Just transition finance: start early and shift the system
Nick Robins and Mark Nicholls examine lessons from initiatives to scale up finance for climate action that actively seeks positive outcomes for people.
In this disorderly and disrupted world, the human dimension of climate action is becoming ever more important. A low-carbon transition that fails to address inequality and poverty and leaves workers and communities behind will likely face insuperable social and political opposition. But it is possible to shape a just transition that delivers positive social progress, particularly for those who are currently most excluded.
Finance will be central to this effort. Not only is the financial system underpinning continued greenhouse gas emissions, but it is still failing to support adaptation to climate shocks and is often blind to the human rights and wider socioeconomic implications of action on net zero, resilience and nature. This needs to change urgently.
On the plus side, leaders within the financial system are starting to experiment with some of the practices we need. A spectrum of just transition finance is emerging, as described recently by the Just Transition Finance Lab and the Institute for Human Rights and Business. And a growing number of real world case studies, which the Lab has been analysing over the past year, is showing how the financial sector is beginning to engage on this critical issue.
Looking across this body of experience, three key lessons emerge: the importance of starting early and planning ahead; the requirement for dedicated innovation across the financial system; and the need to move from experimentation to mainstreaming, to place the just transition at the core of financial decision-making.
Priority 1. Start early and plan ahead
Many of the investments needed to build up capabilities and strengthen communities take time and should be frontloaded to enable major infrastructure development to go ahead.
This is why incorporating just transition into national climate plans (including the NDCs countries submit to the global climate negotiations) is so important. In Chile, its inclusion of just transition within the country’s climate policy provided the foundations for business and finance sector innovation, including a sustainability-linked loan (SLL) issued by the International Finance Corporation (IFC) on behalf of the energy utility Engie, which reinforced efforts to address the local impacts of closing down coal-fired power plants.
Vertical climate funds such as the Climate Investment Funds (CIF), Green Climate Fund and Global Environment Facility can be invaluable in kickstarting just transition planning in emerging markets and developing countries (EMDCs) like Chile. CIF’s Accelerating Coal Transition (ACT) programme has provided grant and concessional capital for six EMDCs, using this to leverage broader development bank funding and private capital.
We examined the case of North Macedonia, where CIF worked closely with the national government and the European Bank for Reconstruction and Development to design a programme to replace coal with renewables. This involved US$84 million of CIF funding to ultimately catalyse over US$3.4 billion of public and private capital. Just transition considerations (including gender-related) are embedded at each stage of the investment cycle, with extensive stakeholder consultation.
Just transition planning equally applies to the private sector. Here, companies and financial institutions are starting to integrate social risks and opportunities into their climate transition plans. An early breakthrough came in 2020, when investors encouraged UK energy utility SSE to release a just transition strategy as part of its net zero plan. The strategy set out commitments to workers, communities, suppliers and consumers as part of the transition out of fossil fuels and into clean energy. SSE’s move came in the context of strong political support for the just transition in its home base of Scotland. Since 2020, the strategy has been implemented and updated with the inclusion of quantified metrics to measure performance.
But there are clear limits to a purely voluntary approach, as only a minority of firms are willing to take a leadership stance. As a result, the requirement for companies to publish transition plans with clear social commitments is the next frontier, both in the UK and also internationally as part of International Sustainability Standards Board (ISSB) and Global Reporting Initiative (GRI) reporting.
Priority 2. System-wide innovation
The just transition covers many well-known priorities around decent work, community empowerment, social dialogue and inclusion. The task is to deliver the changes needed so that these become part of routine practice for climate finance and also stimulate innovative mechanisms across the financial system.
A starting point is to incorporate the just transition into existing efforts. In India, Ayana Renewable Power has made the just transition part of its Community Development Framework, with an emphasis on skills and entrepreneurship for women, young people and marginalised groups. This has provided new job opportunities for women and reduced social risk associated with project development.
The roll-out of renewables in India is not, however, without tensions, particularly over land rights and employment. Mansi Shah of the Self-Employed Women’s Association, a 2 million-member trade union, told us: “India has a large population of young people: how do we channel them into the renewable sector and help rural households strengthen their climate action?” Again, regulation could well be needed to make sure that social risks and opportunities are fully addressed.
The just transition can also be a focus of the world’s sustainable debt markets. The IFC’s US$400 million SLL for Engie in Chile, bought in part by international investors, was accompanied by an environmental and social action plan which tightened Engie’s just transition actions. The SLL did not, however, identify specific key performance indicators for just transition outcomes. To truly harness the potential of SLLs, it is now critical to create objective metrics that can track just transition performance. The Lab believes the SLL and the wider green, social, sustainable and sustainability-linked bond markets could play a strong role in channelling finance to the just transition.
More cutting-edge instruments are also emerging. In Spain, a dedicated just transition energy tender programme has been introduced. In areas where coal-fired power plants have been closed, access to grid capacity by new renewable energy projects is dependent on companies submitting a socioeconomic plan for the just transition. In 2022, the first tender was awarded to Endesa for a site in Andorra, Aragón, where it will invest €1.5 billion in renewable capacity, with an additional €60 million in just transition spending, around 4% of the total. Fifty-five per cent of the scoring for the tender was allocated to the socioeconomic plan, and the aim is for job creation to exceed employment losses from coal closure and help slow down rural outmigration. Importantly, the tender design process means that extra social investment is coming from the private investor rather than the state. Further tenders are now being awarded.
This model of just transition tendering could also be applied to other climate policies such as Contracts for Difference to provide a form of ‘social conditionality’ for clean energy expansion.
Other instruments such as carbon markets can be tailored to support the just transition too. In Asia, developers are examining the use of transition carbon credits to accelerate the phase-out of coal fired power. In the Philippines, energy utility ACEN has already used the Energy Transition Mechanism developed by the Asian Development Bank to pay for the lost revenues involved in closing one of its coal plants 15 years early in 2040, including funding for workers. ACEN is now exploring whether transition credits could be used to bring this forward to 2030: replacing coal with renewables would reduce emissions and generate carbon credits, which could be sold for compliance or voluntary purposes. The framework’s just transition provision allocates at least 2% of credit revenues to affected workers and communities; this has now been set out in a public standard. Transition credit markets remain early-stage, however, and no transactions have yet been conducted.
Priority 3. Mainstream just transition finance
The prize of the just transition is to invest upfront in the social cohesion and human capital required for climate action. Making sure that social factors are integrated into all climate finance is key. The behavioural dimensions of the transition are critical, for example in terms of moving beyond pure skilling issues to building public trust in the opportunities that skilling provides. And additional funding will be needed for dedicated social investments in the just transition: for example, the Independent High-Level Expert Group on Climate Finance estimates that US$40 billion a year will be required for the just transition in EMDCs by 2030, less than 2% of the total $2.4 trillion in climate finance. Our case studies of the Philippines and Spain point to a range of 2–4%. This is clearly a small sample and could well be an underestimate. But it nevertheless suggests that the just transition is both affordable and high value in terms of enabling strategic climate action. There is no financial excuse for inaction.
With about five years of practice, it is clear that just transition finance is still very much a work in progress and mainstreaming across the financial system is now required. The just transition must be given more prominence in the next round of NDCs, due to be published before COP30 – this is necessary to provide vital policy signals for business and finance to change their practices. Currently only one-third of NDCs highlight the just transition but recent NDCs from Brazil and the UK show how this can be done.
Market standards – such as the disclosure guidance produced by the ISSB and GRI – also need to include just transition factors as core requirements. Similarly, sustainable finance standards for bonds, loans and equity must have clear specifications for the social dimension of environmental action (for example, through the International Capital Markets Association). Core to this process of standardisation is the development of a trusted set of just transition metrics: this remains a missing feature in most of the case examples.
The goal should be to properly price and fund the management of the social risks, opportunities and impacts of the transition. Regulatory action and public finance will be essential. Concessional capital, whether from government or foundations, is particularly important to deliver the social value that market forces cannot provide. This means demonstrating the just transition additionality of public funds, for example in the growing number of blended finance vehicles in EMDCs. Efforts by multilateral and national development banks will have to be stepped up, shaping private sector involvement and bringing key stakeholders together. Equally, in-depth work is needed to show how the commercial banking sector can support the just transition, from housing and SME finance through to corporates and capital markets. The potential of the social finance sector remains largely untapped, including impact investors, community-owned organisations and cooperatives.
The COP30 climate summit provides a perfect moment for a new boost to the just transition finance agenda. It needs to finalise the Baku to Belém Roadmap for mobilising US$1.3 trillion a year in external capital flows into developing countries and set out the just transition dimensions. New commitments from public and private financial institutions to measurable just transition activities are vital, notably from the multilateral development banks as well as institutional investors, insurers and commercial banks. And finally, after several rounds of dialogue, it is important that the UNFCCC’s Just Transition Work Programme produces a concrete output with real money behind it, such as the proposed Belem Action Mechanism (BAM).
Nick Robins is Chair of the Just Transition Finance Lab and Mark Nicholls is author of the Lab’s first set of six case studies.