Why financing a just transition is the next frontier in responsible investing
By Fiona Reynolds, CEO, Principles for Responsible Investment and Sharan Burrow, General Secretary, International Trade Union Confederation
Investors and workers around the world face an existential challenge: how to make the transition quickly and equitably to a resilient zero-carbon economy. Fiona Reynolds and Sharan Burrow call on investors to join the growing community practising responsible investment to achieve a ‘just transition’.
At first sight, the worlds of investment and of work can appear to be very distant from one another. Financial markets remain driven by short-term factors, where workers are often regarded simply as a cost of production to be minimised.
A growing number of institutional investors, however, see this as a parody of what is needed to successfully deliver long-term returns. Indeed, more and more of the world’s leading funds recognise that it is from the careful management of human capital in the workplace that businesses can generate the profits needed to pay pensions and grow the world’s savings. Research has shown that investments in training and development, health and safety, employee engagement, diversity and inclusion, and workforce composition and staffing are associated with increased workforce productivity, reduced staff turnover and higher customer satisfaction.
Beyond the financial materiality of social factors, investors also have responsibilities to ensure that international labour standards and human rights principles are respected in the assets they manage. More than this, workers are also savers, with their pensions representing deferred wages designed to provide financial security in their retirement. This gives workers a direct interest in the management of their assets in the financial system and was the reason for the foundation of the Committee on Workers Capital in 1999 by the International Trade Union Confederation (ITUC), the Global Union Federations (GUFs) and the Trade Union Advisory Committee (TUAC) to the Organisation for Economic Co-operation and Development (OECD).
These realities underpin the strong social case for responsible investment, with more than 2,200 investors with over US$80 trillion in assets now signed up to the UN-supported Principles for Responsible Investment. Signatories not only commit to integrating environmental, social and governance (ESG) factors into their decision-making: they also commit to assessing and disclosing their progress.
As major asset owners, pension funds sit at the top of the investment chain. Importantly, workers are often represented in the governance of these funds as labour trustees. It is these trustees who can play a leading role in helping to make the connections between climate change, long-term returns and high social standards. Giving support to a just transition – to a resilient, low-carbon economy that is inclusive of workers and communities – is aligned with the fiduciary duty of labour trustees to consider long-term investment value-drivers that serve the interests of beneficiaries. Working to a just transition framework enables pension funds to connect their climate risk strategies to the fast-paced technological change and industrial transformation that lie ahead for workers and communities across the globe.
Economic benefits from an existential challenge
How to make the transition quickly, effectively and equitably to a prosperous, resilient and zero-carbon economy is an existential challenge for both investors and workers. Climate change certainly started as an environmental threat. But the transition required is a process of far-reaching structural economic, technological and social change.
At a macroeconomic level, the transition offers much for both investors and workers. The New Climate Economy initiative, for example, recently estimated that 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 boost to employment of 37 million jobs.
For workers, the transition raises profound issues around the quantity and quality of jobs, social dialogue in the workplace (between employers, unions and workers), health and safety, as well as the fate of whole communities. As part of this, we need to ensure that workers and communities in fossil fuel-dependent economies have a pathway to prosperity. In the new and emerging work of tomorrow, it is important that these jobs have as good if not better conditions than the sectors we are leaving: highly organised with good salaries, pensions and healthcare. To this end, one of the many innovations brought by the 2015 Paris Agreement on climate change was to make a just transition for workers an imperative for long-term climate action.
Investors are fast recognising their responsibilities
Over the past decade, investors have been incorporating climate risks and environmental opportunities into their shareholder engagement and investment decisions. Until this year, however, the S of ESG was largely silent in most investor strategies. To close this gap, the PRI and the ITUC have joined forces with the Grantham Research Institute at LSE and the Initiative for Responsible Investment (IRI) at Harvard Kennedy School to examine the role of investors in the just transition.
In a few short months, we have seen a noticeable shift, with a growing number of investors recognising that their responses to climate change must incorporate social considerations. Securing the trust of workers and communities is increasingly understood as integral to navigating the profound and systemic changes ahead. Robust analytics and open dialogue have laid the ground for a new guide for investor action prepared by the Grantham Research Institute and IRI, setting out why investors should connect environmental and social priorities to climate change and how they can do so. The guide was launched last week in Katowice at the COP24 climate conference.
We are often told that we need to achieve speed and scale to deliver the transition. This year, we have been struck by how quickly investors have understood the case for action to deliver a just transition. So far, leading pension funds, insurance firms, asset managers, foundations and others with over US$5 trillion in assets under management have made a public commitment to support a just transition. This sign of commitment is only the start. Over the coming months and years, the PRI and ITUC together with the Grantham Research Institute and IRI aim to turn this awareness into routine practice across asset classes and countries. Priorities include extending investor engagement on climate change to the social dimension (for example, through the ClimateAction 100+ alliance) and making sure that low-carbon infrastructure such as renewables has high labour and community standards. Investors can also contribute to shaping national policy frameworks so that these effectively mobilise capital to connect the environmental and social dimensions of the transition. A number of governments have established commissions or struck deals for a just transition, including Canada, Scotland and Spain.
The next frontier
It is clear that workers and communities must be at the heart of the transition to a low-carbon economy. It follows that the stewards of workers’ capital must be central to investor initiatives in support of a just transition. We call on those managing workers’ capital in pension funds and asset managers to sign the investor statement and join the growing community of practice. For us, the next frontier in responsible investing is financing a just transition.
This commentary is published as part of the Grantham Research Institute’s Sustainable Finance Leadership Series.
Climate change and the just transition: A guide for investor action, published by the Grantham Research Institute and the Initiative for Responsible Investment, is available now, and you can read more about the Investing in a Just Transition initiative here.
The views in this commentary are those of the authors and do not necessarily represent those of the Grantham Research Institute.