ESG Feature – A just transition
Oil and gas have powered the world for more than 100 years. It is deeply embedded within the infrastructure of communities and has made parts of the world extremely prosperous. So, changing this is not easy – and the challenge is not limited to finding alternative sources of energy. Millions of people’s livelihoods are directly connected to oil and gas and the industries they support. So, if governments work to replace fossil fuels with cleaner alternatives, they could be cre- ating poverty. Take the millions of people working in the min- ing industry in Indonesia. If the mines are closed, what hap- pens to the workers?
ESG-led investing is not just about protecting the environment for future generations. There is also a social element in the strategy, so putting lots of people out of work and, therefore, decimating communities to fix environmental concerns is a conflict within the ethos of sustainable investing. People living in a world of lower temperatures and free from extreme weather patterns is not a trade-off for living in poverty. So, governments and investors are being encouraged to ensure that we have a just transition from fossil fuels to regenerative sources of energy so that no one is left behind as we move towards a sustainable future.
Global impact Yet this does not just affect people working directly in the oil and gas supply chain. Every industry will have to adopt to some form of change brought about by the transition. “There is almost no part of the global economy that is going to be unaffected by the energy transition,” says Nick Stansbury, head of climate solutions at Legal & General Investment Man- agement (LGIM).
“It is not just that the fossil fuel industry will see demand for its products fall. Everywhere, from financial services to consumer goods, to food retailing, to the restaurant industry, to petro- chemicals, every place in the global economy will, in some way, be affected and affected significantly.
“It is more than thinking about the implications for the oil and gas industry,” he adds. “We use energy in every part of the global economy. Everything we do is affected by energy. There- fore, big changes in the way we deliver energy to the global economy will impact all parts of our portfolios.” Constructing portfolios with the impact of the energy transition not limited to one industry appears to be a common strategy among investors.
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. Therese Niklasson, Newton Investment Management
“The global ecosystem is so interconnected, not just in nature but in how it intertwines with the economy, so doing one thing in isolation would be futile,” says Gabrielle Kinder, an environ- mental analyst at BNP Paribas Asset Management. “The energy transition theme is one of social justice not just environmental justice,” she adds. “By halting climate change there is a lot of climate change inequality around the world which would be abated.”
Step one
The desire among asset owners to pursue a just transition is gaining momentum, it is being mentioned more and more in conversations with their asset managers, says Therese Niklas- son, global head of sustainable investment at Newton Investment Management. “We are still at the starting point where we are discussing a company’s commitment to its transition plan. You have to weave in a just transition at the outset when you 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 govern- ance,” 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.”
26 | portfolio institutional | April 2022 | issue 112
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