How Scotland can mobilise finance for a just transition

Published on October 24, 2019
William Irwin, Nick Robins, Jamie Brogan

Scotland is targeting a net-zero transition that is inclusive and fair. The Edinburgh Centre for Carbon Innovation and the Grantham Research Institute recently gathered finance and government stakeholders to explore how finance can be mobilised as part of this just transition.

“Scotland’s response to the global climate emergency needs to be a national endeavour”, argued Kate Forbes, the country’s Minister for Public Finance and Digital Economy, at a recent gathering of banks and investors at the University of Edinburgh.[i] Forbes added, “Investors that take bold action in backing the low-carbon future stand to benefit.”

In a number of respects, Scotland is ahead of the pack when it comes to planning for a carbon-free future. In September, the Scottish Parliament passed the Climate Change (Emissions Reduction Targets) (Scotland) Bill, legally committing the country to the 2045 net-zero target, five years ahead of the UK as a whole. Uniquely, the Bill also put into statute that the delivery plans must consider the principles of the just transition, in other words, cutting greenhouse gas emissions in ways that create decent, fair and high value work, address inequality and poverty and maintain social consensus. Here, Scotland is in a good position, having established a Just Transition Commission with the goal of showing how the delivery of climate neutrality could be ‘fair for all’.

A new type of finance is needed

Mobilising finance is critical to realising the goals of a just transition. But a new type of finance will be needed – with more upfront capital and more and better consideration of long-term social and environmental factors.

This will involve new blends of public funds, commercial lending and institutional investment along with digital and social finance innovations. Kaisie Rayner, Senior Manager in Fund Development and Responsible Investment at Scottish Widows, told the group, “Currently there’s all the money we need but a lot of it is in equities. We need effective policy and innovation such as an industry-wide infrastructure fund to change this.”

This is a good time to be thinking about transformational approaches to finance, especially as the Bank of England has been driving banks and other financial institutions to think more strategically. “Over the last two to three years this has gone from a debate largely about the energy sector to one about climate risk and opportunities across everything,” explained Sefton Laing, Head of Sustainable Banking Performance and Development at Royal Bank of Scotland.

Local government pension schemes could play an important role, both as investors and as institutions that can have a wider influence on the finance sector. The Lothian Pension Fund, for example, has 80,000 members, with local authorities, employers and trade unions on its board. For David Hickey, Portfolio Manager at the fund, “There is strong demand for long-term green assets.” The problem is the lack of incentives and instruments that can match the risk-return characteristics required by investors. Both policy reform and public finance are needed to bridge this gap.

Here, Scotland is establishing the Scottish National Investment Bank (SNIB) and getting to net-zero emissions will be the SNIB’s primary mission. The government is capitalising the bank with £2 billion in the first 10 years, but this could be thinly stretched given the demand, pointing to the need for additional finance from other sources or further capitalisation in the future.

Breakthrough ideas for getting the finance to flow

Financiers also highlighted a number of breakthrough ideas for closing the funding gap. Current criteria for Defined Contribution (DC) pension funds can block investments into renewable infrastructure assets; these criteria need to be updated to enable capital flows. In addition, the UK government could issue ‘green gilts’ (sovereign bonds), the proceeds of which could be ringfenced for public spending on the environmental dimension of the transition and for the social (such as boosting skills and regional revitalisation).

Changes could also be made within banks and investment institutions. For example, remuneration packages at banks, corporates and investors could be more effectively linked to environmental, social and governance performance. Banks could see the just transition as part of a renewed strategic purpose to serve society a decade on from the financial crisis, building on the framework laid out by the new Principles for Responsible Banking. Individual savers and investors want products that help them build a future that is worth living in. Sustainable investment accreditation could provide signposts for consumers looking to direct their savings to places that accord with their values and visions of the future.

Connecting zero carbon and social justice

“One of the biggest risks of what we do is making climate change a luxury problem for the middle classes,” pointed out Professor Mike Danson of Heriot-Watt University and a Just Transition Commission member. Avoiding this trap necessitates new mechanisms to involve people in decision-making, whether in the workplace, in communities or at the national level. Scotland’s Just Transition Commission is a world-leading effort to make this happen and establishing a similar body for the UK could be a step change for the country as a whole.

More localised efforts are underway, in Edinburgh and elsewhere. As part of the Place-based Climate Action Network (PCAN), the City of Edinburgh Council is establishing a new Climate Commission with the Edinburgh Centre for Carbon Innovation (ECCI) to help deliver the city’s net-zero goal for 2030. The drive to zero carbon and reducing inequality must go hand in hand at the city level.

Analysis for the city’s carbon roadmap, to be released in November 2019, shows that technically appropriate measures for Edinburgh could cut emissions by 67 per cent in 2030 and generate £586 million in annual energy cost savings. Many of these investments will yield attractive returns, potentially cross-subsidising more financially challenging opportunities.

Key decisions to be made in the months ahead

Delivering a just net-zero transition is a significant challenge for Scotland. But it will be money well spent, for the private as well as the public sector. The research that underpins our new UK investor roadmap for a just transition found that delivering zero-carbon with inclusion is not only the right thing but also the smart thing to do in terms of long-term returns. Banks are also starting to explore what the just transition means for them in terms of core purpose and the products they offer to their customers, whether individuals, entrepreneurs or public authorities.

In the coming months, Scotland has some important policy milestones. The Scottish Government will update its Economic Action Plan and Climate Change Plan, and will be setting out its Infrastructure Investment Plan and Capital Spending Review. The currently embryonic Green Deal will also be fleshed out. These are all important opportunities to deepen the understanding of what the just transition means in practice and to identify how finance can accelerate the shift in Scotland – and will produce valuable lessons for the UK and beyond, too not least as the world gears up for the COP26 climate conference to be held in Glasgow in November 2020.

[i] All quotes are taken from the Financing a Just Transition event held in Edinburgh on 2 October 2019.