When money speaks the language of justice: investors, banks and the just transition

Published on July 1, 2019
Nick Robins

Nick Robins explores how UK banks and investors are starting to get behind the just transition that is needed for the country to reach its new net-zero target.

Now that Parliament has voted to make the goal of reducing the UK’s carbon emissions to net-zero by 2050 legally binding, attention is shifting to how this target will be delivered.

Mobilising the necessary finance is certainly critical and the UK’s Committee on Climate Change (CCC) has estimated that hitting the net-zero target will involve extra investment of around 1 per cent of annual GDP in 2050. This is an entirely manageable amount as overall investment levels have fluctuated at between 15 and 24 per cent of the UK’s GDP over the last 30 years. Nonetheless, the sums involved remain substantial and will require both an assertive policy framework from government to redirect capital flows and transformation within the financial system itself.

Avoiding a stalled transition

In its milestone report that recommended the net-zero target, the CCC also underscored another dimension for future UK climate policy: the critical importance that the transition “must be fair and perceived to be fair”.

For the CCC, this focus on social justice flows from two main sources. The first rationale is a genuine concern about the possible implications of the transition for vulnerable workers and consumers: these could include ‘stranded workers’ in high-carbon sectors, and low-income households facing disproportionate costs from decarbonisation.

The second argument is more strategic, recognising a new sophistication in the political economy of managing structural change. “If the impact of the move to net-zero emissions on employment and cost of living is not addressed and managed,” the Committee observed, “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.”

For the first time in a major UK government policy document, the CCC recommended that the Government should introduce a strategy to “ensure a just transition across society”. As in many other areas of policymaking, however, the Scottish Government had already taken the lead, establishing a Just Transition Commission in 2018 to advise on to how to develop “a carbon-neutral economy that is fair for all”. Outside government, the Trades Union Congress (TUC) will soon release a set of principles for how the just transition can be put into practice in the UK.

Where finance and fairness meet

So, the task for the UK over the next 30 years is simultaneously to re-route the £20 trillion held across the British financial system so that it is aligned with rapid decarbonisation and to do this in ways that maximise the social opportunities and mitigate the social risks of the transition.

The first steps have come from investors, who are starting to join the dots between the environmental, social and governance (ESG) dimensions of climate action. In the UK, more than 20 institutions (including major insurers, pension funds and fund managers, along with faith groups, sustainability specialists and foundations) have made a public commitment to take action on the just transition. This is part of a global initiative in which more than 130 investors with US$8trillion in assets have signed a statement organised by the UN-backed Principles for Responsible Investment (PRI).

One of the UK signatories is Impax Asset Management Group. The Group’s Chief Executive, Ian Simm, believes that there are a number of steps investors can take to contribute to the just transition while furthering their own interests: “through enhanced stewardship activity and encouraging policy makers to commit to managing just transition issues”. Taking these actions, Simm argues, “could dramatically improve the attractiveness of long-term investments”.

Of course, investors need to know what the net-zero aspiration means in practice. The Grantham Research Institute is working with the University of Leeds, in partnership with the PRI and the TUC, to draw up an operational roadmap for investors. We estimate that about one in five workers – or around 6 million people – could be affected by the transition, with about half of these having skills which will see increased demand and about half with skills that will face falling demand. The importance of place has come to the fore and the project is focusing on the Yorkshire and Humber region, looking at what the just transition means for investors in examples ranging from the Drax power station to Siemens’ new offshore wind-blade factory in Hull.

Anchor investors in the North of England recognise the importance of place too. For example, the £46 billion Northern Local Government Pension Scheme (LGPS) has committed to actively engage with companies on the just transition as part of its goal to be fully net-zero by 2050. The scheme believes that the just transition “fits well with our objective of seeking to ensure a regional dimension to our Responsible Investment activities”.

A key role for banks

The UK banking sector has also begun to explore how it can contribute to the just transition. Ten years on from the financial crisis, there is increasing recognition of the need for banks to confront the UK’s ‘twin peaks’: stepping up finance for zero-carbon growth as well as tackling inequality and a regionally imbalanced economy. Many of the country’s leading banks have now retrenched to place their core focus on the UK, making the success of the transition strategically important for their commercial success. The Grantham Research Institute, with partners, will be supporting these efforts, launching a new project with banks on 3 July 2019.

A range of questions need to be answered, not least on how banks can make financing a just transition part of their core purpose. There are also key issues of market demand and how banks can interact with all their customers to design the sustainable financial products that will be needed. A blend of public and private finance will be required, plus a new public finance institution if Brexit means that the UK loses access to the European Investment Bank. And in a centralised financial system such as the UK’s, banks and other financial institutions (such as the green crowd-funder, Abundance) will also need to find ways support place-based climate action, responding to the bottom-up needs of communities across the country.

Upgrading green finance

The importance of bringing the UK’s financial system fully behind a just transition is only now being recognised and many steps still need to be taken. To date, the UK has focused on promoting green finance, with an emphasis on the environmental dimension. In the era of the just transition, this will need an upgrade so that the critical social dimension becomes core. A new generation of financial products, business models and institutions will also need to be developed. One thing seems clear: enabling the just transition could well bring a new sense of mission to the UK’s financial system.

The views in this commentary are those of the author and do not necessarily represent those of the Grantham Research Institute.