Investing in a just transition in the UK: connecting climate action with social impact

The just transition offers investors a strategic opportunity to connect climate action with positive social impact across the country, argues Nick Robins, Professor in Practice for Sustainable Finance at Grantham Research Institute.

The just transition is rapidly emerging as an essential element in the successful transition to a resilient zero-carbon economy. This rise to prominence was marked at the COP24 climate conference in December 2018 with the adoption of the Silesia Declaration on a just transition signed by 53 countries, including the UK.

The Declaration fleshed out the 2015 commitment that governments should implement the Paris Agreement 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 of the COP, the case for action 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,” explained the Presidency.

Making sure no-one is left behind

The Declaration could not have been better timed. The centrality of the need for a strong social dimension to climate policy has been displayed on the streets of Paris with the initial gilets jaunes’ protests prompted by the Macron administration’s increase in carbon taxes in France. Starting with the focus on the opportunities and risks for workers, the just transition also brings in the implications for communities where key industries are located, as well as consumers (not least via energy poverty) and citizens too. Its key focus is to ensure that the powerful benefits of the transition are optimized and no-one is left behind.

As Claire Perry MP, Minister of State for Energy and Clean Growth, observed at a post COP briefing hosted by the Aldersgate Group, being in Katowice “underscored this massive central issue that we have to keep addressing which is the issue of the just transition.” And this is not just an issue for governments, or one that is only for trade unions to promote. It’s also critical for business and the financial community.

A compelling case for investor action  

A new guide for investor action was also released at COP24 by the Grantham Research Institute on Climate Change and the Environment at LSE and the Initiative on Responsible Investment at Harvard Kennedy School, in partnership with the Principles for Responsible Investment (PRI) and the International Trade Union Confederation. This was backed by over 100 institutions with US$6 trillion in assets under management (AUM) who made a public commitment to support a just transition. The guide shows how the just transition provides a way for investors to join up the environmental, social and governance (ESG) dimensions of climate action. It gives investors a way of connecting the systemic risks of climate change and inequality. It deepens the fiduciary duty of institutions to fully integrate ESG factors, not least by re-emphasising that pensions, for example, represent ‘workers’ capital’ which needs to be managed with a just transition in mind. Its social lens also complements the analysis of well-understood value drivers in the transition with a focus on human capital management and community relations. New investment opportunities can emerge, particularly for impact investors seeking to deliver positive social and environmental outcomes alongside financial return. And supporting the just transition enables investors to contribute to broader societal objectives such as the Sustainable Development Goals (SDGs).

The importance of a regional lens in the UK

In the UK, the just transition offers investors a strategic opportunity to connect climate action with positive social impact across the country. Over 20 of the signatories of the global 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 on the investor role in the just transition in the UK. The work has a special focus on the Yorkshire and Humber region. With a population of 5.3 million and accounting for 10% of carbon emissions, the region has both a high-carbon legacy and strong potential for an inclusive green economy. A regional lens is crucial as the different aspects of the transition come together in place. Furthermore, the UK is the most geographically unbalanced economy in Europe. Place-based finance is also emerging as the next frontier of responsible investment, including for local authority pension funds.

Achieving a just transition is also material for the UK. Our new report, presenting initial project findings, estimates that about one fifth of current jobs could have skills for which demand could grow in a green economy or which could require reskilling. The East and West Midlands as well as Yorkshire and the Humber emerge as the regions with the highest proportion of jobs that could be most affected at 22-23%. These estimates raise a wealth of questions, such as how to realise the potential for additional high quality jobs, how to involve those affected and how to make sure that the process of change is fair.

Investors do not need to reinvent the wheel to support the just transition

The good news is that investors have a set of tried and tested tools that can be applied to the just transition. Shareholder engagement can be an effective mechanism to generate both a better understanding of corporate performance on the just transition and drive improved practices (for example in the utility and renewable energy sectors). The just transition can also be applied to investment decisions across all asset classes. A new low-carbon equity index with ESG factors included has just been released by a fund in Canada, for example. Real assets such as infrastructure and property offer particular opportunities to connect with place-based priorities. Fixed income is another area for innovation, connecting green bonds with social impact. And new forms of investing through crowdfunding and community shares add to the conventional menu of options.

Investors can also be influential advocates for effective policymaking. The UK government’s Industrial Strategy focuses on clean growth as a grand challenge and includes ‘people’ and ‘place’ as key foundations; the Strategy does not yet have an explicit just transition focus. The Government has also given particular emphasis to strengthening the UK’s capabilities in green finance and social impact investing: the just transition lies at the intersection of these two trends. A new Just Transition Commission has just been established by the Scottish government.

Key stakeholders such as trade unions and environmental organisations are also setting out key priorities for action. And, internationally, the Powering Past Coal Alliance (PPCA), launched in 2017 by Canada and the UK, provides a platform for investors to ensure that coal phase-out delivers a just transition for workers and communities.

From Katowice to the City, the just transition is starting to move into the policy and market mainstream. The full implications have still to be worked through and delivery will be the task of decades. Yet, the imperative of connecting climate action with social inclusion is now becoming clear for governments, business, trade unions, civil society and also for investors.

Nick Robins is Professor in Practice for Sustainable Finance at Grantham Research Institute and an individual member of the Aldersgate Group.

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. Climate change and the just transition: A guide for investor action was published by the Grantham Research Institute and the Harvard Initiative on Responsible Investment in partnership with the PRI and the International Trade Union Confederation (ITUC) in December 2018.