Investors and the Just Transition

As COVID pushes social issues up the agenda, and governments face tough decisions, how should investors be making good on their promises to support a Just Transition?

Coronavirus was meant to be a great leveller. But in reality, it really wasn’t, says Nick Robins, Professor of Sustainable Finance at the London School of Economics’ Grantham Research Institute on Climate Change & the Environment. 

“It revealed huge concerns about inequalities, and entrenching or exacerbating existing inequalities in society,” he reflects. Indeed, work from the ONS, the Kings Fund, and Public Health England revealed that individuals living in lower-economic areas, or from ethnic minorities were more greatly affected.

The pandemic also devastated central pillars of the global economy, like oil & gas, tourism and the retail sector, while renewables and carbon prices proved surprisingly buoyant, and – as emissions and air pollution plummeted during lockdown – the natural world began to restore itself (temporarily, at least).

“Crises are moments of transformation, they can lead to the collapse of certain things, but they can also lead to new realisations of what is important,” says Robins.

'A huge number of investors signed up to that [declaration on Just Transition], but I haven't seen much actual action' – Colin Baines, Friends Provident

One of those realisations, says Fiona Reynolds, the Chief Executive of the Principles for Responsible Investment (PRI), was the interdependence between environmental, social and economic health. “COVID-19 has highlighted to a lot of people that if you want to have a healthy economy, then you must have healthy people and you must have a healthy planet – you cannot divorce one from the other.” 

There are hopes that this growing awareness around the links between people, the planet and the economy may push the Just Transition – the idea that decarbonisation and the fight against climate change must be done with strong consideration for the impact it will have on people and communities – up the political and financial agenda. 

Governments have already begun to move on the Just Transition. Germany, for example, established a Coal Commission in 2018 to work out how to responsibly phase out coal-fired power generation by 2038 in order to meet national and global climate commitments. After long and tense negotiations with representatives from the country’s coal regions, an ‘exit deal’ was published last month, including €40bn of public cash to support the communities that will be hit by the plans. A taskforce has been created to coordinate action around specific projects. 

It is an approach that Reynolds praises for its close coordination: “Everybody understands what is happening,” she says. “Companies, the government, the workers and the unions are all involved and sitting down around a table.” 

Other nations are also stepping up to the challenge: Canada has its own government-led taskforce, for example – Just Transition for Canadian Coal Power Workers and Communities – while the Scottish government has a Just Transition Commission, and Poland is in the process of approving its National Just Transition Plan.  

At EU level, there is a new €17.5bn Just Transition Fund to help Member States vulnerable to the climate transition invest in communities (Poland and Germany are set to be the biggest recipients of funds). 

There have been investor milestones, too. As well as the COP24 Just Transition Silesia Declaration,  there is a dedicated investor coalition that represents 159 institutions with $10.1trn in assets; a statement of support and a guide to the Just Transition, produced by the PRI, Grantham Research Institute, Harvard and the International Trade Union Confederation.

But there is scepticism that the investor efforts don’t go much beyond lip service. 

“A huge number of investors signed up to that [declaration], but I haven't seen much actual action,” says Colin Baines, Investment Engagement Manager at the UK charity Friends Provident Foundation, which runs £31m. 

Indeed, a report by US think tank the Centre for Strategic and International Studies this summer concluded that, while investors have been “grappling” with environmental and social issues for a while now, they are not “entirely fluent in the language of Just Transitions”. 

Some of the signatories to the declaration have made concrete moves on it, though. Fonds de solidarite FTQ, a C$14bn Quebec-based development fund, has set its own targets on Just Transition. “We try to be a partner in the journey,” explains Vice President Mario Tremblay, who points out that, as well as promising to show global leadership on the topic, the fund has also committed to decarbonising its portfolio by investing into low-carbon companies and engaging with firms to encourage them to transition. 


Friends Provident has been working with Royal London Asset Management to engage with UK energy utilities on a range of topics linked to the Just Transition, including discussions about site re-use, community reinvestment and the redeployment and retraining of workers when conventional energy plants are shut down. 

They have also been pushing the utilities to disclose formal Just Transition strategies. At its AGM this summer, SSE became the first to respond to this call, saying it will produce such a document in November 2021. 

“We now need others to follow SSE’s lead if we’re to have a rapid and smooth transition to a net-zero carbon economy,” says Baines. “With the energy utilities market grappling with unprecedented disruption and transition, there are significant risks to be managed and opportunities to be pursued.” 

Baines says a Just Transition requires energy systems to move away from traditional, centralised models at the same time as they move away from fossil fuels, to allow more control and access by local communities. This is one of the biggest challenges, he says, because smaller, community-scale infrastructure is often too small and illiquid to be investable. 

Hence, there needs to be some assistance or aggregation platform to bring together such decentralised energy projects, he argues.  

UK labour union Unison recently called on local authority pension schemes to create dedicated green funds to support these developments, with a “focus on justice, not only intergenerational justice, but in securing justice in terms of equitable distribution of the costs of transition for those working in affected industries".

It is also important to consider energy supply chains in the transition, says Baines. “The old fossil-based system has the ‘resource curse’ associated with it, and has a lot of corruption and exploitation built into it. As we move away from that, there needs to be efforts to ensure that we replace it with something better – that the components and supply chains of renewable energy are truly sustainable.” 

Asset Allocation 

LSE’s Robins believes one of the next big steps towards linking institutional capital with the Just Transition is the development of dedicated sovereign bonds. In a piece for RI in January, he explained that – just like with green and social bonds – proceeds could be ring-fenced for activities that support the social dimension of the climate transition. Using a “universal asset” like sovereign bonds would have a powerful signalling effect across the financial system, he says, as well as offering investors an instrument through which to easily fulfil their Just Transition pledges, and governments a chance to secure cheaper funding to finance the transition – especially at a time of ultra-low interest rates. 

It isn’t just investors that need to start allocating capital to the Just Transition, though. The Grantham Institute recently published a report on the role of the banking sector, calling on the industry to put the concept at the centre of its business models, to create institutional-level action plans and develop portfolios and products to help achieve net zero in a socially inclusive way. 

Beyond developed countries 

When it comes to the Just Transition, as with many aspects of ESG and sustainable finance, there has been an almost exclusive focus on developed markets. 

“But if you're thinking about where some of the social risks are going to be highest, they're going to be in developing and emerging countries,” points out Robins. “The climate risks are also highest, certainly on the resilience side – many developing countries now have higher carbon intensities than industrialised countries.” 

In South Africa, for example, there is growing discussion about how to set ambitious climate goals without adding to already-high unemployment levels in a country where 70% of primary energy is from coal, and emissions per capita are above average. 

One of the initiatives to come out of that discussion already is the Just Transition Climate Transaction, through which state-owned utility Eskom will commit to delivering substantial carbon reductions in return for large-scale concessional funds from development banks and capital markets. Those funds will be spent on the communities most affected by the transition. 

PRI’s Reynolds says this kind of initiative, which pairs social welfare with decarbonisation targets, will be vital for achieving the goals of the Paris Agreement. 

“It's not just about stranded physical assets, it’s about stranded people and stranded communities,” she says. “We can't leave workers and regions behind. We can't make them the people who pay the price for climate change.”