Strategies that deliver a just transition for workers and communities are increasingly seen as essential to speed progress to net zero. This will involve changes across the financial system, as Nick Robins explains.   

Some of the biggest issues now facing the drive to a climate-secure economy are questions of fairness and justice. For example, phasing out fossil fuels is vital to slow the pace of warming, but there can be concentrated impacts for workers and communities that need to be addressed upfront to ensure no one is left behind. Equally, putting a price on vehicle pollution is often needed to decarbonise the sector, but this could disadvantage low-income consumers unless adequate public transport or scrappage schemes are put in place.  

On the upside, the much-needed acceleration of renewable energy will bring a net boost to job creation across the world. But here, too, careful planning is a must so that skills are in place, decent work provisions are applied and communities share in the value that’s created. And, of course, principles of justice lie at the heart of how loss and damage caused by climate change will be paid for, particularly for those in developing countries.

This is the agenda of the ‘just transition’. A concept given just a single-line mention in the 2015 Paris Agreement, the phrase is now increasingly used by political, business and societal leaders to highlight the importance of putting people first in the race to a net zero future. Translating these aspirations into practice will involve many changes, including a rethink of public and private financial practices. New funds will need to be mobilised not least because those who are affected by greening the economy may have inadequate access to the capital required to change the way they live and work. This year’s climate summit, COP28, is set to adopt a just transition work programme for the first time and ahead of this, the UNFCCC hosted a first meeting to explore what the financing dimension could look like.

Changing the mindset

Too often in the past, climate decision-making has been oddly blind to the implications of policy and business actions on people. A change in mindset is required, one that consciously considers the social risks and opportunities for workers, communities, consumers and others, and does this through meaningful dialogue and participation. A just transition lens is therefore needed across the financial system, covering both public and private finance, domestic and international flows. In practical terms, it means connecting climate goals and human rights in every financial decision. Overcoming the siloed approach to environmental action on the one hand and social action on the other is something that has long been implied in frameworks such as the Sustainable Development Goals: now is the time to make this happen for real. A number of countries are starting to do this and the most recent example is in the United States with the Inflation Reduction Act, which explicitly links tax incentives for green investment with labour and environmental justice provisions.

This points to a fundamental role for Ministries of Finance: they need to make sure that the just transition is hardwired into macroeconomic and fiscal policies so that the distributional dimensions of climate action are addressed in advance. Many more countries should make the just transition an explicit part of their climate plans (through their Nationally Determined Contributions submitted to the UNFCCC, for example). This will send signals to business, finance and society at large that this is a priority for action. The energy system has often been the starting point for the just transition, but this has to be a whole-economy exercise covering industry (not least mining), transport, agriculture, land use and the built environment.

To be effective, sector pathways for climate action need to show how labour standards will be promoted and human rights respected, and to provide costings for the associated investments in human and social capital. Effective financing of just transitions therefore needs to start with the assessment of the social implications of climate policies. Practical methodologies for ‘just transition needs assessments’ are needed to understand the workplace, social protection, community and consumer priorities, and then quantify the finance to make the process of change truly inclusive. Within countries, a granular place-based approach to financing just transitions will be crucial, often involving new ways of supporting community-led investments.

Integrity matters for financing just transitions  

Integrity matters for financing just transitions to net zero, not only to avoid ‘greenwashing’ but also to overcome the risk of giving a false impression of acting on fairness – what might be termed ‘justice-washing’. This means having strong systems for financial governance.

Credible governance for financing just transitions has to be rooted in clear standards, founded on the International Labour Organization’s Guidelines, fundamental labour standards and human rights agreements. Shared approaches to the just transition in different parts of the financial system can help to ensure integrity (for example, the principles adopted by the leading multilateral development banks as well as private financial institutions). Social dialogue and stakeholder participation must become central to this governance of finance, actively involving workers, communities, women, indigenous peoples and young people, particularly those often excluded. New institutional mechanisms may be needed to bring this about, such as just transition committees at the workplace level through national just transition commissions and global sector task forces. Transparency is another vital tool for governance and this requires disclosure from real-economy firms and financial institutions on their just transition commitments, processes and outcomes for people. The International Sustainability Standards Board is best positioned to lead on this.

Allocating budgets for the just transition

Ultimately, the imperative for a just transition needs to shape the quantity and quality of capital allocated for investments in climate action by the public and private sectors. This can involve the establishment of dedicated just transition funds and mechanisms as well as the incorporation of social factors into core financial frameworks (such as net zero transition plans). In the UK, for example, the Transition Plan Taskforce is incorporating the just transition into its disclosure guidance for business. Particular attention is needed to make the links between just transitions and financial inclusion, notably for micro, small and medium-sized enterprises (MSMEs) and the informal economy in developing countries. The role of central banks could be significant here, as highlighted in a recent INSPIRE briefing.

Doing all this involves the allocation of limited budgetary resources, not least by governments. Businesses will also need to identify the operating expenditures for worker redeployment and training, supply chain action and community investment. International public climate finance is crucial to expanding the fiscal space of developing countries, and the just transition needs to be seen increasingly as a routine factor in the delivery of the famous $100 billion for developing countries. The four Just Energy Transition Partnerships (JET-Ps) for South Africa, Indonesia, Vietnam and now Senegal have the potential to show how this can come to life. But more work is needed to ensure that the ‘Just’ part has substance, the right level of concessionality is provided for fiscally stretched countries and private investment is deepened. It is also important to make sure that international just transition financing is properly sequenced with trade-related climate measures (such the EU’s scheduled carbon border adjustment mechanism, or CBAM) to avoid risks for jobs and livelihoods in developing economies.

What is crystal clear is that financing a just transition has arrived as an essential part of making climate action fair and thus feasible. This year, COP28 has the chance to consolidate this growing recognition and send clear signals about how governments and business, trade unions, civil society and institutions across the financial system can collaborate to make this common practice through an ambitious new just transition work programme.

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