New report argues investors should engage with Just Transition risks in the same way as they are now engaging with environmental risks
Last week the global investor-led campaign to push leading companies to engage with climate-related risks secured yet another victory. Faced with a resolution backed by a group of investors with $32tr of assets under management calling on it to explain how its strategy is consistent with the Paris Agreement, the management of oil giant BP publicly backed the proposal.
The decision by BP's board may have surprised many of those investors who were preparing to crank up pressure on the company to deliver a more credible decarbonisation strategy, but in reality it formed part of an increasingly well-established pattern. Over the past few years a growing number of carbon intensive firms, especially on this side of the Atlantic, have opted to support rather than resist climate-related resolutions. Most notably, both Shell and BP have now promised to link their executive remuneration packages to performance against emissions targets, while a coalition of leading oil majors has pledged to set methane emission targets and step up clean tech R&D.
Meanwhile, as investors have stepped up calls for companies of all types to engage with both climate risks and the stranded asset or carbon bubble risks associated with the low carbon transition, a growing number of reporting bodies and corporates have pledged to bring their disclosures into line with the recommendations from the Taskforce for Climate-related Financial Disclosures (TCFD). At the same time over 1,000 investors with almost $8tr of assets under management have pledged to divest from carbon intensive assets, underlining how the repercussions for companies not developing a credible decarbonisation strategy are intensifying.
The question now for sustainably minded investors is how to build on this success? One obvious answer is more of the same. More ambitious resolutions, more pressure on firms to make TCFD reporting the norm, more engagement with carbon intensive firms, and more divestment if they refuse to adequately pursue decarbonisation policies. However, there is also the potential to expand the investor pressure currently being exercised to ensure climate strategies are not just credible, but also just.
That is the concept explored by a new report from a team at the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science and the Sustainability Research Institute at the University of Leeds, It argues the UK investors have a "strategic opportunity" to ensure climate action delivers positive social outcomes.
The report follows a similar study last week from non-profit Climate Strategies which sought to sketch out the policy principles for a Just Transition and adds to a flurry of research on the topic in the wake of last year's COP24 UN climate summit, where host nation Poland sought to highlight the risks associated with decarbonisation efforts that damage carbon intensive economies.
The Grantham report was produced as part of a project carried out in partnership with the Principles for Responsible Investment (PRI) and the Trades Union Congress (TUC), and funded by Friends Provident. It notes that while a growing number of investors have engaged with climate and carbon bubble risks "until recently, investors have given little attention to the social consequences of climate change". But it argues investors are leaving themselves exposed to a complex web of risks if they fail to engage with the social and economic risks that would result from a low carbon transition that leaves certain industries, regions, and communities disadvantaged.
"Most investors have managed climate change primarily as an environmental factor," the report states. "Importantly, while climate change is certainly an environmental issue, the transition is a process of structural economic, social and technological change."
It adds that "delivering a Just Transition will be key to the UK's success in building a zero-carbon and resilient economy. In essence, the Just Transition means making sure that action on climate change supports an inclusive economy, with a particular focus on workers and communities across the country".
The report estimates the transition to a low-carbon and green economy could directly impact around 21 per cent of the current UK workforce, equivalent to more than six million of today's jobs. More specifically, around 10 per cent of workers in current UK jobs are thought to use skills for which demand could increase as a result of the transition to a low-carbon and green economy. But at the same time a further 10 per cent of workers could require training in new skills for low-carbon and green jobs if they are to find sustainable employment as the low carbon transition accelerates.
This challenge is complicated by the fact the mix of jobs is not evenly spread. While 'green' jobs are often relatively evenly distributed geographically, high carbon jobs have a tendency to be concentrated in industrial areas. The new report highlights this point through a case study on the Yorkshire and Humber region, which explores how a region with a high concentration of heavy industry could be impacted by the low-carbon transition.
"Once at the heart of the Industrial Revolution, in recent decades the region has experienced immense change, with the decline of the coal, iron and steel industries gathering pace from the 1980s," the report states. "In some areas this has brought poverty, lack of opportunity and a sense of communities being left behind. Naturally, there is a strong desire that any future transitions do not leave a similar legacy."
The report argues there is a compelling case for investors to take proactive steps to try and avert a repeat of the deindustrialisation that continues to scar some communities. "The Just Transition connects the environmental and social dimensions of responsible investment," it states. "It provides a better understanding of systemic risk, it is consistent with fiduciary duty, it points to material value drivers, helps to uncover investment opportunities, and enables investors to contribute to societal objectives such as the Paris Agreement on climate change and the Sustainable Development Goals."
How then can investors actively support a fairer transition? Some are already taking steps to do so. For example, over 20 UK-based institutions with nearly $2tr in assets under management signed an international investor statement on the just transition ahead of the COP24 summit. It is widely expected that the initiative should translate into resolutions and investor engagement in the near future.
The new report also sets out some specific recommendations for investors, arguing they should flex their lobbying muscle to encourage policymakers to deliver effective just transition strategies; engage with corporates, especially in carbon intensive industries that face the largest transition risks; and reconsider their capital allocation strategies.
"The Just Transition can be applied to investment decisions across all asset classes: public equities, fixed income, private equity, infrastructure, real estate and cash," the report states. "The Just Transition offers particular opportunities for impact investors seeking to generate positive social and environmental outcomes alongside financial returns."
More broadly, though the report advises that investors need to extend their existing climate strategies and risk management efforts to consider social and economic implications. "Investors need to determine how the just transition impacts their existing policies for responsible investment and climate change," it recommends. "This can be done through three iterative steps: portfolio assessment, stakeholder dialogue and strategic integration."
The global sustainable investment drive has enjoyed considerable success and has already forced some of the world's largest companies to reconsider their climate strategies. It looks as if a growing band of investors are already considering how they can repeat the trick to deliver a low carbon transition that is not just rapid and effective, but also fair for all concerned.
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