Climate Change And The Just Transition A Guide For Investor Action

1. IntroductionClimate action social inclusion the just transitionThe transition to a resilient, low-carboneconomy is underway and investors areincreasingly taking action to drive this shift.However, the pace of change is still too slowand too limited to achieve the goals of the 2015Paris Agreement on climate change or to realisethe economic and social benefits that climateaction can bring. Investors can do much moreto bring about the needed change.One of the ways to accelerate climate action –and optimise its benefits – is to ensure thatit is inclusive. This means taking account ofthe distributional consequences so that noone is left behind. It is clear that the benefitsof the transition will far outweigh the costs.Managed well, the transition will both preventthe immense human and economic costs ofclimate disruption and also improve growth,generate net new jobs and reduce inequality.In fact, the transition is essential to maintainingdecent work and thriving communities in thecoming decades.However, these benefits will not happenautomatically. Action is needed to ensure thatjobs in the low-carbon economy have workingconditions at least as good as those in highcarbon sectors. The benefits of the low-carboneconomy also need to flow beyond the workplaceto the wider community. In addition, thereare significant transitional implications for keysectors, regions and countries that need to bemanaged. Poorly done, the result could be notonly ‘stranded assets’ but also ‘stranded workers’and ‘stranded communities’. Past experience ofdeindustrialisation in many parts of the worldhighlights the importance of looking beyondthe direct employment impacts to understandthe wider ecosystem of prosperity in affectedregions. Failing to do this could slow or even stallclimate progress, while contributing to economicstagnation and political instability.6 CLIMATE CHANGE AND THE JUST TRANSITION: A GUIDE FOR INVESTOR ACTIONA framework for actionTo overcome this challenge, the goal of a justtransition for workers and communities wasincluded as part of the Paris Agreement on climatechange. At its core, the just transition is a forwardlooking, action-oriented framework that identifiesopportunities for public and private investment ineconomic development that is both sustainableand inclusive. It helps to connect activitiesacross international organisations, regional andnational governments, businesses and investors,the development and philanthropic sectors, and,crucially, the workers and communities who willfeel the effects of the transition – whether well orpoorly managed – most keenly. Importantly, thejust transition is a global agenda for industrialisedas well as emerging and developing economies,one that addresses both the decarbonisation andresilience dimensions of the transition. The mainfeatures of the just transition are presented onpages 8 and 9.The just transition builds on well-established globalframeworks in terms of climate change, humanrights, labour standards and inclusive growth.It focuses attention on the need to anticipate thesocial implications of the shift to a low-carboneconomy and the increasing physical impacts ofclimate change.2 This emphasis on the linkagesbetween environmental drivers of change and thesocial dimension places the just transition at theheart of the global effort to mobilise the trillions

of dollars needed to implement the SustainableDevelopment Goals.3A growing number of trade unions, governments,businesses, investors, civil society advocates andinternational organisations are now taking actionto make the just transition a reality.4 This guideidentifies the role that investors can also play indelivering the social dimension of climate changewith a focus on the implications for workers andcommunities.France, Germany, India, Italy, the Netherlands,South Africa, Sweden, the United Kingdom andthe United States.as stewards of assets, allocators of capital andinfluential voices in public policy. These now needto be deployed in a strategic fashion.Mobilising investor action:aims of the guideA clear message from this dialogue is that thejust transition is a necessary agenda for investorsto work on, one that is fully consistent with thefiduciary commitment to responsible investmentand the integration of environmental, social andgovernance (ESG) dimensions in all decisionmaking. The just transition is equally relevantfor investors whether they are focused on theE or the S of ESG and reveals the need to bringthese dimensions together. As fiduciaries, thereare important contributions that can be madeThis guide is the second output of the Investingin a Just Transition initiative. It builds on an earlierreview of the challenge of the just transition forinvestors, which concluded that the just transitionis about how the transition is delivered.5 Theultimate aim of this new guide is to inspireinvestors to place the just transition at the centreof their climate strategies and it provides an initialframework for investors to apply both individuallyand collectively.“ The just transition is a necessary agenda for investorsto work on, one that is fully consistent with the fiduciarycommitment to responsible investment and the integrationof environmental, social and governance (ESG) dimensionsin all decision-making”Structure of the guideAfter explaining the just transition and presentinga detailed case for action, the guide sets out fiveareas where investors can make the just transitionpart of their practices. Included are examples of howinvestors in countries such as Australia, Canada,France, Germany, Italy and the UK are makingprogress. The guide ends by outlining next steps.The just transition is a new agenda anda complex and challenging topic for investorsand other stakeholders. But they do not needto reinvent the wheel to address the socialdimension of climate change: there is a rangeof well-tested investor approaches that can beapplied, upon which this guide draws. The guidealso builds on extensive dialogue and feedbackfrom investors and other stakeholders in a rangeof countries including Australia, Brazil, Canada,CLIMATE CHANGE AND THE JUST TRANSITION: A GUIDE FOR INVESTOR ACTION 7

The just transition explainedAction to implement the ParisAgreement on climate change needsto be acceleratedconcludes that global emissions will need to fallby 45% from 1990 levels by 2030 to constrain theworst impacts.6This will require unprecedented levels ofinvestment in innovation-led structural changeThe International Energy Agency estimatesthat US 3.5 trillion of energy sector investmentswill be needed on average each year between2016 and 2050, compared with US 1.8bn in 2015.Supply-side investments need to fall in fossil fuelsImplementing the Paris Agreement meansreaching an early peak in global emissions ofgreenhouse gases and rapid reductions thereafterto ‘net zero’ levels. The special report of theIntergovernmental Panel on Climate Change(IPCC) on how to hold global warming to 1.5 CGlobal emissions pathways to limit global cumulative emissions to 1,000Gt45Historical2017 peak2020 peak2025 1990Co2 emissions from fossil fuels andland-use change (Gt per year)(66% chance of limiting temp. rise to 2ºC)Note: Gt gigatonnes. Source: Raupach M R, Davis S J, Peters G P et al. (2014) Sharing a Quota on Cumulative CarbonEmissions. Nature Climate Change 4: 873-879, data available at: http://folk.uio.no/roberan/t/global mitigation curves.shtml8 CLIMATE CHANGE AND THE JUST TRANSITION: A GUIDE FOR INVESTOR ACTIONand rise in renewables. The biggest switch will betowards demand-side efficiency investments inbuildings, industry and transport, which will needto grow ten-fold.7 Current levels of low-carbonenergy investment remain insufficient. Investmentin carbon capture and storage (CCS) has declinedsubstantially in the past decade.8The transition will be a powerful engine foreconomic development and job creationAccording to the Organisation for EconomicCo-operation and Development (OECD), a decisivetransition package could boost long-run outputby 5% on average across the G20 economies by2050.9 The International Labour Organisation (ILO),the United Nations’ agency for the world of work,estimates that action to meet the Paris goals wouldcreate 24 million jobs in clean energy generation,electric vehicles and energy efficiency and lead tojob losses of around 6 million, a net gain of 18 millionjobs.10 The latest report from the New ClimateEconomy (NCE) concludes that ambitious climateaction would result in a net employment gain of 37million jobs across the global economy by 2030.11The transition will affect nearly 1.5 billionworkers across the worldThe secretariat of the UN Framework Conventionon Climate Change (UNFCCC) has identified 1.47billion jobs in sectors critical to climate stability:agriculture (1 billion), followed by manufacturing(200 million), buildings (110 million), transport (88million) and energy (30 million).12 The just transition

means understanding both the quantitative and thequalitative implications so that all jobs in the neweconomy are decent, contributing to thriving andresilient communities.The just transition is part of implementingthe Paris AgreementGovernments acknowledged the importance ofthe social dimension in the Paris Agreement andthe preamble states that governments should takeinto account ‘the imperatives of a just transition ofthe workforce and the creation of decent work andquality jobs in accordance with nationally defineddevelopment priorities.’13Guidelines for the just transition have beenagreed internationallyIn 2015, the ILO adopted a set of guidelinesbased on inputs from governments, businessesand trade unions. These guidelines highlight thereal need for policy coherence between action onclimate change and macroeconomic, industrial,labour market and enterprise policies. Theyemphasise the need to pay special attention tothe industries, regions, workers and communitiesthat could be negatively affected. The guidelinesrecommend action to anticipate skills needs, assesshealth and safety risks, ensure social protectionin the transition (such as workers’ health careand pensions), implement international labourstandards and actively promote social dialogue.14The just transition is a system-wide challengeThe just transition means managing both thepositive and negative social and employmentimplications of climate action across thewhole economy. It means thinking aheadand managing fast-paced and often disruptivechange. It involves developed and developingcountries and tracking social impacts alongglobal value chains. It places climate action inthe broader context of the future of work. It joinsthe dots between a number of the SustainableDevelopment Goals. It focuses attention on thedecentralisation of energy systems, the importanceof place and the need to prioritise marginalisedcommunities. And it needs to be delivered at a timeof growing concern about unequal economic andfinancial systems.business to manage the closure of Engie’sHazelwood coal-fired power station. In Italy, energy utility Enel has committed todecarbonise its energy mix by 2050, agreed aglobal framework agreement with its unions anda just transition framework with its Italian unionpartners, with a focus on fair labour practices,retraining and redeployment.17 In the USA, the Just Transition Fund has usedfederal funds and grant-making to supportbottom-up innovation in sustainable developmentin coal communities in Appalachia.18Action is beginning to grow across government,business, trade unions and civil societyNo single actor can deliver the just transitionalone. Governments have a leading role in termsof linking climate, macroeconomic, industrial,labour and regional policies. Business and tradeunions play a direct role in shaping the transitionwithin the workplace, along with civil societyorganisations in the wider community. Examplesof this include:See also map on page 27. South Africa led the way in 2015 with theincorporation of the just transition in its NationallyDetermined Contribution (NDC) to the ParisAgreement, highlighting that ‘an inclusive andjust transition requires time and well plannedlow-carbon and climate resilient development’.15 In Canada, the government launched the TaskForce on the Just Transition for Canadian CoalPower Workers and Communities in February 2018to make the phase-out of coal a fair one.16 In Australia, the Latrobe Valley Worker TransferPartnership Scheme was agreed in May 2018involving the state government, unions andThe just transition offers a highlyattractive model for managing changeIn the words of economist Nicholas Stern,Chair of the Grantham Research Instituteon Climate Change and the Environment:‘We should see the just transition as partof the new story of inclusive, sustainablegrowth. This is a highly attractive economicmodel, with strong innovation and growthand able to overcome poverty in an effectiveand lasting way. But it requires us to managethe process of change in much better wayswithin modern market economies. We needto be organising for transitions in the pluralincluding technologies, economic structures,cities and the international division of labour.And we must accelerate the pace of decisionmaking if we are to respond to the urgencyof climate change.’CLIMATE CHANGE AND THE JUST TRANSITION: A GUIDE FOR INVESTOR ACTION 9

2. The case for investor actionThe just transition builds on and deepens the coreinvestment case for action on climate change.It focuses on the management of the socialaspects of climate change in the workplace andwider community so that rapid decarbonisationis achieved in ways that contribute to inclusiveand resilient growth. This section focuses on whyinvestors should act on this agenda.For investors, the specific language of thejust transition may be new. But the underlyingimplications are familiar to around 2,200 investorsworldwide with more than US 82 trillion in assetsunder management who have committedto implement the Principles for ResponsibleInvestment.19 It takes the core insight of responsibleinvestment – that a robust understanding ofenvironmental and social issues is a better wayto assess and pursue long-term value – andapplies it to the climate change agenda.At the heart of the Principles and other frameworksis the commitment to integrate environmental, socialand governance (ESG) factors into decision-makingat all levels. For fiduciaries managing funds on behalfof others the just transition points to the need forinstitutional investors to develop a comprehensiveresponse to climate change that connects thesedimensions. In practice, however, ESG factors haveoften been addressed in separate silos.The just transition focuses attention on the needfor a joined-up approach to climate change.Strategically, the just transition is a way to thinkabout the broad and deep socioeconomic changesthat are needed as part of a shift to a low-carboneconomy. This takes its place in a long line oftransformations associated with technologicalinnovation, new business models, changingdemographics and rising social expectations. Today,the economic transformation required to respondto climate change stands out both because of theurgency of the need to make progress and alsobecause of the deep linkages with wider disruptivechanges to the nature of work itself brought onby rapid technological change.As the pace of decarbonisation accelerates andthe physical impacts of climate change intensify,the just transition approach will increasinglyprovide investors with a strategic way to anticipate,evaluate and respond to the social and economicimplications for their beneficiaries, their portfoliosand the financial system as a whole. The justtransition also offers investors a way to participatein building a consensus for managing the transitioneffectively, efficiently and responsibly.Five reasons for investor actionInstitutional investors are a diverse group with avariety of institutional forms, goals and capacities.However, there is a common case for investorsto contribute to the just transition and it rests onfive reasons for action:10 CLIMATE CHANGE AND THE JUST TRANSITION: A GUIDE FOR INVESTOR ACTION Understanding systemic risksReinvigorating fiduciary dutyRecognising material value driversUncovering investment opportunitiesContributing to societal goalsAs illustrated in the diagram opposite, these reasonsare overlapping and mutually reinforcing in manyways. The five reasons represent different entrypoints and investors with different orientations willfind that they often converge on strategies andpractices to address the just transition challenge.The five reasons point to a compelling case forinvestor action based both on strong financialarguments and on the potential to deliver positivesocial and environmental impacts.1. Understanding systemic risksClimate change is well understood by investorsas a systemic risk to the global economy,undermining the ability of the financial systemto deliver long-term returns. There is also growingrealisation among investors that they need to beconcerned about the systemic risk posed by socialinequality.20 According to a recent IMF study onthe US economy, for example, inequality not onlyentails high social costs but has also been ‘shownto negatively affect the pace and sustainabilityof economic growth’.21The just transition sits at the intersection of theseenvironmental and social risks to the stability and

functioning of the financial system. Both typesof risk manifest over extended periods of time anddiffuse through the economy and society. Onesystemic concern raised by the just transition is thatfailing to take account of the social dimension willgive rise to pressures to delay, dilute or abandonclimate policy. This will make the shift to a lowcarbon economy less likely, thereby placing investorsat risk from rising climate costs. Another systemicconcern is that the transition could go ahead in apartial and sub-optimal fashion, achieved at highsocial cost, potentially deepening inequality andharming the sustainability of economic growthby increasing fiscal drag.Reasons for investor action on the just transitionUnderstandingsystemicrisksContributingto cognisingmaterial valuedriversFocusing on the just transition is therefore a wayfor investors to address these systemic threats tolong-term stability and value creation.2. Reinvigorating fiduc

just transition is a global agenda for industrialised as well as emerging and developing economies, one that addresses both the decarbonisation and resilience dimensions of the transition. The main features of the just transition are presented on pages 8 and 9. The just transition builds on well-established global