
Earlier this month, the World Benchmarking Alliance published the methodology it intends to use to assess the just transition plans of 450 high emitting companies. The alliance will use the methodology to assess firms’ alignment with the goals of the Paris Agreement and their approach to addressing the social challenges involved in transitioning to a low-carbon economy.