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Investment Institute

Climate Change: How investors can help deliver a Just Transition

  • 22 June 2022 (5 min read)

The concept of a Just Transition is not new. US labour leaders noted the conflict between jobs and the environment as far back as the early 1990s, but it has gained momentum in recent years. It was referenced in the 2015 Paris Agreement on climate change, and in the same year by the International Labour Organization (ILO), in guidelines aimed at creating decent jobs and promoting social protection.

At the heart of the issue is an acknowledgment that moving to low-carbon energy, buildings, transportation and industrial production will bring dramatic challenges for countries and industries – to workers and their communities. Failing to anticipate the social implications of those challenges could stall climate progress and increase inequalities at local and global level, disrupting the fragile equilibrium between developing and developed economies. 

A world in which the Just Transition is not addressed is a world of heightened political instability and systemic risk. For asset managers, this is a world where investing is made far more difficult by a long-term risk/reward imbalance. But we believe responsible investors can already start to assess companies’ progress towards integrating the Just Transition into their climate strategy.

Social exclusion and growing inequality risks

The risks of climate change are very well known.1 Climate-change related food insecurity, water shortages, losses and damage could prompt disastrous humanitarian consequences and trigger large scale displacement and migration with huge implications for investors.2 But our response to climate change will contain its own risks – the nature of the transition will decide if our new era is able to alleviate conditions for those most vulnerable.

A number of studies show the potential economic benefits of a genuinely Just Transition over the longer term, whether from future growth, job creation or the promotion of decent work conditions. Estimates from a 2017 Organisation for Economic Co-operation and Development (OECD) report found that a decisive transition package could boost long-term output by 5% on average across the G20 economies by 2050.3

One report concludes that ambitious climate action could result in a net employment gain of 37 million jobs across the global economy by 2030.4 The expected net increase would flow from the adoption of sustainable practices and more circular economy thinking, including changes in the energy mix, growth in the use of electric vehicles, and increases in energy efficiency in existing and future buildings.

When viewed in aggregate there may be a positive story to tell around work, but the impact on individual lives, and on each region or country will be uneven – and the job-creating potential of environmental sustainability is not a given. The transition will inevitably cause job losses. Carbon- and resource-intensive industries will be scaled down. A Just Transition requires the retraining of workers to reallocate them, and the oversight to ensure decent working conditions in the sectors rapidly scaling up to meet new demand.

For investors there will be a huge potential advantage if key economies can keep a lid on labour market upheaval. Social dialogue will be instrumental in promoting frameworks and legislation that include both labour and environmental concerns, as well as contributing to the implementation of appropriate governance structures to manage and tackle risks – addressing specific issues such as the disproportionate effect on women from many of these issues.

Regulations and government policy will be crucial for a Just Transition that promotes green industries, locks in decent work conditions and builds social protection systems as a first line of defence against income risks, whether from the physical risks of climate change or from the transition.

How can asset managers help?

The motivation for asset managers to act is clear. The potential social impacts in the transition run from grand macro evolutions, to rapid, dramatic and price-sensitive adjustments at individual issuers. Our engagement with corporates will be a powerful part of this process, as we seek to ensure they include the Just Transition as part of their climate strategies.

Despite a steady accumulation of academic research on the topic, the Just Transition is still an immature concept. Human capital management has been absent from most business responses to climate change, although it is crucial at a time of transformational change.

We have seen that engagement can be an effective engine for change on climate issues.5 It can also be crucial as we drive the Just Transition. The first step is to understand a company’s strategy on:

  • The climate change impact (for employees, jobs in the supply chain, and communities affected)
  • The implications for human resource management (need for restructuring, quantity and quality of employment, impact on wages, pensions)
  • Investments made to mitigate the risks, upskill/reskill people and create new business opportunities while maintaining affordability for customers

The World Benchmarking Alliance (WBA) and the Climate Action 100+ investor coalition have both made headway in developing an approach to address the Just Transition.6  7 Both initiatives will help us frame our engagement with companies in this area, even though, as is often the case for thematic firms in their infancy, consistent disclosure is our first challenge. Gathering appropriate data will prove more difficult for the social dimension than it is for climate – the objectivity and suitability of indicators will have to be tested. High-emitting sectors such as energy, building and construction, transport, agriculture and food are most at stake – but the relevant criteria for each will differ greatly, as will the scope of their potential wider impact on communities. For example, human rights and environmental issues will likely be spotlighted in the increased use of raw materials such as lithium and cobalt for electric vehicle batteries and solar panels.

The steady rise in understanding around this topic, combined with companies’ interactions with active and responsible investors, has already resulted in some behavioural changes that take us towards that first step of true integration. We think that our involvement in collective engagement initiative the Coalition for a Just Transition, will help us identify best practice across the most affected sectors, increasing the potential to spot leaders for our social progress investment strategy, and helping us to identify and engage with the laggards.

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