Investors can have a big role in supporting a just transition in the UK
This post is by Nick Robins, professor in practice for sustainable finance at the Grantham Research Institute.
At the UN climate conference last December, 53 countries including the UK, signed the Silesia Declaration fleshing out the commitment to implement the Paris Agreement, by taking into account “the imperatives of a just transition of the workforce and the creation of decent work and quality jobs”. For the Polish host the case was clear: “considering the social aspect of the transition towards a low carbon economy is crucial for gaining social approval for the changes taking place.”
The need for a strong social dimension to climate policy has also been displayed on the streets of Paris, with the initial protests by the gilets jaunes prompted by an increase in carbon taxes.
Starting with the focus on the opportunities and risks for workers, the just transition also refers to the implications for communities where key industries are located, as well as consumers, not least in relation to energy poverty. Its purpose is to ensure that the powerful benefits of the transition are optimised and no-one is left behind.
A strategic opportunity for investors
This agenda is of strategic relevance to investors. Over 120 institutions with US$6 trillion in assets under management made a public commitment to support a just transition at COP24. The implications were fleshed out in new guide for investor action, released at the UN conference by the Grantham Research Institute on Climate Change and the Environment at LSE and Harvard’s Initiative on Responsible Investment, working in partnership with the Principles for Responsible Investment and the International Trade Union Confederation.
In the UK, the just transition offers investors a strategic opportunity to connect climate action with positive social impact across the country. More than 20 of the signatories of the investor statement are from the UK, including leading pension funds, insurance firms, asset managers, faith and charity funds as well as impact specialists.
To explore this opportunity further, the Grantham Research Institute and the Sustainability Research Institute at the University of Leeds are leading a process of research and dialogue, with a special focus on the Yorkshire and Humber region.
Deepening the fiduciary duty of institutions
The case for action by investors is compelling. It gives them a way of connecting the systemic risks of climate change and inequality at a time when the UK is the most geographically unbalanced economy in Europe. It deepens the fiduciary duty of institutions to fully integrate environment, social and governance (ESG) factors, not least by re-emphasising that pensions, for example, are ‘workers’ capital’ and should be managed with a just transition in mind. A just transition lens can also reveal new opportunities for deploying capital at a time when place-based finance is emerging as the next frontier of responsible investment.
In our new report, we show that the transition could have significant implications for the UK. Our initial estimates suggest about a fifth of current jobs involve skills for which demand could grow or which could require reskilling in a green economy. The East and West Midlands, as well as Yorkshire and the Humber, are the regions with the highest proportion of jobs that could be most affected, at around 22 per cent. This raises a wealth of questions, such as how to realise the potential for additional high quality jobs, involve those affected and make sure the process of change is fair.
Using shareholder engagement to drive better performance
The good news is that investors don’t need to reinvent the wheel. Shareholder engagement can be an effective way to gain a better understanding of corporate performance and drive improved practices, for example in the utility and renewable energy sectors. A just transition focus can be applied to investment decisions across all asset classes. In Canada, for example, one fund has introduced a low carbon equity index that also includes ESG factors.
Real assets, such as infrastructure and property, offer opportunities to connect with the priorities and needs of particular places. Other options for innovation in investment are opening up, for instance by linking green bonds with social impact. And new forms of investing, like crowdfunding and community shares, also add to the conventional menu.
The industrial strategy needs a just transition focus
Investors can also be influential advocates for effective policy making. The government wants to strengthen the UK’s capabilities in green finance and social impact investing: the just transition lies at the intersection of these two trends. The government’s Industrial Strategy focuses on clean growth as a grand challenge and includes ‘people’ and ‘place’ as key foundations, but it does not yet have an explicit just transition focus.
In Scotland, the government has just established a new Just Transition Commission to advise on building “a carbon-neutral economy that is fair for all”. Stakeholders such as trade unions and environmental organisations have also begun to set out their priorities for action. And, internationally, the Powering Past Coal Alliance (PPCA), launched in 2017 by Canada and the UK, is a platform for investors to ensure that coal phase-out is also fair for workers and communities.
Here in the UK, the drive for a just transition is starting to move into the policy and market mainstream. Its full implications still have to be understood and delivery will be the task of decades. What is becoming clear is that it’s the best way to simultaneously achieve climate goals, build an inclusive economy and ensure resilient returns for the country’s savers and investors.
The Investing in a Just Transition UK project is being carried out by the Grantham Research Institute on Climate Change and the Environment at LSE and the Sustainability Research Institute at the University of Leeds, in partnership with the Principles for Responsible Investment (PRI) and the Trades Union Congress (TUC). The project is funded by the Friends Provident Foundation. Its first report, Investing in a just transition in the UK: how investors can integrate social impact and place-based financing into climate strategies, was published on 4 February 2019.
[Photo courtesy of sludgegulper, via Flickr]