Just transition finance
To deliver on global, regional, national and local goals of decarbonised economies, there needs to be due consideration given to the social ramifications and opportunities from this transition. At the Just Transition Finance Lab, we believe that the transition to a low-carbon economy is the investment opportunity of our lifetime. However, this transition will not happen without dislocation of workers, changes in energy prices for consumers and impacts on the social fabric of our society. Therefore, we will need just transitions across the globe to enable the change a low-carbon economy and maintain the social contract in our societies.
Finance must be a key lever for making the just transition a reality. Since the Paris Agreement, a first wave of innovations has placed just transition finance on the map. These efforts have been prompted by a three-fold rationale for financial action:
- first, just transition is the right and principled thing to do in terms of upholding human rights at a moment of disruptive change;
- second, it is necessary to win public trust;
- third, it is the smart thing to do as a way of building the social and human capital needed for long-term value.
The task is now to move from this initial recognition towards practical strategies that result in the reallocation of public and private capital to achieve climate and social goals simultaneously.
Just transition finance takes conventional, green, climate and sustainable finance and extends them to encompass the social risks, the social opportunities and the social dialogue that have to be incorporated for climate and wider environmental success. Since 2018, the Just Transition Finance Lab team, through the Grantham Research Institute at the London School of Economics and Political Science, has been working with banks and investors, business and trade unions, policymakers and regulators, plus civil society and academia, across the world to show why and how the financial system can drive delivery of the just transition.
One result of this work has been a growing recognition of three core priorities for just transition finance, which need to be applied to four stakeholder groups, as illustrated in the figure below.
It is time to move from conceptual acceptance to system transformation. The financial world needs to price in just transition requirements and allocate capital to achieve this goal. The structural role of finance needs to be refreshed. Fundamentally, finance is a service function and, as intermediaries, financial institutions exist to serve households, enterprises and the state to achieve climate and wider sustainability goals. This will require a change in both mindset and operating practices. The graph below demonstrates the Lab’s approach to moving the conversation forward.
