ESG Club
Jennifer O’Neill is an associate partner in Aon’s responsible investment team
A JUST TRANSITION – WHAT ROLE CAN INVESTORS PLAY?
The transition to a more sustainable, low-carbon economy will create winners and losers – but is it possible to deliver a transition that leaves no one behind?
The concept of a just transition seeks to address this and is based on the principle that those affected by climate decisions are considered by government, business and investment leaders making the deci- sions. The aim is to deliver an equitable transition to a climate-resilient future, cre- ating decent work, opportunities and eco- nomic growth – leaving no one behind. Governments at COP26 supported the Just Transition Declaration, which is based on dialogue – not a fixed set of rules – between workers, industries and gov- ernments in all national, social and cul- tural contexts.
Why does this matter? In my conversation with Mark Carney last year, he highlighted that “one of the greatest injustices of climate change is that those who were doing the least to cause it will bear the biggest
brunt, and that puts a special
responsibility on those of us who have the most resources to address it, to use those resources now”. So, it’s positive that discussion about how to address the climate challenge now includes the theme of social justice –
essentially, environmental, social and governance factors should no longer be viewed as distinct from each other. With pension scheme investors playing a key role in driving the race to net zero, this interplay between environmental and social issues is increasingly considered. But many are struggling to translate these considerations into tangible investment decisions and portfolio allocations. Let’s take the case of a South African energy and chemicals company, one of the highest carbon emitters in Africa. If an investor focused their investment deci- sions on the firm’s carbon emissions, its harmful operations and negative environ- mental footprint, they may advocate to mothball the company’s operations, or decide to divest altogether. However, as a large national employer, located in a disadvantaged area, thou- sands of staff and their families rely on the company for their livelihoods. To mothball or shut down the operations without regard for them would have sig- nificant implications for the local society – and its economy. In this scenario, how can investors sup- port positive climate outcomes, and pro- tect the people who work for the firm and the communities it serves?
One option is to take a more holistic view and, through engagement, support its transition to lower-carbon operations, safeguarding employment in the process and creating re-training opportunities for the future. This has the potential to bene- fit the local and national economy and the many thousands of individuals and families dependent on the company for income.
In fact, the company mentioned here did exactly this following investor engagement, and last year shared 2030 and 2050 decar- bonisation roadmaps, planning a transition to net zero and positively managing the societal impact as part of the process.
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26 | portfolio institutional | September 2022 | issue 116
PI Partnership – Aon
How to consider a just transition? Institutional investors tell us they do not want to focus on climate objectives in iso- lation but to consider broader societal and environmental together. As a result, they are looking at financial value and consid- ering the impact on the environment and society before investing – so, what ele- ments inform those decisions? Measurement is critical – Through their investments, investors want to quantify the risks and opportunities of combatting climate
change and managing social
impact. Transparent disclosures and high-quality data will support investors to better understand those risks and opportu- nities – and, as a result, make better investment decisions. The concept of the Task Force on Inequality-related Financial Disclosures, and government’s response to its consultation on social matters in pen- sion fund decision making support this. Stewardship – This is a tool for setting expectations of companies to take account of just transition principles, and particularly where there are significant investment risks. Investors may seek to align their investment principles with international standards, like the PRI or Climate Action 100+. Engagement – Investors can use their power to engage with policymakers and commu- nicate with a broader audience to deliver better outcomes for all stakeholders – and work with their advisers to do this. At Aon, we continue to respond to regulatory con- sultations, drawing on our client’s experi- ences and insights to ensure their needs are factored into policy decisions. Every day, we work with our clients to bring clarity and confidence to managing a just transition. To learn more, contact me – or, Aon’s responsible investment team.
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