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plans are targeting. South Africa is an example of where a just transition could be a challenge. “It has a challenge ahead in terms of the transition itself in weaning the country off fossil- fuel intensive industries, but there is the added challenge of already high levels of poverty.
“If investors stop financing the current set-up you risk cutting the lights off for millions of people. What needs to happen is a plan to finance the transition,” Niklasson says.
There is almost no part of the global economy that is going to be unaffected by the energy transition.
Nick Stansbury, Legal & General Investment Management
develop your transition plan,” she adds. The concept of a just transition emerged relatively recently because the nature and direction of what we now call ESG has changed many times since the 1990s. “In the early days, responsible investment focused on governance,” says Mark Jeavons, head of climate change insights and associate partner at Aon. “Then for three to four years it focused on environmental impacts. Now in the past 18 months to two years, there have been more discussions around nature and the social elements, and the frameworks to consider this in portfolios.”
Despite investors working to find their feet on this issue, one point is clear. “From a just perspective, the best thing to do as an investor is not to abandon the sector,” Niklasson says. “It would be socially irresponsible to make it harder for compa- nies to turn themselves around,” she adds. “The cost of capital is affected if the investment community withdraws from it. Countries need capital to transition, to re-train communities and figure out what an employment system would look like in a world where the energy system is relying on more skilled labour. We need to invest in education to ensure that people can support that system.”
(Not) everyone’s a winner But it is still early days and the just transition is uncharted ter- ritory. “There is not yet a good enough understanding among the general investment community about what a just transi- tion means,” Niklasson says. “We know that it is important, and that there are deep social and economic impacts to consider but knowing what a good transition looks like is tricky. “There will be trade-offs,” she adds. “Not everyone is going to be a win- ner in this transition.” And emerging economies could be big losers due to their high dependence on the sectors net-zero
A pathway
It is understandable that investors are following strategies that they believe will deliver a positive environmental impact while benefiting society. Jeavons points to the two elements needed to achieve a just transition. “First, you need to understand the risks from the transition and how that will impact social prior- ities. Second, you need coherent policies and market frame- works that incentivise investors to support the just transition. “To achieve the rapid change needed to reach net zero, it needs society’s backing,” he adds. “This means making sure that the substantial benefits from the transition to a low carbon, sus- tainable economy are shared widely, and those that are nega- tively impacted economically are given the support they need to make a just transition.” Jeavons says that at COP26, in a first of its kind agreement, South Africa will receive around $8.5bn (£6.4bn) from the US and countries in Europe as part of a “Just Energy Transition Partnership”. “This aims to accelerate South Africa’s green transition but some of the money will be investments in social infrastructure, to manage labour and support workers impacted by the transi- tion. For example, the 90,000 miners involved in coal extraction will be helped to find other industrial roles or education provided to re-skill and work in other areas, such as renewable energy,” he adds. But a just transition cannot happen unless governments, regulators, companies and investors have wider support. “If you want a circular economy instead of a resource-intensive economy, you need to have society on board,” Jeavons says. “Take the energy transition. Going from wood to coal and from coal to oil took 100 years. We are trying to change our energy sys- tems within a couple of decades or so. That is a real challenge that is bound to throw up destabilising elements in the economy and within society. Managing the bumps in the road means you will ensure the economy remains dynamic and performs well, which will be positive for your investments,” he adds. But keeping temperature rises low and stopping the flooding and extreme storm patterns we are seeing around the world will not be solved by no longer burning fossil fuels. There are more proactive measure investors can take. “We have to take a holistic approach by reducing our negative impacts on the planet and increasing our positive impacts,” Kinder says. “The handprint has to be larger than the carbon footprint.”
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