Nick Robins looks at why investors need to connect climate action with social justice.

According to the International Renewable Energy Agency (IRENA), extra investment in clean energy could save the global economy “up to $160tr cumulatively over the next 30 years in avoided health costs, energy subsidies and climate damages”. IRENA estimates that every dollar spent on the energy transition will pay up to $7 in terms of wider benefits.

The latest assessment of the New Climate Economy concluded that ambitious climate action could generate a net employment gain of 37m jobs across the globe by 2030. In the UK, the Can-Do Cities initiative has found that simply investing in today’s cost-effective measures to cut greenhouse gas emissions would save the UK £26.6bn a year by 2026 by reducing energy bills and would create 347,500 years of extra employment.

A first assessment conducted by the LSE and Leeds University has estimated that about one fifth of current jobs in the UK could have skills for which demand could grow in the transition or which could require reskilling. The East and West Midlands as well as Yorkshire and the Humber emerge as the regions that could be most affected.

The UK’s new law to deliver a net zero economy by 2050 promises to be a game-changer, requiring fresh approaches to achieving planetary goals that also deliver in terms of social justice. This is the agenda of the “Just Transition” that is written into the 2015 Paris Agreement on Climate Change.

Adopting this new legal target of net zero is a clear response to growing societal concern about the climate crisis. A recent survey by market researcher, ComRes found that 71% of the UK public agreed that climate change would be more important than the country’s departure from the EU in the long term.

Importantly, the transition is being viewed as a driver of economic renewal creating new industries and new jobs, improving health and bringing cleaner, less polluted communities. Managed poorly however, the transition could bring not only stranded assets and equally stranded enterprises, but also stranded workers and stranded communities. In the words of the Committee on Climate Change (CCC): “If the impact of the move to net-zero on employment and cost of living is not addressed and managed, and if those most affected are not engaged in the debate, there is a significant risk that there will be resistance to change, which could lead the transition to stall”. Avoiding this outcome is the ambition of the so-called Just Transition.

Zero carbon implies a total market transformation in which all of the economy will need to decarbonise and no individual, household, company or organisation will be exempt.  Clearly the transition will have consequences for communities, consumers and citizens as a whole. This will have a crucial regional dimension, set against the backdrop that the UK is the most regionally-imbalanced economy in Europe.

“All of the economy will need to decarbonise and no individual, household, company or organisation will be exempt.”

As a result, the success of this economic transformation will be measured not only in terms of meeting the country’s emissions’ targets and building resilience to climate impacts, but also the degree to which it delivers fairness and social justice for workers, consumers, communities and citizens. This means taking new approaches to dialogue such as Citizens’ Assemblies – groups of people recruited to represent the full range of diversity in the population to discuss and conclude on specific issues.  It also calls for management of multiple processes of disruptive change, of which climate is only one. The Trades Union Congress, for example, has concluded: “The opportunities will not be realised unless the workers most affected have a seat at the table where key decisions are made”.

Making this shift will require the mobilisation of the UK’s £20tr financial system to manage climate risks and channel capital towards the growing sustainable economy. The net-zero economy will be a more capital-intensive economy and will involve extra investments of around 1% of gross domestic product (GDP) a year until 2050.

At a national level, this is a manageable sum as overall investment has fluctuated between 15% and 24% of the UK’s GDP over the past 30 years. According to Bank of England Governor Mark Carney, the transition will require “a massive reallocation of capital” adding that “if some companies and industries fail to adjust to this new world, they will fail to exist”.

What is striking is how quickly the just transition has also moved from the margins of financial thinking into the mainstream. To give the most recent example, the UK government’s Green Finance Strategy released in July identified delivering a Just Transition as a key next step: “as our economy changes it is vital we make sure that this growth in inclusive, benefitting people across the UK, supporting workers as industries transform and ensuring the costs as well as the benefits are shared fairly, protecting consumers, workers and businesses.”

A growing number of return-hungry investors also see that a Just Transition is necessary to build the broad coalition required to deliver the economy-wide transformation. They also recognise that it is the right thing to do in terms of ensuring that high social standards are employed in the process. Most of the world’s leading pension funds, insurance firms and fund managers have committed to integrating environmental, social and governance (ESG) factors into their decisions.

The Just Transition is a way for investors to connect the dots between the environmental and the social dimension. It also provides a focus for investors seeking to deliver a positive sustainable impact alongside financial returns. As a result, contributing to a Just Transition gives investors a strategy for reducing systemic risk, realising fiduciary duties and contributing to wider societal objectives such the Sustainable Development Goals. An investor guide has been produced and over 140 investors worldwide with $8tr in assets have committed to take action to support a Just Transition, which includes applying shareholder pressure and policy advocacy.

“The Northern LGPS’s goal is for all of its assets to be compatible with net zero by 2050.”

Thirty UK-based investment institutions have signalled their support for a Just Transition. One is the Northern Local Government Pension Scheme (LGPS) with around £46bn in assets. The Northern LGPS’s goal is for all of its assets to be compatible with net-zero by 2050. In addition, the scheme has committed to “actively engage with the social aspects of responding to climate change” to deliver a Just Transition.

According to the scheme, this commitment “fits well with our objective of seeking to ensure a regional dimension to our responsible investment activities.” This chimes with the growing bottom-up demand for regional climate action. Over 220 councils in the UK have declared a climate emergency and are looking for ways of financing ambitious action that responds to local needs. Leeds City Council, for example, is exploring the potential for a crowdfunded municipal green bond, which could tap local and wider pools of savings.

“It is an entirely manageable goal.”

The Just Transition represents a generational opportunity for the UK to deliver environmental, economic and social progress. Delivering this will not always be easy and will require new processes for participation as well as new institutional structures. It also comes at a time of multiple disruptions, not least around Brexit and digitisation. But it isan entirely manageable goal. A comprehensive strategy is now needed in the UK to translate this potential into a practical reality, one that resets the financial rules of the game so that capital flows at speed and scale towards a zero-carbon, resilient and inclusive future.

For more information on the Financing a Just Transition initiative, please see here.

 

Nick Robins

Nick is Professor in Practice for Sustainable Finance at the Grantham Research Institute at the London School of Economics. The focus of his work is on how to mobilise finance …

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