Financing the transition: how investors can help make climate action inclusive

It is becoming ever clearer that action on climate change is not just environmentally essential but also provides one of the best strategies for delivering positive economic and social development. According to the latest report from the New Climate Economy (NCE), ambitious climate action could produce a direct economic gain of US$26 trillion through to 2030 compared with business-as-usual, along with a net employment gain of 37 million jobs. But it is also obvious that these benefits will not flow automatically or equitably. As well as rapidly reallocating capital from high- to low-carbon assets, we need to make sure that, in the NCE’s words, “the gains are shared equitably and the transition is just”.

Investors have got used to evaluating the low-carbon opportunities, stranded asset risks and physical shocks that climate change is bringing to their portfolios. Now they are starting to place this ‘first generation’ climate change agenda within the broader context of inclusive growth and sustainable development. To enable investors to take action, the first edition of a new investor guide has been released by the Investing in a Just Transition initiative, a project led by LSE’s Grantham Research Institute and Harvard’s Initiative for Responsible Investment, working in partnership with the Principles for Responsible Investment (PRI) and the International Trade Union Confederation (ITUC).

A just transition: building trust and winning the climate argument

For Fiona Reynolds, CEO of the PRI, there is a compelling rationale for investors to factor the social dimension into their climate work: “We can’t win the climate argument if people feel they will be the losers,” she highlighted at PRI in Person, the global gathering of investors that took place in San Francisco in September 2018. Investors are realising that two systemic risks are now converging: first, the threat to the global economy from unchecked climate disruption, and second, the growth in inequality within nations. The crux of the matter is to make sure that the climate transition is designed to deliver high social standards in the growing green economy and that the phase-down of high-carbon sectors does not result in ‘stranded’ workers, communities and, potentially, countries.

“If we want to build trust, we have to have a just transition”, stressed Sharan Burrow, General Secretary of the ITUC at the investor guide’s launch. The just transition provides a strategic framework for investors to guide their climate strategies. The International Labour Organization has released a consensus set of principles and the need to deliver a just transition is written into the Paris Agreement on climate change. Key dimensions of the just transition include social dialogue with workers, skills development and retraining, promoting health and safety, social protection (including health and pensions) as well as community involvement and investment in regional diversification.

What the investor guide does is translate the broad principles of a just transition into a framework that investors can use, covering investment strategy, shareholder engagement, capital allocation and policy dialogue, as well as learning and review. The importance of ‘getting specific’ was highlighted by Erin Hutson, Director of Corporate Affairs at the US trade union LiUNA, whose 500,000 members come from across the spectrum from high- to low-carbon segments of the energy industry. Speaking at the 2018 Committee on Workers’ Capital conference, she observed that “no one disagrees with the concept, but there are practical challenges”, not least the geographical disparities between established fossil fuel jobs and the growing renewables sector, as well as the low wages and safety problems that can be found in the clean energy industry.

A powerful role for institutional investors

As stewards of assets on behalf of many millions of savers and beneficiaries, institutional investors can play a powerful role in ensuring that the transition respects core human rights principles and international labour standards. A number of investor alliances are already starting to include the worker and community dimension in their shareholder engagement programmes on climate change, including SHARE in Canada and the Interfaith Centre on Corporate Responsibility (ICCR) in the United States.

Internationally, the Climate Action 100+ initiative provides a powerful platform enabling investors to place the just transition at the heart of their engagement with the corporations most responsible for greenhouse gas emissions. Here the role of pension fund trustees can be central. In the Netherlands, Therese Schets of the FNV union and a trustee of the €4.8 billion Window Cleaners’ fund (with 556,000 beneficiaries), says that, “embedding labour rights in our investment beliefs” was an important foundation for the fund to take action on the just transition.

Alongside the guide, the PRI has launched a statement for investors to make a public commitment to the just transition. Already more than 20 investors, with assets over $3.5 trillion, have become early adopters of the statement. One of these is the French pension fund, Ircantec. According to Laetitia Tankwe, adviser to the president of Ircantec, “One of our priorities is to take account of the social impacts of climate change.” She adds, “If we don’t, the transition won’t happen or will happen much later.”

2018: a turning point?

For investors, 2018 has been the year when the long-term importance of the just transition became widely recognised. However, there is much practical work still to be done to make this a core part of decision-making. According to Kevin Thomas, Executive Director of SHARE, this will involve investors operating across traditional boundaries and working with trade unions and community groups. It is an agenda that covers the global economy, runs down international value chains, and is as relevant – if not more so – for major emerging economies such as Brazil, China, India and South Africa as it is for post-industrial economies such as Australia, Canada, the EU, Japan and the US. It will require deeper research and benchmarking of company practices as well as focused engagement to raise standards.

In addition, investors will need to extend the scope of their policy advocacy with governments to ensure that the employment and regional implications of the transition are embedded in climate plans and industrial strategies. Here, placed-based dialogues will be critical to build up the pipeline of assets that can both contribute to decarbonisation, resilience, and thriving communities and generate returns for long-term investors.

Building on the current momentum and growing signs of investor interest, the aim is to develop a community of practice in 2019 that can work through the practical implications so that investor action on climate also builds an inclusive economy.

The final version of the investor guide and the full list of signatories will be launched at the COP24 UN climate conference in Katowice in December. The first edition of the guide can be found here. Investors can signal their support for the just transition here.

Nick Robins is Professor in Practice for Sustainable Finance at the Grantham Research Institute. Vonda Brunsting is Program Manager for the Just Transition project at the Initiative on Responsible Investment and David Wood is the Initiative’s Director. Will Irwin is a policy analyst working on sustainable finance at the Grantham Research Institute. The views in this commentary are those of the authors and not necessarily those of the Grantham Research Institute.