Orderly path to net zero requires social and natural dimensions to be built into transition plans.
Workers, suppliers, communities and consumers should not be forgotten by institutional investors when developing net zero transition strategies.
The report, published by the London School of Economics’ Grantham Research Institute on Climate Change and the Environment (LSE GRI), outlines how financial institutions can integrate “the social dimension” to ensure a just transition to net zero greenhouse gas (GHG) emissions. It focuses on three key factors: anticipating, assessing and addressing the social risks of the transition; identifying and enabling the social opportunities of the transition; and ensuring meaningful dialogue and participation in the net zero planning.
“If the transition is managed poorly, there’s a risk that we could have stranded assets in the financial system – stranded workers, communities, or even countries – which would ultimately result in an inefficient transition to a low-carbon economy,” Brendan Curran, Policy Fellow for Sustainable Finance at LSE GRI, said during the webinar launching the report.
The global coalition of financial institutions identified five transition plan themes – foundations, implementation strategy, engagement strategy, metrics and targets, and governance – comprising ten components for disclosure which should provide effective insight into the credibility and bet zero alignment of any company’s transition plans.
The GFANZ framework references the importance of adopting a “holistic approach” by incorporating just transition and a nature-positive economy to strengthen the “robustness and credibility” of transition plans.
“Our job is to help amplify the importance of the just transition to financial institutions, encouraging them to consider social factors in their climate transition plans,” said Tony Rooke, GFANZ’s Executive Director.
Within these five themes, LSE GRI has outlined 11 recommendations for financial institutions to ensure a just transition, including assessing the social implications of their net zero plans and developing tailored transition responses, as well as implementing metrics to measure progress on just transition goals and activities.
Rooke said that GFANZ also “worked very closely” with the UK Transition Plan Taskforce (TPT), which has a two-year mandate to develop standards for climate transition plans in the UK, and is expected to report shortly.
“This was to ensure that [our respective frameworks] are not just aligned, but that they converge. There are multiple similarities between the two and they can be used equally and interchangeably,” he said.
LSE GRI’s new just transition guidance follows a report published last year which called on asset owners to enhance their scrutiny of social aspects in investee companies’ net zero strategies, signalling their expectations through manager selection and engagement policies. The report was prepared for the Financing a Just Transition Alliance, which is a coalition of 40 banks, investors and other institutions, led by LSE GRI.
Despite new guidance for investors, the lack of standardisation in metrics continues to be a challenge.
“There are emerging practices around metrics and targets, but there’s equally only emerging convergence,” said LSE GRI’s Curran, noting that it remains to be seen what will constitute “best practice” when implementing just transition metrics, and that it will be a future area of focus for the institute.
“The useful thing about [LSE GRI’s] framework is that it relies on the existing [GFANZ] framework, so it’s not trying to reinvent the wheel,” said Andrea Saldarriaga, Director of Social and Environmental Policy and UK-based bank Barclays.
However, she noted that the “lack of a universal definition of just transition” does make it more challenging for financial institutions looking to incorporate social factors into their net zero strategies.
“Just transition is going to be different across communities and geographies,” she said.
Some investors are nonetheless working with companies to prioritise a just transition.
Earlier this year, Royal London Asset Management (RLAM) and UK-based charitable foundation Friends Provident Foundation (FPF) published the findings from their just transition engagement efforts with energy utilities, identifying leaders and laggards.
Scottish energy company SSE and UK-based EDF’s just transition strategies had strong alignment to their overall business plans and included support for workers and local communities impacted by its clean energy transition, the report said.
LSE GRI’s new recommendations are just the first iteration, said Curran, noting that just transition strategies published by financial institutions will be reviewed over the next 12 months.
“It has to be an ever-improving process. As we get more examples of best practice, we can start to develop a better idea of the necessary metrics and really converge on what a viable just transition plan looks like for financial institutions,” he said.