The just transition: the emerging agenda for Europe’s investors

Credit: istock/Davizro

2018 is turning out to be the year of the “just transition”. In December, the UN’s annual climate conference, COP24, will be held in Katowice in the heart of Silesia’s coal-belt. This location is focusing minds on how the twin goals of the Paris Agreement – decarbonisation and resilience – can be achieved in ways that help to build a socially inclusive economy. On the downside, there are concerns that the shift to a zero-carbon economy could produce not just ‘stranded assets’, but ‘stranded workers’ and ‘stranded communities’ too. On the upside, there is the prospect of additional high quality jobs from the greening of the global economy. According to the ILO, action to meet the Paris goals in the energy sector will bring a net gain of 24 million jobs.

This is the global agenda of the “just transition”, an imperative that was included in the Paris Agreement to ensure that workplace and community dimensions of climate action are taken into account. In Europe, governments, trade unions and businesses are starting to scale up their efforts. The European Commission has pledged that the transition should ‘leave no region behind’. Scotland has announced the establishment of a just transition commission. European trade unions have looked at the consequences of climate action across seven industrial regions and produced a guide for involving workers in policy design. And major businesses such as Enel and Unilever are working through what a just transition means for them.

Leading European investors are also waking up to the reality that they must extend the scope of their commitments on climate change to include the social dimension. This would fit with their wider commitment to integrate environmental, social and governance (ESG) factors in investment decisions. But there remains a lack of practical guidance about why investors should act and how they should go about it.

To get to grips with the practical implications for investors, key European stakeholders gathered in London as part of the Investing in a Just Transition project led by LSE’s Grantham Research Institute and Harvard’s Initiative for Responsible Investment, who are working in partnership with the Principles for Responsible Investment and the International Trade Union Confederation.

For Alison Tate, Director of Economic and Social Policy at the ITUC put it, “the just transition is putting the L [labour] in the S of ESG.” This is one of the many reasons for investor action: their role as stewards of workers’ capital through the management of pension funds, making sure that these are protected in the transition to a low-carbon economy.

Strategically, the investor case for action on the just transition “has been pretty well made”, said Stephanie Maier, Director of Responsible Investment at HSBC Asset Management, adding that “we need to move more quickly to action as investors.” Here a number of priorities and challenges came to the fore during the meeting: the importance of strategic dialogue, the focus on place-based investing, the role of investor engagement and the importance of policy frameworks.

Key to the just transition is the involvement of those potentially impacted in the decision-making process. In February 2018, the insurance group Generali  launched its new climate policy and announced steps to cut investments in coal and increase those in green assets. But it was also one of the first investor policies to include stakeholder dialogue as a key commitment, with a special focus on investments in high-carbon regions, such as Poland. Yet the challenge, according to Lucia Silva, Head of Sustainability & Social Responsibility at Generali, is that dialogue “takes time”. This is particularly challenging at a moment when there is an urgency to reposition portfolios to meet the mounting climate threat. The scope of dialogue is also important: “if workers aren’t at the table, it isn’t a just transition,” said Janet Williamson, Senior Policy Officer at the TUC.

The transition also has a profound spatial dimension. De-industrialisation since the 1970s has left many European regions with lasting socio-economic problems in regions with reliance on coal, steel and other industrial sectors. The key is to ensure that the next wave of de-carbonisation is designed in a smarter way. This means a targeted approach. “Every second European coalminer works in Silesia” noted Maciej Bukowski, President of WiseEuropa, adding that a just transition could involve a range of investment opportunities in land rehabilitation, energy system renewal as well as economic diversification into knowledge-based sectors, with municipal bonds offering one way of channeling capital.

Source: chart presented at IJT London event; updated from Maciej Bukowski et al. 2015, “Whither are you headed, Polish coal?”

As part of the Investing in a Just Transition project, the LSE and the University of Leeds are also working together to understand how investors can support inclusive clean growth in the UK. This is focusing on Yorkshire, the most carbon intensive industrial region in England. In the words of Bill Adams, regional secretary for the TUC in Yorkshire and Humberside, “if we turn our backs on the transition, someone else will decide”.

For investors, “place and pipeline are the critical issues,” underscored Bruce Davis, Joint Managing Director of Abundance, a crowdfunding investment platform focusing on sustainable energy and real estate projects. A major bottleneck is the lack of on the ground capacity to develop investable projects: “people are needed to create the assets; there’s not enough expertise in public policy in relation to this,” added Davis. This requires the readiness to deploy patient capital by investors. “For place-based investing, you need investors who are committed over the long-term,” says Tatiana Bosteels, Director of Responsible Property Investment at Hermes.

Place-based investing is perhaps easiest for investors in infrastructure and real estate, as well as the new generation of crowdfunding and community energy initiatives. For investors in listed equity and fixed income markets, the challenge of the just transition is what it means for the picking of individual stocks and bonds. Here, investors would need to include social performance criteria in the way they evaluate companies. In addition, investor engagement can be a powerful signal for companies to improve their social practices. ShareAction’s CEO Catherine Howarth suggested that shareholders could ask companies “to set up just transition funds for their workforces, created by the income created by the wind-down of assets.”

Public policy is crucial here not just to drive decarbonisation and build resilience, but also to make the links with the wider inclusive growth and sustainable development agenda. Member of the European Parliament, Reinhard Bütikofer, stressed the importance of responsible investors feeding into key policy processes, not least Germany’s new Commission on Growth, Structural Change and Employment.

Looking ahead, we should see the just transition as part of the new story of inclusive, sustainable growth” concluded Lord Nicholas Stern, Chair of the Grantham Research Institute. “This is a highly attractive economic model”, he added “but it requires us to manage the process of change in much better ways within modern market economies. We need to be organising for transitions in the plural including technologies, economic structures, cities and the international division of labour. And we must accelerate the pace of decision-making if we are to respond to the urgency of climate change.”

Looking ahead to COP24 in Katowice, the Investing in a Just Transition project will be releasing its Guide for investor action.