Just Transition: The challenge for developed markets

The transition to a net-zero future will entail transformational change across all sectors of the global economy as emissions-intensive goods and activities are replaced by cleaner alternatives. However, the large-scale systemic changes required to achieve global decarbonisation could harm society if not managed properly.

This is why the idea of a Just Transition – which is essentially a combination of climate action and social inclusion – was included in the Paris Agreement. As the recent COP28 and its first-ever work programme on the Just Transition has shown, this now plays a major part in global considerations of successful net-zero goals.

However, with all the benefits that will be realised, global decarbonisation efforts also create the potential in some communities and workforces for job losses and declining incomes. This is why it is crucial to minimise the socioeconomic costs that could inhibit the transformation and lead to a costly and disorderly outcome.

For investors, playing an active role in securing a Just Transition could have the following benefits:

• Improve understanding of systemic risks and how interconnected they are;
• Ensure they abide by international standards focused on human and labour rights;
• Help identify investment opportunities combining climate and social goals to pave the way for a sustainable economic transformation;
• Enhance value creation by encompassing environmental and social dimensions holistically;
• Help them maintain their social licence to operate.

Think global, act local

To date, much of the discourse on Just Transition has understandably focused on the divide between the Global North and the Global South, and the climate justice issues arising from developing countries bearing the brunt of the negative effects of climate change while developed countries have considerably benefitted economically from fossil fuels.

However, the issues of social inclusion in climate strategy are not unique to emerging markets. A lot must be done within developed nations to get the buy-in from communities to ensure a robust and timely transformation. The net-zero transition is going to be powered by people and if people feel left behind, this undermines even the best thought-out plans and introduces significant risks to achieving the goal.

Across the developed world, there are good examples of Just Transition policies from which we can learn.

Tackling the oil and gas challenge

Oil and gas production makes major GDP contributions to economies around the world but is set to face significant reductions in global demand for oil and gas through to 2050. Accordingly, governments need to have a structured response.

In Canada, where the sector contributes more than 6 percent to the country’s GDP, the government has begun to put in place a policy and consultative framework that will support the development of sustainable industries and jobs across the economy, including in high oil and gas producing areas.

This has involved initiatives such as the 2023-25 Sustainable Jobs Plan, which will provide “a worker and people-centred approach to the net-zero future that is equitable, fair and inclusive”.

They are also establishing the Sustainable Jobs Partnership Council, comprising representatives of government, workers and industry, which will engage with communities and stakeholders as part of providing advice to ministers, alongside a Sustainable Jobs action plan to put in place measures to invest in the net-zero emissions economy and skills of the future.

Driving transition

Transport contributes to around 20 percent of global CO2 emissions, more than half of which is generated by road transport. The car industry is also a major employer, providing millions of jobs.

Achieving the goals of the Paris Agreement will require a transformation in the design, production and use of cars. Electrification and digitalisation will involve significant changes to how automobiles are manufactured, with corresponding changes in the numbers of employees and their skills mix.

A Just Transition for affected workers will require an industrial policy with regional development plans that promote new sources of employment through social protection schemes focused on re-skilling and a dialogue with all stakeholders.

In Australia, when the closure of three car manufacturing plants put 27,500 jobs in jeopardy, a comprehensive dedicated support package was put in place by the government, car companies and unions which resulted in around 85 percent of affected workers being re-employed within 12 months.

The good outcomes for workers in this case were strengthened by public investment in economic and community strategies, strong governance and collaboration with workers and communities and holistic retraining programmes, including foundational skills and health and wellbeing support, as well as best practice in engaging with and supporting the supply chain, and building flexibility and recognising the unique needs of affected workers.

Creating the conditions for success

In many developed economies, plans for what a Just Transition may look like are in the early stages of development. It is estimated that only around a third of national climate plans have any formal consideration or measures targeting the social dimension of energy transition, which sounds woefully inadequate.

Clearly more is needed. Learning from the examples cited above, I believe that a successful Just Transition strategy for developed countries will need to be guided by the following conditions:

• Place-based and tailored to local conditions: impacts of national and international policy action will often be most keenly felt at a localised level. Accordingly, any regional or national plans need to be drawn up with place-based specific considerations in mind.
• Real dialogue and collaboration between private and public sector: governments need to commit to continuous negotiation, consultation and information exchange at all levels and stages of Just Transition processes. To be effective, such consultations must involve workers and communities in a way that their voices are being listened to.
• Fair public funding: a Just Transition, particularly in the early stages of implementation, will require public funding to help retrain and reskill workers, and to compensate those whose assets are devalued by hosting and distributing new sources of energy, such as private landowners. However, in a context where there are many calls on public funds, including health, education and affordable housing, spending on Just Transition initiatives must be seen to be fair, measured and efficient. Any perceptions that the costs are disproportionately outweighing the benefits may erode public support.

Be excited by the opportunity!

For investors, there is a lot to be excited about when it comes to global decarbonisation efforts. They will generate opportunities for investment in new clean energy technologies, products and services. Some investors, businesses and consumers will also benefit from the cost savings arising from increased energy and resource efficiency.

So, investors have a strong interest in a just, orderly and timely transition. In addition to new opportunities for investment, it will also furnish the workforce with the skills needed to build and operate new clean technologies, and help cultivate community support for the restructuring of economies that will be needed to secure net zero.

There is a lot to be done in developed economies and there is no time to waste in this critical decade of action.

Maria Nazarova-Doyle is global head of sustainable investment at IFM Investors